DCB FINANCIAL CORP - FORM 10-Q

Attached files

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EX-31.1 - CERTIFICATION - DCB FINANCIAL CORP	v423988_ex31-1.htm
EX-32.1 - CERTIFICATION - DCB FINANCIAL CORP	v423988_ex32-1.htm
EX-31.2 - CERTIFICATION - DCB FINANCIAL CORP	v423988_ex31-2.htm
EX-32.2 - CERTIFICATION - DCB FINANCIAL CORP	v423988_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: September 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 November 12, 2015, the latest practicable date, 7,280,290 of the registrant’s common shares, no par value, were issued and outstanding.

DCB Financial Corp

Table of Contents

	Page
Part I – Financial Information	3

Item 1 – Financial Statements	3

Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014	3

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

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

Consolidated Statements of Shareholders’ Equity (unaudited) for the three and nine month periods ended September 30, 2015 and 2014	6

Consolidated Statements of Cash Flows (unaudited) for the nine month periods ended September 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	25

Item 3 – Quantitative and Qualitative Disclosures about Market Risk	35

Item 4 – Controls and Procedures	35

Part II – Other Information	36

Item 1 – Legal proceedings	36

Item 1A – Risk Factors	36

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3 – Defaults Upon Senior Securities	36

Item 4 – Mine Safety Disclosures	36

Item 5 – Other Information	36

Item 6 – Exhibits	36

Signatures	37

Part I – Financial Information

Item 1. Financial Statements

DCB Financial Corp

Consolidated Balance Sheets

	September 30, 2015			December 31, 2014
	(unaudited)
	(Dollars in thousands, except share and per share data)
Assets:
Cash and due from financial institutions	$	6,883		$	6,247
Interest-bearing deposits		28,148			15,027
Total cash and cash equivalents		35,031			21,274

Securities available-for-sale		82,019			75,909

Loans		380,290			385,444
Less allowance for loan losses		(4,206	)		(4,236	)
Net loans		376,084			381,208

Real estate owned		785			1,111
Investment in FHLB stock		3,250			3,250
Premises and equipment, net		5,178			10,016
Premises and equipment held-for-sale		4,771			—
Bank-owned life insurance		20,598			20,027
Deferred tax asset, net		10,383			—
Accrued interest receivable and other assets		3,635			2,587
Total assets	$	541,734		$	515,382

Liabilities and shareholders’ equity
Liabilities:
Deposits:
Non-interest bearing	$	123,870		$	111,022
Interest bearing		351,037			342,170
Total deposits		474,907			453,192

Borrowings		4,711			11,808
Accrued interest payable and other liabilities		3,420			3,171
Total liabilities		483,038			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 7,280,290 and 7,233,795 shares outstanding for September 30, 2015 and December 31, 2014, respectively		16,412			16,064
Retained earnings		49,526			38,055
Treasury stock, at cost, 307,650 shares		(7,416	)		(7,416	)
Accumulated other comprehensive income		609			654
Deferred stock-based compensation		(435	)		(146	)
Total shareholders’ equity		58,696			47,211
Total liabilities and shareholders’ equity	$	541,734		$	515,382

See notes to the consolidated financial statements.
Common shares outstanding		7,280,290			7,233,795
Book value per common share	$	8.05		$	6.53

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

DCB Financial Corp

Consolidated Statements of Income (Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
	(Dollars in thousands, except share and per share data)
Interest income:
Loans	$	3,979		$	3,775		$	11,884		$	11,231
Securities		473			494			1,460			1,582
Federal funds sold and interest bearing deposits		17			9			46			32
Total interest income		4,469			4,278			13,390			12,845

Interest expense:
Deposits:
Savings and money market accounts		153			147			445			416
Time accounts		88			104			272			341
NOW accounts		16			19			49			56
Total		257			270			766			813

FHLB advances		35			36			106			108
Total interest expense		292			306			872			921

Net interest income		4,177			3,972			12,518			11,924
Provision for loan losses		(150	)		—			—			—
Net interest income after provision for loan losses		4,327			3,972			12,518			11,924

Non-interest income:
Service charges		523			485			1,475			1,485
Wealth management fees		438			420			1,217			1,091
Treasury management fees		81			58			203			173
Income from bank-owned life insurance		163			165			571			566
Losses on loans held for sale		—			(189	)		—			(546	)
Net losses on sales of REO		(19	)		(69	)		(20	)		(73	)
Net gains on the sale of securities available-for-sale		—			241			—			101
Gain on sale of branch		—			—			—			438
Other non-interest income		37			29			115			92
Total non-interest income		1,223			1,140			3,561			3,327

Non-interest expense:
Salaries and employee benefits		2,771			2,821			8,302			8,311
Occupancy and equipment		1,010			892			2,996			2,841
Professional services		405			366			1,042			983
Advertising		169			100			418			258
Office supplies, postage and courier		81			72			232			256
FDIC insurance premium		95			180			302			520
State franchise taxes		75			67			225			199
Other non-interest expense		544			564			1,779			1,677
Total non-interest expense		5,150			5,062			15,296			15,045

Income before income tax benefit		400			50			783			206
Income tax benefit		(10,688	)		—			(10,688	)		—
Net income	$	11,088		$	50		$	11,471		$	206

Share and Per Share Data
Basic average common shares outstanding		7,282,365			7,192,350			7,269,222			7,192,350
Diluted average common shares outstanding		7,302,174			7,249,194			7,288,237			7,242,431
Basic and diluted earnings per common share	$	1.52		$	0.01		$	1.58		$	0.03

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

DCB Financial Corp

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

	Three months ended September 30,					Nine months ended September 30,
	2015		2014			2015			2014
	(In thousands)
Net income	$	11,088	$	50		$	11,471		$	206

Other comprehensive income (loss):

Reclassification adjustment for realized gains included in net income in the three and nine months ended September 30, 2014, net of taxes of $82 and $34, respectively		—		(159	)		—			(67	)

Net unrealized gains (losses) on securities available-for-sale in the three months and nine months ended September 30, 2015 and 2014, net of taxes of $60, $(10), $(22), and $709, respectively		116		(20	)		(45	)		1,377

Reclassification of previously recognized non-credit other than temporary impairment on sale of security in the nine months ended September 30, 2014, net of taxes $(48)		—		—			—			(92	)

Total other comprehensive income (loss)		116		(179	)		(45	)		1,218

Comprehensive income (loss)	$	11,204	$	(129	)	$	11,426		$	1,424

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		$	37,682	$	(7,416	)	$	(774	)	$	—		$	45,263
Net income		—			—		—			206		—			—			—			206
Other comprehensive income, net of taxes		—			—		—			—		—			1,218			—			1,218
Balance at September 30, 2014		7,192,350		$	—	$	15,771		$	37,888	$	(7,416	)	$	444		$	—		$	46,687

Balance at January 1, 2015		7,233,795		$	—	$	16,064		$	38,055	$	(7,416	)	$	654		$	(146	)	$	47,211
Net income		—			—		—			11,471		—			—			—			11,471
Other comprehensive loss, net of taxes		—			—		—			—		—			(45	)		—			(45	)
Issuance of restricted stock		55,785			—		407			—		—			—			(407	)		—
Forfeiture of restricted stock		(9,290	)		—		(59	)		—		—			—			59			—
Amortization of restricted stock		—			—		—			—		—			—			59			59
Balance at September 30, 2015		7,280,290		$	—	$	16,412		$	49,526	$	(7,416	)	$	609		$	(435	)	$	58,696

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

DCB Financial Corp

Consolidated Statements of Cash Flows (Unaudited)

	Nine months ended September 30,
	2015			2014
	(In thousands)
Cash flows from operating activities
Net income	$	11,471		$	206
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		729			813
Deferred taxes, net		(10,688	)		—
Loss on sale of securities available-for-sale		—			(101	)
Loss on loans held-for-sale		—			546
Net loss on sale of real estate owned		20			73
Gain on sale of branch		—			(438	)
Net stock-based compensation expense		132			147
Premium amortization on securities, net		790			823
Earnings on bank owned life insurance		(571	)		(566	)
Net changes in other assets and other liabilities		(545	)		(1,653	)
Net cash provided by (used in) operating activities		1,338			(150	)

Cash flows from investing activities
Purchases of securities available-for-sale		(25,696	)		(16,595	)
Proceeds from maturities, principal payments and calls of securities available-for-sale		18,728			15,842
Proceeds from sales of securities available-for-sale		—			7,140
Net change in loans		5,124			(14,563	)
Proceeds from sale of real estate owned		307			440
Net cash paid with sale of branch		—			(12,464	)
Proceeds from redemption of FHLB stock		—			549
Premises and equipment expenditures		(662	)		(322	)
Proceeds from sale of loans		—			423
Net cash used in investing activities		(2,199	)		(19,550	)

Cash flows from financing activities
Net change in deposits		21,715			15,172
Repayment of borrowings		(7,097	)		(22	)
Net cash provided by financing activities		14,618			15,150

Net change in cash and cash equivalents		13,757			(4,550	)
Cash and cash equivalents at beginning of period		21,274			25,357
Cash and cash equivalents at end of period	$	35,031		$	20,807

Supplemental disclosures of cash flow information
Cash paid during the period for interest on deposits and borrowings	$	834		$	994
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.

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, DCB Insurance Services, Inc, and 110 Riverbend, LLC.

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 nine months ended September 30, 2015 and 2014. The results of operations for the three and nine months ended September 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 September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Weighted-average common shares outstanding (basic)		7,282,365		7,192,350		7,269,222		7,192,350
Dilutive effect of assumed exercise of stock options		19,809		56,844		19,015		50,081
Weighted-average common shares outstanding (diluted)		7,302,174		7,249,194		7,288,237		7,242,431

There were 61,339 shares and 124,622 shares included in the computation of common share equivalents for the three and nine months ended September 30, 2015 and 2014, respectively, because the average fair value of the shares was greater than the exercise price.

At September 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.

Note 1 – Summary of Significant Accounting Policies, cont.

Awards for 2,145 restricted shares and 55,785 restricted shares were granted under the Company’s 2014 Restricted Stock Plan during the three months and nine months ended September 30, 2015, respectively. The awards vest ratably over a five-year period. Forfeitures of unvested restricted shares totaled 9,290 shares in the three months and nine months ended September 30, 2015. There were no grants or forfeitures of restricted shares in the nine months ended September 30, 2014. There were 87,940 and 41,445 unvested restricted shares at September 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.

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.

Note 1 – Summary of Significant Accounting Policies, cont.

Allowance for Loan Losses

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

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

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

Uncollectibility is usually determined based on a pre-determined number of days delinquent in the case of consumer loans, or, in the case of commercial loans, is based on a combination of factors including delinquency, collateral and other legal considerations. Consumer loans are charged-off prior to 120 days of delinquency, but could be charged off earlier, depending on the individual circumstances. Mortgage loans are charged down prior to 180 days of delinquency, but could be charged off sooner, again, depending upon individual circumstance. Typically, loans collateralized by residential real estate are partially charged down to the estimated liquidation value, which is generally based on appraisal less costs to hold and liquidate. Commercial and commercial real estate loans are evaluated for impairment and typically reserved based on the results of the analysis, then subsequently charged down to a recoverable value when loan repayment is deemed to be collateral dependent. Loans can be partially charged down depending on a number of factors including: the remaining strength of the borrower and guarantor; the type and value of the collateral, and the ease of liquidating collateral; and whether or not collateral is brought onto the bank’s balance sheet via repossession. In the case of commercial and commercial real estate loans, charge-offs, partial or whole, take place when management determines that full collectability of principal balance is unlikely to occur. Subsequent recoveries, if any, are credited to the allowance. Management’s policies for determining impairment, reserves and charge-offs are reviewed and approved by the Board of Directors on an annual basis.

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.

10.

Note 1 – Summary of Significant Accounting Policies, cont.

Income Taxes

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

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

Note 2 – Securities

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

	September 30, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government and agency obligations	$	16,432	$	64	$	(27	)	$	16,469
Corporate bonds		4,220		34		(8	)		4,246
States and municipal obligations		22,137		437		(93	)		22,481
Collateralized mortgage obligations		22,316		63		(80	)		22,299
Mortgage-backed securities		15,991		547		(14	)		16,524
Total	$	81,096	$	1,145	$	(222	)	$	82,019

	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

U.S. Government and agency obligations	$	11,602	$	31	$	(88	)	$	11,545
Corporate bonds		4,975		33		(21	)		4,987
States and municipal obligations		21,303		423		(69	)		21,657
Collateralized mortgage obligations		19,601		85		(106	)		19,580
Mortgage-backed securities		17,438		702		—			18,140
Total	$	74,919	$	1,274	$	(284	)	$	75,909

11.

Note 2 – Securities, cont.

Securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at the dates indicated are as follows (dollars in thousands):

	September 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		2	$	896	$	1		2	$	1,970	$	26		4	$	2,866	$	27
Corporate bonds		2		552		3		3		1,405		5		5		1,957		8
State and municipal obligations		6		2,398		64		3		1,308		29		9		3,706		93
Collateralized mortgage obligations		16		10,349		43		4		3,288		37		20		13,637		80
Mortgage-backed securities and other		3		2,570		14		—		—		—		3		2,570		14
Total temporarily impaired securities		29	$	16,765	$	125		12	$	7,971	$	97		41	$	24,736	$	222

	December 31, 2014
	(Less than 12 months)						(12 months or longer)						Total
Description of securities	Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses
U.S. Government and agency obligations		3	$	2,488	$	9		4	$	4,446	$	79		7	$	6,934	$	88
Corporate bonds		1		503		1		4		1,664		21		5		2,167		21
State and municipal obligations		8		2,699		18		4		1,915		51		12		4,614		69
Collateralized mortgage obligations		9		5,649		21		4		3,649		85		13		9,298		106
Mortgage-backed securities and other		—		—		—		—		—		—		—		—		—
Total temporarily impaired securities		21	$	11,339	$	49		16	$	11,674	$	236		37	$	23,013	$	284

The unrealized losses on the Company’s investments in U.S. Government and agency obligations, state and political subdivision obligations, corporate bonds and mortgage-backed securities were caused primarily by changes in interest rates. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be OTTI at September 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 nine months ended September 30, 2015. Gross gains on the sale of securities were $241,000 and $242,000 in the three months and nine months ended September 30, 2014. Gross losses on the sale of securities were $141,000 in the nine months ended September 30, 2014.

At September 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 September 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.

	Amortized Cost		Fair Value
Due in one year or less	$	2,106	$	2,112
Due after one to five years		19,678		19,862
Due after five to ten years		20,990		21,256
Due after ten years		22,331		22,265
Mortgage-backed and related securities		15,991		16,524
Total	$	81,096	$	82,019

Securities with a fair value of $72.4 million at September 30, 2015 were pledged to secure public deposits and other obligations.

12.

Note 3 – Loans

Loans were comprised of the following at the dates indicated (in thousands):

	September 30, 2015		December 31, 2014

Consumer and credit card	$	40,689	$	37,507
Commercial and industrial		99,498		106,222
Commercial real estate		103,891		111,851
Residential real estate and home equity		135,934		129,650
		380,012		385,230

Net deferred loan costs		278		214
Loans	$	380,290	$	385,444

Note 4 – Credit Quality

Allowance for Loan Losses

The Company’s methodology for estimating probable future losses on loans utilizes a combination of probability of loss by loan grade and loss given defaults for its portfolios. The probability of default is based on both market data from a third-party independent source and actual historical default rates within the Company’s portfolio. A loan is impaired when full payment of interest and principal under the original contractual loan terms is not expected. Commercial and industrial loans, commercial real estate, including construction and land development, and multi-family real estate loans are individually evaluated for impairment. If a loan is impaired, the loan amount exceeding fair value, based on the most current information available is reserved. Management has developed a process by which commercial and commercial real estate loan relationships with balances of $250,000 or greater are assigned an internal risk grade based on relevant information about the ability of the borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. Borrower’s receiving an internal risk 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.

13.

Note 4 – Credit Quality, cont.

The tables below summarize activity in the allowance for loan losses for the periods indicated (in thousands).

	Three months ended September 30, 2015
	Consumer and Credit Card			Commercial and Industrial			Commercial Real Estate			Residential Real Estate and Home Equity		Unallocated			Total
Beginning balance	$	172		$	1,035		$	2,195		$	315	$	447		$	4,164
Charge-offs		(63	)		—			—			—					(63	)
Recoveries		50			157			18			30					255
Net (charge-offs) recoveries		(13	)		157			18			30					192

Provision		—			(63	)		(217	)		156		(26	)		(150	)
Ending balance	$	159		$	1,129		$	1,996		$	501	$	421		$	4,206

	Three months ended September 30, 2014
	Consumer and Credit Card			Commercial and Industrial			Commercial Real Estate			Residential Real Estate and Home Equity			Unallocated		Total
Beginning balance	$	161		$	1,418		$	2,511		$	220		$	258	$	4,568
Charge-offs		(43	)		(197	)		(173	)		(32	)				(445	)
Recoveries		31			4			11			7					53
Net charge-offs		(12	)		(193	)		(162	)		(25	)				(392	)

Provision		28			1			(166	)		88			49		—
Ending balance	$	177		$	1,226		$	2,183		$	283		$	307	$	4,176

	Nine months ended September 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		(122	)		(311	)		(64	)		(73	)				(570	)
Recoveries		109			297			37			97					540
Net (charge-offs) recoveries		(13	)		(14	)		(27	)		24					(30	)

Provision		(18	)		11			(353	)		209			151		—
Ending balance	$	159		$	1,129		$	1,996		$	501		$	421	$	4,206

	Nine months ended September 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		(111	)		(1,390	)		(1,041	)		(161	)				(2,703	)
Recoveries		90			14			125			23					252
Net charge-offs		(21	)		(1,376	)		(916	)		(138	)				(2,451	)

Provision		(103	)		(629	)		223			202			307		—
Transferred to loans held for sale		—			—			(97	)		—			—		(97	)
Ending balance	$	177		$	1,226		$	2,183		$	283		$	307	$	4,176

14.

Note 4 – Credit Quality, cont.

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.

The following presents by class, information related to the Company’s impaired loans as of the dates indicated (in thousands).

	At September 30, 2015						Period ended September 30, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Three months Average Recorded Investment		Three months Interest Income Recognized		Nine months Average Recorded Investment		Nine months Interest Income Recognized
With no related allowance recorded:
Consumer and credit card	$	467	$	467			$	469	$	7	$	469	$	19
Commercial and industrial		907		907				914		5		1,106		21
Commercial real estate		129		129				451		2		468		2
Residential real estate and home equity		679		679				733		—		552		8
		2,182		2,182				2,567		14		2,595		50

With an allowance recorded:
Commercial and industrial	$	965	$	1,043	$	144	$	1,134	$	13	$	1,016	$	43
Commercial real estate		4,608		4,608		435		6,706		53		7,727		163
		5,573		5,651		579		7,840		66		8,743		206

Total:
Consumer and credit card	$	467	$	467	$	—	$	469	$	7	$	469	$	19
Commercial and industrial		1,872		1,950		144		2,048		18		2,122		64
Commercial real estate		4,737		4,737		435		7,157		55		8,195		165
Residential real estate and home equity		679		679		—		733		—		552		8
Total	$	7,755	$	7,833	$	579	$	10,407	$	80	$	11,338	$	256

	At December 31, 2014						Period ended September 30, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Three months Average Recorded Investment		Three months Interest Income Recognized		Nine months Average Recorded Investment		Nine months Interest Income Recognized
With no related allowance recorded:
Consumer and credit card	$	455	$	455			$	462	$	4	$	474	$	21
Commercial and industrial		1,288		1,288				1,306		24		1,624		35
Commercial real estate		1,088		1,088				6,372		57		8,373		92
		2,831		2,831				8,140		85		10,471		148

With an allowance recorded:
Commercial and industrial		740		817		256		1,016		23		2,096		33
Commercial real estate		8,602		8,602		1,042		5,369		285		5,127		452
		9,342		9,419		1,298		6,385		308		7,223		485

Total:
Consumer and credit card	$	455	$	455	$	—	$	462	$	4	$	474	$	21
Commercial and industrial		2,028		2,105		256		2,322		47		3,720		68
Commercial real estate		9,690		9,690		1,042		11,741		342		13,500		544
Total	$	12,173	$	12,250	$	1,298	$	14,525	$	393	$	17,694	$	633

15.

Note 4 – Credit Quality, cont.

The allocation of the allowance for loan losses summarized on the basis of the Company’s impairment methodology was as follows at the dates indicated (in thousands):

	Consumer and Credit card		Commercial and Industrial		Commercial Real Estate		Residential Real Estate and Home Equity		Total
September 30, 2015
Individually evaluated for impairment	$	—	$	144	$	435	$	—	$	579
Collectively evaluated for impairment		159		985		1,561		501		3,206
Allocated	$	159	$	1,129	$	1,996	$	501		3,785
Unallocated										421
									$	4,206

December 31, 2014
Individually evaluated for impairment	$	—	$	256	$	1,042	$	—	$	1,298
Collectively evaluated for impairment		190		876		1,334		268		2,668
Allocated	$	190	$	1,132	$	2,376	$	268		3,966
Unallocated										270
									$	4,236

The recorded investment in loans and leases summarized on the basis of the Company’s impairment methodology at the dates indicated was as follows (in thousands):

	Consumer and Credit card		Commercial and Industrial		Commercial Real Estate		Residential Real Estate and Home Equity		Total
September 30, 2015
Individually evaluated for impairment	$	467	$	1,872	$	4,737	$	679	$	7,755
Collectively evaluated for impairment		40,222		97,626		99,154		135,255		372,257
Ending balance	$	40,689	$	99,498	$	103,891	$	135,934	$	380,012

	Consumer and Credit card		Commercial and Industrial		Commercial Real Estate		Residential Real Estate and Home Equity		Total
December 31, 2014
Individually evaluated for impairment	$	455	$	2,028	$	9,690	$	-	$	12,173
Collectively evaluated for impairment		37,052		109,823		96,532		129,650		373,057
Ending balance	$	37,507	$	111,851	$	106,222	$	129,650	$	385,230

Loans on non-accrual status were as follows at the dates indicated (in thousands):

	September 30,		December 31,
	2015		2014
Consumer and credit card	$	56	$	120
Commercial and industrial		573		632
Commercial real estate		30		298
Residential real estate and home equity		679		334
Total	$	1,338	$	1,384

16.

Note 4 – Credit Quality, cont.

Credit Quality Indicators

The Company uses the following definitions for criticized and classified commercial loans and commercial real estate loans which are consistent with regulatory guidelines:

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 Special Mention classification are that (1) it is indicative of an unwarranted level of risk, and (2) weaknesses are considered “potential,” versus “well-defined,” impairments to the primary source of loan repayment.

Substandard

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.

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.

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.

As of the dates indicated and based on the most recent analysis performed, the recorded investment by risk category and class of loans is as of the dates indicated (in thousands):

	September 30, 2015				December 31, 2014
	Commercial and Industrial		Commercial Real Estate		Commercial and Industrial		Commercial Real Estate

Pass	$	95,101	$	94,137	$	100,961	$	96,217
Special mention		933		4,668		823		6,146
Substandard		3,464		5,086		4,438		9,488
Total	$	99,498	$	103,891	$	106,222	$	111,851

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

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

	September 30, 2015				December 31, 2014
	Consumer and Credit Card		Residential Real Estate and Home Equity		Consumer and Credit Card		Residential Real Estate and Home Equity

Performing	$	40,633	$	135,255	$	37,387	$	128,836
Non-performing		56		679		120		814
Total	$	40,689	$	135,934	$	37,507	$	129,650

17.

Note 4 – Credit Quality, cont.

Age Analysis of Past Due Loans

The following tables present past due loans aged as of the dates indicated (in thousands).

	September 30, 2015
	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	$	34	$	30	$	56	$	120	$	40,569	$	40,689	$	—
Commercial and industrial		—		—		—		—		99,498		99,498		—
Commercial real estate		—		—		—		—		103,891		103,891		—
Residential real estate and home equity		29		496		—		525		135,409		135,934		—
Total	$	63	$	526	$	56	$	645	$	379,367	$	380,012	$	—

	December 31, 2014
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 days and Accruing
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

The following table summarizes troubled debt restructurings that occurred during the periods indicated (dollars in thousands):

	For the three months ended September 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		1	$	188		—	$	—
Commercial and industrial		—		—		2		547

Total		1	$	188		2	$	547

	For the nine months ended September 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		7	$	279		—	$	—
Commercial and industrial		—		—		2		547

Total		7	$	279		2	$	547

18.

Note 4 – Credit Quality, cont.

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 periods indicated (dollars in thousands):

	For the three months ended September 30,
	2015				2014
	Number of Contracts		Recorded Investment (as of period end) (1)		Number of Contracts		Recorded Investment (as of period end) (1)
Commercial real estate		—	$	—		1	$	315

Total		—	$	—		1	$	315

	For the nine months ended September 30,
	2015				2014
	Number of Contracts		Recorded Investment (as of period end) (1)		Number of Contracts		Recorded Investment (as of period end) (1)
Commercial real estate		—	$	—		1	$	315

Total		—	$	—		1	$	315

(1)

Period end balances are inclusive of all partial pay downs and charge-offs since the modification date. Loans modified in a TDR that were fully paid down, charged off, or foreclosed upon by period end are not reported.

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

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

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

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

19.

Note 5 – Fair Value Measurements

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

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

	Level 1	Quoted prices in active markets for identical assets or liabilities

	Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

	Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

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

Fair value is defined as the price that would be received to sell an asset or transfer a liability between market participants at the balance sheet date. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to observable market data for similar assets and liabilities. However, certain assets and liabilities are not traded in observable markets and the Company must use other valuation methods to develop a fair value.

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

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

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

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

20.

Note 5 – Fair Value Measurements, cont.

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

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

	September 30, 2015
	Carrying amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	35,031	$	35,031	$	35,031	$	—	$	—
Securities available-for-sale		82,019		82,019		—		82,019		—
Loans (net of allowance)		376,084		374,538		—		—		374,538
FHLB stock		3,250		3,250		—		3,250		—
Accrued interest receivable		1,431		1,431		—		—		1,431

Financial liabilities
Non-interest-bearing deposits	$	123,870	$	123,870	$	—	$	123,870	$	—
Interest-bearing deposits		351,037		351,152		—		351,152		—
Borrowings		4,711		4,711		—		4,711		—
Accrued interest payable		74		74		—		—		74

	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		—
Borrowings		11,808		11,808		—		11,808		—
Accrued interest payable		36		36		—		—		36

21.

Note 5 – Fair Value Measurements, cont.

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 the dates indicated (in thousands):

	September 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	$	16,469	$	—	$	16,469	$	—
Corporate bonds		4,246		—		4,246		—
State and municipal obligations		22,481		—		22,481		—
Collateralized mortgage obligations		22,299		—		22,299		—
Mortgage-backed securities		16,524		—		16,524		—
Total	$	82,019	$	—	$	82,019	$	—

	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	$	—

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 September 30, 2015 and December 31, 2014, impaired loans consisted primarily of loans secured by 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.

22.

Note 5 – Fair Value Measurements, cont.

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 the dates indicated (in thousands).

	September 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	$	7,755	$	—	$	—	$	7,755
Real estate owned		785		—		—		785

	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

Note 6 – Sale of Branch and Assets 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

At September 30, 2015, the Company classified the $4.8 million carrying amount of its headquarters building as held-for-sale, reflecting the Company’s desire to sell and simultaneously lease back the property.

23.

Note 7 – Federal Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction and franchise tax returns in Ohio. Income tax benefit for the dates indicated include the following components (in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2015			2014			2015			2014
Deferred	$	96		$	(92	)	$	96		$	229
Valuation allowance		(10,784	)		92			(10,784	)		(229	)
Total	$	(10,688	)	$	—		$	(10,688	)	$	—

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

	Three months ended						Nine months ended
	September 30,						September 30,
	2015			2014			2015			2014
Federal income taxes compared at the expected statutory rate	$	136		$	17		$	266		$	70
Increase (decrease) in taxes resulting from:
Nontaxable dividend and interest income		(29	)		(20	)		(70	)		(63	)
Increase in cash surrender value of life insurance - net		(56	)		(56	)		(194	)		(193	)
Valuation allowance		(10,784	)		92			(10,784	)		(229	)
Other		45			(33	)		94			415
Income tax benefit per financial statements	$	(10,688	)	$	—		$	(10,688	)	$	—

Deferred tax assets and liabilities were comprised of the following at the dates indicated (in thousands):

	September 30, 2015			December 31, 2014
Deferred tax assets:
Allowance for loan losses	$	1,450		$	1,440
Depreciation		-			103
Deferred compensation		292			316
Alternative minimum tax carry forward		153			145
Expenses on foreclosed property		11			10
NOL carry forward		9,081			8,910
Other		57			284
Subtotal		11,044			11,208
Deferred tax liabilities:
FHLB stock dividends		(307	)		(389	)
Unrealized gains on available-for-sale securities		(314	)		(337	)
Other		(40	)		(35	)
Subtotal		(661	)		(761	)
Net deferred tax asset		10,383			10,447
Less: valuation allowance		—			(10,784	)
Total	$	10,383		$	(337	)

At December 31 2014, the Company had a $26.4 million net operating loss carryforward that begins to expire in 2030.

24.

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, DCB Insurance Services, Inc, and 110 Riverbend, LLC. 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.

25.

Overview of the third quarter of 2015

Total assets were $541.7 million at September 30, 2015, compared with $515.4 million at December 31, 2014.

Total loans were $380.3 million at September 30, 2015, compared with $385.4 million at December 31, 2014.

Total deposits were $474.9 million at September 30, 2015, compared with $453.2 million at December 31, 2014.

Net income was $11.1 million for the three months ended September 30, 2015, compared with $50,000 for the year-ago quarter and $144,000 for the second quarter of 2015. For the nine months ended September 30, 2015, net income was $11.5 million, compared with $206,000 for the first nine months of 2014.

Net income per diluted share was $1.52 for the three months ended September 30, 2015, compared with $0.01 for the year-ago quarter and $0.02 for the second quarter of 2015. Net income per diluted share was $1.58 for the nine months ended September 30, 2015 compared with $0.03 per share for the same period in 2014.

The Company reversed a valuation allowance that had previously been recorded against its net deferred tax assets, resulting in a one-time tax benefit in the third quarter of 2015 of $10.7 million or $1.46 per diluted share. Pre-tax income was $400,000 or $0.06 per diluted share for the third quarter of 2015, compared with $50,000 or $0.01 in the year-ago quarter. Pre-tax income was $783,000 or $0.11 per diluted share for the nine months ended September 30, 2015, compared with $206,000 or $0.03 per diluted share in the year-ago period.

Net interest income was $4.2 million for the three months ended September 30, 2015, compared with $4.0 million for the year-ago quarter and $4.2 million for the second quarter of 2015. Net interest income was $12.5 million for the nine months ended September 30, 2015, compared with $11.9 million for the first nine months of 2014.

The net interest margin was 3.35% in the third quarter of 2015, compared with 3.40% in both the year-ago quarter and in the second quarter of 2015. The net interest margin was 3.41% in the nine months ended September 30, 2015, compared with 3.45% in the year-ago period.

The Company recorded a negative provision for loan losses of $150,000 in the third quarter of 2015. The negative provision for loan losses recorded in the third quarter had the effect of offsetting the provision for loan losses of $150,000 that was recorded in the first quarter of 2015, resulting in no provision for loan losses for the nine months ended September 30, 2015. There was no provision for loan losses recorded in the three months and nine months ended September 30, 2014.

Non-interest income was 22.9% and 22.2% of total revenue in the three months and nine months ended September 30, 2015, respectively, compared to 22.6% and 22.2%, in the three months and nine months ended September 30, 2014, respectively.

Our efficiency ratio was 95.0% and 94.9% in the three months and nine months ended September 30, 2015, respectively, compared to 98.7% and 98.1% in the three months and nine months ended September 30, 2014, respectively. The efficiency ratio measures non-interest operating expenses as a percentage of total revenue, adjusted for non-recurring items such as the gain or loss on sale of securities or REO.

Total non-performing assets (including troubled debt restructurings “ TDR’s”) were $8.2 million or 1.52% of total assets at September 30, 2015, compared to $11.8 million or 2.18% of total assets, at June 30, 2015 and $12.6 million, or 2.45% of total assets, at December 31, 2014.

Total non-performing assets (excluding TDR’s) were $2.1 million or 0.39% of total assets at September 30, 2015, compared to $2.7 million or 0.51% of total assets at June 30, 2015 and $3.0 million or 0.58% at December 31, 2014.

Comparison of Results of Operations

General

Net income was $11.1 million or $1.52 per diluted share for the three months ended September 30, 2015, compared to net income of $50,000 or $0.01 per diluted share for the same period in 2014. We reversed a valuation allowance that had previously been recorded against our net deferred tax assets, resulting in a one-time tax benefit in the third quarter of 2015 of $10.7 million or $1.46 per diluted share. Pre-tax income was $400,000 for the third quarter of 2015, compared with $50,000 in the year-ago quarter.

26.

Net income was $11.5 million or $1.58 per diluted share for the nine months ended September 30, 2015, compared to net income of $206,000 or $0.03 per diluted share for the same period in 2014. Pre-tax income was $783,000 or $0.11 per diluted share for the nine months ended September 30, 2015, compared with $206,000 or $0.03 per diluted share in the year-ago period.

Net Interest Income

Net interest income totaled $4.2 million in the quarter ended September 30, 2015, compared with $4.0 million in the year-ago quarter and $4.2 million in the second quarter of 2015. The net interest margin was 3.35% in the third quarter of 2015, compared to 3.40% in both the year-ago quarter and in the second quarter of 2015. The decline in the net interest margin was due primarily to the reinvestment of loan amortization and payoffs into loans with lower current yields, as well as from the effect of higher interest-bearing cash balances, with yields averaging 0.25%.

Total average interest-earning assets were $496.5 million in the third quarter of 2015, which was an increase of $33.0 million or 7.1% from the year-ago quarter and was an increase of $5.5 million compared with the second quarter of 2015. Average loans outstanding in the third quarter were $21.0 million higher than the year-ago quarter, and were up $5.3 million compared with the second quarter of 2015. The increase in the third quarter’s average loan balances have occurred despite the decline in actual period end loans outstanding at September 30, 2015 as the result of the timing of large commercial loan payoffs that occurred in the third quarter of 2015, along with the effect on average balances throughout 2015 of the $16.2 million of growth in the portfolio that occurred in the fourth quarter of 2014. Total average loans were 77.2% of total average interest-earning assets in the third quarter of 2015, compared with 78.2% in the year-ago quarter and 77.0% in the second quarter of 2015.

Total average interest-bearing depositbalances were $350.4 million in the third quarter of 2015, which was an increase of $11.9 million compared to the year-ago quarter, with an increase of $17.4 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 $5.5 million. Transaction accounts comprised 79.1% of total interest-bearing deposits in the third quarter of 2015, compared to 76.8% in the year-ago quarter and 78.9% in the second quarter of 2015.

Net interest income totaled $12.5 million in the nine months ended September 30, 2015, which was an increase of $594,000 or 5.0% compared with $11.9 million in the year-ago period. The net interest margin was 3.41% for the nine months ended September 30, 2015, compared with 3.45% in the year-ago period.

Average interest-earning assets were $491.7 million in the first nine months of 2015, which was an increase of $30.3 million or 6.6% from the first nine months of 2014. Average loans outstanding in the first nine months of 2015 increased $20.9 million compared to the year-ago period, and totaled 77.4% of total interest-earning assets in the nine months ended September 30, 2015, compared with 78.0% in the nine months ended September 30, 2014.

The average balance of time deposits were $75.0 million in the first nine months of 2015, which was a decrease of $7.1 million compared with the year-ago period, while the average balances in lower-costing interest-bearing demand, savings and money market accounts increased $25.0 million. Transaction accounts comprised 78.8% of total interest-bearing deposits in the first nine months of 2015, compared to 75.6% in the first nine months of 2014.

27.

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 September 30,
	2015								2014
	Outstanding balance			Interest Earned/paid		Yield/rate			Outstanding balance			Interest Earned/paid		Yield/rate
Interest earning assets:
Federal funds sold and other short term	$	27,563		$	17		0.26	%	$	18,324		$	9		0.20	%
Taxable securities		82,088			439		2.18			78,692			453		2.30
Tax-exempt securities		3,560			34		3.77			4,228			41		3.82
Loans		383,323			3,979		4.10			362,313			3,775		4.10
Total interest-earning assets		496,534			4,469		3.55			463,557			4,278		3.63

Non-interest-earning assets		39,432								41,264

Total assets	$	535,966							$	504,821

Interest-bearing liabilities:
Interest-bearing demand, savings and money market accounts	$	277,233		$	169		0.24	%	$	259,858		$	166		0.26	%
Certificates of deposit		73,151			88		0.48			78,621			104		0.53
Total deposits		350,384			257		0.29			338,479			270		0.32
Borrowed funds		7,759			35		1.81			6,723			36		2.12

Total interest-bearing liabilities		358,143			292		0.32			345,202			306		0.35

Non-interest-bearing liabilities and shareholders’ equity:
Demand deposits		126,128								109,938
Other liabilities		4,927								3,575
Shareholders’ equity		46,768								46,106

Total liabilities and shareholders’ equity	$	535,966							$	504,821

Net interest income; interest rate spread				$	4,177		3.23	%				$	3,972		3.28	%

Net interest margin (net interest income as a percent of average interest-earning assets)							3.35	%							3.40	%

Average interest-earning assets to average interest-bearing liabilities		138.64	%							134.29	%

28.

	Nine months ended September 30,
	2015								2014
	Outstanding balance			Interest Earned/paid		Yield/rate			Outstanding balance			Interest Earned/paid		Yield/rate
Interest earning assets:
Federal funds sold and other short term	$	26,167		$	46		0.24	%	$	17,867		$	32		0.24	%
Taxable securities		81,172			1,360		2.29			79,188			1,451		2.42
Tax-exempt securities		3,584			100		3.69			4,546			131		3.85
Loans		380,824			11,884		4.30			359,896			11,231		4.17
Total interest-earning assets		491,747			13,390		3.74			461,497			12,845		3.71

Non-interest-earning assets		40,060								40,956

Total assets	$	531,807							$	502,453

Interest-bearing liabilities:
Interest-bearing demand, savings and money market accounts	$	279,714		$	494		0.29	%	$	254,732		$	472		0.25	%
Certificates of deposit		74,972			272		0.49			82,052			341		0.55
Total deposits		354,686			766		0.29			336,784			813		0.32
Borrowed funds		6,304			106		2.25			5,637			108		2.55

Total interest-bearing liabilities		360,990			872		0.32			342,421			921		0.36

Non-interest-bearing liabilities and shareholders’ equity:
Demand deposits		119,593								110,305
Other liabilities		4,491								4,240
Shareholders’ equity		46,733								45,487

Total liabilities and shareholders’ equity	$	531,807							$	502,453

Net interest income; interest rate spread				$	12,518		3.42	%				$	11,924		3.35	%

Net interest margin (net interest income as a percent of average interest-earning assets)							3.41	%							3.45	%

Average interest-earning assets to average interest-bearing liabilities		136.22	%							134.79	%

29.

Asset Quality and Allowance for Loan Losses

Delinquent loans (including non-accrual loans) totaled $1.5 million or 0.40% of total loans at September 30, 2015, compared to $2.4 million or 0.63% of total loans at June 30, 2015 and $2.3 million or 0.58% of total loans at December 31, 2014. Non-accrual loans totaled $1.3 million or 0.35% of total loans at September 30, 2015, compared to $1.5 million or 0.38% of total loans at June 30, 2015 and $1.4 million or 0.36% of total loans at December 31, 2014.

The following tables present past due loans aged as of the dates indicated (dollars in thousands).

Delinquent loans	September 30, 2015					June 30, 2015					December 31, 2014
	$		%⁽¹⁾			$		%⁽¹⁾			$		%⁽¹⁾

30 days past due	$	60		0.02	%	$	460		0.12	%	$	336		0.09	%
60 days past due		129		0.03	%		22		0.01	%		37		0.01	%
90 days past due and still accruing		—		0.00	%		475		0.12	%		480		0.12	%
Non-accrual		1,338		0.35	%		1,457		0.38	%		1,384		0.36	%
Total	$	1,527		0.40	%	$	2,414		0.63	%	$	2,327		0.58	%

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

Non-performing assets decreased $3.6 million or 30.4% in the third quarter, and were $8.2 million or 1.52% of total assets at September 30, 2015, compared with $11.8 million or 2.18% of total assets at June 30, 2015 and $12.6 million or 2.45% of total assets at December 31, 2014. TDR’s, which are performing in accordance with the restructured terms and accruing interest, but are included in non-performing assets, were $6.1 million at September 30, 2015, compared to $9.1 million at June 30, 2015, and $9.6 million at December 31, 2014. During the third quarter of 2015 the Company sold two commercial mortgage loans that had been classified as impaired TDR’s, at the aggregate outstanding amount of the loans of $3.2 million.

The following table represents information concerning the aggregate amount of non-performing assets (in thousands):

Non-performing assets	September 30, 2015		June 30, 2015		December 31, 2014
Non-accruing loans:
Consumer loans and credit cards	$	56	$	67	$	120
Commercial and industrial		573		593		632
Commercial real estate		30		31		298
Residential real estate loans and home equity		679		766		334
Total non-accruing loans		1,338		1,457		1,384
Accruing loans delinquent 90 days or more		—		475		480
Total non-performing loans (excluding TDR’s)		1,338		1,932		1,864

Other real estate and repossessed assets		785		807		1,111
Total non-performing assets (excluding TDR’s)	$	2,123	$	2,739	$	2,975

Troubled debt restructurings⁽¹⁾	$	6,089	$	9,068	$	9,633
Total non-performing loans (including TDR’s)	$	7,427	$	11,000	$	11,497
Total non-performing assets (including TDR’s)	$	8,212	$	11,807	$	12,608

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

Net recoveries of previously charged-off loans totaling $192,000 were recorded in the third quarter of 2015, compared to net charge-offs of $392,000 or 0.43% (annualized) of average loans in the year-ago quarter, and net recoveries of $75,000 in the second quarter of 2015.

Net charge-offs were $30,000 or 0.02% (annualized) of average loans in the first nine months of 2015, compared to net charge-offs of $2.5 million or 0.91% (annualized) of average loans in the first nine months of 2014. Three relationships comprised approximately 71% of the gross charge-offs in the first nine months of 2014, which were charged against specific allowance allocations established in the fourth quarter of 2013.

We recorded a negative provision for loan losses of $150,000 in the third quarter of 2015, due primarily to the net recoveries recorded in the quarter and to the favorable impact on the allowance for loan losses of the reduction in non-performing loans during the quarter. The negative provision for loan losses recorded in the third quarter had the effect of offsetting the provision for loan losses of $150,000 that was recorded in the first quarter of 2015, resulting in no provision for loan losses for the nine months ended September 30, 2015. There was no provision for loan losses recorded in the three months and nine months ended September 30, 2014.

30.

The allowance for loan losses was $4.2 million at September 30, 2015 and at June 30, 2015 and December 31, 2014. The ratio of the allowance for loan losses to total loans was 1.12% at September 30, 2015, compared to 1.09% at June 30, 2015, and 1.10% at December 31, 2014. The ratio of the allowance for loan losses to non-performing loans (including TDR’s) was 56.6% at September 30, 2015, compared to 37.8% at June 30, 2015, and 36.8% at December 31, 2014. The ratio of the allowance for loan losses to non-accrual loans was 314% at September 30, 2015, compared to 286% at June 30, 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 loan 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 September 30, 2015, $421,000 or 10.0% of the allowance for credit losses was considered to be “unallocated,” compared to $447,000 or 10.8% of the allowance for loan losses, at June 30, 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).

	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Allowance for loan losses, beginning of period	$	4,164		$	4,568		$	4,236		$	6,724

Loans charged-off		(63	)		(445	)		(570	)		(2,703	)
Recoveries of loans previously charged-off		255			53			540			252
Net recoveries (charge-offs)		192			(392	)		(30	)		(2,451	)
Allowance related to loans transferred to held-for-sale		—			—			—			(97	)
Provision for loan losses		(150	)		—			—			—
Allowance for loan losses, end of period	$	4,206		$	4,176		$	4,206		$	4,176

Non-interest Income

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

	Three months ended September 30,												Nine months ended September 30,
	2015			2014			$ Change			% Change			2015			2014			$ Change			% Change
Service charges	$	523		$	485		$	38			7.8	%	$	1,475		$	1,485		$	(10	)		(0.7	)%
Wealth management fees		438			420			18			4.3	%		1,217			1,091			126			11.6	%
Treasury management fees		81			58			23			39.7	%		203			173			30			17.3	%
Income from Bank-owned life insurance		163			165			(2	)		(1.2	)%		571			566			5			0.9	%
Loss on loans held for sale		—			(189	)		189			(100.0	)%		—			(546	)		546			(100.0	)%
Net losses on sale of REO		(19	)		(69	)		50			(72.5	)%		(20	)		(73	)		53			(72.6	)%
Net gains on sale of securities available for sale		—			241			(241	)		(100.0	)%		—			101			(101	)		(100.0	)%
Gain on sale of branch		—			—			—			0.0	%		—			438			(438	)		(100.0	)%
Other non-interest income		37			29			8			27.6	%		115			92			23			25.0	%
Total non-interest income	$	1,223		$	1,140		$	83			7.3	%	$	3,561		$	3,327		$	234			7.0	%

Non-interest income was $1.2 million in the third quarter of 2015, compared to $1.1 million in the third quarter of 2014 and $1.2 million in the second quarter of 2015. Non-interest income for the third quarter of 2014 was impacted by net gains on sales of securities available-for-sale of $241,000 which offset losses on loans held-for-sale of $189,000. Income from wealth management fees and treasury management fees increased $126,000 and $30,000, respectively in the first nine months of 2015 compared to the year-ago period largely from the impact of business development activities.

Non-interest income was $3.6 million in the first nine months of 2015, compared to $3.3 million in the first nine months of 2014.

Non-interest income (net of non-recurring items in the year-ago quarter) accounted for 22.9% of total revenue in the third quarter of 2015, compared with 22.6% in the year-ago quarter and 22.2% in the second quarter of 2015. Non-interest income accounted for 22.2% of total revenue in the nine months ended September 30, 2015 and 2014.

31.

Non-interest Expense

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

	Three months ended September 30,										Nine months ended September 30,
	2015		2014		$ Change			% Change			2015		2014		$ Change			% Change
Salaries and benefits	$	2,771	$	2,821	$	(50	)		(1.8	)%	$	8,302	$	8,311	$	(9	)		(0.1	)%
Occupancy and equipment		1,010		892		118			13.2	%		2,996		2,841		155			5.5	%
Professional services		405		366		39			10.7	%		1,042		983		59			6.0	%
Advertising		169		100		69			69.0	%		418		258		160			62.0	%
Office supplies, postage and courier		81		72		9			12.5	%		232		256		(24	)		(9.4	)%
FDIC insurance premium		95		180		(85	)		(47.2	)%		302		520		(218	)		(41.9	)%
State franchise taxes		75		67		8			11.9	%		225		199		26			13.1	%
Other non-interest expense		544		564		(20	)		(3.6	)%		1,779		1,677		102			6.1	%
Total non-interest expenses	$	5,150	$	5,062	$	88			1.7	%	$	15,296	$	15,045	$	251			1.7	%

Non-interest expenses were $5.2 million for the third quarter of 2015, compared with $5.1 million in the year-ago quarter and $5.2 million for the second quarter of 2015. The Company’s efficiency ratio was 95.0% in the third quarter of 2015, compared with 98.7% in the year-ago quarter, and 97.3% in the second quarter of 2015.

Non-interest expenses were $15.3 million in the first nine months of 2015, compared to $15.0 million in the first nine months of 2014. The Company’s efficiency ratio was 94.9% for the first nine months of 2015, compared to 98.1% in the year-ago period.

FDIC insurance premium decreased $85,000 and $218,000 in the three months and nine months ended September 30, 2015 compared to the year-ago periods due to the improvement in the Bank’s regulatory risk rating, which was effective in the fourth quarter of 2014, and which resulted largely from the substantial improvement in the Bank’s asset quality in 2014.

Income Taxes

We had net deferred tax assets totaling $10.4 million at September 30, 2015 and at December 31, 2014, 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. On a quarterly basis, we determine whether a valuation allowance is necessary on our net deferred tax assets. In doing so, we consider all evidence available, both positive and negative, in determining whether it is more likely than not that the net deferred tax assets will be realized. After weighing all available evidence at September 30, 2015, we concluded that it is more likely than not that our net deferred tax assets will be realized. The evidence we considered in our evaluation included, among other things, growth in our core earnings and improvement in our asset quality metrics over the past seven quarters; our current and forecast capital and liquidity positions; internal financial forecasts; and available tax planning strategies. As a result, we reversed the valuation allowance that had been previously been established against our net deferred tax assets, resulting in the recognition of a $10.7 million federal income tax benefit in our net income in the third quarter of 2015.

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

Total assets were $541.7 million at September 30, 2015, compared with $541.6 million at June 30, 2015 and $515.4 million at December 31, 2014. Cash and cash equivalents increased $13.8 million since the end of 2014 due primarily to deposit growth during the period, and net deferred tax assets increased $10.4 million as the result of the reversal of the valuation allowance in the third quarter of 2015.

Securities

Investment securities totaled $82.0 million at September 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 September 30, 2015 was 27.2% collateralized mortgage obligations, 20.1% government-sponsored entity guaranteed mortgage-backed securities, 27.4% municipal securities, 20.1% obligations of U.S. government agencies and 5.2% corporate bonds.

32.

Loans

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

	September 30, 2015						June 30, 2015						December 31, 2014
	Amount			Percent			Amount			Percent			Amount			Percent
Loan portfolio composition
Consumer and credit card	$	40,689			10.7	%	$	39,403			10.3	%	$	37,507			9.7	%
Commercial and industrial		99,498			26.2	%		102,754			26.9	%		106,222			27.6	%
Commercial real estate		103,891			27.3	%		105,615			27.7	%		111,851			29.0	%
Real estate and home equity		135,934			35.8	%		134,090			35.1	%		129,650			33.7	%
Total loans	$	380,012			100.0	%	$	381,862			100.0	%	$	385,230			100.0	%

Net deferred loan costs		278						302						214
Allowance for loan losses		(4,206	)					(4,164	)					(4,236	)
Net loans	$	376,084					$	378,000					$	381,208

Total loans were $380.3 million at September 30, 2015, compared with $382.2 million at June 30, 2015 and $385.4 million at December 31, 2014. We 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 our commercial loan portfolios in the fourth quarter of 2014 totaled $9.8 million. In addition significant prepayments in our commercial loan portfolios have negatively impacted loan growth in 2015, including five relationships aggregating $5.7 million that paid off during the first quarter and six relationships aggregating $7.1 million that paid off in the third quarter. Non-performing troubled-debt restructured loans comprised approximately one-third of these large payoffs during 2015.

Deposits

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

	September 30, 2015					June 30, 2015					December 31, 2014
	Amount		Percent			Amount		Percent			Amount		Percent
Non-interest bearing demand	$	123,870		26.1	%	$	118,114		25.1	%	$	111,022		24.5	%
Interest bearing demand		81,939		17.3	%		79,954		17.0	%		77,534		17.1	%
Total demand		205,809		43.4	%		198,068		42.1	%		188,556		41.6	%

Savings		44,408		9.3	%		43,722		9.3	%		42,634		9.4	%
Money market		151,910		32.0	%		154,344		32.8	%		147,667		32.6	%
Time deposits		72,780		15.3	%		74,391		15.8	%		74,335		16.4	%
Total deposits	$	474,907		100.0	%	$	470,525		100.0	%	$	453,192		100.0	%

Deposits totaled $474.9 million at September 30, 2015, compared with $470.5 million at June 30, 2015 and $453.2 million at December 31, 2014. Much of the growth in deposits during 2015 has been the result of higher balances maintained by existing municipal and business customers.

Liquidity

Liquidity is the ability of the Company to fund loan originations and 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.

33.

Cash and cash equivalents totaled $35.0 million at September 30, 2015, compared to $21.3 million at December 31, 2014. Cash and equivalents represented 6.5% of total assets at September 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 $11.5 million in the first nine months of 2015 to $58.7 million at September 30, 2015 due to net income for the period, which was comprised of pre-tax income of $783,000 and the income tax benefit of $10.7 million that resulted from the reversal of the valuation allowance against our net deferred tax assets. Our tangible common equity to tangible assets ratio was 10.8% at September 30, 2015.

The Bank’s Tier 1 leverage ratio was 9.18% and its total risk-based capital ratio was 14.23% at September 30, 2015, both of which were well above the regulatory thresholds required to be classified as a “well-capitalized” institution, which are 5.0% and 10.0%, respectively. The effect of the income tax benefit recorded in the third quarter added approximately 50 basis points to the Bank’s regulatory capital ratios.

Beginning January 1, 2015, the capital requirements for the 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 the 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 September 30, 2015:

	Actual			Minimum ratios to be well-capitalized
Tier 1 leverage ratio		9.18	%		6.00	%
Common equity tier 1 capital ratio		13.09	%		4.50	%
Tier 1 risk-based capital ratio		13.09	%		4.50	%
Total risk-based capital ratio		14.23	%		8.00	%

34.

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 September 30, 2015
Total risk-based capital
Consolidated	$	53,009		14.43	%	$	29,388		8.0	%		N/A		N/A
Bank	$	52,295		14.23	%	$	29,400		8.0	%	$	36,750		10.0	%
Tier 1 capital
Consolidated	$	48,803		13.28	%	$	14,700		4.0	%		N/A		N/A
Bank	$	48,089		13.09	%	$	14,695		4.0	%	$	22,042		6.0	%
Leverage
Consolidated	$	48,803		9.33	%	$	20,923		4.0	%		N/A		N/A
Bank	$	48,089		9.18	%	$	20,954		4.0	%	$	26,192		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 September 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 September 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 September 30, 2015, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

35.

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 September 30, 2015 formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014; (ii) the Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2015 and 2014; (iii) the Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2015 and 2014; (iv) the Condensed Consolidated Statements of Shareholders’ Equity (unaudited) for the three month periods ended September 30, 2015 and 2014; (v) the Consolidated Statements of Cash Flows (unaudited) for the nine month periods ended September 30, 2015 and 2014; and (vi) the Notes to Consolidated Financial Statements.

* Filed herewith. ** Furnished herewith.

36.

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: November 13, 2015	/s/ Ronald J. Seiffert
	Ronald J. Seiffert
	President and Chief Executive Officer
	(Principal Executive Officer)

Dated: November 13, 2015	/s/ J. Daniel Mohr
	J. Daniel Mohr
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

37.

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