UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

 

For the quarterly period ended: March 31, 2015

 

OR

 

¨

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

 

Commission file number:

0-22387

 

	DCB Financial Corp
	(Exact name of registrant as specified in its charter)

 

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

 

110 Riverbend Avenue, Lewis Center, Ohio 43035

(Address of principal executive offices) (Zip code)

 

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

 

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 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.

 

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 Rule 12b-2 of the Exchange Act).

Yes ¨   No x

 

As of May 14, 2015, the latest practicable date, 7,287,437 of the registrant’s common shares, no par value, were issued and outstanding.

 

 

DCB Financial Corp

 

Table of Contents

 

	Page
Part I – Financial Information
Item 1 – Financial Statements
Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014	3
Consolidated Statements of Income (unaudited) for the three month periods ended March 31, 2015 and 2014	4
Consolidated Statements of Comprehensive Income (unaudited) for the three month periods ended March 31, 2015 and 2014	5
Consolidated Statements of Shareholder’s Equity (unaudited) for the three month periods ended March 31, 2015 and 2014	6
Consolidated Statements of Cash Flows (unaudited) for the three month periods ended March 31, 2015 and 2014	7
Notes to the Consolidated Financial Statements	8
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3 - Quantitative and Qualitative Disclosures about Market Risk	39
Item 4 – Controls and Procedures	39
Part II – Other Information	40
Item 1 – Legal proceedings	40
Item 1A – Risk Factors	40
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3 – Defaults Upon Senior Securities	40
Item 4 – Mine Safety Disclosures	40
Item 5 – Other Information	40
Item 6 – Exhibits	40
Signatures	42

 

 

Part I - Financial Information

 

Item 1. Financial Statements

 

DCB Financial Corp

Consolidated Balance Sheets

 

		March 31, 2015 (unaudited)				December 31, 2014
		(Dollars in thousands, except share and per share data)
Assets:
Cash and due from financial institutions		$	5,998			$	6,247
Interest-bearing deposits			18,047				15,027
Total cash and cash equivalents			24,045				21,274
Securities available-for-sale			85,844				75,909
Loans			377,246				385,444
Less allowance for loan losses			(4,089	)			(4,236	)
Net loans			373,157				381,208
Real estate owned			940				1,111
Investment in FHLB stock			3,250				3,250
Premises and equipment, net			9,891				10,016
Bank-owned life insurance			20,270				20,027
Accrued interest receivable and other assets			3,312				2,587
Total assets		$	520,709			$	515,382
Liabilities and shareholders’ equity
Liabilities:
Deposits:
Non-interest bearing		$	111,286			$	111,022
Interest bearing			353,510				342,170
Total deposits			464,796				453,192
Borrowings			4,801				11,808
Accrued interest payable and other liabilities			3,461				3,171
Total liabilities			473,058				468,171
Shareholders’ equity:
Preferred shares, no par value, 2,000,000 shares authorized, none issued and outstanding			—				—
Common shares, no par value, 17,500,000 shares authorized, 7,541,445 and 7,500,000 shares issued, and 7,287,437 and 7,233,795 shares outstanding for March 31, 2015 and December 31, 2014, respectively			16,456				16,064
Retained earnings			38,294				38,055
Treasury stock, at cost, 307,650 shares at March 31, 2015 and December 31, 2014			(7,416	)			(7,416	)
Accumulated other comprehensive income			848				654
Deferred stock-based compensation			(531	)			(146	)
Total shareholders’ equity			47,651				47,211
Total liabilities and shareholders’ equity		$	520,709			$	515,382
See notes to the consolidated financial statements.
Common shares outstanding			7,287,437				7,233,795
Book value per common share		$	6.54			$	6.53

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

DCB Financial Corp

Consolidated Statements of Income

 

		For the three months ended March 31,
		2015				2014
		(Dollars in thousands, except share and per share data)
Interest income:
Loans		$	3,952			$	3,738
Securities			505				553
Federal funds sold and interest bearing deposits			10				13
Total interest income			4,467				4,304
Interest expense:
Deposits:
Savings and money market accounts			142				131
Time accounts			92				128
NOW accounts			16				21
Total			250				280
FHLB advances			35				36
Total interest expense			285				316
Net interest income			4,182				3,988
Provision for loan losses			150				—
Net interest income after provision for loan losses			4,032				3,988
Non-interest income:
Service charges			452				511
Wealth management fees			380				293
Treasury management fees			58				56
Income from bank-owned life insurance			243				239
Loss on the sale of securities available-for-sale			—				(140	)
Loss on loans held for sale			—				(245	)
Net gain on sale of REO			10				—
Gain on sale of branch			—				438
Other non-interest income			15				40
Total non-interest income			1,158				1,192
Non-interest expense:
Salaries and employee benefits			2,712				2,779
Occupancy and equipment			963				804
Professional services			353				421
Advertising			108				81
Office supplies, postage and courier			79				95
FDIC insurance premium			110				168
State franchise taxes			75				65
Other non-interest expense			551				650
Total non-interest expense			4,951				5,063
Income before income taxes			239				117
Income taxes			—				—
Net income		$	239			$	117
Share and Per Share Data
Basic average common shares outstanding			7,237,371				7,192,350
Diluted average common shares outstanding			7,253,840				7,244,716
Basic and diluted earnings per common share		$	0.03			$	0.02

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

DCB Financial Corp

Consolidated Statements of Comprehensive Income (Unaudited)

 

		Three months ended March 31,
		2015				2014
		(Dollars in thousands)
Net income		$	239			$	117
Other comprehensive income:
Net unrealized gains on securities available-for-sale, net of taxes of $100 and $769 in 2015 and 2014, respectively			194				1,108
Reclassification adjustment for losses included in net income, net of taxes of $(35) in 2014			—				(92	)
Total other comprehensive income			194				1,016
Comprehensive income		$	433			$	1,133

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

DCB Financial Corp

Consolidated Statements of Shareholders’ Equity (Unaudited)

 

		Issued and Outstanding Common Shares				Preferred Stock				Common Stock				Retained Earnings				Treasury Stock				Accumulated Other Comprehensive Income (Loss)				Deferred Stock-Based Compensation				Total
(Dollars in thousands)
Balance at January 1, 2014			7,192,350			$	—			$	15,771			$	37,683			$	(7,416	)		$	(774	)		$	—			$	45,264
Comprehensive income:
Net income			—				—				—				117				—				—				—				117
Other comprehensive loss, net of taxes			—				—				—				—				—				1,016				—				1,016
Total comprehensive income			—				—				—				—				—				—				—				1,133
Balance at March 31, 2014			7,192,350			$	—			$	15,771			$	37,800			$	(7,416	)		$	242			$	—			$	46,397
Balance at January 1, 2015			7,233,797			$	—			$	16,064			$	38,055			$	(7,416	)		$	654			$	(146	)		$	47,211
Comprehensive income:
Net income			—				—				—				239				—				—				—				239
Other comprehensive income, net of taxes			—				—				—				—				—				194				—				194
Total comprehensive income			—				—				—				—				—				—				—				433
Issuance of restricted stock			53,640				—				392				—				—				—				(392	)			—
Amortization of restricted stock			—				—				—				—				—				—				7				7
Balance at March 31, 2015			7,287,437			$	—			$	16,456			$	38,294			$	(7,416	)		$	848			$	(531	)		$	47,651

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

DCB Financial Corp

Consolidated Statements of Cash Flows (Unaudited)

 

		Three months ended March 31
		2015				2014
		(Dollars in thousands)
Cash flows from operating activities
Net income		$	239			$	117
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation			254				273
Provision for loan losses			150				—
Loss on sale of securities available-for-sale			—				140
Loss on loans held-for-sale			—				245
Gain on sale of real estate owned			(10	)			—
Gain on sale of branch			—				(438	)
Net stock-based compensation expense			7				60
Premium amortization on securities, net			246				270
Earnings on bank owned life insurance			(243	)			(239	)
Net changes in other assets and other liabilities			(536	)			(3,063	)
Net cash provided by (used in) operating activities			107				(2,635	)
Cash flows from investing activities
Purchases of securities available-for-sale			(12,212	)			(5,949	)
Proceeds from maturities, principal payments and calls of securities available-for-sale			2,326				6,439
Proceeds from sales of securities available-for-sale			—				2,133
Net change in loans			7,901				2,644
Proceeds from sale of real estate owned			181				33
Net cash paid with sale of branch			—				(12,464	)
Premises and equipment expenditures			(129	)			(50	)
Net cash used in investing activities			(1,933	)			(7,214	)
Cash flows from financing activities
Net change in deposits			11,604				9,435
Repayment of borrowings			(7,007	)			(7	)
Proceeds from redemption of FHLB stock			—				549
Net cash provided by financing activities			4,597				9,977
Net change in cash and cash equivalents			2,771				128
Cash and cash equivalents at beginning of period			21,274				25,357
Cash and cash equivalents at end of period		$	24,045			$	25,485
Supplemental disclosures of cash flow information
Cash paid during the period for interest on deposits and borrowings		$	269			$	328
Non-cash investing and financing activities:
Transfer of loans to real estate owned			—				377
Transfer of loans to held for sale			—				87

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

Note 1 – Summary of Significant Accounting Policies

 

Throughout this report, the terms “Company,” “DCB,” “we,” “our” and “us” refers to the consolidated entity of DCB Financial Corp and its wholly owned subsidiaries, The Delaware County Bank and Trust Company (the “Bank”), DCB Title Services LLC, and DCB Insurance Services, Inc.

 

The accompanying unaudited financial statements were prepared in accordance with the instructions for Form 10-Q and Regulation S-X and, therefore, do not include information for footnotes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The material under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is written with the presumption that the users of the interim financial statements have read, or have access to, the latest audited financial statements and notes thereto of the Company, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2014, and for the two-year period then ended, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Accordingly, only material changes in the results of operations and financial condition are discussed in the remainder of Part I. Certain amounts from prior year periods are reclassified, when necessary, to conform to the current period presentation.

 

All adjustments, consisting of only normal recurring items, that in the opinion of management are necessary for a fair presentation of the financial statements have been included in the results of operations for the three months ended March 31, 2015 and 2014. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results anticipated for the year.

 

To prepare financial statements in conformity with US GAAP, 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 values of financial instruments and status of contingencies are anytime particularly subject to change.

 

Earnings per share

Earnings per common share is net income divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share is computed including the dilutive effect of additional potential common shares under stock options. Weighted-average shares for basic and diluted earnings per share are presented below.

 

		Three Months Ended March 31,
		2015				2014
Weighted-average common shares outstanding (basic)			7,237,371				7,192,350
Dilutive effect of assumed exercise of stock options			16,469				52,366
Weighted-average common shares outstanding (diluted)			7,253,840				7,244,716

 

There were 62,939 shares and 153,506 shares included in the computation of common share equivalents for the three months ended March 31, 2015 and 2014, respectively, because the average fair value of the shares was greater than the exercise price.

 

At March 31, 2015 and 2014, 9,979 and 45,727 of anti-dilutive shares, respectively, were excluded from the diluted weighted average common share calculations.

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

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.

 

During the first quarter of 2015, awards for 53,640 restricted shares were granted under the Company's 2014 Restricted Stock Plan. The awards vest ratably over a five year period. There were no grants of restricted shares in the first quarter of 2014. There were 95,085 and 41,445 unvested restricted shares at March 31, 2015 and December 31, 2014, respectively.

 

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.

 

Significant Accounting Estimates

The Company’s consolidated financial statements are prepared in accordance with U.S. GAAP and follow general practices within the financial services industry. The application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; as this information changes, the financial statements could reflect different estimates, assumptions, and judgments.

 

The procedures for assessing the adequacy of the allowance for loan losses reflect our evaluation of credit risk after careful consideration of all information available to us. In developing this assessment, the Company must rely on estimates and exercise judgment regarding matters where the ultimate outcome is unknown, such as economic factors, developments affecting companies in specific industries and issues with respect to single borrowers. Depending on changes in circumstances, future assessments of credit risk may yield materially different results, which may require an increase or a decrease in the allowance for loan losses.

 

The valuation of other assets requires that management utilize a variety of estimates and analysis to determine whether an asset is impaired or other-than-temporarily impaired (“OTTI”). After determining the appropriate methodology for fair value measurement, management then evaluates whether or not declines in fair value below book value are temporary or other-than-temporary impairments. When the Company does not intend to sell a debt security, and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.

 

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.

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

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 nonaccrual 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 nonaccrual 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 transferred 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.

 

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 180 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.

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

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.

 

Note 2 – Securities

 

As of March 31, 2015:

 

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

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
U.S. Government and agency obligations		$	19,071			$	64			$	(18	)		$	19,117
Corporate bonds			4,968				47				(7	)			5,008
States and municipal obligations			22,063				571				(41	)			22,593
Collateralized mortgage obligations			22,080				71				(112	)			22,039
Mortgage-backed securities			16,378				709				(0	)			17,087
Total		$	84,560			$	1,462			$	(178	)		$	85,844

 

As of December 31, 2014:

 

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

 

		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 obligations			19,601				85				(106	)			19,580
Mortgage-backed securities			17,438				702				—				18,140
Total		$	74,919			$	1,274			$	(284	)		$	75,909

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at March 31, 2015 and December 31, 2014 (dollars in thousands):

 

		March 31, 2015
		(Less than 12 months)												(12 months or longer)												Total
Description of securities		Number of investments				Fair value				Unrealized losses				Number of investments				Fair value				Unrealized losses				Number of investments				Fair value				Unrealized losses
U.S. Government and agency obligations			2			$	1,498			$	1				3			$	3,500			$	17				5			$	4,998			$	18
Corporate bonds			1				265				1				3				1,410				6				4				1,675				7
State and municipal obligations			4				1,538				16				3				1,324				25				7				2,862				41
Collateralized mortgage obligations			11				6,653				40				4				3,519				72				15				10,172				112
Mortgage-backed securities and other			—				—				—				—				—				—				—				—				—
Total temporarily impaired securities			18			$	9,954			$	58				13			$	9,753			$	120				31			$	19,707			$	178

 

 

 

		December 31, 2014
		(Less than 12 months)												(12 months or longer)												Total
Description of securities		Number of investments				Fair value				Unrealized losses				Number of investments				Fair value				Unrealized losses				Number of investments				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 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

 

The unrealized losses on the Company’s investments in U.S. Government and agency obligations, state and political subdivision obligations, corporate bonds 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 bases 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 OTTI at March 31, 2015 or 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”).

 

There were no sales of securities in the three months ended March 31, 2015. Gross losses on the sale of securities were $140,000 in the first quarter of 2014.

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

At March 31, 2015, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.

 

The amortized cost and estimated fair value of all debt securities at March 31, 2015, 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				Fair
		Cost				Value
Due in one year or less		$	18,776			$	18,845
Due after one to five years			30,010				30,236
Due after five to ten years			17,529				17,794
Due after ten years			1,867				1,883
Mortgage-backed and related securities			16,378				17,086
Total		$	84,560			$	85,844

 

Securities with a fair value of $74.8 million at March 31, 2015 were pledged to secure public deposits and other obligations.

 

Note 3 – Loans

 

At March 31, 2015 and December 31, 2014, loans were comprised of the following (in thousands):

 

		March 31, 2015				December 31, 2014
Commercial and industrial		$	99,946			$	106,222
Commercial real estate			106,334				111,851
Residential real estate and home equity			131,658				129,650
Consumer and credit card			39,074				37,507
Subtotal			377,012				385,230
Add: Net deferred loan origination fees			234				214
Total loans receivable		$	377,246			$	385,444

 

Note 4 – 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 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.

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

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 paydowns, payoffs, credit improvement 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 historical levels.

 

The tables below present allowance for loan losses by loan portfolio and allocated to loans individually and collectively evaluated for impairment. Commercial real estate includes real estate construction and land development loans (in thousands).

 

		Quarter ended March 31, 2015
		Consumer and Credit Card				Commercial and Industrial				Commercial Real Estate				Residential Real Estate and Home Equity				Unallocated				Total
Beginning balance		$	190			$	1,132			$	2,376			$	268			$	270			$	4,236
Charge-offs			(42	)			(310	)			(48	)			(29	)			—				(429	)
Recoveries			28				88				7				9				—				132
Provision			7				127				(18	)			20				14				150
Ending balance		$	183			$	1,037			$	2,317			$	268			$	284			$	4,089
Allowance allocated to:
Individually evaluated for impairment		$	—			$	136			$	991			$	—			$	—			$	1,127
Collectively evaluated for impairment			183				901				1,326				268				284				2,962
Ending balance		$	183			$	1,037			$	2,317			$	268			$	284			$	4,089
Loans:
Individually evaluated for impairment		$	447			$	2,267			$	8,351			$	340			$	—			$	11,405
Collectively evaluated for impairment			38,627				97,679				97,983				131,318				—				365,607
Ending balance		$	39,074			$	99,946			$	106,334			$	131,658			$	—			$	377,012

 

		Quarter ended March 31, 2014
		Consumer and Credit Card				Commercial and Industrial				Commercial Real Estate				Residential Real Estate and Home Equity				Unallocated				Total
Beginning balance		$	301			$	3,232			$	2,974			$	218			$	—			$	6,725
Charge-offs			(46	)			(1,193	)			(159	)			(14	)			—				(1,412	)
Recoveries			31				4				84				10				—				129
Provision			(40	)			30				(127	)			(36	)			173				—
Transferred to loans  held for sale			—				—				(97	)			—				—				(97	)
Ending balance		$	246			$	2,073			$	2,675			$	178			$	173			$	5,345
Allowance allocated to:
Individually evaluated  for impairment		$	—			$	966			$	1,724			$	—			$	—			$	2,690
Collectively evaluated for impairment			246				1,107				951				178				173				2,655
Ending balance		$	246			$	2,073			$	2,675			$	178			$	173			$	5,345
Loans:
Individually evaluated  for impairment		$	—			$	3,730			$	15,108			$	—			$	—			$	18,838
Collectively evaluated for impairment			32,498				107,156				88,017				105,573				—				333,244
Ending balance		$	32,498			$	110,886			$	103,125			$	105,573			$	—			$	352,082

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

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.

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

The following presents by class, information related to the Company’s impaired loans as of March 31, 2015 and December 31, 2014 (in thousands).

 

		At March 31, 2015												Quarter ended March 31, 2015
		Recorded Investment				Unpaid Principal Balance				Related Allowance				Three months Average Recorded Investment				Three months Interest Income Recognized
With No Related Allowance
Recorded
Consumer and Credit Card		$	447			$	447			$	—			$	449			$	5
Commercial and Industrial			1,255				1,255				—				1,266				7
Commercial Real Estate			22				22				—				729				—
Residential real estate and home equity			340				340				—				—				—
With Allowance Recorded
Commercial and Industrial		$	1,012			$	1,090			$	136			$	817			$	13
Commercial Real Estate			8,329				8,329				991				8,350				138
Total
Consumer and Credit Card		$	447			$	447			$	—			$	449			$	5
Commercial and Industrial			2,267				2,345				136				2,083				20
Commercial Real Estate			8,351				8,351				991				9,079				138
Residential real estate and home equity			340				340				—				—				—
Total		$	11,405			$	11,483			$	1,127			$	11,611			$	163

 

 

		At December 31, 2014												Quarter ended March 31, 2014
		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
With No Related Allowance
Recorded
Consumer and Credit Card		$	455			$	455			$	—			$	—			$	—
Commercial and Industrial			1,288				1,288				—				1,434				19
Commercial Real Estate			1,088				1,088				—				9,816				149
With Allowance Recorded
Commercial and Industrial			740				817				256				4,135				12
Commercial Real Estate			8,602				8,602				1,042				5,495				73
Total
Consumer and Credit Card			455				455				—				—				—
Commercial and Industrial			2,028				2,105				256				5,569				31
Commercial Real Estate			9,690				9,690				1,042				15,311				222
Total		$	12,173			$	12,250			$	1,298			$	20,880			$	253

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

The allowance for impaired loans is included in the Company’s overall allowance for loan losses.

The provision necessary to increase this allowance is included in the Company’s overall provision for losses on loans.

 

Loans on non-accrual status at March 31, 2015 and December 31, 2014 are as follows (in thousands):

 

		March 31,				December 31,
		2015				2014
Consumer and credit card		$	118			$	120
Commercial and industrial			612				632
Commercial real estate			60				298
Residential real estate and home equity			340				334
Total		$	1,130			$	1,384

 

Credit Quality Indicators

Corporate risk exposure by risk profile was as follows at March 31, 2015 (in thousands):

 

Category		Commercial and Industrial				Commercial Real Estate
Pass-1-4		$	95,196			$	92,662
Vulnerable-5			985				4,847
Substandard-6			3,765				8,825
Doubtful-7			—				—
Loss-8			—				—
Total		$	99,946			$	106,334

 

Corporate risk exposure by risk profile was as follows at December 31, 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

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

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 net 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 that possess a defined credit weakness and the likelihood that such 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, 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.

 

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.

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

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.

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

Consumer Risk

Consumer risk based on payment activity at March 31, 2015 is as follows (in thousands).

 

Payment Category		Consumer and Credit Card				Residential Real Estate and Home Equity
Performing		$	38,956			$	131,213
Non-performing			118				445
Total		$	39,074			$	131,658

 

Consumer risk based on payment activity at December 31, 2014 is as follows (in thousands).

 

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

 

Age Analysis of Past Due Loans

The following table presents past due loans aged as of March 31, 2015 (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		$	60			$	3			$	118			$	181			$	38,893			$	39,074			$	—
Commercial and industrial			—				—				—				—				99,946				99,946				—
Commercial real estate			—				—				132				132				106,202				106,334				—
Residential real estate and home equity			190				495				302				987				130,671				131,658				105
Total		$	250			$	498			$	552			$	1,300			$	375,712			$	377,012			$	105

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

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

 

Troubled Debt Restructurings

Information regarding Troubled Debt Restructuring (“TDR”) loans for the three month period ended March 31, 2015 and 2014 is as follows (dollars in thousands):

 

		For the three months ended March 31,
		2015								2014
		Number of Contracts				Recorded Investment (as of period end)				Number of Contracts				Recorded Investment (as of period end)
Consumer and Credit Card			—			$	—				—			$	—
Commercial and Industrial			—				—				2				58
Commercial Real Estate			—				—				—				—
Residential Real Estate and Home Equity			—				—				—				—
Total			—			$	—				2			$	58

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

The following presents by class loans modified in a TDR that subsequently defaulted within twelve months of the modification (i.e. 60 days or more past due) during the three month period ended March 31, 2015 and 2014 (dollars in thousands).

 

		For the three months ended March 31,
		2015								2014
		Number of Contracts				Recorded Investment as of period end (1)				Number of Contracts				Recorded Investment as of period end (1)
Consumer and Credit Card			—			$	—				—			$	—
Commercial and Industrial			—				—				—				—
Commercial Real Estate			—				—				3				520
Residential Real Estate and Home Equity			—				—				—				—
Total			—			$	—				3			$	520

 

(1)

Period 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.

 

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-accruing 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. For example: deteriorating collateral, negative cash flow changes and inability to reduce debt to income ratios.

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

Note 5 – 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 1

Quoted prices in active markets for identical assets or liabilities

 

Level 2

Observable 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 3

Unobservable 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 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 approximate 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 securities not valued based upon the methods above is considered Level 3.

 

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 the Fair Value Topic. 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.

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

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 within Level 3 classification.

 

Federal Home Loan Bank Stock: The carrying amount presented in the consolidated statements of financial condition is deemed to approximate fair value, and is classified as a Level 2 instrument.

 

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 (Level 2).

 

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 March 31, 2015 and December 31, 2014, the fair value of loan commitments was not material.

 

Based on the foregoing methods and assumptions, the carrying value and fair value of the Company’s financial instruments are as follows at March 31, 2015 and December 31, 2014 (in thousands):

 

		At March 31, 2015
		Carrying Amount				Fair Value				Level 1				Level 2				Level 3
Financial assets
Cash and cash equivalents		$	24,045			$	24,045			$	24,045			$	—			$	—
Securities available-for-sale			85,844				85,844				—				85,844				—
Loans (net of allowance)			373,157				371,911				—				—				371,911
FHLB stock			3,250				3,250				—				3,250				—
Accrued interest receivable			1,527				1,527				—				—				1,527
Financial liabilities
Non-interest-bearing deposits		$	111,286			$	111,286				—			$	111,286				—
Interest-bearing deposits			353,510				353,550				—				353,550				—
FHLB advances			4,801				4,801				—				4,801				—
Accrued interest payable			52				52				—				—				52

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

		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
Non-interest-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

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

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 March 31, 2015 and December 31, 2014 (in thousands):

 

		At March 31, 2015
						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)
U.S. Government and agency obligations		$	19,117			$	—			$	19,117			$	—
State and municipal obligations			22,593				—				22,593				—
Corporate bonds			5,008				—				5,008				—
Collateralized mortgage obligations			22,039				—				22,039				—
Mortgage-backed securities			17,087				—				17,087				—
Total		$	85,844			$	—			$	85,844			$	—

 

 

		At 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)
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 obligations			19,580				—				19,580				—
Mortgage-backed securities			18,140				—				18,140				—
Total		$	75,909			$	—			$	75,909			$	—

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

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.

 

Impaired loans

At March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014 (in thousands).

 

		At March 31, 2015
		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		$	11,405			$	—			$	—			$	11,405
Real estate owned			940				—				—				940

  

		At 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		$	12,945				—				—			$	12,945
Real estate owned			1,111				—				—				1,111

 

 

DCB Financial Corp

Notes to Consolidated Financial Statements

 

Note 6 – 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

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Introduction

 

DCB Financial Corp (the “Company” or “DCB”) is a financial holding company formed under the laws of the State of Ohio. The Company is the parent of The Delaware County Bank & Trust Company (the “Bank”), DCB Title Services LLC and DCB Insurance Services, Inc. The Bank is a state-chartered commercial bank, which conducts business from its main offices at 110 Riverbend Avenue in Lewis Center, Ohio, and through its 14 branch offices located in central Ohio and surrounding communities. The Bank provides customary retail and commercial banking services to its customers, including checking and savings accounts, time deposits, IRAs, safe deposit facilities, personal loans, commercial loans, commercial leases, real estate mortgage loans, night depository facilities and trust and personalized wealth management services. The Bank also provides cash management, bond registrar and payment services. The Bank operates a wholly-owned subsidiary, ORECO, Inc., which is engaged in the ownership and disposition of the Bank’s foreclosed real estate.

 

Forward-Looking Statements

 

Certain statements in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements relating to the financial condition and prospects, lending risks, plans for future business development and marketing activities, capital spending and financing sources, capital structure, the effects of regulation and competition, and the prospective business of both the Company and the Bank. Where used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” and similar words and expressions, related to the Company or the Bank or their respective management, identify forward-looking statements. Such forward-looking statements reflect the current views of the Company and are based on information currently available to the management of the Company and the Bank and upon current expectations, estimates, and projections about the Company and its industry, management’s belief with respect thereto, and certain assumptions made by management. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. 

 

Potential risks and uncertainties include, but are not limited to: (i) significant increases in competitive pressure in the banking and financial services industries; (ii) changes in the interest rate environment which could reduce anticipated or actual margins; (iii) changes in political conditions or the legislative or regulatory environment; (iv) general economic conditions, either nationally or regionally (especially in central Ohio), becoming less favorable than expected resulting in, among other things, a deterioration in credit quality of assets; (v) changes occurring in business conditions and inflation; (vi) changes in technology; (vii) changes in monetary and tax policies; (viii) changes in the securities markets; and (ix) other risks and uncertainties detailed from time to time in the filings of the Company with the Securities and Exchange Commission.

 

The Company does not undertake, and specifically disclaims any obligation, to publicly revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

 

 

Overview of the first quarter of 2015

 

·

Total assets were $520.7 million at March 31, 2015, compared with $515.4 million at December 31, 2014.

 

·

Total loans were $377.2 million at March 31, 2015, compared with $385.4 million at December 31, 2014.

 

·

Total deposits were $464.8 million at March 31, 2015, compared with $453.2 million at December 31, 2014.

 

·

Net income was $293,000 for the three months ended March 31, 2015, compared with $117,000 for the same period in 2014 and $168,000 for the fourth quarter of 2014.

 

·

Net income per diluted share was $0.03 for the three months ending March 31, 2015, compared with $0.02 for the first and fourth quarters of 2014, respectively.

 

·

Net interest income was $4.2 million in the first quarter of 2015, compared with $4.0 million in the first quarter of 2014 and $4.2 million in the fourth quarter of 2015.

 

·

The net interest margin was 3.50% in the first quarter of 2015, compared with 3.47% in the year-ago quarter and 3.62% in the fourth quarter of 2014.

 

·

The provision for loan losses was $150,000 in the first quarter of 2015 and the fourth quarter of 2014. There was no provision for loan losses recorded in the first quarter of 2014.

 

·

Non-interest income was 21.5% of total revenue in the first quarter of 2015, compared with 22.2% in the year-ago quarter and 20.6% in the fourth quarter of 2014.

 

·

Our efficiency ratio was 92.9% in the first quarter of 2015, compared with 98.5% in the year-ago quarter and 94.6% in the fourth quarter of 2014.

 

·

Total non-performing assets (including TDR’s) were $11.8 million or 2.26% of total assets at March 31, 2015, compared with $12.6 million or 2.45% of total assets at December 31, 2014.

 

·

Total non-performing assets (excluding TDR’s) were $2.2 million or 0.42% of total assets at March 31, 2015, compared to $3.0 million or 0.58% at December 31, 2014.

 

Comparison of Results of Operations

General  

Net income was $239,000 or $0.03 per diluted share for the three months ended March 31, 2015, compared to net income of $117,000 or $0.02 per diluted share for the first quarter of 2014 and net income of $168,000 or $0.02 per diluted share for the fourth quarter of 2014.

 

Net Interest Income  

Net interest income totaled $4.2 million in the three months ended March 31, 2015, compared with $4.0 million in the year-ago quarter and $4.2 million in the fourth quarter of 2014. Net interest income in the fourth quarter of 2014 included $171,000 of interest income recognized upon the refinance of a non-accrual commercial mortgage that, upon the refinance, was returned to accrual status. The net interest margin was unchanged in the first quarter of 2015 compared with the year-ago quarter, but was 12 basis points lower than the fourth quarter of 2014 due to the $117,000 of interest income recognized on the refinance of a previously non-accrual loan in that quarter.

 

The net interest margin was at 3.50% in the first quarter of 2015 compared with 3.47% in the first quarter of 2014 and was 3.62% in the fourth quarter of 2014. The net interest margin was 3.48% in the fourth quarter of 2014 without the $171,000 interest recovery.

 

 

Our earning assets yield and our cost of interest-bearing liabilities have remained relatively stable over the past five quarters (excluding the impact on our earning-assets yield of non-recurring items in the third and fourth quarters of 2014), and were 3.73% and 0.32% respectively in the first quarter of 2015.

 

Average interest-earning assets were $484.9 million in the first quarter of 2015, compared with $466.6 million in the year-ago quarter and $465.7 million in the fourth quarter of 2014. Total period end loans outstanding increased $15.7 million between September 30, 2014 and December 31, 2014; however, most of the impact of this growth on the average balances of the loan portfolio was reflected in the first quarter of 2015 as much of the fourth quarter growth occurred in the latter part of that quarter. The average balances of loans increased $21.4 million in the first quarter of 2015 compared with the year-ago quarter, and were $7.1 million higher than the fourth quarter of 2014. Total average loans were 78.6% of total average interest-earning assets in the first quarter of 2015, compared with 77.1% in the year-ago quarter and 80.5% in the fourth quarter of 2014. Total average interest-bearing deposit balances increased $14.8 million in the first quarter of 2015 compared to the first quarter of 2014, with a decrease in the average balance of time deposits of $9.8 million being offset by an increase of $24.6 million in the average balances of lower-costing interest-bearing demand, savings and money market accounts.

 

 

The following table presents certain information from the Company’s average balance sheet and reflects the average yield on interest-earning assets and the average cost of interest-bearing liabilities (dollars in thousands). Such yields and costs are derived by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities. Average balances are derived from daily balances. Interest on tax-exempt securities is reported on a historical basis without tax-equivalent adjustment. Average loan balances include non-accruing loans and loans held for sale. Loan income includes cash received on non-accruing loans.

 

		Three months ending March 31,
		2015												2014
		Outstanding				Earned/				Yield/				Outstanding				Earned/				Yield/
		balance				paid				rate				balance				paid				rate
Interest-earning assets:
Federal funds sold and other short term		$	19,742			$	10				0.20	%		$	21,750			$	13				0.24	%
Taxable securities			77,139				438				2.30				76,718				466				2.43
Tax-exempt securities			6,850				67				4.03				8,397				86				4.10
Loans			381,125				3,952				4.19				359,769				3,739				4.21
Total interest-earning assets			484,856				4,467				3.73				466,634				4,304				3.74
Non-interest-earning assets			42,201												41,729
Total assets		$	527,057											$	508,363
Interest-bearing liabilities:
Interest-bearing demand, savings and money market accounts		$	279,204			$	158				0.18	%		$	254,633			$	152				0.25	%
Certificates of deposit			76,418				92				0.49				86,204				128				0.60
Total deposits			355,622				250				0.28				340,837				280				0.33
Borrowed funds			6,372				35				2.25				5,280				36				2.76
Total interest-bearing liabilities			361,994				285				0.32				346,117				316				0.37
Non-interest-bearing liabilities:
Demand deposits			113,067												111,505
Other liabilities			5,387												6,130
Shareholders’ equity			46,609												44,611
Total liabilities and shareholders’ equity		$	527,057											$	508,363
Net interest income; interest rate spread						$	4,182				3.41	%						$	3,988				3.37	%
Net interest margin (net interest income as a percent of average interest-earning assets)											3.50	%											3.47	%
Average interest-earning assets to average interest-bearing liabilities			133.94	%											134.82	%

 

 

Asset Quality and Allowance for Loan Losses

 

Delinquent loans (including non-accrual loans) totaled $2.0 million or 0.53% of total loans at March 31, 2015, compared to $2.2 million or 0.58% of total loans at December 31, 2014 and $3.6 million or 0.98% of total loans at September 30, 2014. Non-accrual loans totaled $1.1 million or 0.30% of total loans at March 31, 2015, compared to $1.4 million or 0.36% of total loans at December 31, 2014 and $3.0 million or 0.81% of total loans at September 30, 2014.

 

Delinquent loans		March 31, 2015								December 31, 2014								September 30, 2014
		$				%(1)				$				%(1)				$				%(1)
		(Dollars in thousands)
30 days past due		$	250				0.07	%		$	336				0.09	%		$	68				0.02	%
60 days past due			498				0.13	%			37				0.01	%			50				0.01	%
90 days past due and still accruing			105				0.03	%			480				0.12	%			520				0.14	%
Non-accrual			1,130				0.30	%			1,384				0.36	%			3,007				0.81	%
Total		$	1,983				0.53	%		$	2,327				0.58	%		$	3,645				0.98	%

(1) As a percentage of total loans, excluding deferred costs

 

Non-performing assets were $11.8 million or 2.26% of total assets at March 31, 2015, compared with $12.6 million or 2.45% of total assets at December 31, 2014 and $14.6 million or 2.91% of total assets at September 30, 2014. 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 both March 31, 2015 and December 31, 2014 and $9.8 million at September 30, 2014.

 

The following table represents information concerning the aggregate amount of non-performing assets (includes loans held for sale):

 

Non-performing assets		March 31, 2015				December 31, 2014				September 30, 2014
		(Dollars in thousands)
Non-accruing loans:
Residential real estate loans and home equity		$	340			$	334			$	343
Commercial real estate			60				298				1,889
Commercial and industrial			612				632				651
Consumer loans and credit cards			118				120				124
Total non-accruing loans			1,130				1,384				3,007
Accruing loans delinquent 90 days or more			105				480				520
Total non-performing loans (excluding TDR’s)			1,235				1,864				3,527
Other real estate and repossessed assets			940				1,111				1,215
Total non-performing assets (excluding TDR’s)		$	2,175			$	2,975			$	4,742
Troubled debt restructurings(1)		$	9,575			$	9,633			$	9,834
Total non-performing loans (including TDR’s)		$	10,810			$	11,497			$	13,361
Total non-performing assets (including TDR’s)		$	11,750			$	12,608			$	14,576

 

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

 

 

Net charge-offs were $297,000 or 0.31% (annualized) of average loans in the first quarter of 2015, compared to net charge-offs of $1.3 million or 1.43% (annualized) of average loans in the year-ago quarter, and $90,000 or 0.10% (annualized) of average loans in the fourth quarter of 2014. Two relationships comprised nearly all of the charge-offs in the first quarter of 2014, which were charged against allowance allocations established in the fourth quarter of 2013.

 

The provision for loan losses was $150,000 in the first quarter of 2015 and in the fourth quarter of 2014. No provision for loan losses was recorded in the year-ago quarter. The provision for loan losses as a percentage of net charge-offs was 50.5% for the first quarter of 2015, compared to 166.7% in the fourth quarter of 2014.

 

The allowance for loan losses was $4.1 million at March 31, 2015, compared to $4.2 million at both December 31, 2014 and September 30, 2014. The ratio of the allowance for loan losses to total loans was 1.08% at March 31, 2015, compared with 1.10% at December 31, 2014 and 1.13% at September 30, 2014. The ratio of the allowance for loan losses to non-performing loans (including TDR’s) was 37.8% at March 31, 2015, compared to 38.5% at December 31, 2014 and 31.3% at September 30, 2014. The ratio of the allowance for loan losses to non-accrual loans was 362% at March 31, 2015, compared to 306% at December 31, 2014 and 139% at September 30, 2014.

 

We assess a number of quantitative and qualitative factors at the individual portfolio level in determining the adequacy of the allowance for loan losses and the required provision expense each quarter. In addition, we analyze certain broader, non-portfolio specific factors in assessing the adequacy of the allowance for credit losses, such as the allowance as a percentage of total loans, the allowance as a percentage of non-performing loans and the provision expense as a percentage of net charge-offs. This portion of the allowance has been considered “unallocated,” which means it is not based on either quantitative or qualitative factors. At March 31, 2015, $284,000 or 6.9% of the allowance for credit losses was considered to be “unallocated,” compared to $270,000 or 6.4% at December 31, 2014 and $307,000 or 7.4% at September 30, 2014.

 

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 (in thousands).

 

Allowance for loan losses		Three months ended March 31,
		2015				2014
Allowance for loan losses, beginning of period		$	4,236			$	6,725
Loans charged-off			(429	)			(1,412	)
Recoveries of loans previously charged-off			132				129
Net loans charged-off			(297	)			(1,283	)
Allowance related to loans transferred to held-for-sale			—				(97	)
Provision for loan losses			150				—
Allowance for loan losses, end of period		$	4,089			$	5,345

 

 

Non-interest Income

 

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

 

		Three months ended March 31,
		2015				2014				$ Change				% Change
Service charges		$	452			$	511			$	(59	)			(13.1	)%
Wealth management income			380				293				87				22.9	%
Treasury management fees			58				56				2				3.5	%
Income from Bank-owned life insurance			243				239				5				2.0	%
Loss on loans held for sale			—				(245	)			245				0.0	%
Gain on sale of REO			10				—				10				100.0	%
Loss on sale of securities available for sale			—				(140	)			140				0.0	%
Gain on sale of branch			—				438				(438	)			0.0	%
Other non-interest income			15				40				(26	)			(185.7	)%
Total non-interest income		$	1,158			$	1,192			$	(34	)			(2.9	)%

 

Non-interest income was $1.2 million in the first quarter of 2015 and the first quarter of 2014, and was $1.1 million in the fourth quarter of 2014. Non-interest income (net of nonrecurring income, gains and losses and losses on the sales of securities in the first quarter of 2014) accounted for 21.5% of total revenue in the first quarter of 2015, compared with 22.2% in the year-ago quarter and 20.6% in the fourth quarter of 2014.

 

Non-interest Expense

 

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

 

		Three months ended March 31,
		2015				2014				$ Change				% Change
Salaries and benefits		$	2,712			$	2,779			$	(67	)			(2.5	)%
Occupancy and equipment			963				804				159				16.5	%
Professional services			353				421				(68	)			19.3	%
Advertising			108				81				27				25.0	%
Office supplies, postage and courier			79				95				(16	)			20.3	%
FDIC insurance premium			110				168				(58	)			52.7	%
State franchise taxes			75				65				10				13.3	%
Other non-interest expense			551				650				(99	)			18.0	%
Total non-interest expenses		$	4,951			$	5,063			$	(112	)			(2.3	)%

 

 

Non-interest expenses were $5.0 million for the first quarter of 2015, compared with $5.1 million in the year-ago quarter and in the fourth quarter of 2014. The Company’s efficiency ratio was 92.9% in the first quarter of 2015, compared with 98.5% in the year-ago quarter and 94.6% in the fourth quarter of 2014.

 

Income Taxes

We had net deferred tax assets totaling $10.4 million at March 31, 2015 and December 31, 2014, all of which 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 March 31, 2015 and December 31, 2014

 

Total assets were $520.7 million at March 31, 2015, compared with $515.3 million at December 31, 2014. Securities available-for-sale increased $9.9 million during the first quarter of 2015, which offset an $8.2 million decrease in our loan portfolio.

 

Securities

Investment securities totaled $85.8 million at March 31, 2015, compared with $75.9 million at December 31, 2014. Our portfolio was comprised primarily of investment grade securities. The breakdown of the securities portfolio at March 31, 2015 was 25.7% collateralized mortgage obligations, 19.9% government-sponsored entity guaranteed mortgage-backed securities, 26.3% municipal securities, 22.3% obligations of U.S. government agency obligations and 5.8% corporate bonds.

 

Loans

The following table sets forth the composition of our loan portfolio, including loans held-for-sale at the dates indicated (dollars in thousands):

 

		March 31, 2015								December 31, 2014
		Amount				Percent				Amount				Percent
Loan portfolio composition
Commercial and industrial		$	99,946				26.5	%		$	106,222				27.6	%
Commercial real estate			106,334				28.2	%			111,851				29.0	%
Real estate and home equity			131,658				34.9	%			129,650				33.7	%
Consumer and credit card			39,074				10.4	%			37,507				9.7	%
Total loans		$	377,012				100.0	%		$	385,230				100.0	%
Net deferred loan costs			234								214
Allowance for loan losses			(4,089	)							(4,236	)
Net loans		$	373,157							$	381,208

 

Total loans were $377.2 million at March 31, 2015, compared with $385.4 million at December 31, 2014 and $369.7 million at September 30, 2014. The Company entered the first quarter of 2015 with a relatively light loan pipeline due primarily to seasonal factors and a large number of commercial loan closings in the fourth quarter of 2014. Growth in the Company’s commercial loan portfolios in the fourth quarter of 2014 totaled $9.8 million. In addition, prepayments and payoffs in the Company’s commercial loan portfolios were unusually high during the first quarter of 2015, including 5 relationships aggregating $5.7 million that paid off during the quarter.

 

Deposits

Deposits totaled $464.8 million at March 31, 2015, compared with $453.2 million at December 31, 2014 and $445.5 million at September 30, 2014. Money market accounts increased $9.1 million in the first quarter of 2015 due primarily to seasonal inflows of municipal deposits.

 

 

Liquidity

 

Liquidity is the ability of the Company to fund customers’ needs for borrowing and deposit withdrawals. The purpose of liquidity management is to assure sufficient cash flow to meet all of the financial commitments and to capitalize on opportunities for business expansion. This ability depends on the financial strength, asset quality and types of deposit and investment instruments offered by the Company to its customers. The Company’s principal sources of funds are deposits, loan and security repayments, maturities of securities, sales of securities available for sale and other funds provided by operations. The Bank also has the ability to borrow from the FHLB. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan and mortgage-backed security prepayments are more influenced by interest rates, general economic conditions, and competition. The Company maintains investments in liquid assets based upon management’s assessment of (1) need for funds, (2) expected deposit flows, (3) yields available on short-term liquid assets and (4) objectives of the asset/liability management program.

 

Cash and cash equivalents totaled $24.0 million at March 31, 2015, compared to $21.3 million at December 31, 2014. Cash and equivalents represented 4.6% of total assets at March 31, 2015 and 4.1% of total assets at December 31, 2014. The Company has the ability to borrow funds from the FHLB and the Federal Reserve Bank should the Company need to supplement its future liquidity. Management believes the Company’s liquidity position is adequate based on its current level of cash, cash equivalents, core deposits, the stability of its other funding sources, and the support provided by its capital base.

Capital Resources

 

Shareholders’ equity increased $440,000 in the first quarter and was $47.7 million at March 31, 2015. Net income for the first quarter of $239,000 was augmented by an increase in accumulated other comprehensive income of $194,000 due to an increase in unrealized gains on securities available-for-sale. The Company’s consolidated tangible common equity to assets ratio was 9.15% at March 31, 2015.

 

Beginning January 1, 2015, the capital requirements for our Company and the Bank changed as a result of 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	%

 

 

Implementing Basel III is not expected to have a material impact on our Company’s or the Bank’s capital ratios and we expect they both 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.

 

The Bank’s actual regulatory capital ratios and the minimum required capital ratios to be classified well-capitalized are presented below at March 31, 2015:

 

		Actual				Minimum ratios to be well- capitalized
Tier 1 leverage ratio			8.65	%			6.00	%
Tier 1 risk-based capital ratio			12.69	%			4.50	%
Total risk-based capital ratio			13.83	%			8.00	%

 

The following table compares our actual capital amounts and ratios with those needed to qualify for the “well-capitalized” category, which is the highest capital category as defined in the regulations, dollars in thousands:

 

		Actual								For Capital Adequacy Purposes								To be well-capitalized under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
As of March 31, 2015
Total risk-based capital
Consolidated		$	50,360				14.08	%		$	28,614				8.0	%			N/A				N/A
Bank		$	49,708				13.83	%		$	28,754				8.0	%		$	35,942				10.0	%
Tier 1 capital
Consolidated		$	46,271				12.94	%		$	14,303				4.0	%			N/A				N/A
Bank		$	45,619				12.69	%		$	14,380				4.0	%		$	21,569				6.0	%
Leverage
Consolidated		$	46,271				8.78	%		$	21,080				4.0	%			N/A				N/A
Bank		$	45,619				8.65	%		$	21,095				4.0	%		$	26,369				5.0	%
As of December 31, 2014
Total risk-based capital
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 capital
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	%
Leverage
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	%

 

 

Item 3. Quantitative and Qualitative Disclosure about Market Risk

 

Not required.

 

Item 4. Controls and Procedures

 

The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of March 31, 2015, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2015.

 

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 March 31, 2015, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

Part II.	Other Information
Item 1.	Legal Proceedings.
	There are no matters required to be reported under this item.
Item 1A.	Risk Factors.
	There has been no material change in the nature of the risk factors set forth in the Company’s Form 10-K for the year ended December 31, 2014.
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.
	There are no matters required to be reported under this item.
Item 3.	Defaults upon Senior Securities.
	There are no matters required to be reported under this item.
Item 4.	Mine Safety Disclosures.
	There are no matters required to be reported under this item.
Item 5.	Other Information.
	There are no matters required to be reported under this item.
Item 6.	Exhibits.
	Exhibits – The following exhibits are filed as a part of this report:

 

	Exhibit No.	Exhibit
	3.1	Amended and Restated Articles of Incorporation of DCB Financial Corp as amended, incorporated by reference to the Company’s Registration Statement on Form S-8 filed with the Commission on November 7, 2014 (File No. 000-22387).
	3.2	Second Amended and Restated Code of Regulations of DCB Financial Corp, incorporated by reference to the Company’s  Registration Statement on Form S-8 filed with the Commission on November 7, 2014 (File No. 000-22387).
	31.1*	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
	31.2*	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
	32.1**	Certification pursuant to 18 U.S.C. 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
	32.2**	Certification pursuant to 18 U.S.C. 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101*

The following information from DCB Financial Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015 formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014;  (ii) the Condensed Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014 (unaudited);  (iii) the Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014 (unaudited);  (iv) the Condensed Consolidated Statements of Cash Flow for the three months ended March 31, 2015 and 2014 (unaudited); (v) the Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (unaudited); and (vi) the Notes to Condensed Consolidated Financial Statements.

 

* Filed herewith.

 

** Furnished herewith.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	DCB FINANCIAL CORP
	(Registrant)
Dated:  May 15, 2015	/s/ Ronald J. Seiffert
	Ronald J. Seiffert
	President and Chief Executive Officer
	(Principal Executive Officer)
Dated:  May 15, 2015	/s/ J. Daniel Mohr
	J. Daniel Mohr
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)