DCB FINANCIAL CORP - FORM 10-Q

Attached files

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EX-31.1 - EXHIBIT 31.1 - DCB FINANCIAL CORP	v417376_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - DCB FINANCIAL CORP	v417376_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - DCB FINANCIAL CORP	v417376_ex32-1.htm
EX-32.2 - EXHIBIT 32.2 - DCB FINANCIAL CORP	v417376_ex32-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: June 30, 2015

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 August 14, 2015, the latest practicable date, 7,387,435 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 June 30, 2015 (unaudited) and December 31, 2014	3

Consolidated Statements of Income (unaudited) for the three and six month periods ended June 30, 2015 and 2014	4

Consolidated Statements of Comprehensive Income (unaudited) for the three and six month periods ended June 30, 2015 and 2014	5

Consolidated Statements of Shareholder’s Equity (unaudited) for the three and six month periods ended June 30, 2015 and 2014	6

Consolidated Statements of Cash Flows (unaudited) for the six month period ended June 30, 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	40

Item 4 – Controls and Procedures	40

Part II – Other Information	41

Item 1 – Legal proceedings	41

Item 1A – Risk Factors	41

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	41

Item 3 – Defaults Upon Senior Securities	41

Item 4 – Mine Safety Disclosures	41

Item 5 – Other Information	41

Item 6 – Exhibits	41

Signatures	42

Part I – Financial Information

Item 1. Financial Statements

DCB Financial Corp

Consolidated Balance Sheets

	June 30, 2015 (unaudited)			December 31, 2014
	(Dollars in thousands, except share and per share data)
Assets:
Cash and due from financial institutions	$	5,676		$	6,247
Interest-bearing deposits		41,717			15,027
Total cash and cash equivalents		47,393			21,274

Securities available-for-sale		78,975			75,909

Loans		382,164			385,444
Less allowance for loan losses		(4,164	)		(4,236	)
Net loans		378,000			381,208

Real estate owned		807			1,111
Investment in FHLB stock		3,250			3,250
Premises and equipment, net		9,837			10,016
Bank-owned life insurance		20,434			20,027
Accrued interest receivable and other assets		2,913			2,587
Total assets	$	541,609		$	515,382

Liabilities and shareholders’ equity
Liabilities:
Deposits:
Non-interest bearing	$	118,114		$	111,022
Interest bearing		352,411			342,170
Total deposits		470,525			453,192

Borrowings		4,719			11,808
Accrued interest payable and other liabilities		18,899			3,171
Total liabilities		494,143			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, 7,595,087 and 7,500,000 shares issued, and 7,287,435 and 7,233,795 shares outstanding for June 30, 2015 and December 31, 2014, respectively		16,456			16,064
Retained earnings		38,438			38,055
Treasury stock, at cost, 307,650 shares		(7,416	)		(7,416	)
Accumulated other comprehensive income		493			654
Deferred stock-based compensation		(505	)		(146	)
Total shareholders’ equity		47,466			47,211
Total liabilities and shareholders’ equity	$	541,609		$	515,382

See notes to the consolidated financial statements.
Common shares outstanding		7,287,435			7,233,795
Book value per common share	$	6.51		$	6.53

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

DCB Financial Corp

Consolidated Statements of Income (Unaudited)

	For the three months ended June 30,						For the six months ended June 30,
	2015			2014			2015		2014
	(Dollars in thousands, except share and per share data)
Interest income:
Loans	$	3,953		$	3,719		$	7,905	$	7,456
Securities		482			534			987		1,088
Federal funds sold and interest bearing deposits		19			9			29		23
Total interest income		4,454			4,262			8,921		8,567

Interest expense:
Deposits:
Savings and money market accounts		150			136			292		269
Time accounts		92			108			184		237
NOW accounts		17			19			33		37
Total		259			263			509		543

FHLB advances		36			36			71		72
Total interest expense		295			299			580		615

Net interest income		4,159			3,963			8,341		7,952
Provision for loan losses		—			—			150		—
Net interest income after provision for loan losses		4,159			3,963			8,191		7,952

Non-interest income:
Service charges		500			489			952		1,000
Wealth management fees		399			378			779		671
Treasury management fees		64			59			122		115
Income from bank-owned life insurance		165			164			408		402
Loss on the sale of securities available-for-sale		—			—			—		(140	)
Loss on loans held for sale		—			(114	)		—		(357	)
Net (loss) gain on sale of REO		(11	)		(4	)		1		(4	)
Gain on sale of branch		—			—			—		438
Other non-interest income		63			24			76		62
Total non-interest income		1,180			996			2,338		2,187

Non-interest expense:
Salaries and employee benefits		2,819			2,712			5,531		5,490
Occupancy and equipment		1,023			921			1,986		1,808
Professional services		284			197			637		617
Advertising		141			77			249		158
Office supplies, postage and courier		72			89			151		184
FDIC insurance premium		97			172			207		340
State franchise taxes		75			67			150		132
Other non-interest expense		684			687			1,235		1,254
Total non-interest expense		5,195			4,922			10,146		9,983

Income before income taxes		144			37			383		156
Income taxes		—			—			—		—
Net income	$	144		$	37		$	383	$	156

Share and Per Share Data
Basic average common shares outstanding		7,287,435			7,192,350			7,262,541		7,192,350
Diluted average common shares outstanding		7,303,902			7,250,702			7,278,933		7,247,315
Basic and diluted earnings per common share	$	0.02		$	0.01		$	0.05	$	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 June 30,					Six months ended June 30,
	2015			2014		2015			2014
	(Dollars in thousands)
Net income	$	144		$	37	$	383		$	156

Other comprehensive income (loss):

Net unrealized (losses) gains on securities available-for-sale, net of taxes of $(183), $195 and $(83), $766 in 2015 and 2014, respectively		(355	)		380		(161	)		1,488

Reclassification of previously recognized non-credit other than temporary impairment on sale of security, net of taxes $0 and $(48) in 2014		—			—		—			(92	)

Total other comprehensive (loss) income		(355	)		380		(161	)		1,396

Comprehensive (loss) income	$	(211	)	$	417	$	222		$	1,552

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		—		—		—		156		—			—			—			156
Other comprehensive income, net of taxes		—		—		—		—		—			1,396			—			1,396
Total comprehensive income		—		—		—		—		—			—			—			1,552
Balance at June 30, 2014		7,192,350	$	—	$	15,771	$	37,839	$	(7,416	)	$	622		$	—		$	46,816


Balance at January 1, 2015		7,233,795	$	—	$	16,064	$	38,055	$	(7,416	)	$	654		$	(146	)	$	47,211
Comprehensive income:
Net income		—		—		—		383		—			—			—			383
Other comprehensive loss, net of taxes		—		—		—		—		—			(161	)		—			(161	)
Total comprehensive income		—		—		—		—		—			—			—			222
Issuance of restricted stock		53,640		—		392		—		—			—			(392	)		—
Amortization of restricted stock		—		—		—		—		—			—			33			33
Balance at June 30, 2015		7,287,435	$	—	$	16,456	$	38,438	$	(7,416	)	$	493		$	(505	)	$	47,466

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

DCB Financial Corp

Consolidated Statements of Cash Flows (Unaudited)

	Six months ended June 30,
	2015			2014
	(Dollars in thousands)
Cash flows from operating activities
Net income	$	383		$	156
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		495			545
Provision for loan losses		150			—
Loss on sale of securities available-for-sale		—			140
Loss on loans held-for-sale		—			357
Net (gain) loss on sale of real estate owned		(1	)		4
Gain on sale of branch		—			(438	)
Net stock-based compensation expense		33			102
Premium amortization on securities, net		518			535
Earnings on bank owned life insurance		(408	)		(402	)
Net changes in other assets and other liabilities		15,488			9,457
Net cash provided by operating activities		16,658			10,456

Cash flows from investing activities
Purchases of securities available-for-sale		(15,934	)		(11,850	)
Proceeds from maturities, principal payments and calls of securities available-for-sale		12,106			10,416
Proceeds from sales of securities available-for-sale		—			2,133
Net change in loans		3,058			(2,009	)
Proceeds from sale of real estate owned		303			318
Net cash paid with sale of branch		—			(12,464	)
Premises and equipment expenditures		(316	)		(241	)
Proceeds from sale of loans		—			423
Net cash used in investing activities		(783	)		(13,274	)

Cash flows from financing activities
Net change in deposits		17,333			5,748
Repayment of borrowings		(7,089	)		(15	)
Proceeds from redemption of FHLB stock		—			549
Net cash provided by financing activities		10,244			6,282

Net change in cash and cash equivalents		26,119			3,464
Cash and cash equivalents at beginning of period		21,274			25,357
Cash and cash equivalents at end of period	$	47,393		$	28,821

Supplemental disclosures of cash flow information
Cash paid during the period for interest on deposits and borrowings	$	550		$	620
Non-cash investing and financing activities:		—
Transfer of loans to real estate owned		—			509

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 and six months ended June 30, 2015 and 2014. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results anticipated for the year.

To prepare financial statements in conformity with U.S. 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 June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Weighted-average common shares outstanding (basic)		7,287,435		7,192,350		7,262,541		7,192,350

Dilutive effect of assumed exercise of stock options		16,467		58,352		16,392		54,965

Weighted-average common shares outstanding (diluted)		7,303,902		7,250,702		7,278,933		7,247,315

There were 62,939 shares and 150,609 shares included in the computation of common share equivalents for the three and six months ended June 30, 2015 and 2014, respectively, because the average fair value of the shares was greater than the exercise price.

DCB Financial Corp

Notes to Consolidated Financial Statements

At June 30, 2015 and 2014, 14,985 and 45,727 of anti-dilutive shares, respectively, were excluded from the diluted weighted average common share calculations.

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 shares 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 second quarter of 2015 and in the six months ended June 30, 2014. There were 95,085 and 41,445 unvested restricted shares at June 30, 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 the Company’s evaluation of credit risk after careful consideration of all information available to the Company. 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.

DCB Financial Corp

Notes to Consolidated Financial Statements

Loans (including Loans Held for Sale)

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

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

When loans are 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.

DCB Financial Corp

Notes to Consolidated Financial Statements

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.

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 June 30, 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	$	14,444	$	46	$	(97	)	$	14,393
Corporate bonds		4,962		27		(17	)		4,972
States and municipal obligations		22,275		343		(142	)		22,476
Collateralized mortgage obligations		20,284		70		(82	)		20,272
Mortgage-backed securities		16,264		622		(24	)		16,862
Total	$	78,229	$	1,108	$	(362	)	$	78,975

DCB Financial Corp

Notes to Consolidated Financial Statements

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

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at June 30, 2015 and December 31, 2014 (dollars in thousands):

	At June 30, 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		5	$	3,863	$	26		2	$	1,925	$	71		7	$	5,788	$	97
Corporate bonds		3		1,048		9		3		1,406		8		6		2,454		17
State and municipal obligations		10		3,413		102		3		1,303		40		13		4,716		142
Collateralized mortgage obligations		10		5,450		31		4		3,399		51		14		8,849		82
Mortgage-backed securities and other		2		1,813		24		—		—		—		2		1,813		24
Total temporarily impaired securities		30	$	15,587	$	192		12	$	8,033	$	170		42	$	23,620	$	362

	At 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

DCB Financial Corp

Notes to Consolidated Financial Statements

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 June 30, 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 six months ended June 30, 2015. Gross losses on the sale of securities were $140,000 in the first quarter of 2014. There were no sales of securities in the three months ended June 30, 2014.

At June 30, 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 June 30, 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	$	2,524	$	2,535
Due after one to five years		17,681		17,805
Due after five to ten years		21,773		21,910
Due after ten years		19,987		19,863
Mortgage-backed and related securities		16,264		16,862
Total	$	78,229	$	78,975

Securities with a fair value of $68.6 million at June 30, 2015 were pledged to secure public deposits and other obligations.

Note 3 – Loans

At June 30, 2015 and December 31, 2014, loans were comprised of the following (in thousands):

	June 30, 2015		December 31, 2014

Consumer and credit card	$	39,403	$	37,507
Commercial and industrial		102,754		106,222
Commercial real estate		105,615		111,851
Residential real estate and home equity		134,090		129,650
Subtotal		381,862		385,230
Add: Net deferred loan origination fees		302		214

Total loans receivable	$	382,164	$	385,444

DCB Financial Corp

Notes to Consolidated Financial Statements

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.

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).

	Three months ended June 30, 2015
	Consumer and Credit Card			Commercial and Industrial			Commercial Real Estate			Residential Real Estate and Home Equity			Unallocated		Total
Beginning balance	$	183		$	1,037		$	2,317		$	268		$	284	$	4,089
Charge-offs		(17	)		(1	)		(16	)		(44	)		—		(78	)
Recoveries		31			52			12			58			—		153
Provision		(25	)		(53	)		(118	)		33			163		—

Ending balance	$	172		$	1,035		$	2,195		$	315		$	447	$	4,164

DCB Financial Corp

Notes to Consolidated Financial Statements

	Six months ended June 30, 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		(59	)		(311	)		(64	)		(73	)		—		(507	)
Recoveries		59			140			19			67			—		285
Provision		(18	)		74			(136	)		53			177		150

Ending balance	$	172		$	1,035		$	2,195		$	315		$	447	$	4,164

Allowance allocated to:
Individually evaluated for impairment	$	—		$	139		$	850		$	—		$	—	$	989
Collectively evaluated for impairment		172			896			1,345			315			447		3,175

Ending balance	$	172		$	1,035		$	2,195		$	315		$	447	$	4,164

Loans:
Individually evaluated for impairment	$	485		$	2,162		$	8,425		$	766		$	—	$	11,838
Collectively evaluated for impairment		38,918			100,592			97,190			133,324			—		370,024

Ending balance	$	39,403		$	102,754		$	105,615		$	134,090		$	—	$	381,862

	Three months ended June 30, 2014
	Consumer and Credit Card			Commercial and Industrial			Commercial Real Estate			Residential Real Estate and Home Equity			Unallocated		Total
Beginning balance	$	246		$	2,073		$	2,675		$	178		$	173	$	5,345
Charge-offs		(22	)		—			(709	)		(115	)		—		(846	)
Recoveries		28			5			30			6			—		69
Provision		(91	)		(660	)		515			151			85		—

Ending balance	$	161		$	1,418		$	2,511		$	220		$	258	$	4,568

DCB Financial Corp

Notes to Consolidated Financial Statements

	Six months ended June 30, 2014
	Consumer and Credit Card			Commercial and Industrial			Commercial Real Estate			Residential Real Estate and Home Equity			Unallocated		Total
Beginning balance	$	301		$	3,231		$	2,973		$	219		$	—	$	6,724
Charge-offs		(68	)		(1,193	)		(868	)		(129	)		—		(2,258	)
Recoveries		59			10			114			16			—		199
Provision		(131	)		(630	)		389			114			258		—
Transferred to loans held for sale		—			—			(97	)		—			—		(97	)

Ending balance	$	161		$	1,418		$	2,511		$	220		$	258	$	4,568

Allowance allocated to:
Individually evaluated for impairment	$	—		$	473		$	1,328		$	—		$	—	$	1,801
Collectively evaluated for impairment		161			945			1,183			220			258		2,767

Ending balance	$	161		$	1,418		$	2,511		$	220		$	258	$	4,568

Loans:
Individually evaluated for impairment	$	—		$	2,878		$	12,247		$	—		$	—	$	15,125
Collectively evaluated for impairment		34,102			102,081			90,811			114,038			—		341,032

Ending balance	$	34,102		$	104,959		$	103,058		$	114,038		$	—	$	356,157

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 June 30, 2015, December 31, 2014, and June 30, 2014 (in thousands).

	At June 30, 2015						Period ended June 30, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Three months Average Recorded Investment		Three months Interest Income Recognized		Six months Average Recorded Investment		Six months Interest Income Recognized
With No Related Allowance Recorded
Consumer and credit card	$	485	$	485	$	-	$	488	$	7	$	468	$	14
Commercial and industrial		933		933		-		1,138		8		1,202		18
Commercial real estate		630		630		-		225		10		477		16
Residential real estate and home equity		766		766		-		627		2		444		8

With Allowance Recorded
Commercial and industrial	$	1,229	$	1,307	$	139	$	1,095	$	17	$	956	$	33
Commercial real estate		7,795		7,795		850		8,123		133		8,236		265

Total
Consumer and credit card	$	485	$	485	$	-	$	488	$	7	$	468	$	14
Commercial and industrial		2,162		2,240		139		2,233		25		2,158		51
Commercial real estate		8,425		8,425		850		8,348		143		8,713		281
Residential real estate and home equity		766		766		-		627		2		444		8

Total	$	11,838	$	11,916	$	989	$	11,696	$	177	$	11,783	$	354

DCB Financial Corp

Notes to Consolidated Financial Statements

	At December 31, 2014						Period ended June 30, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Three months Average Recorded Investment		Three months Interest Income Recognized		Six months Average Recorded Investment		Six months Interest Income Recognized
With No Related Allowance Recorded
Consumer and credit card	$	455	$	455	$	-	$	219	$	7	$	110	$	7
Commercial and industrial		1,288		1,288		-		2,131		16		1,783		35
Commercial real estate		1,088		1,088		-		8,931		117		9,373		266

With Allowance Recorded
Consumer and credit card	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial and industrial		740		817		256		1,137		9		2,636		21
Commercial real estate		8,602		8,602		1,042		4,517		33		5,006		106

Total
Consumer and credit card	$	455	$	455	$	-	$	219	$	7	$	110	$	7
Commercial and industrial		2,028		2,105		256		3,268		25		4,419		56
Commercial real estate		9,690		9,690		1,042		13,448		150		14,379		372

Total	$	12,173	$	12,250	$	1,298	$	16,935	$	182	$	18,908	$	435

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 June 30, 2015 and December 31, 2014 are as follows (in thousands):

	June 30,		December 31,
	2015		2014
Consumer and credit card	$	67	$	120
Commercial and industrial		593		632
Commercial real estate		31		298
Residential real estate and home equity		766		334

Total	$	1,457	$	1,384

DCB Financial Corp

Notes to Consolidated Financial Statements

Credit Quality Indicators

Corporate risk exposure by risk profile was as follows at June 30, 2015 (in thousands):

Category	Commercial and Industrial		Commercial Real Estate

Pass-1-4	$	98,286	$	92,034
Vulnerable-5		995		4,800
Substandard-6		3,473		8,781
Doubtful-7		—		—
Loss-8		—		—

Total	$	102,754	$	105,615

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	$	100,961	$	96,217
Vulnerable-5		823		6,146
Substandard-6		4,438		9,488
Doubtful—7		—		—
Loss-8		—		—

Total	$	106,222	$	111,851

Risk Category Descriptions

Risk Grade 1 Prime

Loans secured by DCB liquid assets.

Risk Grade 2 Good

Loans of above average quality exhibiting high liquidity, debt capacity and coverage. Management is strong with depth and financial statements are generally of reviewed or audited quality from a CPA firm. The character and repayment ability of the borrowers/guarantors are excellent and industry expertise is considered superior.

Risk Grade 3 Average

Loans of average quality meeting normal credit standards. Asset quality, liquidity, debt capacity and coverage are satisfactory and management experience is considered adequate with no pronounced weaknesses. Financial statements are considered consistent and reliable.

Risk Grade 4 Acceptable

Loans of acceptable quality and demonstrating more than average risk. Loans generally characterized by limited excess liquidity and limited additional debt capacity. Management may lack sufficient depth or capacity. Start-up businesses, participation purchases, and loans of perceived higher risk may also be assigned this grade until a proven track record is developed. Financial statements are generally of acceptable quality and/or projection based. Certain loans in this category may warrant additional monitoring if weaknesses and/or deficiencies persist or worsen.

DCB Financial Corp

Notes to Consolidated Financial Statements

Risk Grade 5 Special Mention

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.

Risk Grade 6 Substandard

Loans that are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Risk Grade 7 Doubtful

Loans that have all the weaknesses inherent in a Substandard loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Specific pending factors may strengthen the credit, therefore deferring a Loss classification.

Risk Grade 8 Loss

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.

Consumer Risk

Consumer risk based on payment activity at June 30, 2015 is as follows (in thousands).

Payment Category	Consumer and Credit Card		Residential Real Estate and Home Equity
Performing	$	39,336	$	133,324
Non-performing		67		766

Total	$	39,403	$	134,090

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

DCB Financial Corp

Notes to Consolidated Financial Statements

Age Analysis of Past Due Loans

The following table presents past due loans aged as of June 30, 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	$	22	$	67	$	149	$	39,254	$	39,403	$	—
Commercial and industrial		135		—		—		135		102,619		102,754		—
Commercial real estate		202		—		475		677		104,938		105,615		475
Residential real estate and home equity		63		—		477		540		133,549		134,090		—

Total	$	460	$	22	$	1,019	$	1,501	$	380,360	$	381,862	$	475

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		106,154		106,222		—
Commercial real estate		49		—		306		355		111,496		111,851		—
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 June 30, 2015 and 2014 is as follows (dollars in thousands):

	For the three months ended June 30,
	2015				2014
	Number of Contracts		Recorded Investment (as of period end)		Number of Contracts		Recorded Investment (as of period end)
Consumer and credit card		6	$	93		—	$	—
Commercial and industrial		—		—		—		—
Commercial real estate		—		—		—		—
Residential real estate and home equity		—		—		—		—

Total		6	$	93		—	$	—

DCB Financial Corp

Notes to Consolidated Financial Statements

	For the six months ended June 30,
	2015				2014
	Number of Contracts		Recorded Investment (as of period end)		Number of Contracts		Recorded Investment (as of period end)
Consumer and credit card		6	$	93		—	$	—
Commercial and industrial		—		—		1		198
Commercial real estate		—		—		—		—
Residential real estate and home equity		—		—		—		—

Total		6	$	93		1	$	198

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 and six month periods ended June 30, 2015 and 2014 (dollars in thousands).

	For the three months ended June 30,
	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		—		—		2		201
Commercial real estate		—		—		1		479
Residential real estate and home equity		—		—		—		—

Total		—	$	—		3	$	680

(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.

	For the six months ended June 30,
	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		—		—		2		201
Commercial real estate		—		—		1		479
Residential real estate and home equity		—		—		—		—

Total		—	$	—		3	$	680

(1)

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.

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.

DCB Financial Corp

Notes to Consolidated Financial Statements

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.

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 June 30, 2015 and December 31, 2014, the fair value of loan commitments was not material.

DCB Financial Corp

Notes to Consolidated Financial Statements

Based on the foregoing methods and assumptions, the carrying value and fair value of the Company’s financial instruments are as follows at June 30, 2015 and December 31, 2014 (in thousands):

	At June 30, 2015
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	47,393	$	47,393	$	47,393	$	—	$	—
Securities available-for-sale		78,975		78,975		—		78,975		—
Loans (net of allowance)		378,000		379,316		—		—		379,316
FHLB stock		3,250		3,250		—		3,250		—
Accrued interest receivable		1,461		1,461		—		—		1,461

Financial liabilities
Non-interest-bearing deposits	$	118,114	$	118,114		—	$	118,114		—
Interest-bearing deposits		352,411		352,474		—		352,474		—
FHLB advances		4,719		4,719		—		4,719		—
Accrued interest payable		66		66		—		—		66

	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 June 30, 2015 and December 31, 2014 (in thousands):

	At June 30, 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	$	14,393	$	—	$	14,393	$	—
Corporate bonds		4,972		—		4,972		—
State and municipal obligations		22,476		—		22,476		—
Collateralized mortgage obligations		20,272		—		20,272		—
Mortgage-backed securities		16,862		—		16,862		—
Total	$	78,975	$	—	$	78,975	$	—

	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	$	—
Corporate bonds		4,987		—		4,987		—
State and municipal obligations		21,657		—		21,657		—
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 June 30, 2015 and December 31, 2014, impaired loans consisted primarily of loans secured by non-residential 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 non-recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2015 and December 31, 2014 (in thousands).

	At June 30, 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	$	11,838	$	—	$	—	$	11,838
Real estate owned		807		—		—		807

	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	$	12,173		—		—	$	12,173
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 second quarter of 2015

Total assets were $541.6 million at June 30, 2015, compared with $515.4 million at December 31, 2014.

Total loans were $382.2 million at June 30, 2015, compared with $385.4 million at December 31, 2014.

Total deposits were $470.5 million at June 30, 2015, compared with $453.2 million at December 31, 2014.

Net income was $144,000 for the three months ended June 30, 2015, compared with $37,000 for the year-ago quarter and $239,000 for the first quarter of 2015. For the six months ended June 30, 2015, net income was $383,000, compared with $156,000 for the first half of 2014.

Net income per diluted share was $0.02 for the three months ended June 30, 2015, compared with $0.01 for the year-ago quarter and $0.03 for the first quarter of 2015. Net income per diluted share was $0.05 for the six months ended June 30, 2015 compared with $0.02 per share for the same period in 2014.

Net interest income was $4.2 million for the three months ended June 30, 2015, compared with $4.0 million for the year-ago quarter and $4.2 million for the first quarter of 2015. Net interest income was $8.3 million for the six months ended June 30, 2015, compared with $8.0 million for the first half of 2014.

The net interest margin was 3.40% in the second quarter of 2015, compared with 3.51% in the year-ago quarter and 3.50% in the first quarter of 2015. The net interest margin was 3.45% in the first half of 2015, compared with 3.49% in the year-ago period.

There was no provision for loan losses recorded in the second quarter of 2015, compared with a provision for loan losses of $150,000 in the first quarter of 2015. There was no provision for loan losses recorded in the three months and six months ended June 30, 2014.

Non-interest income was 22.2% and 21.9% of total revenue in the three months and six months ended June 30, 2015, respectively, compared to 21.8% and 22.0%, in the three months and six months ended June 30, 2014, respectively.

Our efficiency ratio was 97.3% and 95.0% in the three months and six months ended June 30, 2015, respectively, compared to 96.2% and 97.4% in the three months and six months ended June 30, 2014, respectively.

Total non-performing assets (including TDR’s) were $11.8 million or 2.18% of total assets at June 30, 2015, compared to $11.8 million, or 2.26% of total assets, at March 31, 2015 and $12.6 million, or 2.45% of total assets, at December 31, 2014.

Total non-performing assets (excluding TDR’s) were $2.7 million or 0.51% of total assets at June 30, 2015, compared to $2.2 million or 0.42% of total assets at March 31, 2015 and $3.0 million or 0.58% at December 31, 2014.

Comparison of Results of Operations

General

Net income was $144,000 or $0.02 per diluted share for the three months ended June 30, 2015, compared to net income of $37,000 or $0.01 per diluted share for the same period in 2014 and to net income of $239,000 or $0.03 per diluted share in the first quarter of 2015. The increase in net income in the second quarter compared to the year-ago quarter resulted from a $196,000 increase in net interest income and an increase of $184,000 in non-interest income, which offset a $273,000 increase in non-interest expenses. During the second quarter of 2015, the Company recorded a $175,000 one-time expense accrual for refunds of certain fees charged to a small segment of deposit customers between 2011 and 2015.

Net income was $383,000 or $0.05 per diluted share for the six months ended June 30, 2015, compared to net income of $156,000 or $0.02 per diluted share for the same period in 2014. Increases of $389,000 in net interest income and $151,000 in non-interest income during the first six months of 2015 offset a $150,000 increase in the provision for loan losses and a $163,000 increase in non-interest expenses.

Net Interest Income

Net interest income totaled $4.2 million in the quarter ended June 30, 2015, compared with $4.0 million in the year-ago quarter and $4.2 million in the first quarter of 2015. The net interest margin was 3.40% in the second quarter of 2015, compared to 3.51% in the year-ago quarter and 3.50% in the first quarter of 2015. The decline in the net interest margin resulted primarily from the effect of higher interest-bearing cash balances, with yields averaging 0.25%.

Total average interest-earning assets were $491.1 million in the second quarter of 2015, which was an increase of $37.7 million or 8.3% from the year-ago quarter and was an increase of $6.2 million compared with the first quarter of 2015. Average loans outstanding in the second quarter were up $21.3 million compared to the year-ago quarter, but were down $3.1 million compared with the first quarter of 2015 as nearly all of the $4.9 million increase in outstanding loan balances that occurred during the second quarter occurred in the month of June. Total average loans were 77.0% of total average interest-earning assets in the second quarter of 2015, compared with 78.7% in the year-ago quarter and 78.6% in the first quarter of 2015.

Total average interest-bearing deposit balances increased $27.1 million in the second quarter of 2015 compared to the year-ago quarter, with an increase of $33.1 million in the average balances of lower-costing interest-bearing demand, savings and money market accounts (transaction accounts) offsetting a decrease in the average balance of time deposits of $6.0 million. Transaction accounts comprised 78.9% of total interest-bearing deposits in the second quarter of 2015, compared to 75.4% in the year-ago quarter and 78.5% in the first quarter of 2015.

Net interest income totaled $8.3 million in the first half 2015, which was an increase of $389,000 or 4.9% compared with $8.0 million in the year-ago period. The net interest margin was 3.45% for the six months ended June 30, 2015, compared with 3.49% in the year-ago period.

Total average interest-earning assets were $487.9 million in the first half of 2015, which was an increase of $27.5 million or 6.0% from the first half of 2014. Average loans outstanding in the first half of 2015 increased $20.9 million compared to the year-ago period, and totaled 77.8% of total interest-earning assets in the six months ended June 30, 2015, compared with 77.9% in the six months ended June 30, 2014.

The average balance in time deposits decreased $7.9 million in the first half of 2015 compared with the year-ago period, while the average balances in lower-costing interest-bearing demand, savings and money market accounts increased $28.9 million. Transaction accounts comprised 78.7% of total interest-bearing deposits in the first half of 2015, compared to 75.1% in the first half of 2014.

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 ended June 30,
	2015								2014
	Outstanding			Earned/		Yield/			Outstanding			Earned/		Yield/
	balance			paid		rate			balance			paid		rate
Interest-earning assets:
Federal funds sold and other short term	$	28,466		$	19		0.27	%	$	13,566		$	9		0.28	%
Taxable securities		77,772			415		2.11			75,337			453		2.41
Tax-exempt securities		6,842			67		3.88			7,853			81		4.14
Loans		377,985			3,953		4.17			356,678			3,719		4.14
Total interest-earning assets		491,065			4,454		3.61			453,434			4,262		3.74

Non-interest-earning assets		41,239								40,778

Total assets	$	532,304							$	494,212

Interest-bearing liabilities:
Interest-bearing demand, savings and money market accounts	$	282,728		$	167		0.24	%	$	249,645		$	155		0.25	%
Certificates of deposit		75,384			92		0.49			81,415			108		0.53
Total deposits		358,112			259		0.29			331,060			263		0.34
Borrowed funds		4,765			36		2.97			4,894			36		2.94

Total interest-bearing liabilities		362,877			295		0.33			335,954			299		0.37

Non-interest-bearing liabilities:
Demand deposits		119,440								109,486
Other liabilities		3,163								3,043
Shareholders’ equity		46,824								45,729

Total liabilities and shareholders’ equity	$	532,304							$	494,212

Net interest income; interest rate spread				$	4,159		3.28	%				$	3,963		3.37	%

Net interest margin (net interest income as a percent of average interest-earning assets)							3.40	%							3.51	%

Average interest-earning assets to average interest-bearing liabilities		135.33	%							134.97	%

	Six months ended June 30,
	2015								2014
	Outstanding			Earned/		Yield/			Outstanding			Earned/		Yield/
	balance			paid		rate			balance			paid		rate
Interest-earning assets:
Federal funds sold and other short term	$	24,128		$	29		0.24	%	$	17,635		$	23		0.26	%
Taxable securities		77,457			852		2.22			76,224			998		2.43
Tax-exempt securities		6,846			135		3.97			7,924			90		4.14
Loans		379,553			7,905		4.19			358,663			7,456		4.14
Total interest-earning assets		487,984			8,921		3.68			460,446			8,567		3.75

Non-interest-earning assets		41,710								40,803

Total assets	$	529,694							$	501,249

Interest-bearing liabilities:
Interest-bearing demand, savings and money market accounts	$	280,976		$	325		0.23	%	$	252,126		$	306		0.27	%
Certificates of deposit		75,898			184		0.49			83,796			237		0.57
Total deposits		356,874			509		0.29			335,922			543		0.34
Borrowed funds		5,564			71		2.56			5,086			72		2.85

Total interest-bearing liabilities		362,438			580		0.32			341,008			615		0.36

Non-interest-bearing liabilities:
Demand deposits		116,271								110,490
Other liabilities		4,270								4,578
Shareholders’ equity		46,715								45,173

Total liabilities and shareholders’ equity	$	529,694							$	501,249

Net interest income; interest rate spread				$	8,341		3.36	%				$	7,952		3.39	%

Net interest margin (net interest income as a percent of average interest-earning assets)							3.45	%							3.49	%

Average interest-earning assets to average interest-bearing liabilities		134.64	%							135.02	%

Asset Quality and Allowance for Loan Losses

Delinquent loans (including non-accrual loans) totaled $2.4 million or 0.63% of total loans at June 30, 2015, compared to $2.0 million or 0.53% of total loans at March 31, 2015 and $2.3 million or 0.58% of total loans at December 31, 2014. Non-accrual loans totaled $1.5 million or 0.38% of total loans at June 30, 2015, compared to $1.1 million or 0.30% of total loans at March 31, 2015 and $1.4 million or 0.36% of total loans at December 31, 2014.

Delinquent loans	June 30, 2015					March 31, 2015					December 31, 2014
	$		%⁽¹⁾			$		%⁽¹⁾			$		%⁽¹⁾
	(Dollars in thousands)
30 days past due	$	460		0.12	%	$	250		0.07	%	$	336		0.09	%
60 days past due		22		0.01	%		498		0.13	%		37		0.01	%
90 days past due and still accruing		475		0.12	%		105		0.03	%		480		0.12	%
Non-accrual		1,457		0.38	%		1,130		0.30	%		1,384		0.36	%
Total	$	2,414		0.63	%	$	1,983		0.53	%	$	2,327		0.58	%

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

Non-performing assets were $11.8 million or 2.18% of total assets at June 30, 2015, compared with $11.8 million or 2.26% of total assets at March 31, 2015 and $12.6 million or 2.45% of total assets at December 31, 2014. Troubled debt restructurings (“TDR’s”) which are performing in accordance with the restructured terms and accruing interest, though they are included in non-performing assets, were $9.1 million at June 30, 2015, and $9.6 million at both March 31, 2015 and December 31, 2014.

The following table represents information concerning the aggregate amount of non-performing assets:

Non-performing assets	June 30, 2015		March 31, 2015		December 31, 2014
	(Dollars in thousands)
Non-accruing loans:
Consumer loans and credit cards	$	67	$	118	$	120
Commercial and industrial		593		612		632
Commercial real estate		31		60		298
Residential real estate loans and home equity		766		340		334
Total non-accruing loans		1,457		1,130		1,384
Accruing loans delinquent 90 days or more		475		105		480
Total non-performing loans (excluding TDR’s)		1,932		1,235		1,864

Other real estate and repossessed assets		807		940		1,111
Total non-performing assets (excluding TDR’s)	$	2,739	$	2,175	$	2,975

Troubled debt restructurings⁽¹⁾	$	9,068	$	9,575	$	9,633
Total non-performing loans (including TDR’s)	$	11,000	$	10,810	$	11,497
Total non-performing assets (including TDR’s)	$	11,807	$	11,750	$	12,608

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

Net recoveries of previously charged-off loans totaling $75,000 were recorded in the second quarter of 2015, compared to net charge-offs of $777,000 or 0.87% (annualized) of average loans in the year-ago quarter, and net charge-offs of $297,000 or 0.31% (annualized) of average loans in the first quarter of 2015.

Net charge-offs were $222,000 or 0.12% (annualized) of average loans in the first half of 2015, compared to net charge-offs of $2.1 million or 1.15% (annualized) of average loans in the first half of 2014. Three relationships comprised nearly all of the charge-offs in the first half of 2014, which were charged against specific allowance allocations established in the fourth quarter of 2013.

The allowance for loan losses was $4.2 million at June 30, 2015, compared to $4.1 million at March 31, 2015 and $4.2 million at December 31, 2014. The ratio of the allowance for loan losses to total loans was 1.09% at June 30, 2015, compared with 1.08% at March 31, 2015 and 1.10% at December 31, 2014. The ratio of the allowance for loan losses to non-performing loans (including TDR’s) was 38.2% at June 30, 2015, compared to 37.8% at March 31, 2015 and 38.5% at December 31, 2014. The ratio of the allowance for loan losses to non-accrual loans was 286% at June 30, 2015, compared to 362% at March 31, 2015 and 306% at December 31, 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 June 30, 2015, $447,000 or 10.8% of the allowance for credit losses was considered to be “unallocated,” compared to $284,000 or 6.9% of the allowance for loan losses, at March 31, 2015 and $270,000 or 6.4% of the allowance for loan losses, at December 31, 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 June 30,						Six months ended June 30,
	2015			2014			2015			2014

Allowance for loan losses, beginning of period	$	4,089		$	5,345		$	4,236		$	6,724

Loans charged-off		(78	)		(846	)		(507	)		(2,258	)
Recoveries of loans previously charged-off		153			69			285			199
Net loans charged-off		75			(777	)		(222	)		(2,059	)
Allowance related to loans transferred to held-for-sale		—			—			—			(97	)
Provision for loan losses		—			—			150			—
Allowance for loan losses, end of period	$	4,164		$	4,568		$	4,164			4,568

Non-interest Income

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

	Three months ended June 30,												Six months ended June 30,
	2015			2014			$ Change			% Change			2015		2014			$ Change			% Change
Service charges	$	500		$	489		$	11			2.3	%	$	952	$	1,000		$	(48	)		(4.8	)%
Wealth management income		399			378			21			5.6	%		779		671			108			16.1	%
Treasury management fees		64			59			5			8.5	%		122		115			7			6.1	%
Income from Bank-owned life insurance		165			164			1			0.6	%		408		402			6			1.5	%
Loss on loans held for sale		—			(114	)		114			(100.0	)%		—		(357	)		357			(100.0	)%
Net (loss) gain on sale of REO		(11	)		(4	)		(7	)		175.0	%		1		(4	)		5			(125.0	)%
Loss on sale of securities available for sale		—			—			—			0.0	%		—		(140	)		140			(100.0	)%
Gain on sale of branch		—			—			—			0.0	%		—		438			(438	)		(100.0	)%
Other non-interest income		63			24			39			162.5	%		76		62			14			22.6	%
Total non-interest income	$	1,180		$	996		$	184			18.5	%	$	2,338	$	2,187		$	151			6.9	%

Non-interest income was $1.2 million in the second quarter of 2015, compared to $996,000 in the second quarter of 2014 and $1.2 million in the first quarter of 2015. Non-interest income for the second quarter of 2014 was negatively impacted by losses of $114,000 on loans held-for-sale. The rest of the increase in non-interest income in the second quarter of 2015 compared with the year-ago period resulted from increases in service charges, wealth management income and treasury management fees.

Non-interest income was $2.3 million in the first half of 2015, compared to $2.2 million in the first half of 2014.

Non-interest income (net of non-recurring items in the year-ago quarter) accounted for 22.2% of total revenue in the second quarter of 2015, compared with 21.8% in the year-ago quarter and 21.5% in the first quarter of 2015. Non-interest income accounted for 21.9% of total revenue in the first half of 2015, compared with 22.0% in the year-ago period.

Non-interest Expense

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

	Three months ended June 30,										Six months ended June 30,
	2015		2014		$ Change			% Change			2015		2014		$ Change			% Change
Salaries and benefits	$	2,819	$	2,712	$	107			3.9	%	$	5,531	$	5,490	$	41			0.8	%
Occupancy and equipment		1,023		921		102			11.1	%		1,986		1,808		178			9.9	%
Professional services		284		197		87			44.2	%		637		617		20			3.2	%
Advertising		141		77		64			83.1	%		249		158		91			57.6	%
Office supplies, postage and courier		72		89		(17	)		(19.1	)%		151		184		(33	)		(17.9	)%
FDIC insurance premium		97		172		(75	)		(43.6	)%		207		340		(133	)		(39.1	)%
State franchise taxes		75		67		8			11.9	%		150		132		18			13.6	%
Other non-interest expense		684		687		(3	)		(0.4	)%		1,235		1,254		(19	)		(1.5	)%
Total non-interest expenses	$	5,195	$	4,922	$	273			5.6	%	$	10,146	$	9,983	$	163			1.6	%

Non-interest expenses were $5.2 million for the second quarter of 2015, compared with $4.9 million in the year-ago quarter and $5.0 million for the first quarter of 2015. The Company’s efficiency ratio was 97.3% in the second quarter of 2015, compared with 96.2% in the year-ago quarter, and 92.9% in the first quarter of 2015.

Non-interest expenses were $10.1 million in the first half of 2015, compared to $10.0 million in the first half of 2014. The Company’s efficiency ratio was 95.0% for the first half of 2015, compared to 97.4% in the year-ago period.

Income Taxes

We had net deferred tax assets totaling $10.2 million and $10.4 million at June 30, 2015 and December 31, 2014, respectively, of which the majority are attributable to net operating loss carry-forwards and timing differences between provision for loan losses and the charge-off of loans.

Comparison of Financial Condition at June 30, 2015 and December 31, 2014

Total assets were $541.6 million at June 30, 2015, compared with $520.7 million at March 31, 2015 and $515.4 million at December 31, 2014. Cash and cash equivalents increased $26.1 million since the end of 2014 due in large part to seasonal inflows of funds into the Company’s municipal accounts during the second quarter.

Securities

Investment securities totaled $79.0 million at June 30, 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 June 30, 2015 was 25.7% collateralized mortgage obligations, 21.4% government-sponsored entity guaranteed mortgage-backed securities, 28.4% municipal securities, 18.2% obligations of U.S. government agencies and 6.3% corporate bonds.

Loans

The following table sets forth the composition of our loan portfolio, at the dates indicated (dollars in thousands):

	June 30, 2015						December 31, 2014
	Amount			Percent			Amount			Percent
Loan portfolio composition
Consumer and credit card	$	39,403			10.3	%	$	37,507			9.7	%
Commercial and industrial		102,754			26.9	%		106,222			27.6	%
Commercial real estate		105,615			27.7	%		111,851			29.0	%
Real estate and home equity		134,090			35.1	%		129,650			33.7	%
Total loans	$	381,862			100.0	%	$	385,230			100.0	%

Net deferred loan costs		302						214
Allowance for loan losses		(4,164	)					(4,236	)
Net loans	$	378,000					$	381,208

Total loans were $382.2 million at June 30, 2015, compared with $377.2 million at March 31, 2015 and $385.4 million at December 31, 2014. The Company entered 2015 with a relatively light loan pipeline primarily due 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 five relationships aggregating $5.7 million that paid off during the first quarter of 2015. Loan growth rebounded in the second quarter, with commercial and industrial loans and residential loans increasing $2.9 million and $2.4 million, respectively.

Deposits

Deposits totaled $470.5 million at June 30, 2015, compared with $453.2 million at December 31, 2014 and $464.8 million at March 31, 2015. 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 $47.4 million at June 30, 2015, compared to $21.3 million at December 31, 2014. Cash and equivalents represented 8.8% of total assets at June 30, 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 $255,000 in the first half of 2015 to $47.5 million at June 30, 2015. Net income for the first half of 2015 of $383,000 was partially offset by a decrease in accumulated other comprehensive income due to a decrease in unrealized gains on securities available-for-sale. The Company’s consolidated tangible common equity to assets ratio was 8.80% at June 30, 2015.

The Bank’s Tier 1 leverage ratio was 8.63% and its total risk-based capital ratio was 13.83% at June 30, 2015, both of which were well above the 5.0% and 10.0% regulatory thresholds, respectively, required to be classified as a “well-capitalized” institution.

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 Federal Reserve Board 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 1 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 became 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 as well-capitalized are presented below as of June 30, 2015:

	Actual			Minimum ratios to be well-capitalized
Tier 1 leverage ratio		8.63	%		6.00	%
Common equity tier 1 capital ratio		12.68	%		4.50	%
Tier 1 risk-based capital ratio		12.68	%		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 June 30, 2015
Total risk-based capital
Consolidated	$	50,630		14.00	%	$	28,931		8.0	%		N/A		N/A
Bank	$	49,944		13.83	%	$	28,890		8.0	%	$	36,113		10.0	%
Tier 1 capital
Consolidated	$	46,466		12.84	%	$	14,475		4.0	%		N/A		N/A
Bank	$	45,780		12.68	%	$	14,442		4.0	%	$	21,662		6.0	%
Leverage
Consolidated	$	46,466		8.77	%	$	21,193		4.0	%		N/A		N/A
Bank	$	45,780		8.63	%	$	21,219		4.0	%	$	26,524		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 June 30, 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 June 30, 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 June 30, 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 June 30, 2015 formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014; (ii) the Condensed Consolidated Statements of Operations for the three months ended June 30, 2015 and 2014 (unaudited); (iii) the Condensed Consolidated Statements of Comprehensive Income for the three months ended June 30, 2015 and 2014 (unaudited); (iv) the Condensed Consolidated Statements of Cash Flow for the three months ended June 30, 2015 and 2014 (unaudited); (v) the Consolidated Condensed Statements of Cash Flows for the three months ended June 30, 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: August 14, 2015	/s/ Ronald J. Seiffert
	Ronald J. Seiffert
	President and Chief Executive Officer
	(Principal Executive Officer)

Dated: August 14, 2015	/s/ J. Daniel Mohr
	J. Daniel Mohr
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

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