DCB FINANCIAL CORP - FORM 10-Q

Attached files

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EX-32.1 - EXHIBIT 32.1 - DCB FINANCIAL CORP	v439543_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - DCB FINANCIAL CORP	v439543_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - DCB FINANCIAL CORP	v439543_ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - DCB FINANCIAL CORP	v439543_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: March 31, 2016

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

Commission file number: 0-22387

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

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

110 Riverbend Avenue, Lewis Center, Ohio 43035

(Address of principal executive offices) (Zip code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

As of May 9, 2016, the latest practicable date, 7,341,362 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 March 31, 2016 (unaudited) and December 31, 2015	3

Consolidated Statements of Income (unaudited) for the three month periods ended March 31, 2016 and 2015	4

Consolidated Statements of Comprehensive Income (unaudited) for the three month periods ended March 31, 2016 and 2015	5

Consolidated Statements of Shareholders’ Equity (unaudited) for the three month periods ended March 31, 2016 and 2015	6

Consolidated Statements of Cash Flows (unaudited) for the three month periods ended March 31, 2016 and 2015	7

Notes to the Consolidated Financial Statements	8

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3 – Quantitative and Qualitative Disclosures about Market Risk	33

Item 4 – Controls and Procedures	33

Part II – Other Information	35

Item 1 – Legal proceedings	35

Item 1A – Risk Factors	35

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3 – Defaults Upon Senior Securities	35

Item 4 – Mine Safety Disclosures	35

Item 5 – Other Information	35

Item 6 – Exhibits	35

Signatures	36

Part I – Financial Information

Item 1. Financial Statements

DCB Financial Corp

Consolidated Balance Sheets

	March 31, 2016			December 31, 2015
	(unaudited)
	(Dollars in thousands, except share and per share data)
Assets:
Cash and due from financial institutions	$	6,097		$	6,929
Interest-bearing deposits		23,700			24,963
Total cash and cash equivalents		29,797			31,892

Securities available-for-sale		85,953			87,797

Loans		391,623			378,513
Less allowance for loan losses		(4,335	)		(4,333	)
Net loans		387,288			374,180

Real estate owned		68			68
Investment in FHLB stock		3,250			3,250
Premises and equipment, net		10,055			5,091
Premises and equipment held-for-sale		-			4,771
Bank-owned life insurance		21,003			20,760
Deferred tax asset, net		10,389			10,440
Accrued interest receivable and other assets		5,003			3,015
Total assets	$	552,806		$	541,264

Liabilities and shareholders’ equity Liabilities:
Deposits:
Non-interest bearing	$	125,106		$	124,023
Interest bearing		337,131			350,514
Total deposits		462,237			474,537

Borrowings		19,512			4,520
Obligations under capital lease		8,176			-
Accrued interest payable and other liabilities		3,605			3,360
Total liabilities		493,530			482,417

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, 7,663,762 and 7,588,887 shares issued, and 7,356,112 and 7,281,237 shares outstanding for March 31, 2016 and December 31, 2015, respectively		16,942			16,410
Retained earnings		49,915			49,799
Treasury stock, at cost, 307,650 shares		(7,416	)		(7,416	)
Accumulated other comprehensive income		739			436
Deferred stock-based compensation		(904	)		(382	)
Total shareholders’ equity		59,276			58,847
Total liabilities and shareholders’ equity	$	552,806		$	541,264

Common shares outstanding		7,356,112			7,281,237
Book value per common share	$	8.06		$	8.08

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

DCB Financial Corp

Consolidated Statements of Income (Unaudited)

	Three months ended March 31,
	2016			2015
	(Dollars in thousands, except share and per share data)
Interest income:
Loans	$	3,882		$	3,952
Securities		507			505
Federal funds sold and interest bearing deposits		36			10
Total interest income		4,425			4,467

Interest expense:
Deposits:
Savings and money market accounts		178			142
Time accounts		77			92
NOW accounts		17			16
Total		272			250

Obligation under capital lease		54			-
FHLB advances		41			35
Total interest expense		367			285

Net interest income		4,058			4,182
Provision for loan losses		-			150
Net interest income after provision for loan losses		4,058			4,032

Non-interest income:
Service charges		498			452
Wealth management fees		422			380
Treasury management fees		91			58
Income from bank-owned life insurance		243			244
Net gains on sales of REO		-			10
Other non-interest income		67			14
Total non-interest income		1,321			1,158

Non-interest expense:
Salaries and employee benefits		3,042			2,712
Occupancy and equipment		973			963
Professional services		370			353
Advertising		170			108
Office supplies, postage and courier		88			79
FDIC insurance premium		88			110
State franchise taxes		116			75
Other non-interest expense		511			551
Total non-interest expense		5,358			4,951

Income before income tax benefit		21			239
Income tax benefit		(95	)		-
Net income	$	116		$	239

Share and Per Share Data
Basic average common shares outstanding		7,311,238			7,237,371
Diluted average common shares outstanding		7,330,881			7,253,840
Basic and diluted earnings per common share	$	0.02		$	0.03

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

DCB Financial Corp

Consolidated Statements of Comprehensive Income (Unaudited)

	Three months ended March 31,
	2016		2015
	(In thousands)
Net income	$	116	$	239

Other comprehensive income:

Net unrealized gains on securities available-for-sale, net of taxes of $156 and $100 in 2016 and 2015.		303		194

Total other comprehensive income		303		194

Comprehensive income	$	419	$	433

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, 2015		7,233,797		$	-	$	16,064	$	38,055	$	(7,416	)	$	654	$	(146	)	$	47,211
Net income		-			-		-		239		-			-		-			239
Other comprehensive income, net of taxes		-			-		-		-		-			194		-			194
Issuance of restricted stock		53,640			-		392		-		-			-		(392	)		-
Amortization of restricted stock		-			-		-		-		-			-		7			7
Balance at March 31, 2015		7,287,437		$	-	$	16,456	$	38,294	$	(7,416	)	$	848	$	(531	)	$	47,651

Balance at January 1, 2016		7,281,237		$	-	$	16,410	$	49,799	$	(7,416	)	$	436	$	(382	)	$	58,847
Net income		-			-		-		116		-			-		-			116
Other comprehensive income, net of taxes		-			-		-		-		-			303		-			303
Issuance of restricted stock		76,607			-		532		-		-			-		(532	)		-
Restricted stock withheld upon vesting for payment of taxes		(1,732	)		-		-		-		-			-		-			-
Amortization of restricted stock		-			-		-		-		-			-		10			10
Balance at March 31, 2016		7,356,112		$	-	$	16,942	$	49,915	$	(7,416	)	$	739	$	(904	)	$	59,276

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

DCB Financial Corp

Consolidated Statements of Cash Flows (Unaudited)

	Three months ended March 31,
	2016			2015
	(In thousands)
Cash flows from operating activities
Net income	$	116		$	239
Adjustments to reconcile net income to net cash (used in ) provided by operating activities:
Depreciation		221			254
Provision for loan losses		-			150
Deferred taxes		(95	)		-
Net gain on sale of real estate owned		-			(10	)
Net stock-based compensation expense		(39	)		7
Premium amortization on securities, net		238			246
Earnings on bank owned life insurance		(243	)		(244	)
Net changes in other assets and other liabilities		(1,704	)		(535	)
Net cash (used in) provided by operating activities		(1,506	)		107

Cash flows from investing activities
Purchases of securities available-for-sale		(3,706	)		(12,212	)
Proceeds from maturities, principal payments and calls of securities available-for-sale		5,771			2,326
Net change in loans		(7,578	)		7,901
Net proceeds from sale of premises and equipment		2,347			-
Proceeds from sale of real estate owned		-			181
Premises and equipment expenditures		(61	)		(129	)
Net cash used in investing activities		(3,227	)		(1,933	)

Cash flows from financing activities
Net change in deposits		(12,300	)		11,604
Proceeds from short-term borrowings		15,000			-
Repayment of capital lease		(54	)		-
Repayment of borrowings		(8	)		(7,007	)
Net cash provided by financing activities		2,638			4,597

Net change in cash and cash equivalents		(2,095	)		2,771
Cash and cash equivalents at beginning of period		31,892			21,274
Cash and cash equivalents at end of period	$	29,797		$	24,045

Supplemental disclosures of cash flow information
Cash paid during the period for interest on deposits and borrowings	$	372		$	269
Non-cash investing and financing activities:
Loan to finance sale of premises and equipment		5,530			-
Capital lease obligation		8,230			-

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

Note 1 – Summary of Significant Accounting Policies

Unless the context indicates otherwise, all references in this report to “Delaware,” “DCB,” “we,” “us,” “our company,” “corporation” and “our” refer to DCB Financial Corp and its direct and indirect subsidiaries Delaware County Bank and Trust Company, our wholly owned bank subsidiary (the “Bank”), DCB Title Services, LLC, DCB Insurance Services, LLC, DataTasx LLC, ORECO, Inc., and 110 Riverbend, LLC.

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

We also have two wholly-owned, non-bank subsidiaries, DCB Title Services, LLC, an Ohio limited liability company (“DCB Title”) and DCB Insurance Services, LLC, an Ohio limited liability company (“DCB Insurance”). DCB Title provides standard real estate title services, while DCB Insurance provides a variety of insurance products. The activities of each of these subsidiaries are not material to our operations. The Bank has two wholly-owned subsidiaries, ORECO, Inc., an Ohio corporation, which is used to hold the Bank’s foreclosed real estate, and 110 Riverbend, LLC, which was used to hold real estate owned by the Bank prior to the sale of such real estate in January 2016.

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, 2015, 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, 2015. Accordingly, only material changes in the results of operations and financial condition are discussed in the remainder of Part I. Certain amounts from prior year periods are reclassified, when necessary, to conform to the current period presentation.

All adjustments, consisting of only normal recurring items, that in the opinion of management are necessary for a fair presentation of the financial statements have been included in the results of operations for the three months ended March 31, 2016 and 2015. The results of operations 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 Common Share

Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the period which excludes the participating securities. All outstanding unvested restricted stock awards containing rights to non-forfeitable dividends are considered participating securities for this calculation. Diluted earnings per common share includes the dilutive effect of additional potential common shares from stock compensation awards, but excludes awards considered participating securities.

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.

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

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

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

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

Allowance for Loan Losses

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

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

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

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.

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.

10.

New Accounting Pronouncements

Recently Issued Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:

A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and

A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted. The Company is currently evaluating the effect the guidance will have on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in ASU 2016-01 supersede the guidance to classify equity securities with readily determinable fair values into different categories (that is, trading or available-for-sale) and require equity securities (including other ownership interests, such as partnerships, unincorporated joint ventures, and limited liability companies) to be measured at fair value with changes in the fair value recognized through net income. The amendments allow equity investments that do not have readily determinable fair values to be re-measured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. The amendments also require enhanced disclosures about those investments. The amendments improve financial reporting by providing relevant information about an entity’s equity investments and reducing the number of items that are recognized in other comprehensive income. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The adoption of this guidance is not expected to have a material effect on the Company’s financial position or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This new guidance supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for those goods and services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In April 2015, the FASB approved deferral of the effective date of this guidance, which is now effective prospectively for the Company for annual and interim periods beginning after December 15, 2017. The Company is currently evaluating the effect the guidance will have on the Company’s consolidated financial statements.

11.

Note 2 – Securities

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

	March 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government and agency obligations	$	20,539	$	52	$	39	$	20,552
Corporate bonds		3,708		48		6		3,750
States and municipal obligations		20,997		542		32		21,507
Collateralized mortgage obligations		22,393		78		57		22,414
Mortgage-backed securities		17,196		546		12		17,730
Total	$	84,833	$	1,266	$	146	$	85,953

	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

U.S. Government and agency obligations	$	20,904	$	26	$	88	$	20,842
Corporate bonds		3,714		26		13		3,727
States and municipal obligations		21,954		388		81		22,261
Collateralized mortgage obligations		22,862		46		107		22,801
Mortgage-backed securities		17,702		505		41		18,166
Total	$	87,136	$	991	$	330	$	87,797

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):

	March 31, 2016
	(Less than 12 months)						(12 months or longer)						Total
Description of securities	Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses
U.S. Government and agency obligations		5	$	8,010	$	39		-	$	-	$	-		5	$	8,010	$	39
Corporate bonds		1		259		4		1		500		2		2		759		6
State and municipal obligations		3		1,353		17		3		1,111		15		6		2,464		32
Collateralized mortgage obligations		9		5,216		21		6		2,763		36		15		7,979		57
Mortgage-backed securities		3		3,073		12		-		-		-		3		3,073		12
Total temporarily impaired securities		21	$	17,911	$	93		10	$	4,374	$	53		31	$	22,285	$	146

	December 31, 2015
	(Less than 12 months)						(12 months or longer)						Total
Description of securities	Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses
U.S. Government and agency obligations		14	$	15,333	$	55		2	$	1,964	$	33		16	$	17,297	$	88
Corporate bonds		2		759		5		3		1,400		8		5		2,159		13
State and municipal obligations		9		3,902		48		4		1,355		33		13		5,257		81
Collateralized mortgage obligations		13		11,298		63		6		2,551		44		19		13,849		107
Mortgage-backed securities		5		5,176		41		-		-		-		5		5,176		41
Total temporarily impaired securities		43	$	36,468	$	212		15	$	7,270	$	118		58	$	43,738	$	330

The unrealized losses on the Company’s investments in U.S. Government and agency obligations, state and political subdivision obligations, corporate bonds and mortgage-backed securities were caused primarily by changes in interest rates. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be OTTI at March 31, 2016 or December 31, 2015.

12.

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

There were no sales of securities in the three months ended March 31, 2016 and 2015.

At March 31, 2016, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.

The amortized cost and estimated fair value of all debt securities at March 31, 2016, 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	$	3,731	$	3,732
Due after one to five years		23,312		23,463
Due after five to ten years		21,148		21,495
Due after ten years		19,446		19,533
Mortgage-backed and related securities		17,196		17,730
Total	$	84,833	$	85,953

Securities with a fair value of $77.5 million at March 31, 2016 were pledged to secure public deposits and other obligations.

Note 3 – Loans

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

	March 31, 2016			December 31, 2015
Consumer and credit card	$	39,829		$	40,587
Residential real estate and home equity		142,907			137,645
Commercial and industrial		101,679			99,213
Commercial real estate		106,742			100,743
		391,157			378,188

Net deferred loan costs		466			325
Loans	$	391,623		$	378,513
Allowance for loan losses		(4,335	)		(4,333	)
Net loans	$	387,288		$	374,180

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.

13.

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 losses based on historical and market data for homogenous loan portfolios. As the Company’s troubled loan portfolios have been reduced through paydowns, payoffs, credit improvement and charge-offs, the remaining loan portfolios possess better overall credit characteristics, and based on the Company’s methodology require lower rates of reserving than historical levels.

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

	Three months ended March 31, 2016
	Consumer and Credit Card			Residential Real Estate and Home Equity			Commercial and Industrial			Commercial Real Estate		Unallocated			Total
Beginning balance	$	144		$	561		$	1,321		$	1,999	$	308		$	4,333
Charge-offs		(55	)		-			-			-					(55	)
Recoveries		15			13			14			15					57
Net (charge-offs) recoveries		(40	)		13			14			15					2

Provision		35			(26	)		(10	)		66		(65	)		-
Ending balance	$	139		$	548		$	1,325		$	2,080	$	243		$	4,335

	Three months ended March 31, 2015
	Consumer and Credit Card			Residential Real Estate and Home Equity			Commercial and Industrial			Commercial Real Estate			Unallocated		Total
Beginning balance	$	190		$	268		$	1,132		$	2,376		$	270	$	4,236
Charge-offs		(42	)		(29	)		(310	)		(48	)				(429	)
Recoveries		28			9			88			7					132
Net charge-offs		(14	)		(20	)		(222	)		(41	)				297

Provision		7			20			127			(18	)		14		150
Ending balance	$	183		$	268		$	1,037		$	2,317		$	284	$	4,089

14.

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 March 31, 2016						Period ended March 31, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Three months Average Recorded Investment		Three months Interest Income Recognized
With no related allowance recorded:
Consumer and credit card	$	472	$	472			$	497	$	7
Residential real estate and home equity		656		656				660		-
Commercial and industrial		1,170		1,170				1,003		7
Commercial real estate		123		123				125		2
		2,421		2,421				2,285		16
With an allowance recorded:
Commercial and industrial	$	1,118	$	1,196	$	144	$	1,141	$	12
Commercial real estate		4,675		4,675		436		4,685		54
		5,793		5,871		580		5,826		66
Total:
Consumer and credit card	$	472	$	472	$	-	$	497	$	7
Residential real estate and home equity		656		656		-		660		-
Commercial and industrial		2,288		2,366		144		2,144		19
Commercial real estate		4,798		4,798		436		4,810		56
Total	$	8,214	$	8,292	$	580	$	8,111	$	82

	At December 31, 2015						Period ended March 31, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Three months Average Recorded Investment		Three months Interest Income Recognized
With no related allowance recorded:
Consumer and credit card	$	548	$	548			$	449	$	5
Residential real estate and home equity		668		668				-		-
Commercial and industrial		926		926				1,266		7
Commercial real estate		126		126				729		0
		2,268		2,268				2,444		12
With an allowance recorded:
Commercial and industrial		944		1,021		144		817		13
Commercial real estate		4,579		4,579		435		8,350		138
		5,523		5,600		579		9,167		151
Total:
Consumer and credit card	$	548	$	548	$	-	$	449	$	5
Residential real estate and home equity		668		668		-		-		-
Commercial and industrial		1,870		1,947		144		2,083		20
Commercial real estate		4,705		4,705		435		9,079		138
Total	$	7,791	$	7,868	$	579	$	11,611	$	163

15.

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		Residential Real Estate and Home Equity		Commercial and Industrial		Commercial Real Estate		Total
March 31, 2016
Individually evaluated for impairment	$	-	$	-	$	144	$	436	$	580
Collectively evaluated for impairment		139		548		1,181		1,644		3,512
Allocated	$	139	$	548	$	1,325	$	2,080		4,092
Unallocated										243
									$	4,335

December 31, 2015
Individually evaluated for impairment	$	-	$	-	$	144	$	435	$	579
Collectively evaluated for impairment		144		561		1,177		1,564		3,446
Allocated	$	144	$	561	$	1,321	$	1,999		4,025
Unallocated										308
									$	4,333

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		Residential Real Estate and Home Equity		Commercial and Industrial		Commercial Real Estate		Total
March 31, 2016
Individually evaluated for impairment	$	472	$	656	$	2,288	$	4,798	$	8,214
Collectively evaluated for impairment		39,357		142,251		99,391		101,944		382,943
Ending balance	$	39,829	$	142,907	$	101,679	$	106,742	$	391,157

	Consumer and Credit Card		Residential Real Estate and Home Equity		Commercial and Industrial		Commercial Real Estate		Total
December 31, 2015
Individually evaluated for impairment	$	548	$	668	$	1,870	$	4,705	$	7,791
Collectively evaluated for impairment		40,039		136,977		97,343		96,038		370,397
Ending balance	$	40,587	$	137,645	$	99,213	$	100,743	$	378,188

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

	March 31,		December 31,
	2016		2015
Consumer and credit card	$	-	$	-
Residential real estate and home equity		656		668
Commercial and industrial		531		554
Commercial real estate		-		-
Total	$	1,187	$	1,222

16.

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):

	March 31, 2016				December 31, 2015
	Commercial and Industrial		Commercial Real Estate		Commercial and Industrial		Commercial Real Estate

Pass	$	98,544	$	97,050	$	96,225	$	91,132
Special mention		1,173		4,709		925		4,592
Substandard		1,962		4,983		2,063		5,019
Total	$	101,679	$	106,742	$	99,213	$	100,743

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):

	March 31, 2016				December 31, 2015
	Consumer and Credit Card		Residential Real Estate and Home Equity		Consumer and Credit Card		Residential Real Estate and Home Equity

Performing	$	39,829	$	142,154	$	40,587	$	136,975
Non-performing		-		753		-		670
Total	$	39,829	$	142,907	$	40,587	$	137,645

17.

Age Analysis of Past Due Loans

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

	March 31, 2016
	30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due		Total Past Due		Loans Not Past Due		Total Loans
Consumer and credit card	$	9	$	14	$	-	$	23	$	39,806	$	39,829
Residential real estate and home equity		183		43		497		723		142,184		142,907
Commercial and industrial		36		-		-		36		101,643		101,679
Commercial real estate		150		-		-		150		106,592		106,742
Total	$	378	$	57	$	497	$	932	$	390,225	$	391,157

	December 31, 2015
	30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due		Total Past Due		Loans Not Past Due		Total Loans
Consumer and credit card	$	48	$	13	$	-	$	61	$	40,526	$	40,587
Residential real estate and home equity		160		98		401		659		136,986		137,645
Commercial and industrial		236		-		-		236		98,977		99,213
Commercial real estate		-		-		-		-		100,743		100,743
Total	$	444	$	111	$	401	$	956	$	377,232	$	378,188

Troubled Debt Restructurings

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

	For the three months ended March 31,
	2016				2015
	Number of Contracts		Recorded Investment (as of period end)		Number of Contracts		Recorded Investment (as of period end)
Commercial real estate		3	$	183		-	$	-

Total		3	$	183		-	$	-

There were no loans modified in a TDR that subsequently defaulted within twelve months of the modification (i.e. 60 days or more past due) during the three months ended March 31, 2016 and 2015.

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.

18.

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

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

Note 5 – Fair Value Measurements

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

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

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

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

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

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.

19.

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

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

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

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

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

Advances from the Federal Home Loan Bank: The fair value of these advances is estimated using the rates currently offered for similar advances of similar remaining maturities (Level 2).

Commitments to Extend Credit: For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. At March 31, 2016 and December 31, 2015, the fair value of loan commitments was not material.

20.

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):

	March 31, 2016
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	29,797	$	29,797	$	29,797	$	-	$	-
Securities available-for-sale		85,953		85,953		-		85,953		-
Loans (net of allowance)		387,288		389,835		-		-		389,835
FHLB stock		3,250		3,250		-		3,250		-
Accrued interest receivable		1,515		1,515		-		-		1,515

Financial liabilities
Non-interest-bearing deposits	$	125,106	$	125,106	$	-	$	125,106	$	-
Interest-bearing deposits		337,131		337,151		-		337,151		-
Borrowings		19,512		19,512		-		19,512		-
Accrued interest payable		69		69		-		-		69

	December 31, 2015
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	31,892	$	31,892	$	31,892	$	-	$	-
Securities available-for-sale		87,797		87,797		-		87,797		-
Loans (net of allowance)		374,180		371,930		-		-		371,930
FHLB stock		3,250		3,250		-		3,250		-
Accrued interest receivable		1,307		1,307		-		-		1,307

Financial liabilities
Non-interest-bearing deposits	$	124,023	$	124,023	$	-	$	124,023	$	-
Interest-bearing deposits		350,514		350,957		-		350,957		-
Borrowings		4,520		4,520		-		4,520		-
Accrued interest payable		74		74		-		-		74

21.

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):

	March 31, 2016
			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	$	20,552	$	-	$	20,552	$	-
Corporate bonds		3,750		-		3,750		-
State and municipal obligations		21,507		-		21,507		-
Collateralized mortgage obligations		22,414		-		22,414		-
Mortgage-backed securities		17,730		-		17,730		-
Total	$	85,953	$	-	$	85,953	$	-

	December 31, 2015
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government and agency obligations	$	20,842	$	-	$	20,842	$	-
Corporate bonds		3,727		-		3,727		-
State and municipal obligations		22,261		-		22,261		-
Collateralized mortgage obligations		22,801		-		22,801		-
Mortgage-backed securities		18,166		-		18,166		-
Total	$	87,797	$	-	$	87,797	$	-

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

Impaired loans

At March 31, 2016 and December 31, 2015, 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.

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).

	March 31, 2016
	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	$	8,214	$	-	$	-	$	8,214
Real estate owned		68		-		-		68

	December 31, 2015
	Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2 )		Significant Unobservable Inputs (Level 3)
Impaired loans	$	7,791	$	-	$	-	$	7,791
Real estate owned		68		-		-		68

Note 6 – Sale-Leaseback and Capital Lease Obligation

In January 2016, the Company entered into a sale-leaseback of its corporate headquarters building. Under the arrangement, the Company sold and leased the building back for a period of fifteen years, with options to extend the term of the lease for two additional periods of ten years each. The gain of $3.1 million realized in the transaction has been netted against the right of use asset and will result in a reduction of depreciation expense over the term of the lease.

The lease has been accounted for as a capital lease, and the building is included in property and equipment. The present value of the net minimum lease payments has been capitalized and is being amortized over the life of the lease. Under the terms of the lease agreements, minimum payments of $54,000 are due monthly, increasing 2% annually thereafter, through January 2031. The lease has been imputed with interest at an annual rate of 3.91%.

At March 31, 2016, property under capital leases consists of the corporate headquarters with a cost, net of the deferred gain, of $5.1 million. Accumulated depreciation on the property under capital leases was $68,000 at March 31, 2016.

Depreciation expense on property under capital leases was $68,000 for the three months ended March 31, 2016.

The future minimum lease payments under capital leases are as follows (in thousands):

2016	$	642
2017		655
2018		668
2019		682
2020		695
Thereafter		7,765
Total minimum lease payments		11,107
Less amounts representing interest		2,834
Present value of net minimum lease payments	$	8,273

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
	March 31,
	2016			2015
Current	$	10		$	-
Deferred		(105	)		(20	)
Valuation allowance		-			20
Total	$	(95	)	$	-

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
	March 31,
	2016			2015
Federal income taxes compared at the expected statutory rate	$	7		$	81
Increase (decrease) in taxes resulting from:
Nontaxable dividend and interest income		(7	)		(9	)
Increase in cash surrender value of life insurance - net		(83	)		(83	)
Other		(12	)		(9	)
Valuation allowance		-			20
Income tax benefit per financial statements	$	(95	)	$	-

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

	March 31, 2016			December 31, 2015
Deferred tax assets:
Allowance for loan losses	$	1,473		$	1,473
Gain on sale of fixed asset		1,540			-
Deferred compensation		311			300
Alternative minimum tax carry forward		163			155
Expenses on foreclosed property		10			14
NOL carry forward		7,678			9,020
Other		(29	)		98
Subtotal		11,146			11,060
Deferred tax liabilities:
FHLB stock dividends		(307	)		(307	)
Unrealized gains on available-for-sale securities		(381	)		(225	)
Depreciation		(35	)		(55	)
Other		(34	)		(33	)
Subtotal		(757	)		(620	)
Net deferred tax asset		10,389			10,440
Less: valuation allowance		-			-
Total	$	10,389		$	10,440

At March 31, 2016, the Company had a $22.6 million net operating loss carryforward that begins to expire in 2030.

24.

Note 8 - Earnings per Common Share

The Company issued restricted stock awards with non-forfeitable dividend rights, which are considered participating securities. As such, earnings per share is computed using the two-class method as required by Accounting Standard Codification (“ASC”) 206-10-45. Basic earnings per common share is computed by dividing net income allocated to common stock by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted earnings per common share includes the dilutive effect of additional potential common shares from stock compensation awards and warrants, but excludes awards considered participating securities.

Basic and diluted net income per common share calculations for the three months ended March 31 are as follows (in thousands, except share and per share amounts):

	2016			2015
Basic
Net income	$	116		$	239
Less: undistributed earnings allocated to unvested restricted shares		(2	)		(1	)
Net earnings allocated to common shareholders	$	114		$	238

Weighted average common shares outstanding including shares considered participating securities		7,311,238			7,237,371
Less: average participating securities		(118,886	)		(44,425	)
Weighted average shares		7,192,352			7,192,946

Basic earnings per common share	$	0.02		$	0.03

Diluted
Net earnings allocated to common shareholders	$	114		$	238

Weighted average common shares outstanding for basic earnings per common share		7,192,352			7,192,946
Dilutive effect of assumed exercise of average participating securities		19,643			16,469
Average participating securities		118,886			44,425
Average common shares outstanding – diluted		7,330,881			7,253,840

Diluted per common share	$	0.02		$	0.03

The computation of earnings per share is based upon the following weighted-average shares outstanding for the three months ended March 31:

	2016		2015
Weighted-average common shares outstanding (basic)		7,311,238		7,237,371
Dilutive effect of assumed exercise of stock options		19,643		16,469
Weighted-average common shares outstanding (diluted)		7,330,881		7,253,840

At March 31, 2016 and 2015, 9,979 of anti-dilutive stock options were excluded from the diluted weighted average common share calculations.

25.

Note 9 – Stock Based Compensation

Awards for 76,607 and 53,640 restricted shares were granted under the Company’s 2014 Restricted Stock Plan during the three months ended March 31, 2016 and 2015, respectively. The awards vest ratably over a five-year period. There were no forfeitures of restricted shares in the three months ended March 31, 2016 and 2015, respectively. There were 148,845 and 81,732 unvested restricted shares at March 31, 2016 and December 31, 2015, respectively. Compensation expense associated with the amortization of restricted stock was $10,000 and $7,000 in the quarter ended March 31, 2016 and 2015, respectively.

26.

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

Introduction

We offer full-service banking with a broad range of financial products to meet the needs of our commercial, retail, government, and investment management customers located primarily in Delaware, Franklin and Union Counties in Ohio. Depository account services include interest and non-interest-bearing checking accounts, money market accounts, savings accounts, time deposit accounts, and individual retirement accounts. Our lending activities include the making of residential and commercial mortgage loans, business lines of credit, working capital facilities and business term loans, as well as installment loans, home equity loans, and personal lines of credit to individuals. Investment management and trust services include personal trust, employee benefit trust, investment management, custodial, and financial planning. Through Raymond James Financial Services, Inc., member FINRA/SIPC, we provide financial counseling and brokerage services. We also offer safe deposit boxes, wire transfers, collection services, drive-up banking facilities, 24-hour night depositories, automated teller machines, 24-hour telephone banking, and internet banking.

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.

27.

Overview of the first quarter of 2016

Total assets were $552.8 million at March 31, 2016, compared with $541.3 million at December 31, 2015.

Total loans were $391.6 million at March 31, 2016, compared with $378.5 million at December 31, 2015.

Total deposits were $462.2 million at March 31, 2016, compared with $474.5 million at December 31, 2015.

Net income was $116,000 for the three months ended March 31, 2016, compared with $239,000 for the year-ago quarter and $273,000 for the fourth quarter of 2015.

Net income per diluted share was $0.02 for the three months ended March 31, 2016, compared with $0.03 for the year-ago quarter and $0.04 for the fourth quarter of 2015.

Net interest income was $4.1 million for the three months ended March 31, 2016, compared with $4.2 million in each of the first quarter of 2015 and the fourth quarter of 2015.

The net interest margin was 3.27% for the three months ended March 31, 2016, compared with 3.50% in the year-ago quarter and 3.33% in the fourth quarter of 2015.

There was no provision for loan losses recorded in the first quarter of 2016, compared to a provision for loan losses of $150,000 in the first quarter of 2015.

Non-interest income was 24.6% of total revenue in the quarter ended March 31, 2016, compared to 21.5% in the year-ago quarter and 22.6% in the fourth quarter of 2015.

Our efficiency ratio was 99.6% for the three months ended March 31, 2016, compared to 92.9% in the year-ago quarter and 95.0% in the fourth quarter of 2015.

An income tax benefit of $95,000 was recognized in the first quarter of 2016. There was no income tax expense nor income tax benefit recorded in the first quarter of 2015.

Total non-performing assets (including troubled debt restructurings “TDR’s”) were $7.7 million or 1.40% of total assets at March 31, 2016, compared to $7.3 million or 1.35% of total assets at December 31, 2015.

Total non-performing assets (excluding TDR’s) were $1.4 million or 0.24% of total assets at March 31, 2016, compared to $1.3 million or 0.24% at December 31, 2015.

Comparison of Results of Operations

General

Net income was $116,000 or $0.02 per diluted share for the three months ended March 31, 2016, compared to net income of $239,000 or $0.03 per diluted share for the same period in 2015.

Net Interest Income

Net interest income totaled $4.1 million in the quarter ended March 31, 2016, compared to $4.2 million in each of the first quarter of 2015 and the fourth quarter of 2015. The net interest margin was 3.27% in the first quarter of 2016, compared to 3.50% in the year-ago quarter and 3.33% in the fourth quarter of 2015.

The decline in the net interest margin from the year-ago quarter was due primarily to the reinvestment of loan amortization and payoffs into investment securities and loans with lower current yields, as well as from the effect of higher interest-bearing cash balances. Total average interest-earning assets were $495.9 million in the first quarter of 2016, compared to $484.9 million in the year-ago quarter and $500.4 million in the fourth quarter of 2015. Average loans outstanding in the first quarter of 2016 were $381.7 million or 77.0% of total average interest-earning assets, compared with $381.1 million or 78.6% in the year-ago quarter and $380.5 million or 76.0% in the fourth quarter of 2015.

Total average interest-bearing deposit balances decreased $6.3 million to $349.3 million in the first quarter of 2016 compared to the year-ago quarter, due primarily to a decrease in municipal deposit balances. The average balances of interest-bearing demand, savings and money market accounts (transaction accounts) increased $8.4 million to $287.6 million in the first quarter of 2016 compared to the year-ago quarter, partially offsetting a decrease in the average balance of time deposits of $14.7 million. Transaction accounts comprised 82.3% of total interest-bearing deposits in the first quarter of 2016, compared to 78.5% in the year-ago quarter and 79.7% in the fourth quarter of 2015.

28.

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 March 31,
	2016								2015
	Outstanding balance			Interest Earned/paid		Yield/rate			Outstanding balance			Interest Earned/paid		Yield/rate
Assets
Interest earning assets:
Interest bearing deposits	$	25,095		$	36		0.57	%	$	19,742		$	10		0.20	%

Investment securities		89,060			507		2.25	%		83,989			505		2.41	%

Consumer loans and credit cards		40,536			515		5.10	%		38,119			503		5.35	%
Residential real estate loans and home equity		139,558			1,317		3.79	%		133,552			1,265		3.83	%
Commercial and industrial		98,205			918		3.70	%		102,315			998		3.89	%
Commercial real estate		103,439			1,132		4.26	%		107,139			1,186		4.49	%
Total loans		381,738			3,882		4.03	%		381,125			3,952		4.18	%
Total interest-earning assets		495,893			4,425		3.54	%		484,856			4,467		3.71	%

Non-interest-earning assets:
Other assets		60,105								45,230
Allowance for loan losses		(4,340	)							(4,208	)
Net unrealized gains on securities AFS		1,116								1,179
Total assets	$	552,774							$	527,057

Liabilities and shareholders’ equity
Interest-bearing liabilities:
Interest-bearing demand	$	81,985		$	45		0.22	%	$	81,409		$	22		0.11	%
Savings		47,923			13		0.11	%		42,757			10		0.10	%
Money market		157,670			137		0.35	%		155,038			125		0.33	%
Time accounts		61,740			77		0.50	%		76,418			93		0.49	%
Total interest-bearing deposits		349,318			272		0.31	%		355,622			250		0.29	%
Borrowed funds		9,517			41		1.71	%		6,372			35		2.25	%
Obligations under capital lease		8,203			54		2.63	%		-			-		-

Total interest-bearing liabilities		367,038			367		0.40	%		361,994			285		0.32	%

Non-interest-bearing liabilities and shareholders’ equity:
Demand deposits		121,827								113,067
Other liabilities		5,836								5,387
Shareholders’ equity		58,073								46,609

Total liabilities and shareholders’ equity	$	552,774							$	527,057

Net interest income; interest rate spread				$	4,058		3.14	%				$	4,182		3.39	%

Net interest margin (net interest income as a percent of average interest-earning assets)							3.27	%							3.50	%

Average interest-earning assets to average interest-bearing liabilities		135.11	%							133.94	%

29.

Asset Quality and Allowance for Loan Losses

Delinquent loans (including non-accrual loans) totaled $1.7 million or 0.43% of total loans at March 31, 2016, compared to $1.5 million or 0.41% of total loans at December 31, 2015. Non-accrual loans totaled $1.2 million or 0.30% of total loans at March 31, 2016, compared to $1.2 million or 0.32% of total loans at December 31, 2015.

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

Delinquent loans	March 31, 2016					December 31, 2015					September 30, 2015
	$		%⁽¹⁾			$		%⁽¹⁾			$		%⁽¹⁾

30 days past due	$	378		0.10	%	$	191		0.05	%	$	60		0.02	%
60 days past due		57		0.01	%		111		0.03	%		129		0.03	%
90 days past due and still accruing		97		0.02	%		2		0.01	%		—		0.00	%
Non-accrual		1,187		0.30	%		1,222		0.32	%		1,338		0.35	%
Total	$	1,719		0.43	%	$	1,526		0.41	%	$	1,527		0.40	%

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

Non-performing assets were $7.7 million or 1.40% of total assets at March 31, 2016, compared with $7.3 million or 1.35% of total assets at December 31, 2015. Troubled debt restructurings (“TDR’s”), which are performing in accordance with the restructured terms and accruing interest, but are included in non-performing assets, were $6.4 million at March 31, 2016, compared to $6.0 million at December 31, 2015.

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

Non-performing assets	March 31, 2016		December 31, 2015		September 30, 2015
Non-accruing loans:
Consumer loans and credit cards	$	-	$	-	$	56
Residential real estate loans and home equity		656		668		573
Commercial and industrial		531		554		30
Commercial real estate		-		-		679
Total non-accruing loans		1,187		1,222		1,338
Accruing loans delinquent 90 days or more		97		2		-
Total non-performing loans (excluding TDR’s)		1,284		1,224		1,338

Other real estate and repossessed assets		68		68		785
Total non-performing assets (excluding TDR’s)	$	1,352	$	1,292	$	2,123

Restructured loans not included above⁽¹⁾	$	6,374	$	6,040	$	6,089
Total non-performing loans (including TDR’s)	$	7,658	$	7,264	$	7,427
Total non-performing assets (including TDR’s)	$	7,726	$	7,332	$	8,212

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

Net recoveries of $2,000 were recorded in the quarter ended March 31, 2016, compared to net charge-offs of $297,000 or 0.31% of average loans in the first quarter of 2015. There was no provision for loan losses recorded in the first quarter of 2016, compared to a provision for loan losses of $150,000 in the year-ago quarter. The allowance for loan losses was $4.3 million at March 31, 2016 and at December 31, 2015. The ratio of the allowance for loan losses to total loans was 1.11% at March 31, 2016, compared to 1.14% at December 31, 2015.

The ratio of the allowance for loan losses to non-performing loans (including TDR’s) was 56.6% at March 31, 2016, compared to 59.7% at December 31, 2015. The ratio of the allowance for loan losses to non-accrual loans was 365% at March 31, 2016, compared to 355% at December 31, 2015.

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 March 31, 2016, $243,000 or 5.6% of the allowance for loan losses was considered to be “unallocated,” compared to $308,000 or 7.1% of the allowance for loan losses at December 31, 2015.

30.

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 March 31,
	2016			2015
Allowance for loan losses, beginning of period	$	4,333		$	4,236

Loans charged-off		(55	)		(429	)
Recoveries of loans previously charged-off		57			132
Net recoveries (charge-offs)		2			(297	)
Provision for loan losses		-			150
Allowance for loan losses, end of period	$	4,335		$	4,089

Non-interest Income

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

	Three months ended March 31,
	2016		2015		$ Change			% Change
Service charges	$	498	$	452	$	46			10.2	%
Wealth management fees		422		380		42			11.1	%
Treasury management fees		91		58		33			56.9	%
Income from Bank-owned life insurance		243		244		(1	)		(0.4	)%
Net losses on sale of REO		-		10		(10	)		(100.0	)%
Other non-interest income		67		14		53			378.6	%
Total non-interest income	$	1,321	$	1,158	$	163			14.1	%

Non-interest income was $1.3 million in the first quarter of 2016, compared to $1.2 million in the first quarter of 2015 and $1.3 million in the fourth quarter of 2015. Service charges, wealth management fees and treasury management fees increased an aggregate $121,000 or 13.6% in the first quarter of 2016 compared with the year-ago quarter, primarily from the impact of changes to certain of the Bank’s fees and service charges and from business development activities.

Non-interest income accounted for 24.6% of total revenue in the first quarter of 2016, compared with 21.5% in the year-ago quarter and 22.6% in the fourth quarter of 2015.

Non-interest Expense

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

	Three months ended March 31,
	2016		2015		$ Change			% Change
Salaries and benefits	$	3,042	$	2,712	$	330			12.2	%
Occupancy and equipment		973		963		10			1.04	%
Professional services		370		353		17			4.8	%
Advertising		170		108		62			57.4	%
Office supplies, postage and courier		88		79		9			11.4	%
FDIC insurance premium		88		110		(22	)		(20.0	)%
State franchise taxes		116		75		41			54.7	%
Other non-interest expense		511		551		(40	)		(7.3	)%
Total non-interest expenses	$	5,358	$	4,951	$	407			8.2	%

Non-interest expenses were $5.4 million for the first quarter of 2016, compared with $5.0 million in the year-ago quarter and $5.2 million for the fourth quarter of 2015. Salaries and benefits increased in the first quarter of 2016 by $330,000 and $132,000 compared to the year-ago quarter and to the fourth quarter of 2015, respectively, due primarily to the previously-announced hiring of the small business lending team and residential mortgage originators in the fourth quarter of 2015. State franchise taxes increased $41,000 or 54.7% in the first quarter of 2016 compared with the year-ago quarter due to a change in Ohio tax law enacted in the fourth quarter of 2015.

The Company’s efficiency ratio was 99.6% in the first quarter of 2016, compared with 92.9% in the year-ago quarter and 95.0% in the fourth quarter of 2015.

31.

Income Taxes

We had net deferred tax assets totaling $10.4 million at March 31, 2016, compared with $10.4 million at December 31, 2015, 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. An income tax benefit of $95,000 was recognized in the first quarter of 2016 due primarily to the disproportionate amount of pre-tax income that is not subject to federal income taxes, which is comprised primarily of income from bank-owned life insurance of $243,000 in the first quarter of 2016.

Comparison of Financial Condition at March 31, 2016 and December 31, 2015

Total assets were $552.8 million at March 31, 2016, compared with $541.3 million at December 31, 2015. Much of the increase in assets during the quarter was in the Company’s loan portfolio, which increased $13.1 million or 3.5%, to $391.6 million at March 31, 2016.

Securities

Investment securities totaled $86.0 million at March 31, 2016, compared with $87.8 million at December 31, 2015. Our portfolio was comprised primarily of investment grade securities. The breakdown of the securities portfolio at March 31, 2016 was 26.1% collateralized mortgage obligations, 20.6% government-sponsored entity guaranteed mortgage-backed securities, 25.0% municipal securities, 23.9% obligations of U.S. government agencies and 4.4% corporate bonds.

Loans

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

	March 31, 2016						December 31, 2015
	Amount			Percent			Amount			Percent
Loan portfolio composition
Consumer and credit card	$	39,829			10.2	%	$	40,587			10.7	%
Real estate and home equity		142,907			36.5	%		137,645			36.4	%
Commercial and industrial		101,679			26.0	%		99,213			26.2	%
Commercial real estate		106,742			27.3	%		100,743			26.7	%
Total loans	$	391,157			100.0	%	$	378,188			100.0	%

Net deferred loan costs		466						325
Loans		391,623						378,513
Allowance for loan losses		(4,335	)					(4,333	)
Net loans	$	387,288					$	374,180

Total loans were $391.6 million at March 31, 2016, compared with $378.5 million at December 31, 2015. Growth was nearly equally split among the Company’s three business lines with traditional residential and home equity loans increasing $5.3 million, SBA loans increasing $4.0 million and traditional commercial loans (including real estate) increasing $4.4 million.

Deposits

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

	March 31, 2016					December 31, 2015					September 30, 2015
	Amount		Percent			Amount		Percent			Amount		Percent
Non-interest bearing demand	$	125,106		27.0	%	$	124,023		26.1	%	$	123,870		26.1	%
Interest bearing demand		75,633		16.4	%		77,616		16.4	%		81,939		17.3	%
Total demand		200,739		43.4	%		201,639		42.5	%		205,809		43.4	%

Savings		48,719		10.5	%		47,333		10.0	%		44,408		9.3	%
Money market		158,779		34.4	%		154,119		32.5	%		151,910		32.0	%
Time deposits		54,000		11.7	%		71,446		15.0	%		72,780		15.3	%
Total deposits	$	462,237		100.0	%	$	474,537		100.0	%	$	474,907		100.0	%

32.

Deposits totaled $462.2 million at March 31, 2016, compared with $474.5 million at December 31, 2015. Most of the decrease during the quarter was the result of a net outflow in municipal deposit balances of $16.2 million during the quarter, which was partially offset by higher commercial and retail deposit balances.

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.

Cash and cash equivalents totaled $29.8 million at March 31, 2016, compared to $31.9 million at December 31, 2015. Cash and cash equivalents represented 5.4% of total assets at March 31, 2016 and 5.9% of total assets at December 31, 2015. 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 was $59.3 million at March 31, 2016, compared with $58.8 million at December 31, 2015. The increase in shareholders’ equity was attributable primarily to net income for the quarter of $116,000 and to an increase in accumulated other comprehensive income of $303,000 due to higher unrealized gains on securities available-for-sale. The Company’s tangible common equity to tangible assets ratio was 10.7% at March 31, 2016.

Regulatory Capital Requirements

The Bank’s common equity tier 1 capital ratio was 12.60% and its total risk-based capital ratio was 13.75% at March 31, 2016, both of which were well above the regulatory thresholds required to be classified as a “well-capitalized” institution, which are 6.5% and 10.0%, respectively.

Beginning on January 1, 2015, the capital requirements for our Company and the Bank increased as a result of the phase-in of certain changes to capital requirements for U.S. banking organizations. Consistent with the international Basel III framework, the capital requirements include a new minimum ratio of common equity tier 1 capital to risk-weighted assets and a Tier 1 common capital conservation buffer of 2.5% of risk-weighted assets that applies to all supervised financial institutions. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets to 6.0% and includes a minimum leverage ratio of 4.0% 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.

33.

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

	Actual					For Capital Adequacy Purposes					To be well-capitalized under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2016
Total risk-based capital	$	51,921		13.75	%	$	30,209		8.0	%	$	37,761		10.0	%
Tier 1 capital	$	47,586		12.60	%	$	22,660		6.0	%	$	30,213		8.0	%
Common equity tier 1 capital	$	47,586		12.60	%	$	16,995		4.5	%	$	24,548		6.5	%
Leverage	$	47,586		8.97	%	$	21,220		4.0	%	$	26,525		5.0	%

As of December 31, 2015
Total risk-based capital	$	52,500		14.29	%	$	29,391		8.0	%	$	36,739		10.0	%
Tier-1 capital	$	48,167		13.11	%	$	22,044		6.0	%	$	29,393		8.0	%
Common equity tier 1 capital	$	48,167		13.11	%	$	16,533		4.5	%	$	23,881		6.5	%
Leverage	$	48,167		9.11	%	$	21,149		4.0	%	$	26,436		5.0	%

Share Repurchase Program

On April 28, 2016, the Board of Directors of Directors of the Company approved a share repurchase program of up to three percent of the Company’s outstanding common shares, or approximately 220,000 shares, up to $1.7 million. The share repurchase program is authorized for up to one year, and the repurchases may be effected through open market purchases or privately negotiated transactions. Management will use its discretion in determining the timing of the repurchases and the prices at which buybacks will be made. The extent to which shares are repurchased will depend on a number of factors including market trends and prices, economic conditions, internal and regulatory trading quiet periods and alternative uses for capital. There can be no assurance that the Company will repurchase any or all of the shares authorized for repurchase. As of May 9, 2016, the Company has repurchased 14,750 shares under this program for a total amount of $104,000.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Not required.

Item 4. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of March 31, 2016, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2016.

There was no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended March 31, 2016, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

34.

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, 2015.

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.
	There are no matters required to be reported under this item.

Item 3.	Defaults upon Senior Securities.
	There are no matters required to be reported under this item.

Item 4.	Mine Safety Disclosures.
	There are no matters required to be reported under this item.

Item 5.	Other Information.
	There are no matters required to be reported under this item.

Item 6.	Exhibits.
	Exhibits – The following exhibits are filed as a part of this report:

	Exhibit No.		Exhibit

	3.1		Amended and Restated Articles of Incorporation of DCB Financial Corp as amended, incorporated by reference to the Company’s Registration Statement on Form S-8 filed with the Commission on November 7, 2014 (File No. 000-22387).

	3.2		Second Amended and Restated Code of Regulations of DCB Financial Corp, incorporated by reference to the Company’s Registration Statement on Form S-8 filed with the Commission on November 7, 2014 (File No. 000-22387).

	31.1*		Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

	31.2*		Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

	32.1**		Certification pursuant to 18 U.S.C. 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

	32.2**		Certification pursuant to 18 U.S.C. 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

	101*		The following information from DCB Financial Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016 formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of March 31, 2016 (unaudited) and December 31, 2015; (ii) the Consolidated Statements of Income (unaudited) for the three months ended March 31, 2016 and 2015; (iii) the Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three months ended March 31, 2016 and 2015; (iv) the Condensed Consolidated Statements of Shareholders’ Equity (unaudited) for the three month periods ended March 31, 2016 and 2015; (v) the Consolidated Statements of Cash Flows (unaudited) for the three month periods ended March 31, 2016 and 2015; and (vi) the Notes to Consolidated Financial Statements.

* Filed herewith. ** Furnished herewith.

35.

SIGNATURES

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

		DCB FINANCIAL CORP
		(Registrant)

Dated: May 16, 2016		/s/ Ronald J. Seiffert
		Ronald J. Seiffert
		Chairman, President and Chief Executive Officer
		(Principal Executive Officer)

Dated: May 16, 2016		/s/ J. Daniel Mohr
		J. Daniel Mohr
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

36.

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