Attached files

file filename
EX-23 - EXHIBIT 23 - DCB FINANCIAL CORPv404786_ex23.htm
EX-32.1 - EXHIBIT 32.1 - DCB FINANCIAL CORPv404786_ex32-1.htm
EX-32.2 - EXHIBIT 32.2 - DCB FINANCIAL CORPv404786_ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - DCB FINANCIAL CORPv404786_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - DCB FINANCIAL CORPv404786_ex31-1.htm
EXCEL - IDEA: XBRL DOCUMENT - DCB FINANCIAL CORPFinancial_Report.xls
EX-21 - EXHIBIT 21 - DCB FINANCIAL CORPv404786_ex21.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

(Mark one)

 

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2014

or

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                                        to                                                      

 

Commission file number: 0-22387

 

DCB Financial Corp

(Exact name of registrant as specified in its charter)

 

Ohio 31-1469837
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

 

110 Riverbend Ave., Lewis Center, Ohio 43035
(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (740) 657-7000

 

Securities registered pursuant to Section 12(b) of the Act:      None

 

Securities registered pursuant to Section 12(g) of the Act:      Common Shares, no par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨          No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.

Yes ¨          No x

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x          No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant 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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨ Accelerated filer ¨
Non-accelerated filer (Do not check if a smaller reporting company) ¨ Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨     No x

 

At June 30, 2014, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on a common share price of $7.50 per share (such price being the closing share price on such date) was $41,255,000.

 

At March 20, 2015, the registrant had 7,233,795 common shares outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III of this Annual Report on Form 10-K incorporates by reference certain information from the registrant’s definitive proxy statement for the 2015 Annual Meeting of Shareholders.

 

 
 

  

PART I

 

Cautionary Note Regarding Forward-Looking Statements

 

We may, from time to time, make written or oral “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements contained in our filings with the Securities and Exchange Commission (the “SEC”), our reports to shareholders and in other communications by us. This Annual Report on Form 10-K contains “forward-looking statements” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “intend,” “should,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, statements of our goals, intentions and expectations, statements regarding our business plans and prospects and growth and operating strategies, estimates of our risks, and future costs and benefits that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

 

·an increase in competitive pressure in the banking industry;
·change in interest rates;
·changes in regulatory environment;
·general economic conditions, both nationally and regionally, resulting, among other things, in a deterioration in credit quality;
·changes in business conditions and inflation;
·changes in monetary policies;
·changes in the securities markets;
·changes in technology used in the banking business;
·changes in laws and regulations to which we are subject;
·our ability to maintain and increase market share and control expenses; and
·other factors detailed from time to time in our SEC filings.

 

Any or all of our forward-looking statements in this Annual Report on Form 10-K, and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statements can be guaranteed. We disclaim any obligation to subsequently 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.

 

Unless the context indicates otherwise, all references in this Annual Report on Form 10-K to “Delaware,” “DCB,” “we,” “us,” “our company,” “corporation” and “our” refer to DCB Financial Corp and its subsidiaries Delaware County Bank and Trust Company, our wholly owned bank subsidiary (the “Bank”), DCB Title Services, LLC, DCB Insurance Services, LLC, DataTasx LLC, and ORECO, Inc.

 

Item 1. Business

 

General

DCB Financial Corp (“DCB” or the “Company” or “we” or “us” or “our”) is a financial holding company headquartered in Lewis Center, Ohio, and was incorporated under the laws of the State of Ohio in 1997, as a bank holding company under the Bank Holding Company Act of 1956, as amended. DCB is the holding company for The Delaware County Bank and Trust Company, a commercial bank organized in 1950 and chartered under the laws of the State of Ohio (the “Bank”).

 

The Company also has three wholly-owned, non-bank subsidiaries, DCB Title Services, LLC, an Ohio limited liability company (“DCB Title”), DCB Insurance Services, LLC, an Ohio limited liability company (“DCB Insurance”), and DataTasx LLC, an Ohio limited liability company (DataTasx”). DCB Title provides standard real estate title services, while DCB Insurance provides a variety of insurance products. DataTasx is inactive. The activities of each of the three subsidiaries are not material to the Company’s operations. The Bank has one wholly-owned subsidiary, ORECO, Inc., an Ohio corporation (“ORECO”), which is used to hold the Bank’s foreclosed real estate.

 

At December 31, 2014, we had 133 full-time and 29 part-time employees. Our employees are not represented by any collective bargaining group. We consider our employee relations to be good.

 

The Bank is a member of the Federal Reserve System and the Federal Home Loan Bank System, and its deposits are insured by the Federal Deposit Insurance Corporation up to applicable limits.

 

2
 

 

Services

We offer full-service banking with a broad range of financial products to meet the needs of our commercial, retail, government, and investment management customers located primarily in Delaware, Franklin and Union Counties in Ohio. Depository account services include interest and non-interest-bearing checking accounts, money market accounts, savings accounts, time deposit accounts, and individual retirement accounts. Our lending activities include the making of residential and commercial mortgage loans, business lines of credit, working capital facilities and business term loans, as well as installment loans, home equity loans, and personal lines of credit to individuals. Investment management and trust services include personal trust, employee benefit trust, investment management, custodial, and financial planning. Through Raymond James Financial Services, Inc., member FINRA/SIPC, we provide financial counseling and brokerage services. We also offer safe deposit boxes, wire transfers, collection services, drive-up banking facilities, 24-hour night depositories, automated teller machines, 24-hour telephone banking, and on-line internet banking. The Bank’s core business is not significantly affected by a single industry, however, a number of the Bank’s depositors are public fund units which operate within its geographic footprint. Though this group’s deposit base is significant, overall balances do not fluctuate materially. No material industry or group concentrations exist in the loan portfolio.

 

Competition

Our business is competitive. We compete not only with other commercial banks, but also with other financial institutions such as thrifts, credit unions, money market and mutual funds, insurance companies, brokerage firms, and a variety of other financial services companies.

 

Supervision and Regulation

The following discussion summarizes the primary laws and regulations applicable to bank holding companies and state banks and provides certain information relevant to us. This regulatory framework is primarily intended for protecting depositors, consumers, and the deposit insurance fund that insures bank deposits. The information about statutory and regulatory provisions is qualified in its entirety by reference to those provisions. Congress, regulatory agencies, and state legislatures frequently propose changes to the law and regulations affecting the banking industry. A change in the statutes, regulations, or regulatory policies applicable to our Company or our subsidiaries may have a material adverse effect on our business, financial condition, and results of operations.

 

Bank Holding Company Regulation

We are a bank holding company registered under the Bank Holding Company Act of 1956 and are subject to supervision, regulation and examination by the Federal Reserve Board (“FRB”). The Bank Holding Company Act and other federal laws and regulations subject bank holding companies to restrictions on the activities in which they may engage, and to a supervisory regime that provides for possible regulatory enforcement actions for violations of laws and regulations. We are also a financial holding company; a bank holding company that also qualifies as a financial holding company can expand into a wide variety of services deemed by the FRB to be financial in nature, including securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting; and merchant banking. For a bank holding company to qualify for, and retain, financial holding company status, the holding company must be deemed to be “well managed” and “well capitalized” and each one of the bank holding company’s subsidiary depository institutions must be deemed “well capitalized” and “well managed” by regulators and must have received at least a “Satisfactory” rating on its last Community Reinvestment Act examination.

 

The FRB has broad authority to prohibit activities of bank holding companies and their nonbanking subsidiaries that represent unsafe or unsound practices or which constitute violations of laws or regulations, and can bring enforcement actions, including the assessment of civil money penalties, for certain violations or practices.

 

Under FRB regulations, a bank holding company is expected to act as a source of financial and managerial strength to each of its banking subsidiaries and to commit resources to their support.

 

The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the FRB before it may acquire all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, over 5% of any class of voting shares of such bank. In approving bank acquisitions by bank holding companies, the FRB must consider factors including, among others, the financial and managerial resources and future prospects of the bank holding company and the banks concerned; the convenience and needs of the communities to be served; and competitive factors. The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a bank or bank holding company unless the FRB has been notified and has not objected to the transaction. In addition, any entity must obtain the approval of the FRB under the Bank Holding Company Act before acquiring 25% (5% with an acquirer that is a bank holding company) or more of our outstanding common shares, or otherwise obtaining control or a “controlling influence” over a bank.

 

3
 

  

Our ability to pay dividends depends on the ability of the Bank to pay dividends to us. The ability of both our Company and the Bank to pay dividends is limited by state and federal statutes, regulations and policies. It is the policy of the FRB that bank holding companies should pay cash dividends on common shares only out of income available over the past year, and only if prospective earnings retention follows the holding company’s expected future needs and financial condition. A holding company should not maintain a level of cash dividends that undermines the holding company’s ability to serve as a source of strength to its banking subsidiaries. Even when the legal ability exists, our Company or the Bank may limit the payment of dividends to retain earnings for corporate use.

 

Bank Regulation

The Bank is subject to regulation and examination primarily by the Ohio Division of Financial Institutions (the “ODFI”) and by the Federal Deposit Insurance Corporation (the “FDIC”). ODFI and FDIC regulations govern permissible activities, capital requirements, dividend limitations, investments, loans and other matters for the Bank. The ODFI and the FDIC have the authority to impose sanctions on the Bank and, under certain circumstances, may place the Bank into receivership.

 

The FDIC is the primary federal regulator of the Bank. It is an independent federal agency which insures the deposits, up to prescribed statutory limits, of federally-insured banks and savings associations, and safeguards the safety and soundness of the financial institution industry. Insurance premiums for each insured depository institution are determined based upon the institution’s capital level and supervisory rating and other information the FDIC determines to relate to the risk posed by the institution.

 

Non-Banking Subsidiaries

Our non-banking subsidiaries are also subject to regulation by the FRB and other applicable federal and state agencies. DCB Insurance, as a licensed insurance agency, is subject to regulation by the Ohio Department of Insurance and the state insurance regulatory agencies of those states where it may conduct business.

 

Other Government Agencies

Securities and Exchange Commission (“SEC”). We are also under the jurisdiction of the SEC and certain state securities commissions for matters relating to the offering and sale of its securities.

 

Federal Home Loan Bank (“FHLB”). The Bank is a member of the FHLB which provides credit to its members in advances. As a member of the FHLB, the Bank must maintain an investment in the capital stock of the FHLB in a specified amount.

 

Legislation and Regulation

The Dodd-Frank Act. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or “Dodd-Frank”), passed into law on July 21, 2010, is a broad-ranging financial reform law that affects numerous aspects of the U.S. financial regulatory system. It calls for over 200 rulemakings by numerous federal agencies, some of which have issued rules. However, numerous rules have yet to be proposed or finalized. The Dodd-Frank Act covers subjects including, but not limited to, systemic risk, corporate governance, executive compensation, credit rating agencies, capital and derivatives.

 

The Dodd-Frank Act created the Consumer Financial Protection Bureau (the “CFPB”), which regulates consumer financial products and services, and certain financial services providers. The CFPB may prevent unfair, deceptive or abusive acts or practices, and ensures consistent enforcement of laws so consumers have access to fair, transparent and competitive markets for consumer financial products and services. The CFPB has rulemaking and interpretive authority regarding the Bank.

 

Transactions with Affiliates, Directors, Executive Officers and Shareholders. The Bank’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and the FRB’s Regulation W. In general, these transactions must be on terms at least as favorable to the Bank as comparable transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate percentage of the Bank’s capital. Collateral in specified amounts must usually be provided by affiliates to receive loans from the Bank.

 

4
 

  

Loans to Insiders. The Bank’s authority to extend credit to executive officers, directors and greater than 10% shareholders, and entities such persons control, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated under that Act by the FRB, and state law applicable to the Bank. These loans must be made on terms (including interest rates charged and collateral required) substantially the same as those offered to unaffiliated individuals, or be made as part of a benefit or compensation program and on terms widely available to employees, and must not involve a greater than normal risk of repayment. In addition, the loans a bank may make to these persons is based, in part, on the bank’s capital position, and specified approval procedures must be followed in making loans which exceed specified amounts.

 

Minimum Capital and Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), identifies five capital categories for insured depository institutions and requires the respective federal regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within such categories. The federal regulatory agencies, including the FRB and the FDIC, have adopted substantially similar regulatory capital guidelines and regulations consistent with the requirements of FDICIA, and established a system of prompt corrective action to resolve certain problems of undercapitalized institutions. This system is based on five capital level categories for insured depository institutions: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” The federal banking agencies may (and sometimes must) take certain supervisory actions depending upon a bank’s capital level. The banking agencies must appoint a receiver or conservator for a bank within 90 days after the bank becomes “critically undercapitalized” unless the bank’s primary regulator determines, with the concurrence of the FDIC, that other action would better achieve regulatory purposes. Throughout 2014, our regulatory capital ratios and those of the Bank were over the levels established for well-capitalized institutions. An institution was deemed to be well-capitalized if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater and is not subject to a regulatory order, agreement, or directive to meet and maintain a capital level for any capital measure.

 

Basel III Capital Requirements. The FRB sets risk-based capital ratio and leverage ratio guidelines for bank holding companies. Under the guidelines and related policies, bank holding companies must maintain capital sufficient to meet both a risk-based asset ratio test and a leverage ratio test on a consolidated basis. The risk-based ratio is determined by allocating assets and specified off-balance sheet commitments into four weighted categories, with higher weighting assigned to categories perceived as representing greater risk. The risk-based ratio represents total capital divided by total risk-weighted assets. The leverage ratio is core capital divided by total assets adjusted as specified in the guidelines. The Bank is subject to substantially similar capital requirements.

 

Beginning on January 1, 2015, the capital requirements for our Company and the Bank will increase as a result on the phase-in of certain changes to capital requirements for U.S. banking organizations. On July 2, 2013, the FRB voted to adopt final capital rules implementing Basel III requirements for U.S. banking organizations. The final rules establish an integrated regulatory capital framework to implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. Under the final rule, minimum requirements increased for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the final rule includes a new minimum ratio of common equity tier 1 capital (Tier I Common) to risk-weighted assets and a Tier 1 Common capital conservation buffer of 2.5% of risk-weighted assets that will apply to all supervised financial institutions. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets and includes a minimum leverage ratio of 4% for all banking organizations. These new minimum capital ratios will become effective for us on January 1, 2015, and will be fully phased-in on January 1, 2019. The following table shows the phase-in of the Basel III regulatory capital levels from January 1, 2015 until January 1, 2019:

 

   January 1, 
   2015   2016   2017   2018   2019 
                     
Tier 1 Common   4.5%   5.125%   5.75%   6.375%   7.0%
Tier 1 risk-based capital ratio   6.0%   6.625%   7.25%   7.875%   8.5%
Total risk-based capital ratio   8.0%   8.625%   9.25%   9.875%   10.5%

 

5
 

Implementing Basel III is not expected to have a material impact on our Company’s or the Bank’s capital ratios and the management of the Company and the Bank expect they will continue to be well-capitalized. In 2015, an institution will be deemed to be well-capitalized if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4.5% or greater, and a Tier 1 leverage ratio of 6% or greater and is not subject to a regulatory order, agreement, or directive to meet and maintain a capital level for any capital measure.

 

Community Reinvestment Act (“CRA”). The CRA requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution must help meet the credit needs of its market areas by providing credit or other financial assistance to low and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. As of December 31, 2014, the FDIC’s most recent performance evaluation of the Bank resulted in an overall rating of “satisfactory.”

 

Customer Privacy and Other Consumer Protections. The Bank is subject to regulations limiting the ability of financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated party. The Bank is also subject to numerous federal and state laws aimed at protecting consumers, including for example the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Bank Secrecy Act, the Community Reinvestment Act and the Fair Credit Reporting Act.

 

Bank Secrecy Act. Our Company and the Bank are also subject to the Bank Secrecy Act, as amended by the USA PATRIOT Act, which gives the federal government powers to address money laundering and terrorist threats through enhanced domestic security measures, expanded surveillance powers, and mandatory transaction reporting obligations. The Bank Secrecy Act imposes an affirmative obligation on the Bank to report currency transactions that exceed certain thresholds and to report other transactions determined to be suspicious. The Bank has in place a comprehensive program to ensure compliance with these requirements. In 2014, the Bank engaged in a limited number of transactions of any kind with foreign financial institutions or foreign persons.

 

Monetary Policy. The FRB regulates money and credit conditions and interest rates to influence general economic conditions primarily through open market operations in U.S. government securities, changes in the discount rate on bank borrowings, and changes in the reserve requirements against depository institutions’ deposits. These policies and regulations significantly affect the overall growth and distribution of loans, investments and deposits, and interest rates charged on loans and paid on deposits. These monetary policies have had a significant effect on the operating results of financial institutions in the past and are expected to continue to have significant effects. In view of the changing conditions in the economy, the money markets and the activities of monetary and fiscal authorities, we can make no definitive predictions on future changes in interest rates, credit availability or deposit levels or their impact on us or the Bank.

 

Volcker Rule. In December 2013, five federal agencies adopted a final regulation implementing the Volcker Rule provision of the Dodd-Frank Act (the “Volcker Rule”). The Volcker Rule places limits on the trading activity of insured depository institutions and entities affiliated with a depository institution, subject to certain exceptions. The trading activity includes a purchase or sale as principal of a security, derivative, commodity future or option on any such instrument to benefit from short-term price movements or to realize short-term profits. The Volcker Rule also prohibits a banking entity from having an ownership interest in, or certain relationships with, a hedge fund or private equity fund, with several exceptions. We had one security at the end of 2013, with a carrying value of $976,000, which was subject to the Volcker Rule prohibition. We sold this security in the first quarter of 2014. The Bank does not engage in any of the trading activities with any of the funds regulated by the Volcker Rule.

 

Executive and Incentive Compensation. In June 2010, the FRB and the FDIC issued joint interagency guidance on incentive compensation policies (the “Joint Guidance”) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. This principles-based guidance, which covers all employees that can materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should: (1) provide incentives that do not encourage risk-taking beyond the organization’s ability to identify and manage risks; (2) be compatible with effective internal controls and risk management; and (3) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Under the Joint Guidance, the FRB and the FDIC will review as part of a regular, risk-focused examination process, the incentive compensation arrangements of financial institutions such as our Company and the Bank. Enforcement actions may be taken against an institution if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness, and prompt and effective measures are not being taken to correct the deficiencies.

 

6
 

Effect of Environmental Regulation. Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings or competitive position of our Company and our subsidiaries. We believe the operations of our subsidiaries have little environmental impact and, therefore, anticipates no material capital expenditures for environmental control facilities for its current fiscal year or for the foreseeable future. We believe our primary exposure to environmental risk is through the lending activities of the Bank. In cases where management believes environmental risk potentially exists, the Bank mitigates its environmental risk exposures by requiring environmental site assessments at the time of loan origination to confirm collateral quality on commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the property and adjacent sites. In addition, environmental assessments are typically required prior to any foreclosure activity involving non-residential real estate collateral.

 

Future Legislation. Significant legislation affecting financial institutions and the financial industry is from time to time introduced by the U.S. Congress and the Ohio Legislature. Such legislation may continue to change banking statutes and the operating environment of the Company and its subsidiaries in substantial and unpredictable ways, and could significantly increase or decrease costs of doing business, limit or expand permissible activities, or affect the competitive balance among financial institutions.

 

Item 1A. Risk Factors

 

There are risks inherent to our business. The material risks and uncertainties that we believe affect our Company are described below. Any of the following risks could affect our financial condition and results of operations and could be material and/or adverse in nature.

 

Deterioration in local economic conditions may negatively impact our financial performance.

Our success depends primarily on the general economic conditions of central Ohio and the specific local markets in which we operate. Unlike larger national or other regional banks that are more geographically diversified, we provide banking and financial services to customers primarily in Central Ohio.  The local economic conditions in these areas have a significant impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources.

 

As a lender with the majority of our loans secured by real estate or made to businesses in Central Ohio, a downturn in these local economies could cause significant increases in non-performing loans, which could negatively impact our earnings. Declines in real estate values in our market areas could cause any of our loans to become inadequately collateralized, which would expose us to greater risk of loss. Additionally, a decline in real estate values could materially and adversely impact our portfolio of residential and commercial real estate loans and could result in the decline of originations of such loans, as most of our loans, and the collateral securing our loans, are located in those areas.

 

Variations in interest rates may negatively affect our financial performance.

Our earnings and financial condition are largely dependent upon net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest rate spreads could adversely affect our earnings and financial condition. We cannot predict with certainty, or control, changes in interest rates. Regional and local economic conditions and the policies of regulatory authorities, including monetary policies of the FRB, affect interest income and interest expense.  High interest rates could also affect the amount of loans that we can originate because higher rates could cause customers to apply for fewer mortgages or cause depositors to shift funds from accounts that have a comparatively lower cost to accounts with a higher cost.  We may also experience customer attrition due to competitor pricing. With short-term interest rates at historic lows and the current Federal Funds target rate at 25 bps, our interest-bearing deposit accounts, particularly core deposits, have repriced to historic lows as well.  With the possibility that the FRB will soon begin to raise the Fed Funds target rate, our challenge will be managing the impact of an increasing interest rate environment.  If the cost of interest-bearing deposits increases at a rate greater than the yields on interest-earning assets increase, net interest income will be negatively affected. Changes in the asset and liability mix may also affect net interest income. Similarly, lower interest rates cause higher yielding assets to prepay and floating or adjustable rate assets to reset to lower rates. If we are not able to reduce our funding costs sufficiently, due to either competitive factors or the maturity schedule of existing liabilities, then our net interest margin will decline.

 

7
 

Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial or unexpected change in, or prolonged change in market interest rates could have a material adverse effect on our business, financial condition and results of operations. See the section captioned “Net Interest Income” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosure About Market Risk for further discussion related to our management of interest rate risk.

 

Changes in the equity markets could materially affect the level of assets under management and the demand for other fee-based services.

Economic downturns could affect the volume of income from and demand for fee-based services.  Revenues from the trust and wealth management businesses depend in large part on the level of assets under management.  Market volatility that leads customers to liquidate investments, as well as lower asset values, can reduce our level of assets under management and thereby decrease our investment management revenues.

 

Our lending, and particularly our emphasis on commercial lending, exposes us to the risk of losses upon borrower default.

There are inherent risks associated with our lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where we operate as well as those across Ohio and the entire United States. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing those loans. We are also subject to various laws and regulations that affect our lending activities. Failure to comply with applicable laws and regulations could subject our Company to regulatory enforcement action that could result in the assessment of significant civil money penalties against us.

 

As of December 31, 2014, approximately 56.6% of our loan portfolio consisted of commercial and industrial, commercial construction and commercial real estate loans. These types of loans generally expose a lender to greater risk of non-payment and loss than residential real estate loans because repayment of the loans often depends on the successful operation of the property, the income stream of the borrowers and, for construction loans, the accuracy of the estimate of the property’s value at completion of construction and the estimated cost of construction. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. Because our loan portfolio contains a significant number these loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for loan losses and/or an increase in loan charge-offs, all of which could have a material adverse effect on our business, financial condition and results of operations. See the section captioned “Loans” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion related to commercial and industrial, agricultural, construction and commercial real estate loans.

 

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.

We maintain an allowance for loan losses, which is an allowance established through a provision for loan losses charged to expense, that represents our management’s best estimate of probable losses that could be incurred within the existing portfolio of loans. The allowance, in the judgment of our management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects our management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political, environmental, and regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses. These potential increases in the allowance for loan losses would result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our business, financial condition and results of operations. See the section captioned “Asset Quality and the Allowance for Loan Losses” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion related to our process for determining the appropriate level of the allowance for loan losses.

 

8
 

Strong competition within our industry and market area could hurt our performance and slow our growth.

We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national, regional, and community banks within our market area. Additionally, various banks continue to enter or have announced plans to enter the market in which we currently operate. We also face competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking.  Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.

 

Our ability to compete successfully depends on a number of factors, including, among other things:

 

· our ability to develop, maintain and build upon long-term customer relationships based on top quality service, high ethical standards and safe, sound assets;
   
· our ability to expand our market position;
   
· our scope, relevance and pricing of products and services offered to meet customer  needs and demands;
   
· the rate at which we introduce new products and services relative to our competitors;
   
· customer satisfaction with our level of service;
   
· industry and general economic trends; and
   
· our ability to attract and retain talented employees.

 

Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our business, financial condition and results of operations.

 

We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.

Primarily through the Bank and certain non-bank subsidiaries, we are subject to extensive federal regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See the section captioned “Supervision and Regulation” in Item 1. for further discussion.

 

Compliance with the Dodd-Frank Act and other regulatory reforms may increase our costs of operations and adversely impact our earnings and capital ratios

The Dodd-Frank Act has significantly changed the bank regulatory landscape and has impacted, and will continue to impact the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.  Among other things, the Dodd-Frank Act creates a new federal financial consumer protection agency, tightens capital standards, imposes clearing and margining requirements on many derivatives activities, and generally increases oversight and regulation of financial institutions and financial activities. 

 

9
 

The scope and impact of many of the Dodd-Frank Act’s provisions will be determined over time as regulations are issued and become effective. As a result, we cannot predict the ultimate impact of the Dodd-Frank Act on us at this time, including the extent to which it could increase costs or limit our ability to pursue business opportunities in an efficient manner, or otherwise adversely affect our business, financial condition and results of operations. However, it is expected that at a minimum such provisions will increase our operating and compliance costs.  The financial reform legislation and any rules that are ultimately issued could have adverse implications on the financial industry, the competitive environment, and our business. We will apply resources to ensure that we are in compliance with all applicable provisions of the Dodd-Frank Act and any implemented rules, which may increase our costs of operations and adversely impact our earnings.

 

We are subject to liquidity risk which could adversely affect net interest income and earnings

The purpose of our liquidity management is to meet the cash flow obligations of our customers for both deposits and loans.  The primary liquidity measurement that we utilize is called Basic Surplus which captures the adequacy of our access to reliable sources of cash relative to the stability of its funding mix of average liabilities.  This approach recognizes the importance of balancing levels of cash flow liquidity from short and long-term securities with the availability of dependable borrowing sources which can be accessed when necessary.   However, competitive pressure on deposit pricing could result in a decrease in our deposit base or an increase in funding costs.  In addition, liquidity will come under additional pressure if loan growth exceeds deposit growth.  These scenarios could lead to a decrease in our basic surplus measure below the minimum policy level of 5%.  To manage this risk, we have the ability to purchase brokered time deposits, borrow against established borrowing facilities with other banks (Federal funds), and enter into repurchase agreements with investment companies.  Depending on the level of interest rates, our net interest income, and therefore earnings, could be adversely affected.  See the section captioned “Liquidity” in Item 7.

 

Our ability to pay dividends and otherwise pay our obligations as they come due is substantially dependent on capital distributions from our subsidiaries.

Our Company is a separate and distinct legal entity from our subsidiaries. We receive substantially all of our revenue from dividends from the Bank. These dividends are the principal source of funds to pay dividends on our common shares and interest and principal on our debt. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay to us. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. The Bank did not pay any dividends to us in 2014, and we cannot predict when, or if, any such dividends will be paid in the future. The inability of the Bank to pay dividends to us may impair our ability to pay obligations or pay dividends on our common shares. The continued inability to receive dividends from the Bank could have a material adverse effect on our business, financial condition and results of operations.

 

A breach of information security, including as a result of cyber-attacks, could disrupt our business and impact our earnings.

We depend upon data processing, communication and information exchange on a variety of computing platforms and networks, and over the internet.  In addition, we rely on the services of a variety of vendors to meet our data processing and communication needs.  Despite existing safeguards, we cannot be certain that all of our systems are free from vulnerability to attack or other technological difficulties or failures.  If information security is breached or difficulties or failures occur, despite the controls we and our third party vendors have instituted, information can be lost or misappropriated, resulting in financial loss or costs and reputational damage to us or damages to others. Such costs or losses could exceed the amount of insurance coverage, if any, which would adversely affect our earnings.

 

We continually encounter technological change and the failure to understand and adapt to these changes could hurt our business.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological changes affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

 

10
 

Negative developments in the housing market, financial industry and the domestic and international credit markets may adversely affect our operations and results.

Dramatic declines in the housing market over the past few years, with falling home prices and increasing foreclosures, continued high unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions.

 

The economic pressure experienced by consumers during the recent recession and lack of confidence in the financial markets has adversely affected our business, financial condition and results of operations. In particular, we have seen increases in foreclosures in our markets, increases in expenses such as loan collection and other real estate owned (“OREO”) expenses, and a low reinvestment rate environment.  While we believe the financial and housing markets are slowly recovering, we expect that the challenging conditions in these markets are likely to continue in the near future.  A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions. In particular, we may be affected in one or more of the following ways:

 

·we currently face increased regulation of our industry and compliance with such regulation may increase our costs and limit our ability to pursue business opportunities;

 

·our ability to borrow from other financial institutions or to access the debt or equity capital markets on favorable terms or at all could be adversely affected by further disruptions in the capital markets; or

 

·competition in our industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions.

 

The potential withdrawal of the Bank's deposits from public institutions present possible liquidity and earnings risks.

At December 31, 2014, approximately 12.8% of the Bank's deposits were received from public institutions. The possibility of withdrawal of such deposits, which do not tend to be long-term deposits, poses liquidity and earnings risk to us.

 

We are subject to other-than-temporary impairment risk which could negatively impact our financial performance.

We recognize an impairment charge when the decline in the fair value of debt securities below their cost basis is judged to be other-than-temporary. Significant judgment is used to identify events or circumstances that would likely have a significant adverse effect on the future use of the investment. We consider various factors in determining whether an impairment is other-than-temporary, including the severity and duration of the impairment, forecasted recovery, the financial condition and near-term prospects of the investee, and whether we have the intent to sell and whether it is more likely than not we will be forced to sell the security in question. Information about unrealized gains and losses is subject to changing conditions. The values of securities with unrealized gains and losses will fluctuate, as will the values of securities that we identify as potentially distressed. Our current evaluation of other-than-temporary impairments reflects our intent to hold securities for a reasonable period of time sufficient for a forecasted recovery of fair value. However, our intent to hold certain of these securities may change in future periods as a result of facts and circumstances impacting a specific security. If our intent to hold a security with an unrealized loss changes, and we do not expect the security to fully recover prior to the expected time of disposition, we will write down the security to its fair value in the period that our intent to hold the security changes.

 

Our controls and procedures may fail or be circumvented, which may result in a material adverse effect on our business, financial condition and results of operations.

Our management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, financial condition and results of operations.

 

The preparation of financial statements requires our management to make estimates about matters that are inherently uncertain.

Our management’s accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods in order to ensure that they comply with United States generally accepted accounting principles (“GAAP”) and reflect our management’s judgment as to the most appropriate manner in which to record and report our financial condition and results of operations. Due to the inherent nature of these estimates, we cannot provide absolute assurance that the estimates will not significantly change in subsequent periods.

 

11
 

We are exposed to risk of environmental liabilities with respect to properties to which we obtain title.

A significant portion of our loan portfolio at December 31, 2014 was secured by real estate. In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a government entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation and remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. These costs and claims could have a material adverse effect on our business, financial condition and results of operations.

 

We may be adversely affected by the soundness of other financial institutions including the FHLB of Cincinnati.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated if the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. There is no assurance that any such losses would not materially and adversely affect our business, financial condition or results of operations.

 

We own common stock of FHLB of Cincinnati in order to qualify for membership in the FHLB system, which enables the Bank to borrow funds under the FHLB of Cincinnati’s advance program.  The carrying value and fair market value of our FHLB of Cincinnati common stock was $3.2 million as of December 31, 2014.

 

There are 12 branches of the FHLB, including Cincinnati.  The 12 FHLB branches are jointly liable for the consolidated obligations of the FHLB system.  To the extent that one FHLB branch cannot meet its obligations to pay its share of the system’s debt, other FHLB branches can be called upon to make the payment.  Any such adverse effects on the FHLB of Cincinnati could adversely affect the value of our investment in its common stock and negatively impact our results of operations.

 

Future acquisitions and diversification of business products may materially and adversely affect our business, financial condition and results of operations.

We may acquire other financial institutions or parts of institutions in the future and may open new branches. We also may consider and enter into new lines of business or offer new products or services. Expansions of our business involve a number of expenses and risks, including:

 

·the time and costs associated with identifying and evaluating potential acquisitions;

 

·the potential inaccuracy of estimates and judgments used to evaluate credit, operations, management and market risk with respect to the target institutions;

 

·the time and costs of evaluating new markets, hiring local management and opening new offices, and the delay between commencing these activities and the generation of profits from the expansion;

 

·our ability to finance an acquisition or other expansion and the possible dilution to our existing shareholders;

 

·the diversion of management’s attention to the negotiation of a transaction and the integration of the operations and personnel of the combining businesses;

 

·entry into unfamiliar markets;

 

12
 

·the introduction of new products and services into our existing business;

 

·the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations; and

 

·the risk of loss of key employees and customers.

 

We may incur substantial costs to expand, and we can give no assurance that such expansion will result in the levels of profits we expect. Neither can we assure that integration efforts for any future acquisitions will be successful. We may issue equity securities in connection with acquisitions, which could dilute the economic and voting interests of our existing shareholders.

 

Trading activity in our common shares could result in material price fluctuations.

The market price of the Company’s common shares may fluctuate significantly in response to a number of factors including, but not limited to:

 

·trading in our common shares is not active, and the spread between the bid and the ask price is often wide. As a result, shareholders may not be able to sell their shares on short notice, and the sale of a large number of shares at one time could temporarily depress the market price. The price at which a shareholder may be able to sell his or her common shares may be significantly lower than the price at which he or she could buy our common shares at that time;

 

·changes in securities analysts’ expectations of financial performance;

 

·volatility of stock market prices and volumes;

 

·incorrect information or speculation;

 

·changes in industry valuations;

 

·variations in operating results from general expectations;

 

·actions taken against us by various regulatory agencies;

 

·changes in authoritative accounting guidance by the Financial Accounting Standards Board or other regulatory agencies;

 

·changes in general domestic economic conditions such as inflation rates, tax rates, unemployment rates, labor and healthcare cost trend rates, recessions, and changing government policies, laws and regulations; and

 

·severe weather, natural disasters, acts of war or terrorism and other external events.

 

We undertake no obligation and disclaims any intention to publish revised information or updates to forward-looking statements contained in the above risk factors or in any other statement made at any time by any director, officer, employee or other representative of our Company unless and until any such revisions or updates are required to be disclosed by applicable securities laws or regulations.

 

Item 1B. Unresolved Staff Comments

 

We have no unresolved staff comments.

 

Item 2. Properties

 

We conduct business in Central Ohio through 14 branch offices and our corporate headquarters. We own our corporate headquarters located in Lewis Center, OH and five of our branches. Nine branch offices are subject to leases and/or long-term land leases.

 

Item 3. Legal Proceedings

 

There is no pending litigation of a material nature, other than routine litigation incidental to the business of the Company and Bank, to which the Company or any of its affiliates is a party or of which any of their property is the subject. Further, there are no material legal proceedings in which any director, executive officer, principal shareholder or affiliate of the Company is a party or has a material interest which is adverse to the Company or Bank. There is no routine litigation in which the Company or Bank is involved which is expected to have a material adverse impact on the financial position or results of operations of the Company or Bank.

 

13
 

 

Item 4.Mine Safety Disclosures

 

Not applicable.

 

PART II

 

Item 5.Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

 

Our common shares are quoted on OTCQB Marketplace under the symbol “DCBF.” The table below sets forth the high and low sale transactions for our common shares for the indicated periods. These quotations reflect inter-dealer prices, without retail markup, markdown or commission, and may not represent actual transactions.

 

   2014   2013 
   High   Low   Dividends
Declared
   High   Low   Dividends
Declared
 
1st Quarter  $6.65   $5.98   $-   $5.50   $4.60   $- 
2nd Quarter  $7.50   $6.20   $-   $5.60   $5.00   $- 
3rd Quarter  $7.77   $7.27   $-   $5.60   $5.17   $- 
4th Quarter  $7.50   $6.86   $-   $6.24   $5.35   $- 

 

As of March 12, 2015, our common shares were held of record by 1,401 shareholders.

 

Management does not have knowledge of the prices in all transactions and has not verified the accuracy of those prices that have been reported. Because of the lack of an established market for our stock, these prices may not reflect the prices at which the stock would trade in a more active market. The Company sold no securities during 2014 or 2013 that were not registered under the Securities Act of 1933.

 

Our income primarily consists of dividends, which may be declared by the Board of Directors of the Bank and paid on common shares of the Bank held by the Company. During 2009 we ceased the payment of regular cash dividends and, no assurances can be given that any dividends will be declared or, if declared in the future, what the amount of any such dividends will be. The Bank did not pay dividends to the Company during 2014 or 2013, and we did not pay dividends to our shareholders. See note 13 to the Consolidated Financial Statements for a description of dividend restrictions.

 

14
 

  

Item 6. Selected Financial Data

 

The following tables set forth certain information concerning the consolidated financial condition, results of operations and other data regarding the Company at the dates and for the periods indicated.

 

   Year ended December 31, 
   2014   2013   2012   2011   2010 
Selected Financial Condition Data  (In thousands) 
Total assets  $515,382   $502,419   $506,492   $522,881   $565,105 
Cash and cash equivalents   21,274    25,357    63,307    39,314    33,521 
Securities available for sale   75,909    79,948    87,197    88,113    69,597 
Securities held to maturity   -    -    1,149    1,010    1,313 
Net loans   381,208    349,324    310,623    350,183    412,617 
Loans held for sale   -    7,806    -    -    - 
Deposits   453,192    426,859    448,290    445,428    465,076 
Deposits held for sale   -    22,571    -    -    - 
Borrowings   11,808    4,838    7,498    40,036    59,767 
Shareholders’ equity  $47,211   $45,264   $48,389   $34,699   $37,414 

 

   Year ended December 31, 
   2014   2013   2012   2011   2010 
Selected Operating Data  (In thousands, except per share data) 
Interest income  $17,380   $17,079   $18,848   $22,732   $28,118 
Interest expense   1,212    1,818    3,238    5,113    6,925 
Net interest income   16,168    15,261    15,610    17,619    21,193 
Provision for loan losses   150    2,417    495    5,436    11,040 
Net interest income after provision for loan losses   16,018    12,844    15,115    12,183    10,153 
Noninterest income   4,460    4,967    5,024    6,358    6,115 
Noninterest expense   20,106    21,040    19,606    21,292    23,488 
Income (loss) before income tax   372    (3,229)   533    (2,751)   (7,220)
Income tax (benefit) expense   -    (298)   (69)   (13)   5,110 
Net income (loss)  $372   $(2,931)  $602   $(2,738)  $(12,330)
                          
Per Share Data:                         
Basic earnings (loss) per share  $0.05   $(0.41)  $0.15   $(0.74)  $(3.32)
Diluted earnings (loss) per share  $0.05   $(0.41)  $0.15   $(0.74)  $(3.32)
Dividends declared per share  $-   $-   $-   $-   $- 

 

   At or for the year ended December 31, 
Selected Financial Ratios  2014   2013   2012   2011   2010 
Interest rate spread   3.65%   3.16%   3.20%   3.26%   3.44%
Net interest margin   3.49%   3.28%   3.35%   3.39%   3.58%
Return on average assets   0.07%   (0.58)%   0.12%   (0.49)%   (1.93)%
Return on average equity   0.82%   (6.01)%   1.73%   (7.41)%   (26.33)%
Average equity to average assets   9.06%   9.39%   6.83%   6.56%   7.32%
Allowance for loan losses as a percentage of non-accrual loans   306.1%   87.6%   129.1%   100.1%   73.8%

 

15
 

  

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

2014 Highlights and Overview

Our results of operations are dependent primarily on net interest income, which is the difference between the income earned on our loans and leases and securities and our cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the provision for loan losses, securities and loan sale activities, loan servicing activities, service charges and fees collected on our deposit accounts, income collected from trust and investment advisory services and the income earned on our investment in bank-owned life insurance. Our expenses primarily consist of salaries and employee benefits, occupancy and equipment expense, marketing expense, professional services, technology expense, other expense and income tax expense. Results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, inflation, government policies and the actions of regulatory authorities.

 

The following is a summary of key financial results for the year ended December 31, 2014:

 

·Total assets were $515.4 million and $502.4 million and total deposits were $453.2 million and $426.9 million at December 31, 2014 and December 31, 2013, respectively.

 

·Total loans were $385.4 million at the end of 2014, compared with $356.0 million at the end of 2013.

 

·Net income in 2014 was $372,000, compared to a net loss of $2.9 million in 2013.

 

·Net income per diluted common share was $0.05 in 2014, compared with a net loss of $(0.41) in 2013.

 

·Net interest income was $16.2 million in 2014, compared with $15.3 million in 2013.

 

·The net interest margin was 3.49% in 2014, compared with 3.28% in 2013.

 

·Provision for loan losses was $150,000 in 2014, compared with $2.4 million in 2013.

 

·Total non-performing assets were $12.6 million or 2.4% of total assets at December 31, 2014, compared with $23.2 million, or 4.6% at December 31, 2013. Troubled debt restructurings which are performing in accordance with the restructured terms and are on an accrual basis, but which are classified as non-performing assets were $9.6 million at December 31, 2014, compared with $12.8 million at December 31, 2013.

 

·Non-interest income, excluding gains and losses on the sales of securities, sale of branch, loans held-for-sale and real estate owned (“REO”), was 21.8% of total revenue (net-interest income plus non-interest income less gains and losses) in 2014, compared with 23.9% in 2013.

 

·Our efficiency ratio was 97.2% in 2014, compared with 104.9% in 2013.

 

The following discussion is intended to assist in understanding our financial condition and results of operations. This discussion should be read in conjunction with our consolidated financial statements and accompanying notes contained elsewhere in this report.

 

16
 

  

Average Balance Sheet

The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the yields and rates thereon. Non-accrual loans have been included in the average balances. Securities are shown at average amortized cost.

 

   Year ended December 31, 
   2014   2013 
   Average
Balance
   Amount
of
Interest
   Yield/
Rate
   Average
Balance
   Amount
of
Interest
   Yield/
Rate
 
   (Dollars in thousands) 
Assets:                              
Interest-earning assets:                              
Interest-bearing deposits  $16,576   $39    0.24%  $32,799   $87    0.27%
Investment securities   83,018    2,065    2.49%   89,790    2,064    2.30%
Residential real estate loans and home equity   115,404    4,322    3.75%   85,760    3,282    3.94%
Consumer loans and credit cards   35,008    1,945    5.56%   28,610    1,775    6.20%
Commercial and industrial loans   106,890    4,365    4.06%   120,895    5,205    4.31%
Commercial real estate   106,038    4,644    4.38%   107,150    4,666    4.35%
Total loans   363,340    15,276    4.20%   342,415    14,928    4.36%
                               
Total interest-earning assets   462,934    17,380    3.75%   465,004    17,079    3.67%
                               
Noninterest-earning assets:                              
Other assets   44,769              47,413           
Allowance for loan losses   (5,080)             (6,669)          
Net unrealized gains on
securities available-for-sale
   724              1,065           
Total  $503,347             $506,813           
                               
                               
Liabilities and Shareholder’s Equity:                              
Interest-bearing liabilities:                              
Demand deposits  $78,447   $76    0.10%  $74,853    91    0.12%
Savings deposits   42,845    60    0.14%   40,953    61    0.15%
Money market deposits   136,393    499    0.37%   116,872    413    0.35%
Time deposits   80,113    434    0.54%   116,151    989    0.85%
Total interest-bearing deposits   337,798    1,069    0.32%   348,829    1,554    0.45%
Borrowings   5,687    143    2.52%   5,916    264    4.46%
Total interest-bearing liabilities   343,485    1,212    0.35%   354,745    1,818    0.51%
                               
Noninterest-bearing liabilities:                              
Demand deposits   110,457              101,575           
Other liabilities   3,791              2,883           
Shareholders’ equity   45,614              47,610           
Total  $503,347             $506,813           
                               
Net interest income; interest rate spread       $16,168    3.40%       $15,261    3.16%
Net interest margin             3.49%             3.28%
                               
Average interest-earning assets to
average interest-bearing liabilities
   134.8%             131.1%          

 

17
 

  

Rate/Volume Analysis

The following table sets forth the dollar volume of increase (decrease) in interest income and interest expense resulting from changes in the volume of interest-earning assets and interest-bearing liabilities, and from changes in rates. Volume changes are computed by multiplying the volume difference by the prior year’s rate. Rate changes are computed by multiplying the rate difference by the prior year’s volume. The change in interest due to both rate and volume has been allocated proportionally between the volume and rate variances.

 

   2014 compared to 2013
Increase (decrease) due to
   2013 compared to 2012
Increase (decrease) due to
 
   Volume   Rate   Net
Change
   Volume   Rate   Net
Change
 
   (In thousands) 
Interest-bearing deposits  $(39)  $(9)  $(48)  $(22)  $11   $(11)
Investment securities   (162)   163    1    (133)   (210)   (343)
Residential real estate loans and home equity   675    365    1,040    623    (788)   (165)
Consumer loans and credit cards   367    (197)   170    642    (458)   184 
Commercial and industrial loans   (560)   (280)   (840)   268    (923)   (655)
Commercial real estate   (52)   30    (22)   (403)   (376)   (779)
Total interest-earning assets   229    72    301    975    (2,744)   (1,769)
                               
Interest-bearing demand   4    (19)   (15)   (4)   10    6 
Savings   3    (4)   (1)   9    -    9 
Money market   72    14    86    82    11    93 
Time deposits   (255)   (300)   (555)   (438)   (467)   (905)
Borrowings   (10)   (111)   (121)   (675)   52    (623)
 Total interest-bearing liabilities   (186)   (420)   (606)   (1,026)   (394)   (1,420)
                               
Net interest income  $415   $492   $907   $2,001   $(2,350)  $(349)

 

Comparison of Operating Results for the Years Ended December 31, 2014 and 2013

 

General

Net income was $372,000 or $0.05 per diluted common share for the year ended December 31, 2014, compared to a net loss of $2.9 million or $(0.41) per diluted common share in 2013. Net interest income increased $907,000 and the provision for loan losses decreased $2.3 million, respectively, in 2014 compared to 2013. The return on average assets and return on average shareholders’ equity were 0.07% and 0.82%, respectively, in 2014, compared with (0.58)% and (6.01)%, respectively, in 2013.

 

Net Interest Income

Net interest income totaled $16.2 million in 2014, which was an increase of $907,000 or 5.9% compared with $15.3 million in 2013. The net interest margin was 3.49% in 2014, compared to 3.28% in 2013. The earning assets yield increased 8 basis points in 2014, due largely to loan growth, and the cost of interest-bearing liabilities decreased 16 basis points over the same period due primarily to the movement of maturing time accounts to lower rate non-maturity accounts.

 

Average interest-earning assets were $462.9 million in 2014, which was a decrease of $2.1 million from 2013, but was more heavily weighted in loans in 2014. Average loans outstanding increased $20.9 million in 2014 compared with 2013, while the average balance of interest earning cash balances decreased $16.2 million and average investments decreased $6.8 million in 2014 when compared with 2013, as we used our excess liquidity position to fund organic loan growth. Total average loans were 78.5% of average interest-earning assets in 2014, compared with 73.6% of average interest-earning assets in 2013.

 

The cost of our interest-bearing liabilities decreased in 2014 compared to 2013 due to a combination of the low interest rate environment, our deposit pricing strategies and a deposit mix that remains heavily weighted in lower-cost interest-bearing demand, savings and money market accounts, whose rates can be immediately changed at our discretion. The average cost of our money market accounts was 0.37% in 2014, compared with 0.35% in 2013. The average cost of our time deposits dropped 31 basis points, to 0.54% in 2014. Average interest-bearing transaction accounts (non-maturity accounts) comprised 76.3% of total average interest-bearing deposits in 2014, compared to 66.7% in 2013.

 

18
 

  

Non-maturity transaction accounts (interest and non-interest-bearing) comprised the majority of our funding sources in 2014 as depositors continue to refrain from investing funds in time accounts at very low, yet competitive rates, and also because of the buildup of cash on corporate customers’ balance sheets. The aggregate average balance of transaction accounts was $368.1 million or 82.1% of total average deposits in 2014, compared with $334.3 million or 74.2% of total average deposits in 2013. Average time account balances in 2014 were $80.1 million or 17.9% of total average deposits, compared with $116.2 million or 25.8% in 2013. Our ability to gather and retain transaction deposits reflects a high positive awareness of our brand in the communities in which we operate. Environmental factors such as equity market volatility and risk aversion among retail investors have also played a role in the growth in our transaction accounts.

 

Our cost of interest-bearing liabilities was also reduced in 2014 by a restructuring of advances from the Federal Home Loan Bank which we executed in November 2013. The restructuring contributed to a 194 basis point decrease in the cost of borrowings in 2014 compared to 2013.

 

Non-Interest Income

Our non-interest income is comprised of service charges on deposits, fees from investment management trust and brokerage services, and other recurring operating income fees from normal banking operations, along with non-core components that primarily consist of net gains or losses from sales of investment securities.

 

The following table sets forth certain information on non-interest income for the years indicated:

 

   Year ended December 31,         
   2014   2013   Change 
   (Dollars in thousands)     
Service charges  $1,963   $2,195   $(232)   (10.6)%
Wealth management fees   1,474    1,418    56    3.9%
Treasury management fees   220    244    (24)   (9.8)%
Income from bank owned life insurance   730    733    (3)   (0.4)%
Gain on sales of securities available-for-sale   101    135    (34)   (25.2)%
Losses on loans held-for-sale   (509)   -    (509)   NM 
Net (loss) gain on sale of REO   (84)   31    (115)   (371.0)%
Gain on sale of branch   438    -    438    NM 
Other   127    211    (84)   (39.8)%
Total non-interest income  $4,460   $4,967   $(507)   (10.2)%

 

Non-interest income was $4.5 million in 2014, compared to $5.0 million in 2013. Non-recurring write-downs and losses on loans and REO, net of securities gains, were $54,000 in 2014, compared to net non-recurring gains of $166,000 in 2013. Service charges decreased $232,000 in 2014 compared to 2013 due primarily to lower volumes of customer overdraft and debit card transactions.

 

Non-interest income (net of nonrecurring income, gains and losses and gains/losses on the sales of securities) accounted for 21.8% of total revenue in 2014, compared with 23.9% in 2013.

 

19
 

  

The following table sets forth certain information on non-interest expenses for the years indicated (dollars in thousands):

 

   Year ended December 31,         
   2014   2013   Change 
   (Dollars in thousands)     
Salaries and employee benefits  $11,141   $11,287   $(146)   (1.3)%
Occupancy and equipment   3,192    3,069    123    4.0%
Professional services   1,379    1,791    (412)   (23.0)%
Advertising   347    293    54    18.4%
Office supplies, postage and courier   328    481    (153)   (31.8)%
FDIC insurance premium   630    699    (69)   (9.9)%
State franchise taxes   266    478    (212)   (44.4)%
Other   2,823    2,942    (119)   (4.0)%
Total non-interest expenses  $20,106   $21,040   $(934)   (4.4)%

 

Non-interest expenses were $20.1 million in 2014, which was a decrease of $934,000 or 4.4% compared to 2013. Professional services decreased $412,000 due to the substantial reduction in non-performing assets in 2014 which has resulted in a reduced need for outside professional services related to the workout of such assets. Office supplies, postage and courier expenses declined $153,000 in 2014 due primarily to expense reduction initiatives. State franchise taxes decreased $212,000 in 2014 due to a change in the tax law which changed how the tax was calculated in 2014. Non-interest expenses in 2014 included approximately $314,000 of non-routine expenses, consisting primarily of legal expenses covering matters of corporate governance, capital management, corporate equity plans and the special meeting of shareholders held in October 2014, among other things.

 

Our efficiency ratio was 97.2% in 2014, compared to 104.9% in 2013.

 

Income Taxes

We had net deferred tax assets totaling $10.4 million and $11.6 million, respectively, at December 31, 2014 and December 31, 2013, of which approximately 99% and 94%, respectively, were attributable to net operating loss carry-forwards and timing differences between the provision for loan losses and the charge-off of loans.

 

Comparison of Financial Condition at December 31, 2014 and December 31, 2013

 

General

Total assets were $515.4 million at December 31, 2014, compared with $502.4 million at December 31, 2013. Loans (including loans held-for-sale) were $385.4 million at the end of 2014, representing growth of $21.6 million or 5.9% from the end of 2013.

 

Securities

The securities portfolio is designed to provide a favorable total return utilizing low-risk, high-quality securities while at the same time assisting in meeting the liquidity needs of our loan and deposit operations, and supporting our interest rate risk objectives. Our securities portfolio is predominately comprised of investment grade mortgage-backed securities, securities issued by U.S. government sponsored entities and municipal securities. We classify all of our securities as available-for-sale. We do not engage in securities trading or derivatives activities in carrying out our investment strategies.

 

20
 

  

The following table sets forth the amortized cost and market value for our available-for-sale securities portfolio:

 

   At December 31, 
   2014   2013 
   Amortized
Cost
   Fair Value   Amortized
Cost
   Fair Value 
   (In thousands) 
U.S. Government and agency obligations  $11,602   $11,545   $13,714   $13,302 
Corporate bonds   4,975    4,987    6,187    6,168 
States and municipal obligations   21,303    21,657    20,651    20,450 
Collateralized debt obligations   -    -    1,916    976 
Collateralized mortgage obligations   19,601    19,580    15,217    15,045 
Mortgage-backed securities   17,438    18,140    23,435    24,007 
Total  $74,919   $75,909   $81,120   $79,948 

 

Investment securities totaled $75.9 million at December 31, 2014, compared with $79.9 million at December 31, 2013. Our portfolio is comprised primarily of investment grade securities, the majority of which are rated “AAA” by one or more of the nationally recognized rating agencies. The breakdown of the securities portfolio at December 31, 2014 was 23.9% government-sponsored entity guaranteed mortgage-backed securities, 25.8% collateralized mortgage obligations, 28.5% municipal securities, 15.2% obligations of U.S. government-sponsored corporations and 6.6% corporate bonds. Mortgage-backed securities, which totaled $18.1 million at December 31, 2014, are comprised primarily of pass-through securities backed by conventional residential mortgages and guaranteed by Fannie-Mae, Freddie-Mac or Ginnie Mae, which in turn are backed by the U.S. government.

 

We had net unrealized gains of approximately $990,000 in our securities portfolio at December 31, 2014, compared with net unrealized losses of $1.2 million at December 31, 2013.

 

In March 2014, we sold the remaining collateralized debt obligation in our securities portfolio and recognized a loss of $141,000 on the sale. The actual loss recognized on the sale was substantially lower than the $940,000 unrealized loss on this security at the end of 2013 as increased investor demand for these types of securities pushed prices higher in the first quarter of 2014.

 

The following table sets forth as of December 31, 2014, the maturities and the weighted-average yields of our debt securities, which have been calculated on the basis of the amortized cost, weighted for scheduled maturity of each security, and adjusted to a fully tax-equivalent basis (dollars in thousands):

 

   At December 31, 2014 
   Within
one
year or
less
   After one
year but
within five
years
   After five
years but
within ten
years
   After
ten
years
   Total 
                     
U.S. Government and agency obligations  $-   $4,965   $5,616   $964   $11,545 
Corporate bonds   1,247    2,308    1,432    -    4,987 
States and municipal obligations   183    4,683    11,636    5,155    21,657 
Collateralized mortgage obligations   -    701    5,014    13,865    19,580 
Mortgage-backed securities   -    1,925    3,378    12,837    18,140 
Total  $1,430   $14,582   $27,076   $32,821   $75,909 
Weighted average yield at year-end   2.11%   1.77%   2.73%   2.55%   2.49%

 

Loans

The loan portfolio is the largest component of our interest-earning assets and it generates the largest portion of our interest income. We provide a full range of credit products through our branch network and through our commercial lending line of business. Consistent with our focus on providing community banking services, we generally do not attempt to diversify geographically by making a significant amount of loans to borrowers outside of our primary service area. Loans are primarily generated internally and the majority of our lending activity takes place in the Central Ohio counties of Delaware, Franklin, Union, and other nearby counties.

 

21
 

  

Loans (including loans held-for-sale and deferred loan costs) were $385.4 million at the end of 2014, representing growth of $21.6 million or 5.9% from the end of 2013. The loan growth was concentrated in our residential mortgage and home equity loan portfolio, which increased $31.0 million in 2014. Our commercial loan portfolios decreased $11.7 million in 2014, due in large part to weak loan demand early in 2014 combined with the significant decline in the outstanding balances on non-performing loans and prepayments of certain large commercial relationships. Loan demand strengthened in the second half of 2014, resulting in growth in our commercial portfolios of $9.8 million in the fourth quarter of 2014, which partially offset a $21.6 million decrease in our commercial portfolios in the first nine months of 2014.

 

The following table sets forth the composition of our loan portfolio, excluding deferred loan costs and including loans held-for-sale at the dates indicated:

 

   At December 31, 
   2014   2013   2012   2011   2010 
   (In thousands) 
Commercial and industrial  $106,222   $122,901   $112,300   $126,225   $155,410 
Commercial real estate   111,851    106,901    111,417    129,958    152,374 
Residential and home equity   129,650    98,622    72,137    83,814    94,399 
Consumer and credit card   37,507    35,265    21,620    19,770    23,411 
Total loans  $385,230   $363,689   $317,474   $359,767   $425,594 

 

At December 31, 2013, total loans included $7.8 million in loans held for sale. At December 31, 2014, 2012 and 2011, there were no loans held-for-sale. At December 31, 2010 there were $753,000 in loans held-for-sale, which consisted entirely of residential mortgage loans for sale on the secondary market.

 

The following table shows the amount of loans outstanding (excluding loans held for sale) as of December 31, 2014, which, based on remaining scheduled payments of principal, are due in the periods indicated:

 

   Maturing
within one
year or less
   Maturing
after one but
within five years
   Maturing after
five but
within ten years
   Total 
   (In thousands) 
Commercial real estate  $15,651   $35,455   $55,116   $106,222 
Commercial and industrial   8,346    47,444    56,061    111,851 
Residential and home equity   20,455    1,460    107,735    129,650 
Consumer and credit card   6,115    3,832    27,560    37,507 
Total  $50,567   $88,191   $246,472   $385,230 

 

The following table sets forth the sensitivity to changes in interest rates as of December 31, 2014:

 

   Fixed Rate   Variable Rate   Total 
   (In thousands) 
Due after one year, but within five years  $59,602   $28,589   $88,191 
Due after five years   152,209    94,263    246,472 

 

22
 

  

Asset Quality and the Allowance for Loan Losses

 

The following table summarizes delinquent loans grouped by the number of days delinquent at December 31, 2014:

 

   30-59
days past
due
   60-89
days
past
due
   Greater
than 90
days
past due
   Total
past due
   Current   Total
Loans
   Recorded
investment
> 90 days
and
Accruing
 
   (In thousands) 
Consumer and credit card  $66   $7   $120   $193   $37,314   $37,507   $- 
Commercial and industrial   68    -    -    68    111,783    111,851    - 
Commercial real estate   49    -    306    355    105,867    106,222    - 
Residential real estate and Home equity   220    30    642    892    128,758    129,650    480 
Total  $403   $37   $1,068   $1,508   $383,722   $385,230   $480 

 

The following table represents information concerning the aggregate amount of non-performing assets (includes certain loans held-for-sale at December 31, 2013):

 

   At December 31, 
   2014   2013   2012   2011   2010 
   (In thousands) 
Non-accruing loans:                         
Residential real estate loans and home equity  $334   $352   $321   $451   $389 
Commercial real estate   298    2,624    2,195    6,698    10,102 
Commercial and industrial   632    4,702    2,815    2,381    6,043 
Consumer loans and credit cards   120    -    -    46    33 
Total non-accruing loans   1,384    7,678    5,331    9,576    16,567 
Accruing loans delinquent 90 days or more   480    560    643    1,812    2,515 
Total non-performing loans   1,864    8,238    5,974    11,388    19,082 
                          
Collateralized debt obligations   -    976    1,149    1,010    1,313 
Other real estate and repossessed assets   1,111    1,219    3,671    4,605    5,284 
Total non-performing assets  $2,975   $10,433   $10,794   $17,003   $25,679 
                          
Restructured loans not included above(1)  $9,634   $12,788   $20,080   $22,219   $15,163 
Total non-performing loans (including TDR’s)   11,498    21,026    26,054    33,607    34,245 
Total non-performing assets (including TDR’s)   12,609    23,221    30,874    39,222    40,842 

 

(1) TDR’s that are in compliance with their modified terms and accruing interest.

 

Delinquent loans (including loans greater than 30 days past due) totaled $1.5 million or 0.39% of total loans at December 31, 2014, compared with $4.4 million or 1.2% at December 31, 2013. Non-performing assets, defined as non-accrual loans plus loans 90 days or more past due, other real estate owned and repossessed assets, impaired investment securities, and troubled debt restructurings not included in non-accrual loans were $12.6 million or 2.45% of total assets at December 31, 2014, compared with $23.2 million or 4.62% of total assets at December 31, 2013. Troubled debt restructurings (“TDR’s”) which are performing in accordance with the restructured terms and accruing interest, but are included in non-performing assets, were $9.6 million at December 31, 2014 compared with $12.8 million at December 31, 2013. Included in non-performing assets at the end of 2014 are non-performing loans totaling $1.9 million or 0.48% of total loans, compared with $8.2 million or 2.27% of total loans (including loans held for sale) at December 31, 2013.

 

We made significant progress in reducing our non-performing assets in 2014, which were down $10.6 million or 45.7% during the year largely as the result of the execution of previously disclosed strategies developed in the fourth quarter of 2013 to accelerate the disposition of certain troubled assets. Our exposure to the three highest risk troubled commercial relationships with aggregate balances at the end of 2013 of $7.0 million was reduced by $6.8 million in 2014 through a combination of collection actions, negotiated settlements, and asset sales, which resulted in charge-offs of $1.9 million and cash collections of $4.7 million, much of which occurred in the first three quarters of 2014. Non-performing assets decreased $2.4 million during the fourth quarter of 2014, due primarily to the successful workout of two non-accrual commercial real estate loans totaling $961,000, and to cash pay-downs of $585,000 on a third non-accrual commercial mortgage.

 

23
 

 

As a recurring part of our portfolio management program, we have classified certain loans as “substandard” in our loan rating system. Substandard loans (excluding loans held-for-sale) total approximately $13.9 million at December 31, 2014, compared with $24.2 million at December 31, 2013. Substandard loans are loans that are currently performing, but where the borrower’s operating performance or other relevant factors could result in potential credit problems. At December 31, 2014, substandard loans consisted of commercial loans and commercial real estate. There can be no assurance that additional loans will not become non-performing, require restructuring, or require increased provision for loan losses.

 

We have a loan monitoring program that evaluates non-performing loans and the loan portfolio in general. The loan review program continually audits the loan portfolio to confirm management’s loan risk rating system, and systematically tracks such problem loans and to ensure compliance with loan policy underwriting guidelines, and to evaluate the adequacy of the allowance for loan losses.

 

Our policy is to place a loan on non-accrual status and recognize income on a cash basis when a loan is more than 90 days past due, unless in the opinion of management, the loan is well secured and in the process of collection. Interest payments received on non-accrual loans may be applied to the principal balance of the loan in situations where management believes full collection of the principal amount owed is not probable. The impact of interest not recognized on non-accrual loans was $241,000 in 2014 and $175,000 in 2013.

 

The allowance for loan losses represents our management’s best estimate of probable incurred losses in our loan portfolio. Our management’s quarterly evaluation of the allowance for loan losses is a comprehensive analysis that builds a total allowance by evaluating the probable incurred losses within each loan portfolio segment. Our portfolio segments are as follows: commercial loan and commercial real estate loans, residential real estate and consumer loans. Our allowance for losses consists of specific valuation allowances based on probable credit losses on specific loans, historical valuation allowances based on loan loss experience for similar loans with similar characteristics and trends and general valuation allowances based on general economic conditions and other qualitative risk factors both internal and external to the organization.

 

Historical valuation allowances are calculated for commercial loans based on the historical loss experience of specific types of loans and the internal risk grade 24 months prior to the time they were charged off. The internal credit risk grading process evaluates, among other things, the borrower’s ability to repay, the underlying collateral, if any, and the economic environment and industry in which the borrower operates. Historical valuation allowances for residential real estate and consumer loan segments are based on the average loss rates for each class of loans for the time period that includes the current year and two full prior years. We calculate historical loss ratios for pools of similar consumer loans based upon the product of the historical loss ratio and the principal balance of the loans in the pool. Historical loss ratios are updated quarterly based on actual loss experience. Our general valuation allowances are based on general economic conditions and other qualitative risk factors which affect our company. Factors considered include trends in our delinquency rates, macro-economic and credit market conditions, changes in asset quality, changes in loan and lease portfolio volumes, concentrations of credit risk, the changes in internal loan policies, procedures and internal controls, experience and effectiveness of lending personnel. Management evaluates the degree of risk that each one of these components has on the quality of the loan and lease portfolio on a quarterly basis.

 

For commercial loan and commercial real estate segments, we maintain a specific allocation methodology for those classified in our internal risk grading system as substandard, doubtful or loss with a principal balance in excess of $200,000. A loan is considered impaired, based on current information and events, if it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the estimated fair value of the collateral. Loans with modified terms in which a concession to the borrower has been made that it would not otherwise consider unless the borrower was experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.  As of December 31, 2014, there was $12.2 million in impaired loans for which $1.3 million in related allowance for loan losses was allocated. There was $22.9 million in impaired loans for which $4.2 million in related allowance for credit losses was allocated as of December 31, 2013.

 

Loans are charged against the allowance for loan losses, in accordance with our loan lease policy, when they are determined by management to be uncollectible. Recoveries on loans previously charged off are credited to the allowance for loan losses when they are received. When management determines that the allowance for loan losses is less than adequate to provide for probable incurred losses, a direct charge to operating income is recorded.

 

24
 

  

The following table summarizes changes in the allowance for loan losses arising from loans charged off, recoveries on loans previously charged off and additions to the allowance, which have been charged to expense.

 

   Year ended December 31, 
   2014   2013   2012   2011   2010 
   (Dollars in thousands) 
Balance at beginning of year  $6,724   $6,881   $9,584   $12,247   $10,479 
                          
Loans charged-off:                         
Commercial and industrial   (1,410)   (86)   (1,926)   (2,034)   (2,261)
Commercial real estate   (1,086)   (1,038)   (1,366)   (5,562)   (6,175)
Residential real estate and home equity   (169)   (331)   (74)   (278)   (498)
Consumer and credit card   (200)   (286)   (372)   (567)   (824)
Total loans charged-off   (2,865)   (1,741)   (3,738)   (8,441)   (9,758)
                          
Loan recoveries:                         
Commercial and industrial   42    823    251    58    270 
Commercial real estate   131    38    47    27    4 
Residential real estate and home equity   38    52    18    10    12 
Consumer and credit card   113    219    224    247    200 
Total loan recoveries   324    1,132    540    342    486 
                          
Net loans charged-off   (2,541)   (609)   (3,198)   (8,099)   (9,272)
                          
Allowance related to loans transferred to held-for-sale   (97)   (1,965)   -    -    - 
Provision for loan losses   150    2,417    495    5,436    11.040 
Balance at end of year  $4,236   $6,724   $6,881   $9,584   $12,247 
                          
Ratio of net charge-offs to average loans outstanding   0.70%   0.18%   0.97%   2.05%   2.00%

 

Net charge-offs were $2.5 million or 0.70% of average loans in 2014, compared to $609,000 or 0.18% in 2013. Approximately 67.1% of the gross charge-offs in 2014 were charged against specific allowance allocations established in the fourth quarter of 2013 for the three highest risk commercial relationships in connection with the non-performing asset reduction strategy developed in last year’s fourth quarter.

 

The provision for loan losses was $150,000 for the year ended December 31, 2014, compared to $2.4 million for the year ended December 31, 2013. The provision expense recorded in the fourth quarter of 2013 was $3.3 million and was attributable to the strategies we developed at that time to accelerate the reduction of the exposure to the three highest risk commercial relationships, and to a group of homogenous single-family residential investment properties. Taken together, loan loss provisions allocated to these four exposures totaled $3.3 million or 100% of the provision expense for the fourth quarter of 2013. The provision for loan losses as a percentage of net charge-offs was 166.7% and 5.9%, respectively, in the quarter and year ended December 31, 2014, compared to 303.7% and 396.9%, respectively, in the year ago periods. The provision for loan losses as a percentage of net charge-offs was 95.2% for the five quarters ending December 31, 2014.

 

The allowance for loan losses was $4.2 million at December 31, 2014, compared with $6.7 million at December 31, 2013. The decrease in the allowance for loan losses in 2014 was a direct result of write-downs taken on loans in 2014 against the loan loss allowances established for these loans at or prior to the end of 2013. The ratio of the allowance for loan losses to total loans was 1.10% at December 31, 2014, compared with 1.85% at December 31, 2013. The ratio of the allowance for loan losses to non-performing loans (including TDR’s) was 38.5% at December 31, 2014, compared with 33.2% at December 31, 2013. The ratio of the allowance for loan losses to non-accrual loans was 306% at December 31, 2014, compared with 88% at December 31, 2013.

 

25
 

  

The allowance for loan losses has been allocated within the following categories of loans at the dates indicated with the corresponding percent of loans to total loans (excluding loans held-for-sale) for each category:

 

   At December 31, 
   2014   2013   2012   2011   2010 
   Amount
of
Allowance
   Percent
of
Loans
to Total
Loans
   Amount
of
Allowance
   Percent
of
Loans
to Total
Loans
   Amount
of
Allowance
   Percent
of
Loans
to Total
Loans
   Amount
of
Allowance
   Percent
of
Loans
to Total
Loans
   Amount
of
Allowance
   Percent
of
Loans
to Total
Loans
 
   (Dollars in thousands) 
Commercial and industrial  $1,132    27.6%  $2,973    34.3%  $1,620    35.4%  $1,952    35.1%  $4,174    36.6%
Commercial real estate   2,376    29.0%   3,231    29.5%   4,692    35.1%   6,916    36.1%   6,786    35.9%
Residential real estate and home equity   268    33.7%   219    27.0%   204    22.7%   291    23.3%   491    22.0%
Consumer and credit card   190    9.7%   301    9.2%   365    6.8%   425    5.5%   796    5.5%
Unallocated   270    -    -    -    -    -    -    -    -    - 
Total  $4,236    100.0%  $6,724    100.0%  $6,881    100.0%  $9,584    100.0%  $12,247    100.0%

 

The allowance for loan losses is allocated according to the amount deemed to be reasonably necessary to provide for the probable incurred losses within each loan category. The higher amounts allocated to the commercial loan and commercial real estate portfolios reflect the higher outstanding balances of these portfolios coupled with the higher inherent risk of these portfolios compared with residential and consumer lending.

 

Deposits

Our primary source of funds is deposits, consisting of demand, savings, money market and time accounts, of retail, commercial and municipal customers gathered through our branch network. We continuously monitor market pricing, competitors’ rates, and internal interest rate spreads to maintain and promote growth and profitability.

 

The following table sets forth the composition of our deposits by business line at December 31, 2014 (dollars in thousands):

 

   Amount   Percent 
Non-interest bearing demand  $111,022    24.5%
Interest bearing demand   77,534    17.1%
Total demand   188,556    41.6%
           
           
Savings   42,634    9.4%
Money market   147,667    32.6%
Time deposits   74,335    16.4%
Total deposits  $453,192    100.0%

 

Deposits totaled $453.2 million at December 31, 2014, compared with $449.4 million at December 31, 2013. Our deposit mix at the end of 2014 continued to be weighted heavily in lower cost demand, savings and money market accounts, which totaled $378.9 million or 83.6% of total deposits at the end of 2014, compared to $360.0 million or 80.1% of total deposits at the end of 2013, as we continued to experience a shift into these accounts from maturing time accounts as depositors in general continue to exhibit a reluctance to place funds in time accounts in the low interest rate environment.

 

Time deposits in excess of $100,000, which tend to be more volatile and sensitive to interest rates, totaled $47.3 million at December 31, 2014, representing 63.6% of total time deposits and 10.4% of total deposits. These deposits totaled $46.2 million, representing 54.8% of total time deposits and 10.3% of total deposits at year-end 2013 (excluding deposits held-for-sale).

 

26
 

  

The following table schedules the amount of our time deposits of $100,000 or more by time remaining until maturity as of December 31, 2014 (in thousands):

 

Maturing in:     
Three months or less  $10,702 
Over three through six months   3,212 
Over six through twelve months   15,943 
Over twelve months   17,422 
Total  $47,279 

 

Borrowings

During 2014, we utilized advances from the FHLB as an alternative source of funding and as a liability management tool. At December 31, 2014, borrowings from the FHLB were $11.8 million, including $7.0 million of overnight borrowings, compared with $4.8 million at December 31, 2013. In the fourth quarter of 2013, we prepaid $4.4 million of fixed rate FHLB advances with a contractual average interest rate of 4.61% and a weighted average remaining term to maturity of 1.4 years. The transaction was accomplished by extending the maturity date of the advances and rolling the net present value of the advances into the funding cost of the new structure. As a result of the restructure, we were required to pay a prepayment penalty of $268,000 to the FHLB. In accordance with ASC 470-50, Debt - Modification and Exchanges, the new advances were considered a minor modification. The prepayment penalty was deferred and will be recognized in interest expense over the life of the new advances.

 

Liquidity

Liquidity is our ability to fund customers’ needs for borrowing and deposit withdrawals. The purpose of liquidity management is to assure sufficient cash flow exists to meet all financial commitments and to capitalize on business expansion opportunities. This ability depends on the institution’s financial strength, asset quality and types of deposit and investment instruments we offer to our customers. Our 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. We also have the ability to obtain funding from other sources including the FHLB, and through the Federal Reserve. 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. We maintain investments in liquid assets based upon our management’s assessment of (1) need for funds, (2) expected deposit flows, (3) yields available on short-term liquid assets and (4) objectives of the asset/liability management program.

 

Cash and cash equivalents decreased $4.1 million, or 16.1% to $21.3 million at year-end 2014 from $25.4 million at year-end 2013. Cash and cash equivalents represented 4.1% of total assets at December 31, 2014 compared to 5.0% on December 31, 2013. The Bank has the ability to borrow funds from the FHLB and has credit lines with the Federal Reserve Bank of Cleveland in the form of discount window availability and through the Borrower-In-Custody program, should it need to supplement its future liquidity needs in order to meet loan demand or to fund investment opportunities.

 

Off-Balance Sheet Arrangements

In addition to funding maturing deposits and other deposit liabilities, we also have off-balance sheet commitments in the form of lines of credit and letters of credit utilized by customers in the normal course of business. Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. These off-balance sheet commitments are not considered to have a significant effect on the liquidity position of our Company. Further, our management believes our liquidity position is adequate based on our stable level of cash equivalents and the stability of its core funding sources.

 

Capital Resources

Total shareholders’ equity was $47.2 million at December 31, 2014, which was an increase of $1.9 million from the end of 2013 resulting primarily from net income of $372,000 and a $1.4 million increase in unrealized gains on securities available-for-sale, net of taxes.

 

Tier-1 capital is shareholders’ equity excluding the net unrealized gains or losses included in other comprehensive income and a percentage of mortgage-servicing rights. 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 our total assets after such assets are assessed for risk and assigned a weighting factor based on their inherent risk.

 

27
 

 

Regulatory minimums call for a total risk-based capital ratio of 8.0% and a Tier-1 risk-based consolidated capital ratio of 4.0%. Our consolidated ratio of total capital to risk-weighted assets was 13.88% at year-end 2014, while the Tier-1 risk-based consolidated capital ratio was 12.72%. Our consolidated leverage ratio, defined as Tier-1 capital divided by average assets, was 9.21% at year-end 2014. The Bank’s total capital to risk-weighted assets was 13.56%, Tier-1 risk-based capital ratio was 12.40% and Tier-1 leverage ratio was 9.00% at December 31, 2014.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

Asset and Liability Management and Market Risk

Our Asset/Liability Committee (“ALCO”) utilizes a variety of tools to measure and monitor interest rate risk. This is defined as the risk that our financial condition will be adversely affected due to movements in interest rates. To a lesser extent, we are also exposed to liquidity risk, or the risk that changes in cash flows could adversely affect our ability to honor our financial obligations. The ALCO monitors changes in the interest rate environment, and how these changes affect lending and deposit rates, liquidity and profitability.

 

Since income of the Bank is primarily derived from the excess of interest earned on interest-earning assets over the interest paid on interest-bearing liabilities, the ALCO places great importance on monitoring and controlling interest rate risk. The measurement and analysis of the changes in the interest rate environment are referred to as asset/liability modeling. One method used to analyze our sensitivity to changes in interest rates is the “net portfolio value” (“NPV”) methodology.

 

NPV is generally considered to be the present value of the difference between expected incoming cash flows on interest-earning and other assets and expected outgoing cash flows on interest-bearing and other liabilities. For example, the asset/liability model that we currently use attempts to measure the change in NPV for a variety of interest rate scenarios, typically for parallel and sustained shifts of +400/-300 basis points in market rates. Presented below is an analysis depicting the changes in our interest rate risk as of December 31, 2014 and December 31, 2013, as measured by changes in NPV for instantaneous and sustained parallel shifts of -100 to +400 basis points in market interest rates. These parallel shifts were used to more accurately represent the current interest rate environment in which we operate. Certain shortcomings are inherent in this method of analysis presented in the computation of estimated NPV.

 

28
 

  

The table that follows is provided pursuant to the market risk disclosure rules set forth in Item 305 of Regulation S-K of the Securities and Exchange Commission. The information provided in the following table is based on significant estimates and assumptions and constitutes, like certain other statements included herein, a forward-looking statement.  The base case (no rate change) information in the table shows an estimate of our net portfolio value at December 31, 2014 arrived at by discounting estimated future cash flows at current market rates, assuming that maturing assets or liabilities are replaced with new balances of the same type, in the same amount, and at current (December 31, 2014) rate levels and repricing balances are adjusted to current (December 31, 2014) rate levels.  The rate change information (rate shocks) in the table shows estimates of net portfolio value at December 31, 2014, assuming instantaneous rate changes of up 100, 200, 300 and 400 basis points.  Cash flows for non-maturity deposits are based on a decay or runoff rate based on average account age.  Rate changes in the rate shock scenario are assumed to be shock or immediate changes and occur uniformly across the yield curve.  Balances that reprice are assumed to reprice at post shock rate levels. The assumptions used in interest rate sensitivity modeling are inherently uncertain and, as a result, we cannot precisely predict the impact of changes in interest rates on NPV. Actual results may differ significantly from those presented due to the timing, magnitude and frequency of changes in interest rates and changes in market conditions and interest rate differentials (spreads) between maturity/repricing categories, as well as any actions which management may take to counter such changes.

 

   December 31, 2014   December 31, 2013 
Change in Interest
Rates (Basis Points)
  Change in
NPV ($)
   Change in
NPV (%)
   NPV
Ratio
   Change in
NPV ($)
   Change in
NPV (%)
   NPV
Ratio
 
   (Dollars in thousands) 
+400  $(1,011)   (1.69)%   12.53%  $788    1.11%   16.18%
+300   6,978    11.67%   13.84%   6,552    9.19%   17.05%
+200   10,005    16.74%   14.11%   8,513    11.95%   17.08%
+100   5,936    9.93%   12.98%   5,073    7.12%   16.00%
Base   -    -    -    -    -    - 
-100   (9,286)   (15.54)%   9.56%   (8,999)   (12.63)%   12.60%

 

29
 

  

Item 8.Financial Statements and Supplementary Data

 

Index to Financial Statements and Schedules

 

Page(s)  
   
Report of Independent Registered Public Accounting Firm 31
   
Consolidated Balance Sheets as of December 31, 2014 and 2013 32
   
Consolidated Statements of Income as of December 31, 2014 and 2013 33
   
Consolidated Statements of Comprehensive Income (Loss) as of December 31, 2014 and 2013 34
   
Consolidated Statements of Shareholders’ Equity as of December 31, 2014 and 2013 35
   
Consolidated Statements of Cash Flow for the years ended December 31, 2014 and 2013 36
   
Notes to Consolidated Financial Statements 37

 

30
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Shareholders

DCB Financial Corp

Lewis Center, Ohio

 

We have audited the accompanying consolidated balance sheets of DCB Financial Corp as of December 31, 2014 and 2013, the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 that 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 financial position of DCB Financial Corp as of December 31, 2014 and 2013 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Plante & Moran PLLC

 

Columbus, Ohio

 

March 25, 2015

 

31
 

 

DCB Financial Corp and Subsidiaries

Consolidated Balance Sheets

 

   December 31, 
   2014   2013 
   (Dollars in thousands, except share and per share data) 
Assets:          
Cash and due from financial institutions  $6,247   $6,110 
Interest-bearing deposits   15,027    19,247 
Total cash and cash equivalents   21,274    25,357 
           
Securities available-for-sale   75,909    79,948 
           
Loans   385,444    356,048 
Less allowance for loan losses   (4,236)   (6,724)
Net loans   381,208    349,324 
           
Loans held for sale   -    7,806 
Real estate owned   1,111    1,219 
Investment in FHLB stock   3,250    3,799 
Premises and equipment, net   10,016    10,641 
Premises and equipment held for sale   -    1,405 
Bank-owned life insurance   20,027    19,297 
Accrued interest receivable and other assets   2,587    3,623 
Total assets  $515,382   $502,419 
           
Liabilities and shareholders’ equity          
Liabilities:          
Deposits:          
Non-interest bearing  $111,022   $109,622 
Interest bearing   342,170    317,237 
Total deposits   453,192    426,859 
           
Deposits held for sale   -    22,571 
Borrowings   11,808    4,838 
Accrued interest payable and other liabilities   3,171    2,887 
Total liabilities   468,171    457,155 
           
Shareholders’ equity:          
Preferred stock, no par value, 2,000,000 shares authorized, none issued and outstanding   -    - 
Common stock, 17,500,000 and 7,500,000 shares authorized, 7,541,445 and 7,500,000 shares issued, and 7,233,795 and 7,192,350 shares outstanding for 2014 and 2013, respectively   16,064    15,771 
Retained earnings   38,055    37,683 
Treasury stock, at cost, 307,650 shares at December 31, 2014 and 2013   (7,416)   (7,416)
Accumulated other comprehensive income (loss)   654    (774)
Deferred stock-based compensation   (146)   - 
Total shareholders’ equity   47,211    45,264 
Total liabilities and shareholders’ equity  $515,382   $502,419 

 

See notes to the consolidated financial statements.

 

32
 

 

DCB Financial Corp and Subsidiaries

Consolidated Statements of Income

 

   Year ended
December 31,
 
   2014   2013 
   (Dollars in thousands, except share and per share data) 
Interest income:          
Loans  $15,276   $14,928 
Securities   2,065    2,064 
Federal funds sold and interest bearing deposits   39    87 
Total interest income   17,380    17,079 
           
Interest expense:          
Deposits:          
Savings and money market accounts   559    474 
Time accounts   434    989 
NOW accounts   76    91 
Total   1,069    1,554 
           
FHLB advances   143    264 
Total interest expense   1,212    1,818 
           
Net interest income   16,168    15,261 
Provision for loan losses   150    2,417 
Net interest income after provision for loan losses   16,018    12,844 
           
Non-interest income:          
Service charges   1,963    2,195 
Wealth management fees   1,474    1,418 
Treasury management fees   220    244 
Income from bank-owned life insurance   730    733 
Gain on the sale of securities available-for-sale   101    135 
Losses on loans held for sale   (509)   - 
Net (loss) gain on sale of REO   (84)   31 
Gain on sale of branch   438    - 
Other non-interest income   127    211 
Total non-interest income   4,460    4,967 
           
Non-interest expense:          
Salaries and employee benefits   11,141    11,287 
Occupancy and equipment   3,192    3,069 
Professional services   1,379    1,791 
Advertising   347    293 
Office supplies, postage and courier   328    481 
FDIC insurance premium   630    699 
State franchise taxes   266    478 
Other non-interest expense   2,823    2,942 
Total non-interest expense   20,106    21,040 
           
Income (loss) before income tax benefit   372    (3,229)
Income tax benefit   -    (298)
Net income (loss)  $372   $(2,931)
           
Share and Per Share Data          
Basic average common shares outstanding   7,193,372    7,192,350 
Diluted average common shares outstanding   7,232,388    7,192,350 
Basic and diluted earnings (loss) per common share  $0.05   $(0.41)

 

See notes to the consolidated financial statements.

 

33
 

 

DCB Financial Corp and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

 

   Year ended December 31, 
   2014   2013 
   (Dollars in thousands) 
         
Net income (loss)  $372   $(2,931)
           
Other comprehensive income (loss):          
           
Reclassification of previously recognized noncredit other than temporary impairment on sale of security in 2013, net of taxes of $512   -    995 
           
Net unrealized gains (losses) on securities available-for-sale, net of taxes of $769 and $(755) in 2014 and 2013, respectively   1,494    (1,482)
           
Reclassification adjustment for gains included in net income (loss), net of taxes of $(35) and $(2) in 2014 and 2013, respectively   (66)   (3)
           
Unrealized gains on securities transferred to available-for-sale in 2013, net of taxes of $131   -    254 
           
Amortization of unrealized losses on held-to-maturity securities in 2013, net of taxes of $28.   -    42 
           
Total other comprehensive income (loss)   1,428    (194)
           
Comprehensive income (loss)  $1,800   $(3,125)

 

See notes to the consolidated financial statements.

 

34
 

 

DCB Financial Corp and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

Year ended December 31, 2014 and 2013

(Dollars in thousands, except share data)

 

   Issued and
Outstanding
Common
Shares
   Preferred
Stock
   Common
Stock
   Retained
Earnings
   Treasury
Stock
   Accumulated
Other
Comprehensive
Income (Loss)
   Deferred
Stock-Based
Compensation
   Total 
                                 
Balance at January 1, 2013   7,192,350   $-   $15,771   $40,614   $(7,416)  $(580)  $-   $48,389 
Comprehensive loss:                                        
Net loss   -    -    -    (2,931)   -    -    -    (2,931)
Other comprehensive loss, net of taxes   -    -    -    -    -    (194)   -    (194)
Total comprehensive loss   -    -    -    -    -    -    -    (3,125)
Balance at December 31, 2013   7,192,350   $-   $15,771   $37,683   $(7,416)  $(774)  $-   $45,264 
                                         
Comprehensive income:                                        
Net income   -    -    -    372    -    -    -    372 
Other comprehensive income, net of taxes   -    -    -    -    -    1,428    -    1,428 
Total comprehensive income   -    -    -    -    -    -    -    1,800 
Issuance of restricted stock in exchange for
cancelled stock options
   41,445    -    293    -    -    -    (146)   147 
Balance at December 31, 2014   7,233,795   $-   $16,064   $38,055   $(7,416)  $654   $(146)  $47,211 

 

See notes to consolidated financial statements.

 

35
 

 

DCB Financial Corp and Subsidiaries

Consolidated Statements of Cash Flows

 

   Year ended December 31 
   2014   2013 
   (Dollars in thousands) 
Cash flows from operating activities          
Net income (loss)  $372   $(2,931)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Depreciation   1,070    1,068 
Provision for loan losses   150    2,417 
Deferred income taxes   -    (298)
Gain on sale of securities   (101)   (135)
Loss on loans held-for-sale   509    - 
Loss (gain) on sale of real estate owned   84    (31)
Gain on sale of branch   (438)   - 
Stock option plan expense   190    129 
Premium amortization on securities, net   1,064    1,644 
Earnings on bank owned life insurance   (730)   (733)
Net changes in other assets and other liabilities   543    3,260 
Net cash provided by operating activities   2,713    4,390 
           
Cash flows from investing activities          
Purchases of securities available-for-sale   (25,136)   (23,564)
Proceeds from maturities, principal payments and calls of securities available-for-sale   23,234    27,699 
Proceeds from sales of securities available-for-sale   7,140    2,560 
Net change in loans   (31,076)   (48,983)
Proceeds from sales of loans held-for-sale   845    - 
Proceeds from sale of real estate owned   768    2,546 
Net cash paid with sale of branch   (12,464)   - 
Proceeds from redemption of FHLB stock   549    - 
Premises and equipment expenditures   (445)   (1,078)
Net cash used in investing activities   (36,585)   (40,820)
           
Cash flows from financing activities          
Net change in deposits   22,819    1,140 
Proceeds from short-term borrowings   7,000    - 
Proceeds from long-term borrowings   -    4,411 
Repayment of borrowings   (30)   (7,071)
Net cash provided by (used in) financing activities   29,789    (1,520)
           
Net change in cash and cash equivalents   (4,083)   (37,950)
Cash and cash equivalents at beginning of year   25,357    63,307 
Cash and cash equivalents at end of year  $21,274   $25,357 
           
Supplemental disclosures of cash flow information          
Cash paid during the period for interest on deposits and borrowings  $1,288   $1,914 
Non-cash investing and financing activities:          
Transfer of loans to real estate owned   744    59 
Transfer of loans to held for sale   913    7,806 
Transfer of loans held for sale to held for investment   769    - 
Transfer of deposits (from) to held for sale   (3,210)   22,571 

 

See notes to consolidated financial statements.

 

36
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

1. Summary of Significant Accounting Policies

 

Basis of Presentation: The consolidated financial statements include the accounts of DCB Financial Corp (“DCB”) and its wholly-owned subsidiaries, The Delaware County Bank and Trust Company (the “Bank”), DCB Title Services, LLC, DCB Insurance Services, Inc., DataTasx LLC, and ORECO, Inc. (collectively referred to hereinafter as the “Company”). All intercompany transactions and balances have been eliminated in the consolidated financial statements.

 

Nature of Operations: The Company provides financial services in Delaware, Franklin, and Union Counties, Ohio, as well as nearby counties, through its 14 banking locations. Its primary deposit products are checking, savings, and term certificate accounts and its primary lending products are residential mortgage, commercial and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Real estate loans are secured by both residential and commercial real estate. The Bank also operates a trust department and engages in other personal wealth management activities, including brokerage services and private banking.

 

Business Segments: While the Bank’s management monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Bank’s operations are considered by management to be aggregated into one operating segment.

 

Use of Estimates: To prepare consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect amounts reported in the financial statements and disclosures provided, and future results could differ. The allowance for loan losses, fair value of financial instruments, determination of other-than-temporary impairment, status of contingencies and deferred tax asset valuation are particularly subject to change.

 

Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, federal funds sold and deposits with other financial institutions with original maturities of less than 90 days. Net cash flows are reported for customer loan and deposit transactions, federal funds purchased and other short-term borrowings.

 

Securities: Securities are classified as held-to-maturity and carried at adjusted amortized cost when management has the positive intent and ability to hold them to maturity. Securities classified as available-for-sale might be sold before maturity. Securities classified as available-for-sale are carried at fair value, with temporary unrealized holding gains and losses excluded from earnings and reported as a component of other comprehensive income. Realized gains and losses on sale of securities are recognized using the specific identification method. The Company does not engage in securities trading activities. Interest income includes premium amortization and accretion of discounts on securities.

 

For securities with unrealized losses, management considers, in determining whether other-than-temporary impairment exists, (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

For securities with other-than-temporary impairment, further analysis is required to determine the appropriate accounting. If management neither intends to sell the impaired security nor expects it will be required to sell the security prior to recovery, only the credit loss component of the other-than-temporary impairment is recognized in earnings while the non-credit loss is recognized in other comprehensive income. The credit loss component recognized in earnings is identified as the principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections.

 

37
 

 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

Loans (including Loans Held for Sale)

Loans are classified as held for investment when management has both the intent and ability to hold the loan for the foreseeable future, or until maturity or payoff. Management’s intent and view of the foreseeable future may change based on changes in business strategies, the economic environment, market conditions and the availability of government programs. Loans that are held for investment are reported at the principal balance outstanding, net of unearned interest, unamortized deferred loan fees and costs and the allowance for loan losses. Loans held for sale are carried at the lower of amortized cost or estimated fair value, determined on an aggregate basis for each type of loan. Net unrealized losses are recognized by charges to income.

 

Interest income is accrued based on the unpaid principal balance and includes amortization of net deferred loan fees and costs over the loan term. Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for loans placed on non-accrual status is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

When loans are reclassified from held for investment to held for sale, specific reserves and allocated pooled reserves included in the allowance for loan and losses are reclassified to reduce the basis of the loans to the lower of cost or estimated fair value less cost to sell. Reclassifications of loans from held for sale to held for investment are made at fair value.

 

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable but unconfirmed credit losses, increased by the provision for loan losses and decreased by charge-offs net of recoveries. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the required allowance balance based on past loan loss experience, augmented by additional estimates related to the nature and volume of the portfolio, information about specific borrower situations, estimated collateral values, economic conditions and other factors.

 

The allowance consists of both specific and general components. The specific component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the collateral value, or value of expected discounted cash flows of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process. Management utilizes an average of a three year historical loss period. Management has the ability to adjust these loss rates by utilizing risk ratings based on current period trends. If current period trends differ either positively or negatively from the given weighted historical loss rates, adjustments can be made. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risking rating data.

 

Management also utilizes its assessment of general economic conditions, and other localized economic data to more fully support its loan loss estimates. General economic data may include: inflation rates, savings rates and national unemployment rates. Local data may include: unemployment rates, housing starts, real estate valuations, and other economic data specific to the Company’s market area. Though not specific to individual loans, these economic trends can have an impact on portfolio performance as a whole.

 

Uncollectibility is usually determined based on a pre-determined number of days delinquent in the case of consumer loans, or, in the case of commercial loans, is based on a combination of factors including delinquency, collateral and other legal considerations. Consumer loans are charged-off prior to 120 days of delinquency, but could be charged off earlier, depending on the individual circumstances. Mortgage loans are charged down prior to 120 days of delinquency, but could be charged off sooner, again, depending upon individual circumstance. Typically, loans collateralized by residential real estate are partially charged down to the estimated liquidation value, which is generally based on appraisal less costs to hold and liquidate. Commercial and commercial real estate loans are evaluated for impairment and typically reserved based on the results of the analysis, then subsequently charged down to a recoverable value when loan repayment is deemed to be collateral dependent. Loans can be partially charged down depending on a number of factors including: the remaining strength of the borrower and guarantor; the type and value of the collateral, and the ease of liquidating collateral; and whether or not collateral is brought onto the bank’s balance sheet via repossession. In the case of commercial and commercial real estate loans, charge-offs, partial or whole, take place when management determines that full collectability of principal balance is unlikely to occur. Subsequent recoveries, if any, are credited to the allowance. Management’s policies for determining impairment, reserves and charge-offs are reviewed and approved by the Board of Directors on an annual basis, and were not materially changed in 2014.

 

38
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

Troubled debt restructuring of loans is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule.  All modified loans are evaluated to determine whether the loans should be reported as a Troubled Debt Restructuring (TDR).  A loan is a TDR when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower by modifying or renewing a loan that the Company would not otherwise consider. To make this determination, the Company must determine whether (a) the borrower is experiencing financial difficulties and (b) the Company granted the borrower a concession. This determination requires consideration of all of the facts and circumstances surrounding the modification.  An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean the borrower is experiencing financial difficulties.

 

Investment in Federal Home Loan Bank Stock: The Company is required as a condition of membership in the Federal Home Loan Bank of Cincinnati (“FHLB”) to maintain an investment in FHLB common stock. The stock is redeemable at par and, therefore, its cost is equivalent to its redemption value. The Company’s ability to redeem FHLB shares is dependent on the redemption practices of the FHLB. The stock is carried at cost and evaluated for impairment.

 

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the assets’ useful lives, estimated to be five to 39 years for buildings, improvements and leasehold improvements. The Company generally uses three to five years for the useful lives of furniture, fixtures, and equipment, using the straight line method, depending on the nature of the asset. Premises and equipment are reviewed for impairment when events indicate the carrying amount may not be recoverable. Maintenance and repairs are expensed and major improvements are capitalized.

 

Foreclosed Assets: Assets acquired through foreclosure are initially recorded at the lower of cost or fair value less expected selling costs. Subsequent declines in fair value below the recorded amount are recorded as a direct write-down to expense. The Company generally evaluates fair market values of foreclosed assets on a quarterly basis, and adjusts accordingly. Holding costs after acquisition are expensed as incurred; however, construction costs to improve a property’s value may be capitalized as part of the asset value.

 

Servicing Assets: Servicing assets represent the allocated value of retained servicing on loans sold. Servicing assets are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the assets, using groupings of the underlying loans as to interest rates, and then secondarily as to geographic and prepayment characteristics. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance. Loans serviced for others totaled $2.1 million and $2.9 million at December 31, 2014 and 2013, respectively. The Company had net servicing assets of $3,000 and $5,000 at December 31, 2014 and 2013, respectively.

 

39
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

Bank Owned Life Insurance: The Company has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at its cash surrender value.

 

Income Taxes: The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred tax assets are reduced by a valuation allowance, if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

 

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment. The Company recognizes interest and penalties on income taxes, if applicable, as a component of income tax expense. The Company files consolidated income tax returns with its subsidiaries.

 

Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

 

Earnings (Loss) Per Common Share: Basic earnings (loss) per common share is net income (loss) divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share are computed including the dilutive effect of additional potential common shares issuable under stock options. Diluted earnings (loss) per share are not computed for periods in which an operating loss is sustained.

 

The computation of earnings (loss) per share is based upon the following weighted-average shares outstanding for the years ended December 31:

 

   2014   2013 
Weighted-average common shares outstanding (basic)   7,193,372    7,192,350 
Dilutive effect of assumed exercise of stock options   39,016     
Weighted-average common shares outstanding (diluted)   7,232,388    7,192,350 

 

At December 31, 2014, 9,979 of anti-dilutive stock options were excluded from the diluted weighted average common share calculations.

 

At December 31, 2013, options to purchase 156,665 shares of common stock were excluded from the computation of diluted earnings per share because of the loss incurred.

 

40
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

Stock-Based Compensation: Compensation cost is recognized for restricted stock awards issued to employees and directors based on the fair value of these awards at the date of grant. The market price of the Company’s common stock at the date of grant is used to determine the fair value for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

 

The Company’s outstanding stock options may be settled for cash at the recipient’s discretion; therefore, liability accounting applies to the Company’s 2004 Long-Term Stock Incentive Plan under which such stock options were granted. Compensation expense is recognized based on the fair value of these awards at the reporting date. A Black Scholes model is utilized to estimate the fair value of stock options at the date of grant and subsequent re-measurement dates. Compensation cost is recognized over the required service period, generally defined as the vesting period. The Company’s stock option awards contain terms that provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period.  Changes in fair value of the options between the vesting date and option expiration date are also recognized in the Consolidated Statement of Income.

 

Comprehensive Income (Loss): Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), net of applicable income tax effects. Other comprehensive income (loss) includes unrealized appreciation (depreciation) on available-for-sale securities and unrealized appreciation (depreciation) on held-to-maturity securities for which a portion of an other-than-temporary impairment has been recognized in income. Accumulated other comprehensive income consists solely of unrecognized gains and losses on investment securities, net of taxes of $336,000 and ($398,000) at December 31, 2014 and 2013, respectively..

 

Restrictions on Cash: Other deposits at the Federal Reserve Bank above the clearing balance requirements earn interest at an overnight rate, and are not restricted. In addition, $1.1 million is held in another institution and is under the control of a third party due to a contractual agreement.

 

Dividend Restrictions: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to DCB or by DCB to shareholders.

 

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. 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.

 

Advertising and Marketing: Advertising and other marketing costs are expensed as incurred.

 

Reclassification: Certain amounts in the prior year consolidated financial statements have been reclassified to conform to the 2014 presentation. These reclassifications had no effect on net income for any period presented.

 

New Accounting Pronouncements: In August 2014, the Financial Accounting Standards Board (“FASB”) issued amended accounting guidance for the classification of certain government guaranteed mortgage loans upon foreclosure. This guidance requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based upon the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. This guidance should be applied using a prospective transition method or a modified retrospective transition method. The Company expects that the adoption of this guidance in 2015 will not have a significant effect on the Company’s financial position or results of operations.

 

41
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

In June 2014, the FASB issued amended accounting guidance for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The amended guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. This guidance is effective for annual periods and interim periods within those annual periods beginning after December 31, 2015, with earlier adoption permitted. The Company does not expect the amended guidance published by the FASB to have a material impact on its financial position or results of operations.

 

In January 2014, the FASB issued amended accounting and disclosure guidance for reclassification of residential real estate collateralized consumer mortgage loans upon foreclosure. The amended guidance clarifies that an in-substance repossession or foreclosure occurs and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amended guidance also requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure according to local requirements of the applicable jurisdiction. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. This guidance should be applied using a prospective transition method or a modified retrospective transition method. The Company expects that the adoption of this guidance in 2015 will not have a significant effect on the Company’s financial position or results of operations.

 

2. Sale of Branch and Loans Held for Sale

 

In March 2014, the Bank closed the previously announced sale of its Marysville branch (the “Branch”) to Merchants National Bank, a national bank headquartered in Hillsboro, Ohio (“Merchants”). Merchants acquired certain assets and assumed certain liabilities of the Branch, including the assumption of $19.4 million in deposit liabilities and the purchase of $4.8 million in loans related to the Branch.

 

The amounts related to the sale are as follows (in thousands):

 

Deposits assumed  $19,403 
Loans sold (at book value)   (4,750)
Property and equipment (agreed upon value)   (1,500)
Cash on hand   (261)
Premium on deposits   (438)
Other, net   10 
Cash paid to Merchants  $12,464 

 

The carrying value of the assets sold and the deposits assigned were classified as held for sale at December 31, 2013.

 

42
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

In addition to the loans reclassified to held-for-sale in connection with the branch sale, the Company also reclassified 54 homogenous loans secured by single family residential investor properties to held-for-sale as of December 31, 2013. At December 31, 2013 the loans had an aggregate contractual principal balance of $4.2 million, and aggregate allowance for loan loss allocations of $2.0 million. In connection with the transfer to held-for-sale, the Company recorded a provision for loan losses of $946,000 in the fourth quarter of 2013. The loans were transferred to held-for-sale, net of the allowance allocations, at their estimated fair value of $2.2 million.

 

During the third quarter of 2014, the Company reclassified 30 of the residential investor properties from held for sale to held for investment, because the Company believes the best value for these loans, which generally have been paying as agreed, can be achieved through a hold strategy. The reclassifications of the loans, which had an aggregate contractual principal balance of $1.9 million, were made at the loans net book value of $769,000 on the date of transfer. The $1.1 million difference between the contractual balances and the net book value represents the amount of write-downs taken on these loans at the end of 2013 based on perceived credit weakness of the residential investor properties portfolio in the aggregate. Management believes that the fair value of these loans does not require consideration of a credit loss component, because of the generally satisfactory payment performance of these loans. The weighted average interest rates on these loans was 4.4% on the date of transfer, which management believes reasonably approximates a market interest rate for loans of this type. As a result, management has concluded that the contractual loan amounts approximate their fair value on the transfer date, and the $1.1 million discount on these loans will be accreted to interest income over the life of the loans as payments are made on the loans.

 

The Company did not have any assets or deposits classified as held-for-sale at December 31, 2014.

 

3. Securities

 

The amortized cost and estimated fair values of securities available-for-sale as of December 31, 2014 and 2013 were as follows (in thousands):

 

As of December 31, 2014:  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 
                 
U.S. Government and agency obligations  $11,602   $31   $(88)  $11,545 
Corporate bonds   4,975    33    (21)   4,987 
States and municipal obligations   21,303    423    (69)   21,657 
Collateralized mortgage obligation   19,601    85    (106)   19,580 
Mortgage-backed securities   17,438    702        18,140 
Total  $74,919   $1,274   $(284)  $75,909 

 

As of December 31, 2013:  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 
                 
U.S. Government and agency obligations  $13,714   $16   $(428)  $13,302 
Corporate bonds   6,187    42    (61)   6,168 
States and municipal obligations   20,651    283    (484)   20,450 
Collateralized debt obligations   1,916        (940)   976 
Collateralized mortgage obligations   15,217    135    (308)   15,045 
Mortgage-backed securities   23,435    596    (23)   24,007 
Total  $81,120   $1,072   $(2,244)  $79,948 

 

43
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

 

The tables below indicate the length of time individual securities have been in a continuous unrealized loss position at December 31, 2014 and 2013 (in thousands):

 

December 31, 2014

   (Less than 12 months)   (12 months or longer)   Total 
Description of
securities
  Number
of
securities
   Fair
value
   Unrealized
losses
   Number
of
securities
   Fair
value
   Unrealized
losses
   Number
of
securities
   Fair
value
   Unrealized
losses
 
U.S. Government and agency obligations   3   $2,488   $9    4   $4,446   $79    7   $6,934   $88 
Corporate bonds   1    503    1    4    1,664    21    5    2,167    21 
State and municipal obligations   8    2,699    18    4    1,915    51    12    4,614    69 
Collateralized debt obligations                                    
Collateralized Mortgage obligations   9    5,649    21    4    3,649    85    13    9,298    106 
Mortgage-backed securities and other                                    
Total temporarily impaired securities   21   $11,339   $49    16   $11,674   $236    37   $23,013   $284 

 

December 31, 2013

   (Less than 12 months)   (12 months or longer)   Total 
Description of
securities
  Number
of
securities
   Fair
value
   Unrealized
losses
   Number
of
securities
   Fair
value
   Unrealized
losses
   Number
of
securities
   Fair
value
   Unrealized
losses
 
U.S. Government and agency obligations   10   $10,680   $428       $   $    10   $10,680   $428 
Corporate bonds   5    2,141    38    2    883    23    7    3,024    61 
State and municipal obligations   32    11,012    442    2    822    42    34    11,834    484 
Collateralized debt obligations               1    976    940    1    976    940 
Collateralized mortgage obligations   7    5,011    208    1    1,189    100    8    6,200    308 
Mortgage-backed securities and other   5    3,434    23                5    3,434    23 
Total temporarily impaired securities   59   $32,278   $1,139    6   $3,870   $1,105    65   $36,148   $2,244 

 

Collateralized debt obligations at December 31, 2013 consisted of one security, which was reported in the financial statements at an amount less than its historical cost at December 31, 2013. The decline primarily resulted from changes in market interest rates and failure to maintain consistent credit quality ratings. This security was sold in the first quarter of 2014.

 

44
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

The unrealized losses on the Company’s investments in U.S. Government and agency obligations, corporate bonds, state and political subdivision obligations, and mortgage-backed securities were caused primarily by changes in interest rates. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2014.

 

Substantially all mortgage-backed securities are backed by pools of mortgages that are insured or guaranteed by the Federal National Mortgage Association (“FNMA”), the Government National Mortgage Association (“GNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”).

 

No other-than-temporary impairment was recognized in 2014 or 2013. There was no accumulated other-than-temporary impairment as of December 31, 2014. The accumulated other-than-temporary impairment was $1.1 million as of December 31, 2013, which was primarily caused by (a) decrease in performance and regulatory capital resulting from exposure to subprime mortgages and (b) sector downgrade by industry analysts which impaired the value of the Company’s investments in collateralized debt obligations. The Company recognized a loss equal to the credit loss, establishing a new, and lower amortized cost basis. The credit loss was calculated by comparing expected discounted cash flows based on performance indicators of the underlying assets in the security to the carrying value of the investment. In March 2014, the Company sold its remaining investment in collateralized debt obligations for a loss of $140,000.

 

There are no securities from the same issuer, besides agency investments, greater than 10% of total equity at December 31, 2014.

 

The amortized cost and estimated fair value of debt securities, at December 31, 2014, by contractual maturity, are shown below (in thousands). Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown separately since they are not due at a single maturity date.

 

   Available-for-sale 
   Amortized
Cost
   Fair
Value
 
Due in one year or less  $1,417   $1,430 
Due from one to five years   12,646    12,656 
Due from five to ten years   23,424    23,699 
Due after ten years   19,994    19,984 
Mortgage-backed securities   17,438    18,140 
Total  $74,919   $75,909 

 

Sales of investment securities during the years ended December 31, 2014 and 2013 were as follows (in thousands):

 

   2014   2013 
         
Proceeds from investments sales  $7,140   $2,560 
Gross gains on investment sales  $242   $135 
Gross losses on investment sales  $(141)  $ 

 

Securities with a carrying amount of $65.5 million and $65.6 million at December 31, 2014 and 2013, respectively, were pledged to secure public deposits and other obligations.

 

45
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

4. Loans

 

At December 31, 2014, loans were comprised of the following (in thousands):

 

   2014   2013 
         
Commercial and industrial  $106,222   $122,084 
Commercial real estate   111,851    104,692 
Residential real estate and home equity   129,650    96,245 
Consumer and credit card   37,507    32,862 
Subtotal   385,230    355,883 
Add: Net deferred loan origination fees   214    165 
           
Total loans receivable  $385,444   $356,048 

 

Loans to principal officers, directors, and their related affiliates during 2014 and 2013 in the normal course of business were as follows (in thousands).

 

   2014   2013 
         
Balance at beginning of year  $1,440   $469 
New loans   7,070    1,058 
Repayments   (403)   (87)
Balance at end of year  $8,107   $1,440 

 

5. Credit Quality

 

Allowance for Loan Losses

 

The Company’s methodology for estimating probable future losses on loans utilizes a combination of probability of loss by loan grade and loss given defaults for its portfolios. The probability of default is based on both market data from a third-party independent source and actual historical default rates within the Company’s portfolio. A loan is impaired when full payment of interest and principal under the original contractual loan terms is not expected. Commercial and industrial loans, commercial real estate, including construction and land development, and multi-family real estate loans are individually evaluated for impairment. If a loan is impaired, the loan amount exceeding fair value, based on the most current information available is reserved. Management has developed a process by which commercial and commercial real estate loans receiving an internal grade of Vulnerable, Substandard or Doubtful are individually evaluated for impairment through a loan quality review (LQR). The LQR details the various attributes of the relationship and collateral and determines based on the most recent available information if a specific reserve needs to be applied and at what level. The LQR process for all loans meeting the specific review criteria is completed on a quarterly basis. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, such loans are not separately identified for impairment disclosures. This methodology recognizes portfolio behavior while allowing for reasonable loss ratios on which to estimate allowance calculations.

 

Further, the process for estimating probable loan losses is divided into reviewing impaired loans on an individual basis for probable losses and, as noted above, calculating probable future losses based on historical and market data for homogenous loan portfolios. As the Company’s troubled loan portfolios have been reduced through payoffs, paydowns, and charge-offs, the remaining loan portfolios possess better overall credit characteristics, and based on the Company’s methodology require lower rates of reserving than recent historical levels.

 

46
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

The table below presents allowance for loan losses by loan portfolio (in thousands). Commercial real estate includes real estate construction and land development loans.

 

For the Year Ended December 31, 2014:

 

   Consumer and
Credit Card
   Commercial and
Industrial
   Commercial
Real Estate
   Residential
Real Estate
and
Home Equity
   Unallocated   Total 
Allowance for loan losses:                              
Beginning balance:  $301   $3,231   $2,973   $219   $   $6,724 
Chargeoffs   (200)   (1,410)   (1,086)   (169)       (2,865)
Recoveries   113    42    131    38        324 
Transfer to held for sale           (97)           (97)
Provision   (24)   (731)   455    180    270    150 
Ending balance:  $190   $1,132   $2,376   $268   $270   $4,236 
                               
Allowance on loans:                              
Individually evaluated for impairment  $   $256   $1,042   $   $   $1,298 
Collectively evaluated for impairment   190    876    1,334    268    270    2,938 
Ending balance:  $190   $1,132   $2,376   $268   $270   $4,236 
                               
As of December 31, 2014:                              
                               
Loans:                              
Individually evaluated for impairment  $455   $2,028   $9,690   $   $   $12,173 
Collectively evaluated for impairment   37,052    109,823    96,532    129,650        373,057 
Ending balance:  $37,507   $111,851   $106,222   $129,650   $   $385,230 

 

47
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

For the year ended December 31, 2013

 

   Consumer and
Credit Card
   Commercial and
Industrial
   Commercial
Real Estate
   Residential
Real Estate
and
Home Equity
   Total 
Allowance for loan losses:                         
Beginning balance:  $365   $1,620   $4,692   $204   $6,881 
Chargeoffs   (286)   (86)   (1,038)   (331)   (1,741)
Recoveries   219    823    38    52    1,132 
Transfer to held for sale           (1,965)       (1,965)
Provision   3    874    1,246    294    2,417 
Ending balance:  $301   $3,231   $2,973   $219   $6,724 
                          
Allowance on loans:                         
Individually evaluated for impairment  $   $2,304   $1,862   $   $4,166 
Collectively evaluated for impairment   301    927    1,111    219    2,558 
Ending balance:  $301   $3,231   $2,973   $219   $6,724 
                          
As of December 31, 2013:                         
                          
Loans:                         
Individually evaluated for impairment  $   $7,221   $15,660   $   $22,881 
Collectively evaluated for impairment   32,862    114,863    89,032    96,245    333,002 
Ending balance:  $32,862   $122,084   $104,692   $96,245   $355,883 

 

Impaired Loans

 

A loan is considered impaired when based on current information and events it is probable the Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include non-performing commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Commercial and commercial real estate loans with risk grades Substandard, Vulnerable, Doubtful, or Loss are evaluated for impairment.

 

48
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

The following table indicates impaired loans with and without an allocated allowance at December 31, 2014 (in thousands).

 

   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no related allowance recorded                         
Consumer and credit card  $455   $455   $   $474   $25 
Commercial and industrial   1,288    1,288        1,531    45 
Commercial real estate   1,088    1,088        6,714    70 
                          
With allowance recorded                         
Commercial and industrial   740    817    256    1,772    43 
Commercial real estate   8,602    8,602    1,042    6,048    595 
                          
Total                         
Consumer and credit card   455    455        474    25 
Commercial and industrial   2,028    2,105    256    3,303    88 
Commercial real estate   9,690    9,690    1,042    12,762    665 
                          
Total  $12,173   $12,250   $1,298   $16,539   $778 

 

The following table indicates impaired loans with and without an allocated allowance at December 31, 2013 (in thousands).

 

   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no related allowance recorded                         
Commercial and industrial  $1,530   $1,530   $   $3,081   $67 
Commercial real estate   9,892    11,788        10,005    615 
                          
With allowance recorded                         
Commercial and industrial   5,691    5,833    2,304    2,686    196 
Commercial real estate   5,768    7,296    1,862    10,060    308 
                          
Total                         
Commercial and industrial   7,221    7,363    2,304    5,767    263 
Commercial real estate   15,660    19,084    1,862    20,065    923 
                          
Total  $22,881   $26,447   $4,166   $25,832   $1,186 

 

Included in certain impaired loan categories are troubled debt restructurings that by definition are classified as impaired. At December 31, 2014 and 2013, troubled debt restructurings which were performing in accordance with their modified terms were $780,000 and $262,000 for commercial loans, $8.5 million and $11.8 million for commercial real estate, and $334,000 and $225,000 for consumer loans, respectively.

 

In addition to these amounts, the Bank had troubled debt restructurings that were impaired and no longer performing in accordance with their modified terms. At December 31, 2014 and 2013, troubled debt restructurings which were no longer performing in accordance with their modified terms were $68,000 and $1.1 million for commercial loans, $236,000 million and $2.1 million for commercial real estate, respectively.

 

49
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

Non-performing loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Interest income that would have been recognized had non-performing loans performed in accordance with contractual terms totaled $241,000 and $175,000 for years ended December 31, 2014 and 2013, respectively. At December 31, 2014 and 2013, management viewed all loans past due and still accruing interest as well-secured and in the process of collection.

 

Loans on non-accrual status as of December 31, 2014 and 2013 are as follows (in thousands):

 

   2014   2013 
Consumer and credit card  $120   $ 
Commercial and industrial   632    4,702 
Commercial real estate   298    1,398 
Residential real estate and home equity   334    352 
           
Total  $1,384   $6,452 

 

Loans held for sale on non-accrual status as of December 31, 2013 were $1.2 million. There were no loans held for sale as of December 31, 2014.

 

Credit Quality Indicators

 

Credit risk exposure by risk profile and by class of commercial loans was as follows at year-end 2014 (in thousands).

 

Category  Commercial and
Industrial
   Commercial
Real Estate
 
         
Pass-1-4  $106,590   $90,588 
Vulnerable-5   823    6,146 
Substandard-6   4,438    9,488 
Doubtful-7        
Loss-8        
Total  $111,851   $106,222 

 

Credit risk exposure by risk profile and by class of commercial loans was as follows at year-end 2013 (in thousands).

 

Category  Commercial and
Industrial
   Commercial
Real Estate
 
         
Pass-1-4  $111,266   $83,953 
Vulnerable-5   2,574    4,785 
Substandard-6   8,244    15,954 
Doubtful-7        
Loss-8        
Total  $122,084   $104,692 

 

50
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

Risk Category Descriptions

 

Pass (Prime – 1, Good – 2, Fair – 3, Compromised – 4)

 

Loans with a pass grade have a higher likelihood that the borrower will be able to service its obligations in accordance with the terms of the loan than those loans graded 5, 6, 7, or 8. The borrower’s ability to meet its future debt service obligations is the primary focus for this determination. Generally, a borrower’s expected performance is based on the borrower’s financial strength as reflected by its historical and projected balance sheet and income statement proportions, its performance, and its future prospects in light of conditions that may occur during the term of the loan.

 

Vulnerable (Special Mention) – 5

 

Loans which possess some credit deficiency or potential weakness which deserves close attention, but which do not yet warrant substandard classification. Such loans pose unwarranted financial risk that, if not corrected, could weaken the loan and increase risk in the future. The key distinctions of a 5 (Special Mention) classification are that (1) it is indicative of an unwarranted level of risk, and (2) weaknesses are considered “potential”, versus “well-defined”, impairments to the primary source of loan repayment.

 

Substandard – 6

 

Loans that are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. One or more of the following characteristics may be exhibited in loans classified Substandard:

 

·Loans which possess a defined credit weakness and the likelihood that a loan will be paid from the primary source, is uncertain; financial deterioration is underway and very close attention is warranted to ensure that the loan is collected without loss.
·Loans are inadequately protected by the current net worth and paying capacity of the obligor.
·The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment such as collateral liquidation or guarantees.
·Loans are characterized by the distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.
·Unusual courses of action are needed to maintain a high probability of repayment.
·The borrower is not generating enough cash flow to repay loan principal; however, the borrower continues to make interest payments.
·The lender is forced into a subordinated or unsecured position due to flaws in documentation.
·Loans have been restructured so that payment schedules, terms and collateral represent concessions to the borrower when compared to the normal loan terms.
·The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.
·There is a significant deterioration in the market conditions and the borrower is highly vulnerable to these conditions.

 

51
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

Doubtful – 7

 

One or more of the following characteristics may be exhibited in loans classified Doubtful:

 

·Loans have all of the weaknesses of those classified as Substandard. Additionally, however, these weaknesses make collection or liquidation in full based on existing conditions improbable.
·The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.
·The possibility of loss is high, but, because of certain important pending factors, which may strengthen the loan, loss classification is deferred until its exact status is known. A Doubtful classification is established during this period of deferring the realization of the loss.

 

Loss – 8

 

Loans are considered uncollectible and of such little value that continuing to carry them as assets on the institution’s financial statements is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

 

For consumer loan classes and residential real estate loans, the Company evaluates credit quality primarily based upon the aging status of the loan, which was previously presented, and by payment activity.

 

The following table presents the recorded investment in consumer loans and residential real estate loans based on payment activity at the dates indicated (in thousands).

 

   December 31, 2014 
Payment Category  Consumer and
Credit Card
   Residential Real
Estate and Home
Equity
 
Performing  $37,387   $128,836 
Non-Performing   120    814 
           
Total  $37,507   $129,650 

 

   December 31, 2013 
Payment Category  Consumer and
Credit Card
   Residential Real
Estate and Home
Equity
 
Performing  $32,862   $95,333 
Non-Performing       912 
           
Total  $32,862   $96,245 

 

52
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

Age Analysis of Past Due Loans

 

The following table presents past due loans aged as of December 31, 2014 (in thousands).

 

Category  30-59 Days
Past Due
   60-89
Days
Past
Due
   Greater
than 90
Days Past
Due
   Total
Past Due
   Current   Total Loans   Recorded
Investment
> 90 days
and
Accruing
 
                             
Consumer and Credit Card  $66   $7   $120   $193   $37,314   $37,507   $ 
Commercial and Industrial   68            68    111,783    111,851     
Commercial Real Estate   49        306    355    105,867    106,222     
Residential Real Estate and Home Equity   220    30    642    892    128,758    129,650    480 
Total  $403   $37   $1,068   $1,508   $383,722   $385,230   $480 

 

The following table presents past due loans aged as of December 31, 2013 (in thousands).

 

Category  30-59 Days
Past Due
   60-89
Days
Past
Due
   90 Days
or more
Past Due
   Total
Past Due
   Current   Total Loans   Recorded
Investment
> 90 days
and
Accruing
 
                             
Consumer and credit card  $90   $92   $   $182   $32,680   $32,862   $ 
Commercial and industrial   407        1,001    1,408    120,676    122,084     
Commercial real estate   49        682    731    103,961    104,692     
Residential real estate and home equity   374    197    321    892    95,353    96,245    560 
Total  $920   $289   $2,004   $3,213   $352,670   $355,883   $560 

 

53
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

Troubled Debt Restructurings

 

Information regarding Troubled Debt Restructuring (“TDR”) loans for the year ended December 31, 2014 and 2013 is as follows (dollars in thousands):

 

   2014   2013 
   Number of
contracts
   Post-
modification
outstanding
recorded
investment
   Number of
contracts
   Post-
modification
outstanding
recorded
investment
 
Consumer and credit card      $       $ 
Commercial and industrial           4    1,081 
Commercial real estate           8    3,905 
Residential real estate and home equity                
Total      $    12   $4,986 

 

There were no loans modified as troubled debt restructurings in 2014.

 

The following presents by class loans modified in a TDR during the years ended December 31, 2014 and 2013 that subsequently defaulted (i.e. 60 days or more past due following a modification) during the next twelve month periods (dollars in thousands).

 

   December 31, 2014   December 31, 2013 
   Number of
Contracts
   Post-Modification
Outstanding
Recorded Investment
   Number
of
Contracts
   Post-Modification
Outstanding
Recorded Investment
 
Consumer and Credit Card      $       $ 
Commercial and Industrial           3    1,075 
Commercial Real Estate           1    484 
Residential Real Estate and Home Equity                
                     
Total      $    4   $1,559 

 

The post-modification outstanding recorded investment amounts at each year end balances are inclusive of all partial pay downs and charge-offs since the modification date. Loans modified in a TDR that were fully paid down, charged off, or foreclosed upon by period end are not reported.

 

A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan; however, forgiveness of principal is rarely granted. Depending on the financial condition of the borrower, the purpose of the loan and the type of collateral supporting the loan structure; modifications can be either short-term (12 months of less) or long term (greater than one year). Commercial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor may be requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period.

 

54
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

Land loans are also included in the class of commercial real estate loans. Land loans are typically structured as interest-only monthly payments with a balloon payment due at maturity. Land loans modified in a TDR typically involve extending the balloon payment by one to three years, changing the monthly payments from interest-only to principal and interest, while leaving the interest rate unchanged.

 

Loans modified in a TDR are typically already on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. The allowance for impaired loans that have been modified in a TDR is measured based on the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent or on the present value of expected future cash flows discounted at the loan’s effective interest rate. Management exercises significant judgment in developing these estimates.

 

As mentioned above, an individual loan is placed on a non-accrual status if, in the judgment of management, it is unlikely that all principal and interest will be received according to the terms of the note. Loans on non-accrual may be eligible to be returned to an accruing status after six months of compliance with the modified terms. However, there are number of factors that could prevent a loan from returning to accruing status, even after remaining in compliance with loan terms for the aforementioned six month period, including deteriorating collateral, negative cash flow changes and inability to reduce debt to income ratios.

 

6. Premises and Equipment

 

Premises and equipment were as follows at the dates indicated (in thousands):

 

   December 31, 
   2014   2013 
         
Land  $1,266   $1,266 
Buildings   13,287    13,277 
Furniture and equipment   9,948    9,836 
Subtotal   24,501    24,379 
Accumulated depreciation   (15,115)   (14,329)
Total premises and equipment   9,386    10,050 
Software, net of accumulated amortization   630    591 
           
Total premises and equipment  $10,016   $10,641 

 

The Company had $1.4 million in premises and equipment held for sale at December 31, 2013 associated with the sale of a branch that was completed March 21, 2014.

 

Depreciation expense totaled $1.1 million for the years ended December 31, 2014 and 2013.

 

The Company has entered into operating lease agreements for branch offices and equipment, which expire at various dates through 2023, and provide options for renewals. Rental expense on lease commitments for 2014 and 2013 amounted to $566,000 and $568,000, respectively.

 

55
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

The total future minimum lease commitments at December 31, 2014 under these leases are summarized as follows (in thousands).

 

2015  $596 
2016   587 
2017   361 
2018   231 
2019   199 
Thereafter   250 
Total  $2,224 

 

7. Interest-Bearing Deposits

 

Interest-bearing deposits were as follows at the dates indicated (in thousands):

 

   December 31, 
   2014   2013 
         
Interest-bearing demand  $77,534   $68,382 
Money market   147,667    123,237 
Savings deposits   42,634    41,231 
Time deposits          
In denominations under $250,000   64,758    75,608 
In denominations of $250,000 or more   9,577    8,779 
           
Total  $342,170   $317,237 

 

Scheduled maturities of time deposits were as follows (in thousands):

 

2015  $48,431 
2016   23,343 
2017   2,154 
2018   346 
2019 and after   61 
Total  $74,335 

 

At December 31, 2014 and 2013 deposits received from officers, directors and related affiliates were considered to be immaterial to the total amount of total deposits.

 

8. Borrowings

 

As a member of the FHLB of Cincinnati, the Bank has the ability to obtain borrowings based on its investment in FHLB stock and other qualified collateral. FHLB advances are collateralized by a blanket pledge of the Bank’s qualifying 1-4 family loan portfolio and all shares of FHLB stock. At December 31, 2014, total pledged loans was $141.8 million and investment in FHLB Stock was $3.2 million. Those amounts at December 31, 2013 were $124.9 million and $3.8 million respectively. The Bank had a $30.1 million line of credit with no outstanding balance at December 31, 2013 with the Federal Reserve Bank of Cleveland through its Discount Window. The Bank has pledged loans totaling $61.7 million at December 31, 2014.

 

56
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

The following is a summary of borrowings outstanding at year ending December 31, 2014 and 2013 (in thousands):

 

   2014   2013 
         
Total Borrowings:          
FHLB advances  $11,808   $4,838 

 

In the fourth quarter of 2013, the Company refinanced $4.4 million of fixed rate FHLB advances with a contractual average interest rate of 4.61% and a weighted average remaining term to maturity of 1.4 years. The transaction was accomplished by extending the maturity date and rolling the net present value of the refinanced advances into the funding cost of the new advances which remain outstanding as of December 31, 2014. As a result of the restructure, the Company was required to pay a prepayment penalty of $268,000 to the FHLB. In accordance with ASC 470-50, Debt - Modification and Exchanges, the new advances were considered a minor modification. The prepayment penalty was deferred and will be recognized in interest expense over the life of the new advances.

 

The contractual amounts of FHLB borrowings mature as follows at December 31, 2014 (dollars in thousands).

 

       Weighted 
Maturing  Amount   Average Rate 
2014  $    %
2015   7,257    0.27%
2016   1,530    0.84%
2017   590    1.12%
2018   2,034    1.79%
2019 and after   397    5.44%
   $11,808    0.82%

 

9. Retirement Plans

 

The Company provides a 401(k) savings plan (the “Plan”) for all eligible employees. To be eligible, an individual must complete six months of employment and be 20 or more years of age. Under provisions of the Plan, participants can contribute a certain percentage of their compensation to the Plan up to the maximum allowed by the IRS. The Company also matches a certain percentage of those contributions up to a maximum match of up to 3% of the participant’s compensation. The Company may also provide additional discretionary contributions, but did not do so in 2014 or 2013. Employee voluntary contributions are vested immediately and Company contributions are fully vested after three years. The 2014 and 2013 expenses related to the Plan were $176,000 and $173,000, respectively.

 

The Company maintains a deferred compensation 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 amount of each officer’s benefit will generally depend on their salary, and their length of employment. The Company accrues the cost of this deferred compensation plan during the working careers of the officers. Expense under this plan totaled $38,000 and $0 in 2014 and 2013, respectively. The total accrued liability under this plan was $928,000 and $1.2 million at December 31, 2014 and 2013, respectively. In addition to recognizing expense associated with the plan, the Company funds the vested amounts, $768,000 and $1.0 million, into separate accounts held in custody by the Company’s trust department at December 31, 2014 and 2013, respectively.

 

The Company has purchased insurance contracts on the lives of the participants in the supplemental post-retirement benefit plan and has named the Company as the beneficiary. While no direct connection exists between the deferred compensation plan and the life insurance contracts, it is management’s current intent that the earnings on the insurance contracts be used as a funding source for benefits payable under the plan.

 

57
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

10. Stock-Based Compensation

 

The 2014 Restricted Stock Plan (“2014 Plan”) was approved by shareholders in October 2014 authorizing the use of 350,000 shares of authorized but unissued common stock of DCB. The purpose of the 2014 Plan is to promote the growth and profitability of the Company and its affiliated companies; to attract and retain directors, key officers and employees of outstanding competence; to provide eligible directors, certain key officers and employees of the Company and its affiliated companies with an incentive to achieve corporate objectives; and to provide such directors, officers and employees with an equity interest in the Company and its affiliated companies. Awards granted under this plan generally vest ratably over a five year period.

 

Restricted stock awards are recorded as deferred compensation, a component of shareholders’ equity, at fair value at the date of the grant and amortized to compensation expense over the specified vesting periods.

 

The Company also has a long-term stock incentive compensation plan (the “2004 Plan”), under which certain employees were granted the right to purchase shares of the Company’s common stock at a predetermined price. The 2004 Plan, which is limited to 300,000 shares, expired in 2014 and no further awards will be granted from the 2004 Plan. Options granted under the 2004 Plan vest 20% per year over a five year period, and expire after ten years. There were no options granted in 2014. During the year ended December 31, 2013, options for 13,889 shares were granted at an exercise price of $5.40. At December 31, 2014, 58,450 shares were exercisable under the 2004 Plan.

 

The Company recorded $190,000 and $129,000 in compensation expense for its outstanding stock options for the years ended December 31, 2014 and 2013, respectively.

 

Stock option activity in the 2004 Plan for the year ended December 31, 2014 was as follows:

 

   Shares   Weighted
Average Exercise
Price
 
         
Outstanding at beginning of year   250,518   $9.91 
Exercised   17,073    3.81 
Forfeited/cancelled   147,816    12.91 
           
Outstanding at end of year   85,629   $6.81 
           
Options exercisable at year end   58,450   $8.11 

 

There were no options granted in 2014. The weighted-average fair value of stock options granted in 2013 was $2.45. In determining the fair value of the stock options granted in 2013, the Company utilized a Black-Scholes valuation model with a risk-free interest rate of 2.25%, an expected dividend yield of zero, an expected common stock price volatility of 30%, and an expected life of 10 years.

 

58
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

The following table summarizes the Company’s stock options at December 31, 2014:

 

   Options Outstanding   Options Exercisable 
                     
Range of
Exercise
Prices
  Options
Outstanding
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Life (Years)
   Options
Exercisable
   Weighted
Average
Exercise
Price
 
$3.50-$5.40   68,999   $3.95    6.9    41,820   $3.78 
$5.41-$9.00   5,196   $9.00    4.5    5,196   $9.00 
$9.01-$16.90   4,783   $16.90    3.1    4,783   $16.90 
$16.01-$30.70   6,651   $26.01    1.7    6,651   $26.01 

 

The total intrinsic value of options exercised during 2014 and 2013 was $57,000 and $7,000, respectively. At December 31, 2014, the aggregate intrinsic value of outstanding options was $211,000 and the aggregate intrinsic value of exercisable options was $138,000.

 

At December 31, 2014, unrecognized compensation expense to be recognized over the remaining vesting period of outstanding options was $95,000.

 

On November 25, 2014, the Company commenced a tender offer to exchange (the “Exchange Offer”) 190,104 options outstanding under the Company’s 2004 Plan, for shares of restricted stock to be granted under the Company’s 2014 Plan. The Exchange Offer was subject to the terms and conditions described in Schedule TO (“TO”) which was filed with the SEC on November 25, 2014.

 

The stock options subject to the TO were any or all options to purchase the Company’s common stock held by employees, executive officers and non-employee directors, whether vested or unvested, out-of-the-money or in-the-money, which had not expired or terminated prior to the expiration of the Exchange Offer on December 23, 2014.

 

The primary reason for making the Exchange Offer was to reduce the compensation expense we are required to recognize for the Company’s options which are accounted for under the liability accounting method, under which changes in the fair value of the options between the vesting date and expiration date are recognized in the Company’s financial statements. The shares of restricted stock offered in exchange for the eligible options are not subject to liability accounting and, accordingly, would allow the Company to better manage its compensation expense.

 

Additionally, the exercise prices of some of the outstanding eligible options are significantly higher than the market price of the Company’s common shares. The Company believes that these significantly “out of the money” options may be unlikely to be exercised in the near future and were therefore not providing the incentives intended for our employees, executive officers and non-employee directors. By making the Exchange Offer, the Company believes it was able to re-establish some of the intended incentive value of these options by realigning its compensation programs to more closely reflect the current market and economic conditions.

 

The Company established eight exchange ratios for eligible options depending on their exercise price, ranging from 0.029 shares of restricted stock per Option to 0.672 shares of restricted stock per option, as specifically set forth in the TO.

 

Thirty holders of eligible options tendered, and the Company accepted for cancellation, eligible options to purchase an aggregate of 113,873 common shares, representing approximately 64% of the total common shares underlying options eligible for exchange in the Exchange Offer. On December 23, 2014, a total of 41,445 shares of restricted stock were issued to holders of eligible options in exchange for the cancellation of such eligible options pursuant to the Offer to Exchange. The restricted stock granted under the Exchange Offer had a grant date fair value of $7.07 per share, and vest ratably over a five-year period.

 

59
 

  

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

The excess of the aggregate grant date fair value of the restricted stock of $293,000 over the fair value of the stock options canceled of $147,000 was recorded as deferred stock-based compensation, a component of shareholders’ equity, and is being amortized over the vesting period of the restricted stock. The Company did not record any compensation expense associated with restricted stock in 2014 and 2013.

 

11. Federal Income Taxes

 

The Company files income tax returns in the U.S. federal jurisdiction and franchise tax returns in Ohio. Income tax expense (benefit) for the years ended December 31, 2014 and 2013 included the following components (in thousands).

 

   2014   2013 
Current  $   $ 
Deferred   384    (1,918)
Valuation allowance   (384)   1,620 
Totals  $-   $(298)

 

The difference between the financial statement tax provision and amounts computed by applying the statutory federal income tax rate to income before income taxes was as follows (in thousands):

 

   2014   2013 
Income tax benefit computed at the statutory federal income tax rate  $127   $(1,098)
Tax exempt income   (330)   (1,002)
Change in valuation allowance   (384)   1,620 
Other   587    (324)
Totals  $-   $(298)

 

60
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

Year-end deferred tax assets and liabilities were comprised of the following (in thousands).

 

   2014   2013 
Deferred tax assets          
Allowance for loan losses  $1,440   $3,369 
Depreciation   103    92 
Deferred compensation   316    54 
Alternative minimum tax carry forward   145    145 
Other-than-temporary impairment losses   -    369 
Expenses on foreclosed real estate   10    70 
NOL carry forward   8,910    7,460 
Other   284    151 
Subtotal   11,208    11,710 
           
Deferred tax liabilities          
FHLB stock dividends   (389)   (455)
Unrealized (gain) loss on available-for-sale securities   (337)   399 
Other   (35)   (87)
Subtotal   (761)   (143)
Net deferred tax asset   10,447    11,567 
Less: valuation allowance   (10,784)   (11,168)
Total  $(337)  $399 

 

At December 31, 2014, the Company had a $26 million net operating loss carry forward that begins to expire in 2030.

 

12. Commitments, Contingencies and Financial Instruments with Off-Balance Sheet Risk

 

Some financial instruments such as loan commitments, credit lines, letters of credit and overdraft protection are issued to meet customer financing needs. These financing arrangements to provide credit typically have predetermined expiration dates, but can be withdrawn if certain conditions are not met. The commitments may expire without ever having been drawn on by the customer; therefore the total commitment amount does not necessarily represent future cash requirements. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used for loans, including obtaining various forms of collateral, such as real estate or securities at exercise of the commitment or letter of credit.

 

The Bank grants retail, commercial and commercial real estate loans in central Ohio. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based upon management’s credit evaluation of each customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income producing commercial properties.

 

61
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

The contractual amount of financing instruments with off-balance sheet risk was as follows at year-end (in thousands).

 

   2014   2013 
   Fixed
rate
   Variable
rate
   Fixed
rate
   Variable
rate
 
                 
Commitments to extend credit  $2,290   $8,300   $6,568   $2,129 
Unused lines of credit and letters of credit  $4,953   $127,076   $4,126   $124,811 

 

Commitments to make loans are generally made for periods of 30 days or less. Maturities for loans subject to these fixed-rate commitments range from up to 1 to 30 years. In the opinion of management, outstanding loan commitments equaled or exceeded prevalent market interest rates at December 31, 2014, such commitments were underwritten in accordance with normal loan underwriting policies, and all disbursements will be funded via normal cash flows from operations and existing excess liquidity.

 

Legal Proceedings

 

There is no pending material litigation, other than routine litigation incidental to the business of the Company and Bank. Further, there are no material legal proceedings in which any director, executive officer, principal shareholder or affiliate of the Company is a party or has a material interest, which is adverse to the Company or Bank. Finally, there is no litigation in which the Company or Bank is involved which is expected to have a material adverse impact on the financial position or results of operations of the Company or Bank.

 

13. Regulatory Capital

 

The Company is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Capital adequacy guidelines and, additionally for banks, 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. Failure to meet various capital requirements can initiate regulatory action.

 

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 Bank met the well-capitalized requirements, as publicly defined, at December 31, 2014.

 

62
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

Actual and required capital ratios are presented below at year-end (dollars in thousands).

 

   Actual   For capital adequacy
purposes
   To be well capitalized
under Prompt Corrective
Action Provisions (in 2013)
and pursuant to the Consent
Order and Written
Agreement (2012)
 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
December 31, 2014:                              
Total capital to risk-weighted assets                              
Consolidated  $50,656    13.88%  $29,197    8.0%   N/A    N/A 
Bank  $49,602    13.56%  $29,264    8.0%  $36,580    10.0%
Tier-1 (core) capital to risk-weighted assets                              
Consolidated  $46,420    12.72%  $14,597    4.0%   N/A    N/A 
Bank  $45,366    12.40%  $14,634    4.0%  $21,951    6.0%
Tier-1 (core) capital to average assets                              
Consolidated  $46,420    9.21%  $20,161    4.0%   N/A    N/A 
Bank  $45,366    9.00%  $20,163    4.0%  $25,203    5.0%
                               
December 31, 2013:                              
Total capital to risk-weighted assets                              
Consolidated  $50,644    13.82%  $29,321    8.0%   N/A    N/A 
Bank  $49,473    13.50%  $29,321    8.0%  $36,651    10.0%
Tier-1 (core) capital to risk-weighted assets                              
Consolidated  $46,036    12.56%  $14,661    4.0%   N/A    N/A 
Bank  $44,865    12.24%  $14,661    4.0%  $21,992    6.0%
Tier-1 (core) capital to average assets                              
Consolidated  $46,036    9.00%  $20,456    4.0%   N/A    N/A 
Bank  $44,865    8.77%  $20,456    4.0%  $25,570    5.0%

 

Banking regulations limit capital distributions by the Bank. Generally, capital distributions are limited to undistributed net income for the current and prior two years. At December 31, 2014, $372,000 was available for the declaration of dividends by the Bank.

 

63
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

14. Fair Value Measurements

 

The Company accounts for fair value measurements in accordance with FASB ASC 820, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1Quoted prices in active markets for identical assets or liabilities
Level 2Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

 

The carrying value of certain financial assets and liabilities is impacted by the application of fair value measurements, either directly or indirectly.  In certain cases, an asset or liability is measured and reported at fair value on a recurring basis, such as available-for-sale investment securities.  In other cases, management must rely on estimates or judgments to determine if an asset or liability not measured at fair value warrants an impairment write-down or whether a valuation reserve should be established.  Given the inherent volatility, the use of fair value measurements may have a significant impact on the carrying value of assets or liabilities, or result in material changes to the financial statements, from period to period.

 

Fair value is defined as the price that would be received to sell an asset or transfer a liability between market participants at the balance sheet date. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to observable market data for similar assets and liabilities. However, certain assets and liabilities are not traded in observable markets and the Company must use other valuation methods to develop a fair value. The fair value of impaired loans is based on the fair value of the underlying collateral, which is estimated through third party appraisals or internal estimates of collateral values.

 

The following methods, assumptions, and valuation techniques were used by the Company to measure different financial assets and liabilities at fair value and in estimating its fair value disclosures for financial instruments.

 

Cash and Cash Equivalents: The carrying amounts reported in the consolidated statements of financial condition for cash and cash equivalents is deemed to be fair value and are classified as Level 1 of the fair value hierarchy.

 

Available for Sale Investment Securities: Fair values for investment securities are determined by quoted market prices if available (Level 1). For securities where quoted prices are not available, fair values are estimated based on market prices of similar securities. For securities where quoted prices or market prices of similar securities are not available, fair values are estimated using matrix pricing, which is a mathematical technique widely used in the industry to value investment securities without relying exclusively on quoted prices for the specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities (Level 2). Any investment security not valued based upon the methods above is considered Level 3.

 

64
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

The Company utilizes information provided by a third-party investment securities portfolio manager in analyzing the investment securities portfolio in accordance with the fair value hierarchy of ASC 820. The portfolio manager’s evaluation of investment security portfolio pricing is performed using a combination of prices and data from other sources, along with internally developed matrix pricing models. The third-party’s month-end pricing process includes a series of quality assurance activities where prices are compared to recent market conditions, previous evaluation prices, and between the various pricing services. These processes produce a series of quality assurance reports on which price exceptions are identified, reviewed and where appropriate, securities are re-priced. In the event of a materially different price, the third party will report the variance and review the pricing methodology in detail. The results of the quality assurance process are incorporated into the selection of pricing providers by the third party.

 

Collateralized Debt Obligations: Estimated fair value for collateralized debt obligations is based on independent third-party evaluations including discounted cash flows and other market assumptions. The methods used to estimate the fair value of the securities do not necessarily represent an exit price and due to the significant judgment involved, these securities are classified Level 3.

 

Loans: For fixed rate loans and for variable rate loans with infrequent re-pricing or re-pricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. For loans held on balance sheet, the discounted fair value is further reduced by the amount of reserves held against the loan portfolios. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price and due to the significant judgment involved in evaluating credit quality, loans are classified Level 3.

 

Federal Home Loan Bank Stock: The carrying amount presented in the consolidated statements of financial condition is deemed to approximate fair value.

 

Accrued Interest Receivable and Payable: The fair value for accrued interest approximates its carrying amounts due to the short duration before collection. The valuation is a Level 3 classification which is consistent with its underlying asset or liability.

 

Deposits: The fair values of deposits with no stated maturity, such as money market demand deposits, savings and NOW accounts have been analyzed by management and assigned estimated maturities and cash flows which are then discounted to derive a value. The fair value of fixed-rate certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The Company classifies the estimated fair value of deposit liabilities as Level 2 in the fair value hierarchy.

 

Advances from the Federal Home Loan Bank: The fair value of these advances is estimated using the rates currently offered for similar advances of similar remaining maturities or, when available, quoted market prices.

 

Commitments to Extend Credit: For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. At December 31, 2014 and December 31, 2013, the fair value of loan commitments was not material.

 

65
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

Based on the foregoing methods and assumptions, the carrying value and fair value of the Company’s financial instruments are as follows (in thousands):

 

At December 31, 2014:

 

   Carrying
Amount
   Fair Value   Level 1   Level 2   Level 3 
Financial assets                         
Cash and cash equivalents  $21,274   $21,274   $21,274   $   $ 
Securities available-for-sale   75,909    75,909        75,909     
Loans (net of allowance)   381,208    381,224            381,224 
FHLB stock   3,250    3,250        3,250     
Accrued interest receivable   1,234    1,234            1,234 
                          
Financial liabilities                         
Noninterest-bearing deposits  $111,022   $111,022   $   $111,022   $ 
Interest-bearing deposits   342,170    342,318        342,318     
FHLB advances   11,808    11,808        11,808     
Accrued interest payable   36    36            36 

 

At December 31, 2013:

 

   Carrying
Amount
   Fair
Value
   Level 1   Level 2   Level 3 
Financial assets                         
Cash and cash equivalents  $25,357   $25,357   $25,357   $   $ 
Securities available-for-sale   79,948    79,948        78,972    976 
Loans (net of allowance) (1)   357,130    348,295            348,295 
FHLB stock   3,799    3,799        3,799     
Accrued interest receivable   1,356    1,356            1,356 
                          
Financial liabilities                         
Noninterest-bearing deposits (2)  $112,711   $112,711   $   $112,711   $ 
Interest-bearing deposits (2)   317,237    318,107        318,107     
FHLB advances   4,838    4,838        4,838     
Accrued interest payable   112    112            112 

 

(1)Includes loans held for sale
(2)Includes deposits held for sale

 

66
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

The following table presents the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2014 and December 31, 2013 (in thousands):

 

       Fair Value Measurements Using 
December 31, 2014  Fair Value  

Quoted Prices in
Active Markets for
Identical Assets

(Level 1)

  

Significant Other

Observable Inputs

(Level 2)

  

 

Significant

Unobservable Inputs

(Level 3)

 
U.S. Government and agency obligations  $11,545   $   $11,545   $ 
State and municipal obligations   21,657        21,657     
Corporate bonds   4,987        4,987     
Collateralized mortgage obligation   19,580        19,580     
Mortgage-backed securities and other   18,140        18,140     
Total  $75,909   $   $75,909   $ 

 

       Fair Value Measurements Using 
December 31, 2013  Fair Value  

Quoted Prices in
Active Markets for

Identical Assets

(Level 1)

  

Significant Other

Observable Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 
U.S. Government and agency obligations  $13,302   $   $13,302   $ 
State and municipal obligations   20,450        20,450     
Corporate bonds   6,168        6,168     
Collateralized debt obligation   976            976 
Collateralized mortgage obligation   15,045        15,045     
Mortgage-backed securities and other   24,007        24,007     
Total  $79,948   $   $78,972   $976 

 

The table below presents a roll-forward of the balance sheet amounts for the year ended December 31, 2014 for the collateralized debt obligation measured on a recurring basis and classified as Level 3. The classification of an item as Level 3 is based on the significance of the unobservable inputs to the overall fair value measurement.

 

Level 3 Fair Value Measurements
Year ended December 31, 2014
 
Balance, beginning of year  $976 
Sales   (1,775)
Total gains (losses):     
Included in earnings   (141)
Included in other comprehensive income   940 
Balance, end of year  $ 

 

67
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

The following is a description of the valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.

 

Securities

Collateralized debt obligations were classified as available for sale at December 31, 2013. The Company recognized other-than-temporary impairment on certain of the securities as of December 31, 2013, based upon a Level 3 estimate of fair value, including a discounted cash flows calculation and a fair value estimate from an independent evaluation of the securities.

 

Impaired loans

At December 31, 2014 and 2013, impaired loans consisted primarily of loans secured by nonresidential and commercial real estate. Management has determined fair value measurements on impaired loans primarily through evaluations of appraisals performed.

 

Real Estate Owned

 

Real estate acquired through, or in lieu of, loan foreclosure is held for sale and initially recorded at fair value (based on current appraised value) at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Management has determined fair value measurements on real estate owned primarily through evaluations of appraisals performed.

 

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2014 and 2013 (in thousands).

 

December 31, 2014      Fair Value Measurements Using 
  

 

 

Fair
Value

  

Quoted Prices in
Active Markets for

Identical Assets

(Level 1)

  

Significant Other

Observable Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 
Impaired loans  $12,173   $   $   $12,173 
Real estate owned   1,111            1,111 

 

December 31, 2013      Fair Value Measurements Using 
  

 

 

Fair
Value

  

Quoted Prices in
Active Markets for

Identical Assets

(Level 1)

  

Significant Other

Observable Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 
Impaired loans  $22,881           $22,881 
Real estate owned   1,219            1,219 

 

68
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

15. Parent Company Financial Information

 

Condensed financial information of DCB Financial Corp for the years ended December 31 is as follows:

 

Condensed Balance Sheets

 

   2014   2013 
Assets          
Cash  $948   $948 
Investment in subsidiaries   46,283    44,336 
           
Total assets  $47,231   $45,284 
           
Liabilities          
Other liabilities  $20   $20 
           
Shareholders’ Equity   47,211    45,264 
           
Total liabilities and shareholders’ equity  $47,231   $45,284 

 

Condensed Statements of Operations

 

   2014   2013 
         
Equity in undistributed income (loss) of subsidiaries  $372    (2,805)
Other        
Total income (loss)   372    (2,805)
Operating expenses       (126)
Federal income tax        
           
Net income (loss)  $372   $(2,931)

 

69
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

Condensed Statements of Cash Flows        
   2014   2013 
Cash flows from operating activities          
Net income (loss)  $372   $(2,931)
Adjustments to reconcile net income (loss) to cash provided by operating activities:          
Equity in undistributed net income (loss) from subsidiaries   (372)   2,805 
Net change in other assets and liabilities       (4,171)
Net cash used in operating activities       (4,297)
           
Cash flows from investing activities          
Investments in affiliates       5 
Net cash provided by investing activities       5 
Cash flows from financing activities          
Investment in Subsidiary       (8,092)
Net cash used in financing activities       (8,092)
           
Net change in cash       (12,382)
           
Cash at beginning of year   948    13,332 
           
Cash at end of year  $948   $948 

 

16. Details of Operating Expenses

 

The following table details the composition of occupancy and equipment expenses for the years ended December 31, 2014 and 2013.

 

(In thousands)  2014   2013 
         
Bank occupancy expense  $1,876   $1,590 
Equipment lease   83    342 
Equipment depreciation   233    303 
Software maintenance   961    824 
Other   39    10 
           
Total  $3,192   $3,069 

 

The following table details the composition of other operating expenses for the years ended December 31, 2014 and 2013.

 

(In thousands)  2014   2013 
         
ATM and debit cards  $690   $772 
Telephone   269    320 
Loan   344    482 
Real estate taxes   325    281 
OREO expenses   26    22 
Other operating   1,169    1,065 
           
Total  $2,823   $2,942 

 

70
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2014 and 2013

 

17. Quarterly Financial Data (Unaudited)

 

The following tables summarize the Company’s quarterly results for the years ended December 31, 2014 and 2013.

 

(Dollars in thousands, except share and per share data)  2014 
   Fourth   Third   Second   First 
Interest income  $4,536   $4,278   $4,262   $4,304 
Interest expense   291    306    299    316 
Net interest income   4,245    3,972    3,963    3,988 
Provision for loan losses   150             
Net interest income after provision for loan losses   4,095    3,972    3,963    3,988 
Other non-interest income   1,132    1,140    996    1,192 
Other non-interest expense   5,059    5,062    4,922    5,063 
Income before income tax expense   168    50    37    117 
Income taxes                
Net income  $168   $50   $37   $117 
                     
Stock and related per share data                    
Basic and diluted earnings per common share  $0.02   $0.01   $0.01   $0.02 
Basic weighted average common shares outstanding   7,196,404    7,192,350    7,192,350    7,192,350 
Diluted weighted average common shares outstanding   7,232,961    7,249,194    7,250,702    7,244,716 

 

   2013 
   Fourth   Third   Second   First 
Interest income  $4,372   $4,316   $4,245   $4,146 
Interest expense   369    425    494    530 
Net interest income   4,003    3,891    3,751    3,616 
Provision for loan losses   3,307        (240)   (650)
Net interest income after provision for loan losses   696    3,891    3,991    4,266 
Other non-interest income   1,116    1,192    1,351    1,308 
Other non-interest expense   4,914    5,230    5,440    5,456 
 (Loss) income before income tax benefit   (3,102)   (147)   (98)   118 
Income tax benefit       (20)   (254)   (24)
Net (loss) income  $(3,102)  $(127)  $156   $142 
                     
Stock and related per share data                    
Basic and diluted (loss) earnings per common share  $(0.43)  $(0.02)  $0.02   $0.02 
Basic weighted average common shares outstanding   7,192,350    7,192,350    7,192,350    7,192,350 
Diluted weighted average common shares outstanding   7,192,350    7,192,350    7,227,901    7,223,144 

 

The sum of the quarterly earnings per share amounts may not equal the total for the year due to the effects of rounding.

 

71
 

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None

 

Item 9A. Controls and Procedures

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2014, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2014.

 

There was no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended December 31, 2014, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Management’s Report on Internal Control over Financial Reporting

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934. The Company’s management, including the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting at December 31, 2014, as required by Section 404 of the Sarbanes Oxley Act of 2002. Management’s assessment is based on criteria established in the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013) and was designed to provide reasonable assurance that the Company maintained effective internal control over financial reporting as of December 31, 2014. Based on this assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2014.

 

Item 9B. Other Information

 

None

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

The information required by this item is set forth in our Proxy Statement to Shareholders in connection with our 2015 Annual Meeting (the “2015 Proxy Statement”), under the headings “Proposal 1 — Election of Directors and Information with Respect to Directors and Officers,” “Board of Directors and Selected Committees,” “Corporate Governance,” and “Section 16(a) Beneficial Ownership Reporting Compliance.” Such information is incorporated herein by reference.

 

72
 

 

Our Board of Directors has adopted a Code of Ethics and Business Conduct that applies to all of its directors, officers, and employees, including its principal executive, principal financial, and principal accounting officers. A copy of the code of ethics will be provided, at no cost, upon written request to the attention of Mr. J. Daniel Mohr, Executive Vice President and Chief Financial Officer, at our main office, 110 Riverbend Avenue Lewis Center, Ohio 43035. In addition, a copy of the Code of Ethics and Business Conduct is posted on our website at http://www.dcbfinancialcorp.com. In the event we make any amendment to, or grant any waiver of, a provision of the Code of Ethics and Business Conduct that applies to the principal executive officer, a principal financial officer, principal accounting officer, or controller, or persons performing similar functions that require disclosure under applicable SEC rules, we intend to disclose such amendment or waiver, the reasons for it, and the nature of any waiver, the name of the person to whom it was granted, and the date, on our internet website.

 

Item 11. Executive Compensation

 

The information required by this item is set forth in our 2015 Proxy Statement under the headings “Executive Compensation and Other Information” and “Board of Directors and Selected Committees.” Such information is incorporated herein by reference.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information about beneficial ownership of our common shares required by this item is set forth in our 2015 Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management.” Such information is incorporated herein by reference.

 

Item 13. Certain Relationships and Related Transactions and Director Independence

 

Information required by this item is set forth in our 2015 Proxy Statement under the headings “Certain Relationships and Related Transactions” and “Board of Directors and Selected Committees”, “Selection of Auditors” and “Principal Accounting Firm Fees.” Such information is incorporated herein by reference.

 

Item 14. Principal Accountant Fees and Services

 

Information required by this item is set forth in our 2015 Proxy Statement under the heading "Information Concerning Independent Registered Public Accountants.” Such information is incorporated herein by reference.

 

73
 

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules

 

(a) The following documents are filed as part of this report:

 

  (1) The report of independent registered public accounting firm and consolidated financial statements appearing in Item 8.

 

  (2) None.

 

  (3) The exhibits required by this item and item (b) are listed below under the heading “Exhibit Index.”

 

(b) The exhibits required by item (a)(3) and this item are listed below under the heading “Exhibit Index.

 

(c) None.

 

Exhibit Index

 

Exhibit No.   Exhibit Description
     
2.1   Branch Purchase and Assumption Agreement by and between The Delaware County Bank & Trust Company and Merchants National Bank dated January 10, 2014 (incorporated by reference to Registrant’s Form 8-K filed on January 10, 2014, Exhibit 2.1 (File No.000-22387))
3.1   Amended and Restated Articles of Incorporation of DCB Financial Corp (incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, Exhibit 3.1 (File No.000-22387))
3.2   Amended and Restated Code of Regulations of DCB Financial Corp (incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, Exhibit 3.2 (File No. 000-22387))
4.1   Agreement to furnish instruments and agreements defining rights of holders of long-term debt. (incorporated by reference to Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2011, Exhibit 4.1 (File No. 000-22387))
10.1*   Employment agreement with Ronald J. Seiffert (incorporated by reference to Registrant’s Current Report on Form 8-K filed on August 15, 2014, Exhibit 4.1 (File No. 000-22387))
10.2*   Employment agreement with Daniel J. Mohr (incorporated by reference to Registrant’s Current Report on Form 8-K filed on August 15, 2014, Exhibit 4.1 (File No. 000-22387))
10.3*   DCB Financial Corp 2004 Long-Term Stock Incentive Plan (incorporated by reference to Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2011, Exhibit 4.1 (File No. 000-22387))
10.4*   DCB Financial Corp 2014 Restricted Stock Plan (incorporated by reference to the Registrant’s Proxy Statement for a Special Meeting of Shareholders held October 30, 2014, filed on September 18, 2014))
10.5*   DCB Financial Corp 2014 Restricted Stock Plan Form of Restricted Stock Award Notice (incorporated by reference to Registrant’s Current Report on Form 8-K filed on November 4, 2014, Exhibit 10.1 (File No. 000-22387))
10.6*   Special Incentive Agreement with Ronald J. Seiffert (incorporated by reference to Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2011, Exhibit 4.1 (File No. 000-22387))
10.7*   Plan for Payment of Fees in DCB Financial Corp Common Stock (incorporated by reference to Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2011, Exhibit 4.1 (File No. 000-22387))

 

74
 

 

10.8*   The Delaware County Bank & Trust Company Executive Deferred Compensation Plan, with amendments (incorporated by reference to Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2011, Exhibit 4.1 (File No. 000-22387))
10.9*   Form of Change of Control Agreement, dated August 11, 2014 by and between the Bank, the Company and Charles O. Moore, David R. Archibald, Daniel M. Roberts, Roger A. Lossing, and Barbara S. Walters (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on August 15, 2014 (File No. 000-22387))
21**   Subsidiaries of DCB Financial Corp
23**   Consent of Plante & Moran PLLC
31.1**   Rule 13a-14 (a) Certifications
31.2**   Rule 13a-14 (a) Certifications
32.1**   Section 1350 Certifications
32.2**   Section 1350 Certifications
101**   The following materials from DCB Financial Corp’s Annual Report on Form 10-K for the year ended December 31, 2014 formatted in Extensible Business Reporting Language (“XBRL”): (i) Consolidated Statements of Financial Condition; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to the Consolidated Financial Statements.

 

*Compensatory agreement or arrangement.

 

**Filed herewith.

 

75
 

 

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.

 

Dated:  March 25, 2015   DCB FINANCIAL CORP
     
By: /s/ RONALD J. SEIFFERT   President and Chief Executive Officer
Ronald J. Seiffert   (Principal Executive Officer)
     
By: /s/ J. DANIEL MOHR   Executive Vice President and Chief Financial
J. Daniel Mohr   Officer (Principal Financial and Accounting Officer)

 

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 on March 25, 2015 and in the capacities indicated.

 

Signatures   Title
     
/s/ RONALD J. SEIFFERT   President and Chief Executive Officer
Ronald J. Seiffert   (Principal Executive Officer), Director
     
/s/ J. DANIEL MOHR   Executive Vice President and Chief Financial
J. Daniel Mohr   Officer (Principal Financial and Accounting Officer)
     
/s/ VICKI J. LEWIS   Director, Chairman of the Board
Vicki J. Lewis    
     
/s/ EDWARD A. POWERS   Director
Edward A. Powers    
     
/s/ ADAM STEVENSON   Director
Adam Stevenson    
     
/s/ DONALD J. WOLF   Director
Donald J. Wolf    
     
/s/ GERALD L. KREMER, MD   Director
Gerald L. Kremer    
     
/s/ MARK H. SHIPPS   Director
Mark H. Shipps    
     
/s/ BART E. JOHNSON   Director
Bart E. Johnson    
     
/s/ MICHAEL A. PRIEST   Director
Michael A. Priest    
     
/s/ TOMISLAV MITEVSKI   Director
Tomislav Mitevski    
     
/s/ JEROME HARMEYER   Director
Jerome Harmeyer    

 

76