10-Q 1 d334195d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended: JUNE 30, 2012

OR

 

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

Commission file number: 0-22387

 

 

DCB Financial Corp

(Exact name of registrant as specified in its charter)

 

 

 

Ohio   31-1469837

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

110 Riverbend Avenue, Lewis Center, Ohio 43035

(Address of principal executive offices)

(740) 657-7000

(Registrant’s telephone number)

 

 

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 definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filers   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   x

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

As of August 10, 2012, the latest practicable date, 3,717,385 shares of the registrant’s common stock, no par value, were issued and outstanding.

 

 

 


Table of Contents

DCB FINANCIAL CORP

FORM 10-Q

Table of Contents

 

     Page  

PART I – FINANCIAL INFORMATION

  

ITEM 1 – Financial Statements

  

Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

     2   

Condensed Consolidated Statements of Operations for the three and six months ended June  30, 2012 and 2011

     3   

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and 2011

     4   

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011

     5   

Notes to the Condensed Consolidated Financial Statements

     6   

ITEM 1A – Risk Factors

     35   

ITEM 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

     36   

ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk

     43   

ITEM 4 – Controls and Procedures

     44   

PART II – OTHER INFORMATION

     45   

SIGNATURES

     47   


Table of Contents

DCB FINANCIAL CORP

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, except per share data)

Item 1. Financial Statements

 

     June 30, 2012     December 31, 2011  
     (unaudited)        

ASSETS

    

Cash and due from financial institutions

   $ 16,301      $ 11,067   

Interest-bearing deposits

     40,852        28,247   
  

 

 

   

 

 

 

Total cash and cash equivalents

     57,153        39,314   

Securities available-for-sale

     95,051        88,113   

Securities held-to-maturity

     1,080        1,010   
  

 

 

   

 

 

 

Total securities

     96,131        89,123   

Loans

     322,777        359,767   

Less allowance for loan losses

     (9,148     (9,584
  

 

 

   

 

 

 

Net Loans

     313,629        350,183   

Real estate owned

     4,741        4,605   

Investment in FHLB Stock

     3,799        3,799   

Premises and equipment, net

     11,709        12,107   

Bank owned life insurance

     18,233        17,822   

Accrued interest receivable and other assets

     5,313        5,928   
  

 

 

   

 

 

 

Total assets

   $ 510,708      $ 522,881   
  

 

 

   

 

 

 

LIABILITIES

    

Noninterest bearing deposits

   $ 89,622      $ 82,429   

Interest bearing deposits

     360,022        362,999   
  

 

 

   

 

 

 

Total deposits

     449,644        445,428   

Federal Home Loan Bank advances

     17,568        40,036   

Accrued interest payable and other liabilities

     8,299        2,718   
  

 

 

   

 

 

 

Total liabilities

     475,511        488,182   

STOCKHOLDERS’ EQUITY

    

Common stock, no par value, 7,500,000 shares authorized 4,273,908 issued

     3,785        3,785   

Retained earnings

     45,587        45,145   

Treasury stock, at cost, 556,523 shares

     (13,494     (13,494

Accumulated other comprehensive loss

     (681     (737
  

 

 

   

 

 

 

Total stockholders’ equity

     35,197        34,699   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 510,708      $ 522,881   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

2


Table of Contents

DCB FINANCIAL CORP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share data)

 

     Three months ended June 30,     Six months ended June 30,  
     2012     2011     2012     2011  

Interest and dividend income

        

Loans

   $ 4,081      $ 5,106      $ 8,447      $ 10,434   

Taxable securities

     560        540        1,151        1,050   

Tax-exempt securities

     56        87        117        180   

Federal funds sold and other

     28        37        49        57   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     4,725        5,770        9,764        11,721   

Interest expense

        

Deposits

     631        697        1,296        1,399   

Borrowings

     226        585        594        1,222   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     857        1,282        1,890        2,621   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     3,868        4,488        7,874        9,100   

Provision for loan losses

     255        2,536        730        3,211   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     3,613        1,952        7,144        5,889   

Non-interest income

        

Service charges on deposit accounts

     596        647        1,194        1,210   

Trust department income

     224        206        450        465   

Net gain on sales of assets

     (42     (14     314        97   

Net gain on sale of loans

     —          19        —          38   

Treasury management fees

     65        101        132        214   

Data processing servicing fees

     —          286        —          426   

Earnings on bank owned life insurance

     166        249        410        416   

Total other-than-temporary impairment losses

     —          —          —          (75

Portion of loss recognized in (reclassified from) other comprehensive loss (before taxes)

     —          —          —          (17
  

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment losses recognized in income

     —          —          —          (92

Other

     225        251        422        473   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     1,234        1,745        2,922        3,247   

Noninterest expense

        

Salaries and other employee benefits

     2,358        2,767        4,613        5,172   

Occupancy and equipment

     695        920        1,538        1,946   

Professional services

     307        355        698        761   

Advertising

     104        91        188        177   

Postage, freight and courier

     32        63        83        158   

Supplies

     51        49        89        87   

State franchise taxes

     104        125        208        250   

Federal deposit insurance premiums

     284        482        575        889   

Other

     847        969        1,661        1,811   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     4,782        5,821        9,653        11,251   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income taxes

     65        (2,124     413        (2,115

Income tax benefit

     (218     (268     (29     (292
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 283      $ (1,856   $ 442      $ (1,823
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings (loss) per common share

   $ 0.08      $ (0.50   $ 0.12      $ (0.49
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per share

   $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to condensed consolidated financial statements.

 

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Table of Contents

DCB FINANCIAL CORP

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Dollars in Thousands)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2012      2011     2012      2011  

Net income (loss)

   $     283       $     (1,856)        $    442       $     (1,823)   

Reclassification adjustment for realized gains (losses) Included in net income, net of taxes of $0, $0, $0 and $31

     —           —          —           61   

Unrealized gains (loss) on securities available-for-sale, net of taxes of $206, $259, $24 and $245

     400         502        46         476   

Net unrealized gains on securities held-to-maturity for which a portion of an other-than-temporary impairment has been recognized in income, net of realized losses and net of taxes of $11, $323, $5 and $4

     23         627        10         11   
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income (loss)

   $     706       $ (727   $     498       $ (1,275
  

 

 

    

 

 

   

 

 

    

 

 

 

See Notes to condensed consolidated financial statements.

 

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Table of Contents

DCB FINANCIAL CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

     Six months ended
June 30,
 
     2012     2011  

Cash flows provided by (used in) operating activities

   $ 48,957      $ (2,825

Cash flows provided by investing activities

    

Securities

    

Purchases

     (37,563     (13,868

Maturities, principal payments and calls

     17,149        13,208   

Sales

     12,934        —     

Net change in loans

     36,554        30,586   

Proceeds from sale of real estate owned

     1,672        1,324   

Premises and equipment expenditures

     (44     (287
  

 

 

   

 

 

 

Net cash flows provided by investing activities

     30,702        30,963   

Cash flows provided by financing activities

    

Net change in deposits

     (4,216     58,982   

Net change in federal funds purchased and other short-term borrowings

     —          139   

Repayment of Federal Home Loan Bank advances

     (57,604     (6,660
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (61,820     52,461   

Net change in cash and cash equivalents

     17,839        80,599   

Cash and cash equivalents at beginning of period

     39,314        33,521   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 57,153      $ 114,120   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid during the period for:

    

Interest on deposits and borrowings

   $ 1,866      $ 3,815   

Supplemental disclosures of non-cash investing and financing activities

    

Transfers from loans to real estate owned

   $ 2,158      $ 1,955   

See Notes to condensed consolidated financial statements.

 

5


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

 

Note Section

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These consolidated interim financial statements are prepared without audit and reflect all adjustments which, in the opinion of management, are necessary to present fairly the financial position of DCB Financial Corp (the “Corporation”) at June 30, 2012, and its results of operations for the three and six months ended and cash flows for the six month periods ended June 30, 2012 and 2011. All such adjustments are normal and recurring in nature. The accompanying consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not purport to contain all necessary financial disclosures required by accounting principles generally accepted in the United States of America that might otherwise be necessary in the circumstances, and should be read in conjunction with the consolidated financial statements, and notes thereto, included in its Annual Report as of December 31, 2011. Refer to the accounting policies of the Corporation described in the Notes to Consolidated Financial Statements contained in the Corporation’s Annual Report as of December 31, 2011. The Corporation has consistently followed these policies in preparing this Form 10-Q. The results of operations for the three and six months ended June 30, 2012, are not necessarily indicative of the results that may be expected for the entire year.

The accompanying consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries, The Delaware County Bank and Trust Company (the “Bank”), DCB Title Services LLC, Datatasx LLC, and DCB Insurance Services, Inc. and the Bank’s wholly-owned subsidiary, ORECO, Inc. (collectively, all subsidiaries and the Corporation referred to herein after as the “Corporation”). All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Management considers the Corporation to operate within one business segment, banking. Subsequent to the end of the first quarter 2011, management entered into an agreement to sell the outstanding contracts serviced through Datatasx LLC. Those services were discontinued in September 2011, and were not a significant part of operations or revenue.

To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect amounts reported in the financial statements and disclosures provided, and future results could differ. The allowance for loan losses, fair values of financial instruments and status of contingencies are particularly subject to change.

Income tax expense is based on the effective tax rate expected to be applicable for the entire year. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A full valuation allowance was taken in 2010, reducing the deferred tax assets, and management is maintaining its full allowance tax position each quarter

 

6


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Earnings per share

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Weighted-average common shares outstanding (basic)

     3,717,385         3,717,385         3,717,385         3,717,385   

Dilutive effect of assumed exercise of stock options

     22,964         —           15,745         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding (diluted)

     3,740,349         3,717,385         3,733,130         3,717,385   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Stock option plan

The Corporation’s shareholders approved an employee long-term stock incentive plan (the “Plan”) in May 2004. The Plan provides for awards of equity to certain employees. The Plan is limited to granting 300,000 options. Options to acquire shares that are granted to employees vest 20% per year over a five year period. The options expire after ten years. No options were granted for the six month period ending June 30, 2012. At June 30, 2012, 113,521 shares were exercisable and 98,456 options were available for grant under the Plan.

The Corporation recognizes compensation cost for unvested equity-based awards based on their grant-date fair value. The Corporation recorded $7 and $30 in compensation cost for equity-based awards for the three month period ending June 30, 2012 and 2011, respectively. The Corporation recorded $15 and $60 in compensation cost for equity-based awards that vested during the six month periods ended June 30, 2012 and 2011, respectively. The Corporation has $46 of total unrecognized compensation cost related to non-vested equity-based awards granted under its stock option plan as of June 30, 2012, which is expected to be recognized over a weighted-average period of 3.1 years.

Options to purchase 199,856 shares of common stock with a weighted-average exercise price of $12.52 were outstanding at June 30, 2012. Of this amount, 113,521 options are vested with an average exercise price of $18.12. Earnings per share are computed based upon the weighted average number of shares of common stock outstanding during the three and six month periods. Diluted earnings per share are computed assuming that stock options outstanding are exercised and the proceeds, are used entirely to acquire shares at the average price for the period. Under this method for calculating diluted earnings per share, 22,964 and 15,745 options for the three and six months ended June 30, 2012 were considered dilutive and therefore included in the calculation. Options to purchase 216,179 shares of common stock with a weighted-average exercise price of $12.44, were outstanding at December 31, 2011, but were excluded from the computation of common share equivalents for 2011 due to the loss recognized in 2011.

 

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Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

A summary of the status of the Plan as of June 30, 2012 and December 31, 2011, and changes during the periods then ended are presented below:

 

           For the Six Months Ended
June 30, 2012
 
     Shares     Weighted
Average Exercise
Price
     Weighted
Average
Remaining

Contractual
Life
 

Outstanding at beginning of period

     216,179      $ 12.44         7.1 years   

Exercised

     (428     3.50      

Forfeited

     (15,895     12.05      
  

 

 

      

Outstanding at end of period

     199,856      $ 12.52         6.6 years   
  

 

 

   

 

 

    

 

 

 

Options exercisable at period end

     113,521      $ 18.12      
  

 

 

   

 

 

    

 

           For the Year Ended
December 31, 2011
 
     Shares     Weighted
Average Exercise
Price
     Weighted
Average
Remaining
Contractual
Life
 

Outstanding at beginning of year

     285,806      $ 11.87         8.6 years   

Granted

     500        3.35      

Forfeited

     (70,127     9.40      
  

 

 

      

Outstanding at end of year

     216,179      $ 12.44         7.1 years   
  

 

 

   

 

 

    

 

 

 

Options exercisable at year end

     81,800      $ 18.22      
  

 

 

   

 

 

    

 

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Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

The following table depicts nonvested options at June 30, 2012:

 

     Nonvested
Shares
 

Nonvested at January 1, 2012

     112,422   

Granted

     —     

Vested

     (18,963

Exercised

     (428

Forfeited or expired

     (7,124
  

 

 

 

Nonvested at June 30, 2012

     86,763   
  

 

 

 

The following information applies to options outstanding at June 30, 2012:

 

Number Outstanding

   Range of
Exercise Prices
  54,965    $23.00 - $30.70
  30,894    $14.15 - $16.90
  27,603    $7.50 - $9.00
  86,394    $3.50

 

  
199,856   

 

  

Application of Critical Accounting Policies

DCB’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America 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 most significant estimates and assumptions in the consolidated financial statements are recorded in the allowance for loan losses and in the fair value measurement of financial instruments.

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 OTTI. If it is determined that measured impairment is other-than-temporary, the appropriate loss recognition is recorded within the period that OTTI is recognized. Generally, management utilizes third parties to provide appraisals, analysis or market pricing in support of OTTI analysis.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, unamortized deferred loan fees and costs and the allowance for loan losses.

Interest income is accrued based on the unpaid principal balance and includes amortization of net deferred loan fees and costs over the loan term. Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for loans placed on nonaccrual status are 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.

 

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Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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 uncollectability 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 historical loss rates from the previous 12 quarters in the calculation. 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. The risk ratings either increase the expected loss rates, or decrease the expected loss rates, depending on the variance on actual versus historical trends. 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 Corporation’s market area. Though not specific to individual loans, these economic trends can have an impact on portfolio performance as a whole.

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, land development and multi-family real estate loans are individually evaluated for impairment. If a loan is impaired, the loan amount exceeding fair value based on the most current information available is reserved. Management has developed a process by which commercial and commercial real estate loans receiving an internal grade of substandard or doubtful are individually evaluated for impairment through a loan quality review (“LQR”). The LQR details the various attributes of the relationship and collateral and determines based on the most recent available information if a specific reserve needs to be applied and at what level. The LQR process for all loans meeting the specific review criteria is completed on a quarterly basis.

Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment, and accordingly, such loans are not separately identified for impairment disclosures. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Uncollectability is usually determined based on a pre-determined number of days in the case of consumer loans, or, in the case of commercial loans, is based on 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, depending upon individual circumstance. Typically, loans collateralized by consumer 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. Both consumer and commercial 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.

 

11


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

In the case of commercial and commercial real estate loans, charge-off, partial or whole, takes 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. 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.

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 nonaccrual may be eligible to be returned to an accruing status after six months of compliance. 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, such as deteriorating collateral, negative cash flow changes and inability to reduce debt to income ratios.

New Accounting Pronouncements: FASB ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the “Boards”) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the Codification in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. The adoption of this ASU did not have a material impact on the consolidated financial statements.

FASB ASU 2011-05, Presentation of Comprehensive Income. In June 2011, the FASB issued ASU 2011-05, which provides entities with the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income, along with a total for other comprehensive income, and a total amount for comprehensive income. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. This update should be applied retrospectively effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. As the Corporation currently reports comprehensive income in two separate but consecutive statements with all of the components required by ASU 2011-05, the adoption of this guidance has had no impact on the consolidated financial statements.

 

12


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 2 – SECURITIES

As of June 30, 2012:

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

 

     Amortized
Costs
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

U.S. Government and agency obligations

   $ 26,694       $ 141       $ 3       $ 26,832   

States and municipal obligations

     20,458         882         29         21,311   

Corporate bonds

     3,637         32         4         3,665   

Mortgage-backed securities

     42,357         932         46         43,243   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 93,146       $ 1,987       $ 82       $ 95,051   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and estimated fair values of securities held-to-maturity were as follows:

 

     Adjusted
Amortized
Cost
     Gross
Unrealized
Gains
     Estimated
Fair Value
 

Collateralized debt obligations

   $ 1,080       $ 990       $ 2,070   
  

 

 

    

 

 

    

 

 

 

As of December 31, 2011:

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

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

U.S. Government and agency obligations

   $ 35,393       $ 439       $ 24       $ 35,808   

States and municipal obligations

     15,497         548         50         15,995   

Corporate bonds

     1,854         —           17         1,837   

Mortgage-backed securities

     33,478         1,021         26         34,473   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 86,222       $ 2,008       $ 117       $ 88,113   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and estimated fair values of securities held-to-maturity were as follows:

 

     Adjusted
Amortized
Cost
     Gross
Unrealized
Gains
     Estimated
Fair Value
 

Collateralized debt obligations

   $ 1,010       $ 350       $ 1,360   
  

 

 

    

 

 

    

 

 

 

 

13


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 2 – SECURITIES (continued)

 

Credit Losses Recognized on Investments

The following table provides information about debt securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income for the six month periods ended June 30, 2012 and 2011.

Accumulated Credit Losses:

 

    

Six Months Ended

June 30,

 
     2012      2011  

Credit losses on debt securities held

     

Beginning of period

   $ 4,015       $ 3,923   

Additions related to other-than-temporary losses not previously recognized

     —           92   

Reductions due to sales

     —           —     

Reductions due to change in intent or likelihood of sale

     —           —     

Additions related to increases in previously recognized other-than-temporary losses

     —           —     

Reductions due to increases in expected cash flows

     —           —     
  

 

 

    

 

 

 

End of period

   $ 4,015       $ 4,015   
  

 

 

    

 

 

 

 

14


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 2 – SECURITIES (continued)

 

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at June 30, 2012 and December 31, 2011:

June 30, 2012

 

     (Less than 12 months)      (12 months or longer)      Total  

Description of securities

   Number of
investments
     Fair
value
     Unrealized
losses
     Number of
investments
     Fair
value
     Unrealized
losses
     Number of
investments
     Fair
value
     Unrealized
losses
 

U.S. Government and agency obligations

     3       $ 2,994       $ 3         —         $ —         $ —           3       $ 2,994       $ 3   

Corporate bonds

     3         1,307         4         —           —           —           3         1,307         4   

State and municipal obligations

     6         1,987         29         —           —           —           6         1,987         29   

Mortgage- backed securities and other

     9         7,997         46         —           —           —           9         7,997         46   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

     21       $ 14,285       $ 82         —         $ —         $ —           21       $ 14,285       $ 82   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

 

     (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       $ 5,498       $ 24         —         $ —         $ —           5       $ 5,498       $ 24   

State and municipal obligations

     11         4,516         50         —           —           —           11         4,516         50   

Corporate bonds

     3         1,562         17         —           —           —           3         1,562         17   

Mortgage-backed securities and other

     5         5,435         26         —           —           —           5         5,435         26   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

     24       $ 17,011       $ 117         —         $ —         $ —           24       $ 17,011       $   117   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 2 – SECURITIES (continued)

 

The unrealized losses on the Corporation’s investments in U.S. Government and agency obligations, state and political subdivision obligations and mortgage-backed securities were caused primarily by changes in interest rates. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Corporation does not intend to sell the investments and it is not more likely than not the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be OTTI at June 30, 2012 or December 31, 2011.

The Corporation’s investment in collateralized debt obligations relates to an original investment of $8,000 in pooled trust securities. The company evaluates those investments on a quarterly basis for OTTI and other unrealized losses due to temporary market factors.

Credit losses on these securities are calculated by comparing expected discounted cash flows based on performance indicators of the underlying assets in the security to the carrying value of the investment. Because the Corporation does not intend to sell the investment and it is not more likely than not the Corporation will be required to sell the investment before recovery of its new, lower amortized cost basis, which may be maturity, it does not consider the remainder of the investment in the securities to be OTTI at June 30, 2012.

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”).

At June 30, 2012, 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 other than the pooled trust securities as noted above.

The amortized cost and estimated fair value of all debt securities at June 30, 2012, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown separately since they are not due at a single maturity date.

 

     Available-for-sale      Held-to-maturity  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ 1,028       $ 1,056       $ —         $ —     

Due from one to five years

     17,382         17,482         —           —     

Due from five to ten years

     21,489         22,000         —           —     

Due after ten years

     10,890         11,270         1,080         2,070   

Mortgage-backed and related securities

     42,357         43,243         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 93,146       $ 95,051       $ 1,080       $ 2,070   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities with a fair value of $73,485 at June 30, 2012 were pledged to secure public deposits and other obligations.

 

16


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 3 - LOANS

Loans at June 30, 2012 and December 31, 2011, were as follows:

 

     June 30,
2012
     December 31,
2011
 

Commercial and industrial

   $ 111,806       $ 126,225   

Commercial real estate

     117,187         129,958   

Residential real estate and home equity

     75,437         83,814   

Consumer and credit card

     18,312         19,770   
  

 

 

    

 

 

 

Subtotal

     322,742         359,767   

Add: Net deferred loan origination fees

     35         —     
  

 

 

    

 

 

 

Total loans receivable

   $ 322,777       $ 359,767   
  

 

 

    

 

 

 

 

17


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 4 – CREDIT QUALITY

Allowance for Credit Losses

The following table depicts the charge-offs, recoveries and provision for various categories of loans in the Corporation’s portfolios and indicates whether loans in those categories were individually or collectively evaluated for impairment. It also provides the dollar amount of reserves allocated to those portfolios based on analysis. Note that the reduced provision for commercial and industrial loans is the result of loans that were individually evaluated for impairment and assigned reserves in prior periods either improving their credit quality or paying off, which subsequently reduced the need for carrying reserves. As presented within this note, commercial real estate includes real estate construction and land development loans.

For the Three Months Ended June 30, 2012:

 

     Consumer and
Credit Card
    Commercial and
Industrial
    Commercial
Real Estate
    Residential Real
Estate and

Home Equity
    Total  

Allowance for credit losses:

          

Beginning balance:

   $ 393      $ 2,214      $ 6,524      $ 212      $ 9,343   

Chargeoffs

     (88     (30     (414     (20     (552

Recoveries

     47        43        5        7        102   

Provision

     21        (95     321        8        255   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance:

   $ 373      $ 2,132      $ 6,436      $ 207      $ 9,148   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

   $ —        $ 494      $ 5,353      $ —        $ 5,847   

Collectively evaluated for impairment

     373        1,638        1,083        207        3,301   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance:

   $ 373      $ 2,132      $ 6,436      $ 207      $ 9,148   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2012:

          

Financing Receivables:

          

Individually evaluated for impairment

   $ —        $ 11,079      $ 27,443      $ —        $ 38,522   

Collectively evaluated for impairment

     18,312        100,727        89,744        75,437        284,220   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance:

   $ 18,312      $ 111,806      $ 117,187      $ 75,437      $ 322,742   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 4 – CREDIT QUALITY (continued)

 

For the Six Months Ended June 30, 2012:

 

     Consumer and
Credit Card
    Commercial and
Industrial
    Commercial
Real Estate
    Residential Real
Estate and

Home Equity
    Total  

Allowance for credit losses:

          

Beginning balance:

   $ 425      $ 1,952      $ 6,916      $ 291      $ 9,584   

Chargeoffs

     (212     (147     (1,074     (19     (1,451

Recoveries

     111        151        13        11        285   

Provision

     49        176        581        (76     730   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance:

   $ 373      $ 2,132      $ 6,436      $ 207      $ 9,148   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

   $ —        $ 494      $ 5,353      $ —        $ 5,847   

Collectively evaluated for impairment

     373        1,638        1,083        207        3,301   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance:

   $ 373      $ 2,132      $ 6,436      $ 207      $ 9,148   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the Three Months Ended June 30, 2011:

 

     Consumer and
Credit Card
    Commercial and
Industrial
    Commercial
Real Estate
    Residential Real
Estate and
Home Equity
    Total  

Beginning balance

   $ 755      $ 1,913      $ 7,142      $ 490      $ 10,300   

Chargeoffs

     (225     (235     (1,093     (21     (1,574

Recoveries

     132        10        17        4        93   

Provision

     133        57        2,337        9        2,536   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 725      $ 1,745      $ 8,403      $ 482      $ 11,355   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

   $ —        $ 504      $ 7,385      $ —        $ 7,889   

Collectively evaluated for impairment

     725        1,241        1,018        482        3,466   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 725      $ 1,745      $ 8,403      $ 482      $ 11,355   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2011:

          

Financing receivables

          

Individually evaluated for impairment

   $ —        $ 15,584      $ 44,284      $ —        $ 59,868   

Collectively evaluated for impairment

     21,186        119,767        104,141        90,284        335,378   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 21,186      $ 135,351      $ 148,425      $ 90,284      $ 395,246   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 4 – CREDIT QUALITY (continued)

 

For the Six Months Ended June 30, 2011:

 

     Consumer and
Credit Card
    Commercial and
Industrial
    Commercial
Real Estate
    Residential
Real Estate
and Home
Equity
    Total  

Beginning balance

   $ 796      $ 4,174      $ 6,786      $ 491      $ 12,247   

Chargeoffs

     (342     (1,654     (2,251     (57     (4,304

Recoveries

     132        45        17        7        201   

Provision

     139        (820     3,851        41        3,211   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 725      $ 1,745      $ 8,403      $ 482      $ 11,355   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

   $ —        $ 504      $ 7,385      $ —        $ 7,889   

Collectively evaluated for impairment

     725        1,241        1,018        482        3,466   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 725      $ 1,745      $ 8,403      $ 482      $ 11,355   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 4 – CREDIT QUALITY (continued)

 

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 nonperforming 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. Generally, commercial and commercial real estate loans with risk grades Substandard, Vulnerable, Doubtful, or Loss, with aggregate relationships greater than $250 are evaluated for impairment. Interest income on impaired loans is recognized when accrued, for loans that remain in a performing status. Loans that are not performing and in a nonaccrual status recognize interest only on cash basis if circumstances warrant.

The following table presents information related to the recorded investment, unpaid balance and related allowance on impaired at June 30, 2012 and December 31, 2011.

 

     At June 30, 2012      At December 31, 2011  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

With no related allowance recorded

                 

Consumer and credit card

   $ —         $ —         $ —         $ —         $ —         $ —     

Commercial and industrial

     2,758         2,836         —           4,400         5,303         —     

Commercial real estate

     7,181         7,836         —           16,061         21,116         —     

Residential RE and home equity

     —           —           —           —           —           —     

With allowance recorded

                 

Consumer and credit card

     —           —           —           —           —           —     

Commercial and industrial

     8,321         9,805         494         8,220         9,647         2,003   

Commercial real estate

     20,262         23,650         5,353         15,355         18,740         4,090   

Residential RE and home equity

     —           —           —           —           —           —     

Total

                 

Consumer and credit card

     —           —           —           —           —           —     

Commercial and industrial

     11,079         12,641         494         12,620         14,950         2,003   

Commercial real estate

     27,443         31,486         5,353         31,416         39,856         4,090   

Residential RE and home equity

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 38,522       $ 44,127       $ 5,847       $ 44,036       $ 54,806       $ 6,093   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 4 – CREDIT QUALITY (continued)

 

The following table presents information related to the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2012 and 2011.

For the three months ended June 30:

 

     2012      2011  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded

           

Consumer and credit card

   $ —         $ —         $ —         $ —     

Commercial and industrial

     3,129         41         4,306         48   

Commercial real estate

     11,761         100         12,935         34   

Residential RE and home equity

     —           —           —           —     

With allowance recorded

           

Consumer and credit card

     —           —           —           —     

Commercial and industrial

     8,005         140         10,934         167   

Commercial real estate

     17,037         205         25,457         673   

Residential RE and home equity

     —           —           —           —     

Total

           

Consumer and credit card

     —           —           —           —     

Commercial and industrial

     11,134         181         15,240         215   

Commercial real estate

     28,798         305         38,392         707   

Residential RE and home equity

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 39,932       $ 486       $ 53,632       $ 922   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 4 – CREDIT QUALITY (continued)

 

For the six months ended June 30:

 

     2012      2011  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded

           

Consumer and credit card

   $ —         $ —         $ —         $ —     

Commercial and industrial

     3,534         84         4,738         111   

Commercial real estate

     13,019         201         14,472         212   

Residential RE and home equity

     —           —           —           —     

With allowance recorded

           

Consumer and credit card

     —           —           —           —     

Commercial and industrial

     8,029         290         11,607         362   

Commercial real estate

     16,218         436         24,707         859   

Residential RE and home equity

     —           —           —           —     

Total

           

Consumer and credit card

     —           —           —           —     

Commercial and industrial

     11,563         374         16,345         473   

Commercial real estate

     29,237         637         39,179         1,071   

Residential RE and home equity

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 40,800       $ 1,011       $ 55,524       $ 1,544   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 4 – CREDIT QUALITY (continued)

 

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

Financing receivables on nonaccrual status at June 30, 2012 and December 31, 2011 are as follows:

 

     June 30, 2012      December 31, 2011  

Consumer and credit card

   $ —         $ 46   

Commercial and industrial

     1,764         2,381   

Commercial real estate

     4,963         6,698   

Residential real estate and home equity

     373         451   
  

 

 

    

 

 

 

Total

   $ 7,100       $ 9,576   
  

 

 

    

 

 

 

Credit Quality Indicators

Corporate risk exposure by risk profile was as follows at June 30, 2012:

 

Category

   Commercial and
Industrial
     Commercial Real
Estate
 

Pass - 1 through 4

   $ 83,718       $ 81,942   

Vulnerable – 5

     9,061         6,962   

Substandard – 6

     19,026         28,283   

Doubtful – 7

     —           —     

Loss – 8

     —           —     
  

 

 

    

 

 

 

Total

   $ 111,806       $ 117,187   
  

 

 

    

 

 

 

Corporate risk exposure by risk profile was as follows at December 31, 2011:

 

Category

   Commercial and
Industrial
     Commercial Real
Estate
 

Pass - 1 through 4

   $ 88,948       $ 90,364   

Vulnerable - 5

     15,265         5,605   

Substandard - 6

     22,012         33,989   

Doubtful - 7

     —           —     

Loss - 8

     —           —     
  

 

 

    

 

 

 

Total

   $ 126,225       $ 129,958   
  

 

 

    

 

 

 

 

24


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 4 – CREDIT QUALITY (continued)

 

Risk Category Descriptions

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

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

Vulnerable (Special Mention) – 5

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

Substandard – 6

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

 

   

Loans that possess a defined credit weakness and the likelihood that a loan will be paid from the primary source is uncertain. Financial deterioration is underway and very close attention is warranted to ensure that the loan is collected without loss.

 

   

Loans are inadequately protected by the current net worth and paying capacity of the obligor.

 

   

The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment such as collateral liquidation or guarantees.

 

   

Loans are characterized by the distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

 

   

Unusual courses of action are needed to maintain a high probability of repayment.

 

   

The borrower is not generating enough cash flow to repay loan principal; however, continues to make interest payments.

 

   

The Bank is forced into a subordinated or unsecured position due to flaws in documentation.

 

25


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 4 – CREDIT QUALITY (continued)

 

   

Loans have been restructured so that payment schedules, terms and collateral represent concessions to the borrower when compared to the normal loan terms.

 

   

The Bank is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

 

   

There is a significant deterioration in the market conditions and the borrower is highly vulnerable to these conditions.

Doubtful – 7

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

 

   

Loans have all of the weaknesses of those classified as Substandard. Additionally, however, these weaknesses make collection or liquidation in full based on existing conditions improbable.

 

   

The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.

 

   

The possibility of loss is high, but, because of certain important pending factors, which may strengthen the loan, loss classification is deferred until its exact status is known. A Doubtful classification is established during this period of deferring the realization of the loss.

Loss – 8

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

Consumer Risk

Consumer risk based on payment activity at June 30, 2012 is as follows.

 

Payment Category

   Consumer and
Credit Card
     Residential Real
Estate and
Home Equity
 

Performing

   $ 18,289       $ 74,916   

Nonperforming

     23         521   
  

 

 

    

 

 

 

Total

   $ 18,312       $ 75,437   
  

 

 

    

 

 

 

 

26


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 4 – CREDIT QUALITY (continued)

 

Consumer risk based on payment activity at December 31, 2011 is as follows.

 

Payment Category

   Consumer and
Credit Card
     Residential Real
Estate and

Home Equity
 

Performing

   $ 19,525       $ 83,317   

Nonperforming

     245         497   
  

 

 

    

 

 

 

Total

   $ 19,770       $ 83,814   
  

 

 

    

 

 

 

Age Analysis of Past Due Loans

The following table presents past due loans aged as of June 30, 2012.

 

Category

   30-59 Days
Past Due
     60-89
Days
Past
Due
     Greater
than 90
Days Past
Due
     Total
Past Due
     Current      Total
Financing
Receivables
     Recorded
Investment
> 90 days
and
Accruing
 

Consumer and credit card

   $ 139       $ 138       $ 23       $ 300       $ 18,012       $ 18,312       $ 23   

Commercial and industrial

     161         —           896         1,057         110,749         111,806         500   

Commercial real estate

     1,550         —           2,481         4,031         113,156         117,187         —     

Residential real estate and home equity

     91         —           521         612         74,825         75,437         149   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,941       $ 138       $ 3,921       $ 6,000       $ 316,742       $ 322,742       $ 672   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents past due loans aged as of December 31, 2011.

 

Category

   30-59 Days
Past Due
     60-89
Days
Past Due
     90 Days or
more Past
Due
     Total Past
Due
     Current      Total
Financing
Receivables
     Recorded
Investment

> 90 days  and
Accruing
 

Consumer and credit card

   $ 250       $ 177       $ 245       $ 672       $ 19,098       $ 19,770       $ 199   

Commercial and industrial

     9         165         706         880         125,345         126,225         740   

Commercial real estate

     —           —           5,803         5,803         124,155         129,958         —     

Residential real estate and home equity

     135         67         497         699         83,115         83,814         46   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 394       $ 409       $ 7,251       $ 8,054       $ 351,713       $ 359,767       $ 985   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

27


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 4 – CREDIT QUALITY (continued)

 

Troubled Debt Restructurings

Information regarding troubled debt restructuring (“TDR”) loans for the three and six month periods ended June 30, 2012 is as follows:

 

     Three Months Ended
June 30, 2012
     Six Months Ended
June 30, 2012
 
     Number of
Contracts
     Recorded Investment
(as of period end)
     Number of
Contracts
     Recorded Investment
(as of period end)
 

Consumer and credit card

     5       $ 92         6       $ 93   

Commercial and industrial

     —           —           —           —     

Commercial real estate

     2         3,929         2         3,929   

Residential real estate and home equity

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     7       $ 4,021         8       $ 4,022   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following presents by class loans modified in a TDR from January 1, 2011 through March 31, 2012 that subsequently defaulted (i.e. 60 days or more past due following a modification) during the three and six month periods ended June 30, 2012.

TDRs that defaulted during the period, within twelve months of their modification date:

 

     Three Months Ended
June 30, 2012
     Six Months Ended
June 30, 2012
 
     Number of
Contracts
     Recorded Investment
as of period end (1)
     Number of
Contracts
     Recorded Investment
as of period end (1)
 

Consumer and credit card

     —         $ —           —           —     

Commercial and industrial

     —           —           —           —     

Commercial real estate

     1         1,540         1         1,540   

Residential real estate and home equity

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 1,540         1       $ 1,540   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Corporation 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 or 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

 

28


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 4 – CREDIT QUALITY (continued)

 

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.

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

Loans modified in a TDR are typically already on nonaccrual 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 Corporation 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 nonaccrual may be eligible to be returned to an accruing status after six months of compliance with the modified terms. However, there are a 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, such as deteriorating collateral, negative cash flow changes and inability to reduce debt to income ratios.

 

29


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 5 – FAIR VALUE MEASUREMENTS

The Corporation 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

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

Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include certain equity securities and U.S. Government and agency obligations. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Government and agency obligations, state and municipal obligations, corporate bonds and mortgage-backed securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

 

30


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 5 – FAIR VALUE MEASUREMENTS (continued)

 

The following table presents the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2012 and December 31, 2011:

June 30, 2012

 

            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

   $ 26,832       $ —         $ 26,832       $ —     

State and municipal obligations

     3,665         —           3,665         —     

Corporate bonds

     21,311         —           21,311         —     

Mortgage-backed securities and other

     43,243         —           43,243         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 95,051       $ —         $ 95,051       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

 

            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

   $ 35,808       $ —         $ 35,808       $ —     

State and municipal obligations

     15,995         —           15,995         —     

Corporate bonds

     1,837         —           1,837         —     

Mortgage-backed and other securities

     34,473         —           34,473         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 88,113       $ —         $ 88,113       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

31


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 5 – FAIR VALUE MEASUREMENTS (continued)

 

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

Securities

Certain collateralized debt obligations are classified as held to maturity. The Corporation recognized other-than-temporary impairment on the securities as of June 30, 2012, based upon a Level 3 estimate of fair value, including a discounted cash flows calculation and a fair value estimate from an independent evaluation of the securities.

Impaired loans

At June 30, 2012 and December 31, 2011, impaired loans consisted primarily of loans secured by nonresidential and commercial real estate. Management has determined fair value measurements on impaired loans primarily through evaluations of appraisals performed.

Real Estate Owned

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

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2012 and December 31, 2011.

June 30, 2012

 

            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)
 

Collateralized debt obligations

   $ 2,070       $ —         $ —         $ 2,070   

Impaired loans

     22,735         —           —           22,735   

Real estate owned

     1,808         —           —           1,808   

December 31, 2011

 

            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)
 

Collateralized debt obligations

   $ 1,360       $ —         $ —         $ 1,360   

Impaired loans

     17,483         —           —           17,483   

Real estate owned

     1,590         —           —           1,590   

 

32


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 5 – FAIR VALUE MEASUREMENTS (continued)

 

Carrying amount and estimated fair values of financial instruments were as follows:

At June 30, 2012:

 

     Carrying
Amount
     Fair Value      Level 1      Level 2      Level 3  

Financial assets

              

Cash and cash equivalents

   $ 57,153       $ 57,153       $ 57,153         

Securities available-for-sale

     95,051         95,051            95,051      

Securities held-to-maturity

     1,080         2,070               2,070   

Loans

     313,629         312,224               312,224   

FHLB stock

     3,799         3,799            3,799      

Accrued interest receivable

     1,515         1,515         1,515         

Financial liabilities

              

Noninterest-bearing deposits

   $ 89,622       $ 89,622          $ 89,622      

Interest-bearing deposits

     360,022         365,131            365,131      

FHLB advances

     17,568         17,690            17,690      

Accrued interest payable

     358         358         358         

At December 31, 2011:

 

     Carrying
Amount
     Fair Value      Level 1      Level 2      Level 3  

Financial assets

              

Cash and cash equivalents

   $ 39,314       $ 39,314       $ 39,314         

Securities available-for-sale

     88,113         88,113            88,113      

Securities held-to-maturity

     1,010         1,360               1,360   

Loans (net of allowance)

     350,183         345,774               345,774   

FHLB stock

     3,799         3,799            3,799      

Accrued interest receivable

     1,480         1,480         1,480         

Financial liabilities

              

Noninterest-bearing deposits

   $ 82,429       $ 82,429          $ 82,429      

Interest-bearing deposits

     362,999         364,086            364,086      

FHLB advances

     40,036         40,616            40,616      

Accrued interest payable

     340         340         340         

 

33


Table of Contents

DCB FINANCIAL CORP

(Dollars in thousands, except per share data)

 

NOTE 5 – FAIR VALUE MEASUREMENTS (continued)

 

The estimated fair value of cash and cash equivalents, Federal Home Loan Bank (“FHLB”) stock, accrued interest receivable, noninterest bearing deposits, federal funds purchased and other short-term borrowings and accrued interest payable approximates the related carrying amounts.

For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of loans held for sale is based on market quotes. Fair values of long-term FHLB advances are based on current rates for similar financing. Fair values of off-balance-sheet items are based on the current fee or cost that would be charged to enter into or terminate such agreements, which are not material.

 

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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/A for the year ended December 31, 2011.

 

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

INTRODUCTION

In the following pages, management presents an analysis of the Corporation’s consolidated financial at June 30, 2012, compared to December 31, 2011, and the consolidated results of operations for the three and six months ended June 30, 2012, compared to the same periods in 2011. This discussion is designed to provide shareholders with a more comprehensive review of the operating results and financial position than could be obtained from reading the consolidated financial statements alone. This analysis should be read in conjunction with the consolidated financial statements and related footnotes and the selected financial data included elsewhere in this report.

The Corporation, through the Bank, provides customary retail banking services to its customers, including checking and savings accounts, time deposits, IRAs, safe deposit facilities, personal loans, real estate mortgage loans and installment loans. The Bank also provides trust and wealth management products and services through its own trust department and its Raymond James affiliation. It also offers a variety of commercial and commercial real estate loans along with treasury management services to various commercial businesses.

The Corporation, through the Bank, grants residential real estate, commercial real estate, consumer and commercial loans to customers located primarily in Delaware, Franklin, Licking, Morrow, Marion and Union Counties, Ohio. The economic conditions in the Corporation’s market are one of the strongest within the State of Ohio, however, these conditions continue to present challenges to the banking industry. While economic activity is slowly starting to recover, there are still increases in unemployment levels, increased loan foreclosure volume and a decline in real estate values. The Corporation’s business has been under pressure due primarily to decreased market activity, which has resulted in declining loan portfolios. Real estate values, especially in the Bank’s core geographic area, have declined during the past several years and have not shown signs of increased prices or activity during 2012.

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 Corporation and the Bank. Where used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” and similar words and expressions, related to the Corporation or the Bank or their respective management, identify forward-looking statements. Such forward-looking statements reflect the current views of the Corporation and are based on information currently available to the management of the Corporation and the Bank and upon current expectations, estimates, and projections about the Corporation 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)

 

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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 Corporation with the Securities and Exchange Commission.

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

Overview of the second quarter of 2012

The following is a summary of financial highlights from the three and six months ended June 30, 2012:

 

   

The Corporation’s total assets remained relatively consistent with December 31, 2011, decreasing 2.3% to $510,708. The decrease was mainly attributed to the decline in the loan portfolio, partially offset by an increase in total cash and cash equivalents and investment securities.

 

   

As previously reported, in October 2010, the Bank entered into a Consent Agreement with the FDIC, and a written agreement with the Ohio Division of Financial Institutions (“Ohio Division”), both of which require that Tier 1 and Total Risk Based Capital percentages reach 9.0% and 13.0%, respectively. As of June 30, 2012, the Bank’s capital ratios, as previously noted, were not at these levels. The Tier-1 capital ratio was 6.89%, while the Total Risk Based Capital was 10.41% at June 30, 2012.

 

   

Net income for the six months ended June 30, 2012 totaled $442, an improvement over a net loss of $1,823 for the same period in 2011. This mainly attributed to the decline in the provision for loan losses from $3,211 to $730.

 

   

Net interest income for the six months ended June 30, 2012 totaled $7,874, a decrease from $9,100 in the same period in the prior year, the decrease is primarily due to a smaller interest-earning asset base in the current year.

 

   

Overall loan balances continue to decline due to lower market activity. Loans stood at $322,777 at June 30, 2012 compared to $359,767 at December 31, 2011, a decline of $36,990.

 

   

Total borrowings decreased to $17,568 at June 30, 2012 from $40,036 at December 31, 2011. This is a result of paying off long-term debt with excess cash generated from the overall decrease in loans and the improved ability to raise deposits from its core customer base.

ANALYSIS OF FINANCIAL CONDITION

The Corporation’s assets totaled $510,708 at June 30, 2012, compared to $522,881 at December 31, 2011, a decrease of $12,173, or 2.3%. Cash and cash equivalents increased by $17,839 from year end, totaling $57,153 at June 30, 2012 as a result of increased deposits and payoffs and paydowns in the loan portfolios. Total securities increased $7,008 to $96,131 from December 31, 2011. This increase is also attributable to the payoffs and paydowns in the loan portfolio. Management utilizes investment securities to provide the Corporation with the flexibility to move funds into loans as demand warrants, and as collateral for various borrowing opportunities.

Total loans decreased $36,990, or 10.3%, during the first six months of 2012. The decline in outstanding loan balances is mainly due to the lower volume of new originations due to the current economy and payoffs amd paydowns within the current portfolio. The Corporation’s loan originations have remained lower, as the availability of quality lending opportunities within the Bank’s marketplace remain low.

 

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Total deposits remained stable, increasing 0.9% from $445,428 at December 31, 2011 to $449,644 at June 30, 2012. Noninterest-bearing deposits grew by 8.7%, or $7,193, from year-end. The focus on core-deposit growth over the past 15 months has contributed to this growth.

Total borrowings decreased $22,468 during the six months ended June 30, 2012. The decline in long-term borrowings was mainly attributed to the Bank reducing its FHLB debt through the early pay-off of existing balances. In previous years, the Corporation utilized a matched funding methodology for its borrowing and deposit activities. However, with its current deposit base and adequate cash balances, there has been less need for the utilization of borrowed funds.

 

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COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2012 AND JUNE 30, 2011

Net Income (Loss). The Corporation reported net income of $283 for the three month period ended June 30, 2012, compared to a net loss of $1,856 for the same period in 2011. The improvement was mainly attributed to reduced provision expense of $2,281, reduced noninterest expense of $1,039, offset by a decline in net interest income of $620 and a reduction in noninterest income of $511.

Net Interest Income. Net interest income represents the amount by which interest income on interest-earning assets exceeds interest expense on interest-bearing liabilities. Net interest income is the largest component of the Corporation’s income, and is affected by the interest rate environment and the volume and the composition of interest-earning assets and interest-bearing liabilities.

Net interest income was $3,868 for the three month period ended June 30, 2012, and $4,488 for the same period in 2011. This decline is attributed to lower interest earning assets, primarily from the previously mentioned decline in loan balances. As noted, the current economic activity in the Corporation’s market area is slowly recovering; however, there are still lower loan originations. Additionally, management has focused on reducing risk in its portfolios by tightening credit standards, further reducing the universe of quality loan originations available. Management has also focused on reducing low yielding cash balances by increasing its investment securities portfolio.

As noted, the Corporation continues to reduce its overall borrowings, mainly through the FHLB, by either replacing them with customer deposits or by reducing the overall size of the balance sheet through deposit run-off. Deposits normally are less expensive than borrowings and contribute to the stable net interest margin the Bank has experienced. Net interest margin for the second quarter was 3.29%, compared to 3.36% for the first quarter 2012 and 3.38% for the second quarter 2011. The decrease is a result of decreased yields on loans, offset by a decrease in deposit costs.

The Asset/Liability Management Committee, which is responsible for determining deposit rates, continues to closely monitor the Bank’s cost of funds to take advantage of pricing and cash flow opportunities. Additionally, because of the increased competition in the Bank’s primary marketplace, management has continued to recognize the importance of offering special rates on certain deposit products. These special deposit rates tend to negatively affect the Corporation’s net interest margin. This strategy has yet to have a significant impact on the Bank’s cost of funds, as any increase in customer deposit rates is more than offset by a reduction in the need and amount of higher costing FHLB borrowings.

Provision and Allowance for Loan Losses. The provision for loan losses represents the charge to income necessary to adjust the allowance for loan losses to an amount that represents management’s assessment of the losses known and inherent in the Bank’s loan portfolio. All lending activity contains associated risks of loan losses and the Bank recognizes these credit risks as a necessary element of its business activity.

The provision for loan losses totaled $255 for the three months ended June 30, 2012, compared to $2,536 for the same period in 2011. This decline from the prior year quarter is mainly attributed to the overall improvement in credit quality within the Bank’s loan portfolios. Other contributing factors include improvement in delinquencies, improved workout results and stabilized real estate values, after periods of decline, within the Bank’s market area. Management maintains an allowance for loan losses at a level to absorb management’s estimate of probable inherent credit losses in its portfolio.

Nonaccrual loans at June 30, 2012 were $7,100, a decrease of $2,476 from the December 31, 2011 balance of $9,576. The portfolio of problem loans has continued to decrease in response to workout activities, and fewer new problem loans have surfaced. The majority of nonaccrual balances are attributed to loans in the investment real estate sector that were not generating sufficient cash flow to service the debt.

 

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The allowance for loan losses was $9,148, or 2.83% of total loans at June 30, 2012, compared to $9,584, or 2.66% of total loans at December 31, 2011. Net charge-offs for the second quarter were $450, compared to $1,481 in the prior year quarter. The decrease in charge-offs is due to the previously mentioned continued stabilization of the problem loan portfolio. Management will continue to monitor the credit quality of the loan portfolio and may recognize additional provisions in the future if needed to maintain the allowance for loan losses at an appropriate level.

Noninterest Income. Total noninterest income was $1,234 for the three months ended June 30, 2012, a decline from the $1,745 recognized in the second quarter 2011. The decline is attributed to reduced data processing revenue as a result of the sale of all outstanding contracts that were owned by Datatasx LLC in the prior year and reduced appreciation of Bank-owned life insurance when compared to the same quarter in the prior year.

Noninterest Expense. Total noninterest expense was $4,782 for the three months ended June 30, 2012, a 17.8% decrease compared to noninterest expense of $5,821 for the same period in 2011. The decrease is primarily the result of restructuring that included reducing staff levels and branch closures in 2011, driving a $409 decrease in salaries and benefits and a $225 decrease in occupancy and equipment. The Corporation has also seen a reduction in FDIC insurance premiums of $198 as in the prior year the FDIC changed the methodology for the calculation of the premium which had a positive impact on the Bank’s assessed amount.

Income Taxes. The Corporation recorded an income tax credit of $218 for the three months ended June 30, 2012, compared to an income tax credit of $268 in the same period in 2011. In 2010, management recognized a full allowance on the net deferred tax asset. Management is maintaining its full allowance tax position each quarter.

COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND JUNE 30, 2011

Net Income (Loss). The Corporation reported net income of $442 for the six month period ended June 30, 2012, compared to a loss of $1,823 for the same period in 2011. The improvement in profitability was mainly attributed to reduced provision expense and reduced operating expenses resulting from a reduction in staff and branch closures in 2011.

Net Interest Income. Net interest income was $7,874 for the six month period ended June 30, 2012, and $9,100 for the same period in 2011. The decline in net interest income is mainly attributed to lower interest earning assets when compared to the same period in 2011. The Corporation has been reducing its balance sheet in order to increase capital ratios, but has also experienced a decline in loan originations as the economy is slowly recovering. In lieu of increasing loan balances, management has allocated excess cash balances into its securities portfolio in order to increase yield on earning assets while providing collateral to fund future borrowing ability.

As noted earlier, the Corporation has been able to reduce its overall borrowings, by paying down debt with cash generated from the declining loan portfolio, and from an increase in retail deposits. Deposits normally are less expensive than borrowing which contributes to the stable net interest margin the Bank has experienced

Provision and Allowance for Loan Losses. The provision for loan losses totaled $730 for the six months ended June 30, 2012, compared to $3,211 for the same period in 2011. This decline in provision expense from the previous year’s quarter is mainly attributed to the overall improvement in credit quality within the Bank’s loan portfolios. Overall, problem loans have declined since year-end 2010, and delinquencies are down. Management maintains an allowance for loan losses at a level to absorb management’s estimate of probable inherent credit losses in its portfolio.

 

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Net charge-offs for the six months ended June 30, 2012 were $1,166, compared to net charge-offs of $4,103 for the same period in the prior year. The significant decrease in charge-offs is due to further stabilization in the loan portfolio. Management will continue to monitor the credit quality of the loan portfolio and may recognize additional provisions in the future if needed to maintain the allowance for loan losses at an appropriate level.

Noninterest Income. Total noninterest income decreased $325 to $2,922 for the six months ended June 30, 2012, compared to the same period in 2011. The decrease was primarily attributable to the decline in data processing revenue resulting from the sale of contracts that were owned by Datatasx in 2011.

Noninterest Expense. Total noninterest expense decreased $1,598 to $9,653 for the first six months of the year compared to 2011. The decrease is a result of restructuring that reduced staff and closed branches. The Corporation experience higher expenses in the prior year associated with legal and consulting as a result of the credit issues within its loan portfolios. As workout results improved in the current year, these expenses have decreased accordingly.

Income Taxes. The Corporation recorded an income tax credit of $29 for the six months ended June 30, 2012, compared to a credit of $292 in the same period in 2011. In 2010, management recognized a full allowance on the net deferred tax asset, and continues to record a full valuation allowance.

LIQUIDITY

Liquidity is the ability of the Corporation to fund customers’ needs for borrowing and deposit withdrawals. The purpose of liquidity management is to assure sufficient cash flow to meet all of the financial commitments and to capitalize on opportunities for business expansion. This ability depends on the financial strength, asset quality and types of deposit and investment instruments offered by the Corporation to its customers. The Corporation’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 Corporation 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 increased $17,839 to $57,153 at June 30, 2012 as compared to December 31, 2011. The Bank continues to offer a number of retail deposit programs to increase core deposits while reducing reliance on large depositors and CDARS deposits. Cash and equivalents represented 11.2% of total assets at June 30, 2012 and 7.5% of total assets at December 31, 2011. The Corporation has the ability to borrow funds from the FHLB and the Federal Reserve should the Corporation need to supplement its future liquidity needs. Management believes the Corporation’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.

 

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CAPITAL RESOURCES

Total shareholders’ equity increased $498 between December 31, 2011 and June 30, 2012. The increase is primarily due to net income of $442 and a decrease in accumulated other comprehensive loss.

Tier 1 capital is shareholders’ equity excluding the unrealized gain or loss on securities and intangible assets. Total capital includes Tier 1 capital plus the allowance for loan losses, not to exceed 1.25% of risk-weighted assets. Risk-weighted assets are the Corporation’s total assets after such assets are assessed for risk and assigned a weighting factor defined by regulation based on their inherent risk.

The Corporation and its subsidiaries meet all published regulatory capital requirements. For the Bank, the total risk-based capital ratio was 10.41% at June 30, 2012, while the Tier 1 risk-based capital ratio was 9.20%. Regulatory minimums call for Tier 1 capital and total risk-based capital ratios of 4.0% and 8.0% at June 30, 2012, respectively. The Bank’s Tier 1 leverage ratio, defined as Tier 1 capital divided by average assets, was 6.89% at June 30, 2012. As previously reported, in October 2010, the Bank entered into a Consent Agreement with the FDIC and a written agreement with the Ohio Division which requires that Tier-1 and Total Risk Based Capital percentages be 9.0% and 13.0% respectively. As a result, the Bank is currently not in compliance with these orders. The Corporation has been exploring alternatives for raising Capital. On July 18, 2012, the Corporation filed a Forms S-1 that announced a rights offering to standby purchasers for a total of approximately $13.2 million. The Corporation expects that it will be able to meet the Bank’s Capital requirements if the rights offering is completed.

The following table sets forth the Corporation’s obligations and commitments to make future payments under contract as of June 30, 2012.

 

Contractual Obligations

          Payment Due by Year  
   Total      Less than
1 year
     1-3 years      3-5 years      More than
5 years
 

FHLB advances

   $ 17,568       $ 8,500       $ 3,794       $ 2,798       $ 2,476   

Operating lease obligations

     5,275         598         1,062         852         2,763   

Loan and line of credit commitments

     69,899         43,561         —           —           26,338   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Contractual Obligations

   $ 92,742       $ 52,659       $ 4,856       $ 3,650       $ 31,577   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Item 3. Quantitative and Qualitative Disclosure about Market Risk

ASSET AND LIABILITY MANAGEMENT AND MARKET RISK

The Corporation’s primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. Interest rate risk is the possibility that the Corporation’s financial condition will be adversely affected due to movements in interest rates. The income of financial institutions is primarily derived from the excess of interest earned on interest-earning assets over the interest paid on interest-bearing liabilities. Accordingly, the Corporation places great importance on monitoring and controlling interest rate risk. The measurement and analysis of the exposure of the Corporation’s primary operating subsidiary, the Bank , to changes in the interest rate environment are referred to as asset/liability management. One method used to analyze the Corporation’s sensitivity to changes in interest rates is the “net portfolio value” (“NPV”) methodology.

NPV is generally considered to be the present value of the difference between expected incoming cash flows on interest-earning and other assets and expected outgoing cash flows on interest-bearing and other liabilities. For example, the asset/liability model that the Corporation currently employs attempts to measure the change in NPV for a variety of interest rate scenarios, typically for up and down parallel shifts of 100 to 400 basis points in market rates.

The Corporation’s Annual Report includes a table depicting the changes in the Corporation’s interest rate risk as of December 31, 2011, as measured by changes in NPV for instantaneous and sustained parallel shifts of -100 to +400 basis points in market interest rates. Management believes that no events have occurred since December 31, 2011 that would significantly change their ratio of rate sensitive assets to rate sensitive liabilities.

The Corporation’s NPV is more sensitive to rising rates than declining rates. From an overall perspective, such difference in sensitivity occurs principally because, as rates rise, borrowers do not prepay fixed-rate loans as quickly as they do when interest rates are declining. Thus, in a rising interest rate environment, because the Corporation has fixed-rate loans in its loan portfolio, the amount of interest the Corporation would receive on its loans would increase relatively slowly as loans are slowly prepaid and new loans at higher rates are made. Moreover, the interest the Corporation would pay on its deposits would increase rapidly because the Corporation’s deposits generally have shorter periods for repricing.

The Corporation can utilize various tools to reduce exposure to changes in interest rates including offering floating versus fixed rate products, or utilizing interest rate swaps. Additional consideration should also be given to today’s current interest rate levels. Several deposit products are within 200 basis points of zero percent and other products within 300 basis points. Should rates decline, fewer liabilities could be repriced down to offset potentially lower yields on loans. Thus, decreases could also impact future earnings and the Corporation’s NPV.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the NPV approach. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and mortgage-backed securities and early withdrawal levels from certificates of deposit would likely deviate significantly from those assumed in making risk calculations.

 

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Item 4. Controls and Procedures

The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Corporation’s disclosure controls and procedures as of June 30, 2012, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) were effective as of June 30, 2012.

There was no change in the Corporation’s internal control over financial reporting that occurred during the Corporation’s fiscal quarter ended June 30, 2012, that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

 

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FORM 10-Q

Quarter ended June 30, 2012

PART II - OTHER INFORMATION

 

Item 1.       Legal Proceedings
      There are no matters required to be reported under this item.
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, incorporated by reference to the Company’s Report on Form 10-Q filed with the Commission on November 14, 2003, film number 031001218.
  

  3.2

   Amended and Restated Articles of Incorporation of DCB Financial Corp, incorporated by reference to the Company’s Report on Form 10-Q filed with the Commission on November 14, 2003, film number 031001218.
  

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

 

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32.2

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

 101

   The following information from DCB Financial Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012 formatted in XBRL (eXtensible Business Reporting Language ) pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011; (ii) the Condensed Consolidated Statements of Operations for the three months ended June 30, 2012 and 2011 (unaudited); (iii) the Condensed Consolidated Statements of Comprehensive Income for the three months ended June 30, 2012 and 2011 (unaudited); (iv) the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited); (v) the Notes to Condensed Consolidated Financial Statements (furnished herewith).
      Pursuant to Rule 406T of Regulation S-T, the interactive data files included as Exhibit 101 are furnished and not deemed filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those Sections.

 

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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)
Date: August 14, 2012  

/s/ Ronald J. Seiffert

  Ronald J. Seiffert
  President and Chief Executive Officer

 

Date: August 14, 2012  

/s/ John A. Ustaszewski

  John A. Ustaszewski
  Senior Vice President and Chief Financial Officer

 

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INDEX TO EXHIBITS

 

EXHIBIT

NUMBER

  

DESCRIPTION

31.1    Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32.1   

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

of 2002.

32.2   

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

of 2002.

101    The following information from DCB Financial Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012 formatted in XBRL (eXtensible Business Reporting Language ) pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011; (ii) the Condensed Consolidated Statements of Operations for the three months ended June 30, 2012 and 2011 (unaudited); (iii) the Condensed Consolidated Statements of Comprehensive Income for the three months ended June 30, 2012 and 2011 (unaudited); (iv) the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited); (v) the Notes to Condensed Consolidated Financial Statements (furnished herewith).
   Pursuant to Rule 406T of Regulation S-T, the interactive data files included as Exhibit 101 are furnished and not deemed filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those Sections.

 

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