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EX-21 - EXHIBIT 21 - DCB FINANCIAL CORPv434666_ex21.htm
EX-23 - EXHIBIT 23 - DCB FINANCIAL CORPv434666_ex23.htm
EX-31.2 - EXHIBIT 31.2 - DCB FINANCIAL CORPv434666_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - DCB FINANCIAL CORPv434666_ex32-1.htm
EX-32.2 - EXHIBIT 32.2 - DCB FINANCIAL CORPv434666_ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - DCB FINANCIAL CORPv434666_ex31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

(Mark one)

 

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

 

For the fiscal year ended December 31, 2015

or

 

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

 

For the transition period from ___________________ to____________________

 

Commission file number: 0-22387

 

DCB Financial Corp

(Exact name of registrant as specified in its charter)

 

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

 

110 Riverbend Ave., Lewis Center, Ohio   43035
(Address of principal executive offices)   (Zip Code)

 

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

 

Securities registered pursuant to Section 12(b) of the Act:   None

 

Securities registered pursuant to Section 12(g) of the Act:   Common Shares, no par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.

Yes ¨ No x

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 

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

 

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

 

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

 

At June 30, 2015, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on a common share price of $7.25 per share (such price being the closing share price on such date) was $39,942,715.

 

At March 22, 2016, the registrant had 7,357,844 common shares outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III of this Annual Report on Form 10-K incorporates by reference certain information from the registrant’s definitive proxy statement for the 2016 Annual Meeting of Shareholders.

 

 

 

 

PART I

 

Cautionary Note Regarding Forward-Looking Statements

 

We may, from time to time, make written or oral “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements contained in our filings with the Securities and Exchange Commission (the “SEC”), our reports to shareholders and in other communications by us. This Annual Report on Form 10-K contains “forward-looking statements” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “intend,” “should,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, statements of our goals, intentions and expectations, statements regarding our business plans and prospects and growth and operating strategies, estimates of our risks, and future costs and benefits that are subject to various factors that could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

 

·an increase in competitive pressure in the banking industry;
·changes in interest rates;
·changes in regulatory environment;
·general economic conditions, both nationally and regionally, resulting, among other things, in a deterioration in credit quality;
·changes in business conditions and inflation;
·changes in monetary policies;
·changes in the securities markets;
·changes in technology used in the banking business;
·changes in laws and regulations to which we are subject;
·our ability to maintain and increase market share and control expenses; and
·other factors detailed from time to time in our SEC filings.

 

Any or all of our forward-looking statements in this Annual Report on Form 10-K, and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statements can be guaranteed. We disclaim any obligation to subsequently 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.

 

Unless the context indicates otherwise, all references in this Annual Report on Form 10-K to “Delaware,” “DCB,” “we,” “us,” “our company,” “corporation” and “our” refer to DCB Financial Corp and its direct and indirect subsidiaries Delaware County Bank and Trust Company, our wholly owned bank subsidiary (the “Bank”), DCB Title Services, LLC, DCB Insurance Services, LLC, DataTasx LLC, ORECO, Inc., and 110 Riverbend, LLC.

 

Item 1. Business

 

General

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

 

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

 

At December 31, 2015, we had 164 full-time equivalent employees. Our employees are not represented by any collective bargaining group. We consider our employee relations to be good.

 

The Bank is a member of the Federal Home Loan Bank System, and its deposits are insured by the Federal Deposit Insurance Corporation up to applicable limits.

 

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Services

We offer full-service banking with a broad range of financial products to meet the needs of our commercial, retail, government, and investment management customers located primarily in Delaware, Franklin and Union Counties in Ohio. Depository account services include interest and non-interest-bearing checking accounts, money market accounts, savings accounts, time deposit accounts, and individual retirement accounts. Our lending activities include the making of residential and commercial mortgage loans, business lines of credit, working capital facilities and business term loans, as well as installment loans, home equity loans, and personal lines of credit to individuals. Investment management and trust services include personal trust, employee benefit trust, investment management, custodial, and financial planning. Through Raymond James Financial Services, Inc., member FINRA/SIPC, we provide financial counseling and brokerage services. We also offer safe deposit boxes, wire transfers, collection services, drive-up banking facilities, 24-hour night depositories, automated teller machines, 24-hour telephone banking, and internet banking. The Bank’s core business is not significantly affected by a single industry, however, a number of the Bank’s depositors are public fund units which operate within its geographic footprint. Though this group’s deposit base is significant, overall balances do not fluctuate materially. No material industry or group concentrations exist in the loan portfolio.

 

Competition

Our business is highly competitive. We compete not only with other commercial banks, but also with other financial institutions such as thrifts, credit unions, money market and mutual funds, insurance companies, brokerage firms, and a variety of other financial services companies. Competition is also increasing for deposits and lending services from internet-based competitors.

 

Supervision and Regulation

The following discussion summarizes the primary laws and regulations applicable to bank holding companies and state banks and provides certain information relevant to us. This regulatory framework is primarily intended for protecting depositors, consumers, and the deposit insurance fund that insures bank deposits. The information about statutory and regulatory provisions is qualified in its entirety by reference to those provisions. Congress, regulatory agencies, and state legislatures frequently propose changes to the law and regulations affecting the banking industry. A change in the statutes, regulations, or regulatory policies applicable to our Company or our subsidiaries may have a material adverse effect on our business, financial condition, and results of operations.

 

Bank Holding Company Regulation

We are a bank holding company registered under the Bank Holding Company Act of 1956 and are subject to supervision, regulation and examination by the Federal Reserve Board (“FRB”). The Bank Holding Company Act and other federal laws and regulations subject bank holding companies to restrictions on the activities in which they may engage, and to a supervisory regime that provides for possible regulatory enforcement actions for violations of laws and regulations.

 

We are also a financial holding company; a bank holding company that also qualifies as a financial holding company can expand into a wide variety of services deemed by the FRB to be financial in nature, including securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting; and merchant banking. For a bank holding company to qualify for, and retain, financial holding company status, the holding company must be deemed to be “well managed” and “well capitalized” and each one of the bank holding company’s subsidiary depository institutions must be deemed “well capitalized” and “well managed” by regulators and must have received at least a “Satisfactory” rating on its last Community Reinvestment Act examination.

 

The FRB is our primary federal regulator. The FRB has broad authority to prohibit activities of bank holding companies and their nonbanking subsidiaries that represent unsafe or unsound practices or which constitute violations of laws or regulations, and can bring enforcement actions, including the assessment of civil money penalties, for certain violations or practices.

 

Bank holding companies must act as a source of financial and managerial strength to each of their banking subsidiaries and to commit resources to their support.

 

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The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the FRB before it may acquire all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, over 5% of any class of voting shares of such bank. In approving bank acquisitions by bank holding companies, the FRB must consider factors including, among others, the financial and managerial resources and future prospects of the bank holding company and the banks concerned; the convenience and needs of the communities to be served; and competitive factors. The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a bank or bank holding company unless the FRB has been notified and has not objected to the transaction. In addition, any entity must obtain the approval of the FRB under the Bank Holding Company Act before acquiring 25% (5% with an acquirer that is a bank holding company) or more of our outstanding common shares, or otherwise obtaining control or a “controlling influence” over a bank.

 

Our ability to pay dividends depends on the ability of the Bank to pay dividends to us. State and federal statutes, regulations and policies limit the ability of both our Company and the Bank to pay dividends. For example, the FRB has a policy that bank holding companies should pay cash dividends on common shares only out of income available over the past year, and only if prospective earnings retention follows the holding company’s expected future needs and financial condition. A holding company should not maintain a level of cash dividends that undermines the holding company’s ability to serve as a source of strength to its banking subsidiaries. Even when the legal ability exists, our Company or the Bank may limit the payment of dividends to retain earnings for corporate use.

 

Bank Regulation

The Bank is subject to regulation and examination primarily by the Ohio Division of Financial Institutions (the “ODFI”) and by the Federal Deposit Insurance Corporation (the “FDIC”). ODFI and FDIC regulations govern permissible activities, capital requirements, dividend limitations, investments, loans and other matters for the Bank. The ODFI and the FDIC have the authority to impose sanctions on the Bank and, under certain circumstances, may place the Bank into receivership.

 

The FDIC is the primary federal banking regulator of the Bank. It is an independent federal agency that insures the deposits, up to prescribed statutory limits, of federally-insured banks and savings associations, and safeguards the safety and soundness of the financial institution industry. The FDIC sets deposit insurance premiums for each insured depository institution based upon the institution’s capital level and supervisory rating and other information the FDIC determines to be related to the risk posed by the institution.

 

The Bank is not a member of the Federal Reserve System.

 

Non-Banking Subsidiaries

Our non-banking subsidiaries are also subject to regulation by the FRB and other applicable federal and state agencies. DCB Insurance is a licensed insurance agency that is subject to regulation by the Ohio Department of Insurance and the state insurance regulatory agencies of those states where it may conduct business.

 

Other Government Agencies

Securities and Exchange Commission (“SEC”). We are also under the jurisdiction of the SEC and certain state securities commissions for matters relating to the offering and sale of our securities.

 

Federal Home Loan Bank (“FHLB”). The Bank is a member of the FHLB which provides credit to its members in advances. As a member of the FHLB, the Bank must maintain an investment in the capital stock of the FHLB in a specified amount.

 

Legislation and Regulation

The Dodd-Frank Act. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or “Dodd-Frank”), passed into law on July 21, 2010, is a broad-ranging financial reform law that affects numerous aspects of the U.S. financial regulatory system. It calls for over 200 rulemakings by numerous federal agencies, some of which have issued rules. However, numerous rules have yet to be proposed or finalized. The Dodd-Frank Act covers subjects including, but not limited to, systemic risk, corporate governance, executive compensation, credit rating agencies, capital and derivatives.

 

The Dodd-Frank Act created the Consumer Financial Protection Bureau (the “CFPB”), which regulates consumer financial products and services, and certain financial services providers. The CFPB may prevent unfair, deceptive or abusive acts or practices, and ensures consistent enforcement of laws so consumers have access to fair, transparent and competitive markets for consumer financial products and services. The CFPB has rulemaking and interpretive authority regarding the Bank. As an institution with less than $10 billion in assets, the Bank is not directly subject to the jurisdiction of the CFPB, although the Bank is subject to the consumer protection regulations issued by the CFPB.

 

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Transactions with Affiliates, Directors, Executive Officers and Shareholders. The Bank’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and the FRB’s Regulation W. In general, these transactions must be on terms at least as favorable to the Bank as comparable transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate percentage of the Bank’s capital. Collateral in specified amounts must usually be provided by affiliates to receive loans from the Bank.

 

Loans to Insiders. The Bank’s authority to extend credit to executive officers, directors and greater than 10% shareholders, and entities such persons control, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated under that Act by the FRB, and state law applicable to the Bank. These loans must be made on terms (including interest rates charged and collateral required) substantially the same as those offered to unaffiliated individuals, or be made as part of a benefit or compensation program and on terms widely available to employees, and must not involve a greater than normal risk of repayment. In addition, the loans a bank may make to these persons is based, in part, on the bank’s capital position, and specified approval procedures must be followed in making loans which exceed specified amounts.

 

Minimum Capital and Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), identifies five capital categories for insured depository institutions and requires the respective federal regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within such categories. The federal regulatory agencies, including the FRB and the FDIC, have adopted substantially similar regulatory capital guidelines and regulations consistent with the requirements of FDICIA, and established a system of prompt corrective action to resolve certain problems of undercapitalized institutions. This system is based on the following five capital level categories for insured depository institutions: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.”

 

The federal banking agencies may (and sometimes must) take certain supervisory actions depending upon a bank’s capital level. If a bank becomes “critically undercapitalized,” the banking agencies must appoint a receiver or conservator for the bank within 90 days, unless the bank’s primary regulator determines, with the concurrence of the FDIC, that other action would better achieve regulatory purposes. Throughout 2015, both our regulatory capital ratios and those of the Bank were over the levels established for well-capitalized institutions. In 2015, an institution was deemed to be well-capitalized if it satisfied all of the following requirements:

 

·total risk-based capital ratio of 10% or greater;
·Tier 1 risk-based capital ratio of 8% or greater;
·common equity Tier 1 capital ratio of 6.5% or greater;
·Tier 1 leverage ratio of 5% or greater; and
·it is not subject to a regulatory order, agreement, or directive to meet and maintain a capital level for any capital measure.

 

Basel III Minimum Capital Requirements. The FRB sets minimum risk-based capital ratio and leverage ratio guidelines for bank holding companies. Under the guidelines and related policies, bank holding companies must maintain capital sufficient to meet both a risk-based asset ratio test and a leverage ratio test on a consolidated basis. The risk-based ratio is determined by allocating assets and specified off-balance sheet commitments into four weighted categories, with higher weighting assigned to categories perceived as representing greater risk. The risk-based ratio represents total capital divided by total risk-weighted assets. The leverage ratio is core capital divided by total assets adjusted as specified in the guidelines. The Bank is subject to substantially similar capital requirements.

 

Beginning on January 1, 2015, the capital requirements for our Company and the Bank increased as a result of the phase-in of certain changes to capital requirements for U.S. banking organizations. On July 2, 2013, the FRB voted to adopt final capital rules implementing Basel III requirements for U.S. banking organizations. The final rules establish an integrated regulatory capital framework to implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. Under the final rule, minimum requirements increased for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the final rule includes a new minimum ratio of common equity tier 1 capital (Tier I Common) to risk-weighted assets and a Tier 1 Common capital conservation buffer of 2.5% of risk-weighted assets that applies to all supervised financial institutions. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets and includes a minimum leverage ratio of 4% for all banking organizations. These new minimum capital ratios became effective for us on January 1, 2015, and will be fully phased-in on January 1, 2019. The following table shows the remaining phase-in of the Basel III regulatory capital levels from January 1, 2016 until January 1, 2019:

 

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   January 1 
   2016   2017   2018   2019 
Capital conservation buffer   0.625%   1.25%   1.875%   2.50%
Minimum common equity tier 1 capital ratio + capital conservation buffer   5.125%   5.75%   6.375%   7.00%
Minimum tier 1 capital ratio + capital conservation buffer   6.625%   7.25%   7.875%   8.50%
Minimum total risk-based capital ratio + capital conservation buffer   8.625%   9.25%   9.875%   10.50%

 

 

Implementing Basel III is not expected to have a material impact on our Company’s or the Bank’s capital ratios and the management of the Company and the Bank expect they will continue to be well-capitalized.

 

Community Reinvestment Act (“CRA”). The CRA requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution must help meet the credit needs of its market areas by providing credit or other financial assistance to low and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. As of December 31, 2015, the FDIC’s most recent performance evaluation of the Bank resulted in an overall rating of “satisfactory.”

 

Customer Privacy and Other Consumer Protections. The Bank is subject to regulations limiting the ability of financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated party. The Bank is also subject to numerous federal and state laws aimed at protecting consumers, including for example the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Bank Secrecy Act, the Community Reinvestment Act and the Fair Credit Reporting Act.

 

Bank Secrecy Act. Our Company and the Bank are also subject to the Bank Secrecy Act, as amended by the USA PATRIOT Act, which gives the federal government powers to address money laundering and terrorist threats through enhanced domestic security measures, expanded surveillance powers, and mandatory transaction reporting obligations. The Bank Secrecy Act imposes an affirmative obligation on the Bank to report currency transactions that exceed certain thresholds and to report other transactions determined to be suspicious. The Bank has in place a comprehensive program to ensure compliance with these requirements. In 2015, the Bank engaged in a limited number of transactions of any kind with foreign financial institutions or foreign persons.

 

Monetary Policy. The FRB regulates money and credit conditions and interest rates to influence general economic conditions primarily through open market operations in U.S. government securities, changes in the discount rate on bank borrowings, and changes in the reserve requirements against depository institutions’ deposits. These policies and regulations significantly affect the overall growth and distribution of loans, investments and deposits, and interest rates charged on loans and paid on deposits. These monetary policies have had a significant effect on the operating results of financial institutions in the past and are expected to continue to have significant effects. In view of the changing conditions in the economy, the money markets and the activities of monetary and fiscal authorities, we can make no definitive predictions on future changes in interest rates, credit availability or deposit levels or their impact on us or the Bank.

 

Volcker Rule. In December 2013, five federal agencies adopted a final regulation implementing the Volcker Rule provision of the Dodd-Frank Act (the “Volcker Rule”). The Volcker Rule places limits on the trading activity of insured depository institutions and entities affiliated with a depository institution, subject to certain exceptions. The trading activity includes a purchase or sale as principal of a security, derivative, commodity future or option on any such instrument to benefit from short-term price movements or to realize short-term profits. The Volcker Rule also prohibits a banking entity from having an ownership interest in, or certain relationships with, a hedge fund or private equity fund, with several exceptions. The Bank does not currently engage in any of the trading activities with any of the funds regulated by the Volcker Rule.

 

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Executive and Incentive Compensation. In June 2010, the FRB and the FDIC issued joint interagency guidance on incentive compensation policies (the “Joint Guidance”) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. This principles-based guidance, which covers all employees that can materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should: (1) provide incentives that do not encourage risk-taking beyond the organization’s ability to identify and manage risks; (2) be compatible with effective internal controls and risk management; and (3) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Under the Joint Guidance, the FRB and the FDIC will review as part of a regular, risk-focused examination process, the incentive compensation arrangements of financial institutions such as our Company and the Bank. Enforcement actions may be taken against an institution if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness, and prompt and effective measures are not being taken to correct the deficiencies.

 

Effect of Environmental Regulation. Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings or competitive position of our Company and our subsidiaries. We believe the operations of our subsidiaries have little environmental impact and, therefore, we anticipate no material capital expenditures for environmental control facilities for our current fiscal year or for the foreseeable future. We believe our primary exposure to environmental risk is through the lending activities of the Bank. In cases where management believes environmental risk potentially exists, the Bank mitigates its environmental risk exposures by requiring environmental site assessments at the time of loan origination to confirm collateral quality of commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the property and adjacent sites. In addition, environmental assessments are typically required prior to any foreclosure activity involving non-residential real estate collateral.

 

Future Legislation. Significant legislation affecting financial institutions and the financial industry is from time to time introduced by the U.S. Congress and the Ohio Legislature. Such legislation may continue to change banking statutes and the operating environment of our Company and our subsidiaries in substantial and unpredictable ways, and could significantly increase or decrease costs of doing business, limit or expand permissible activities, or affect the competitive balance among financial institutions.

 

Item 1A. Risk Factors

 

There are risks inherent to our business. The material risks and uncertainties that we believe affect our Company are described below. Any of the following risks could affect our financial condition and results of operations and could be material and/or adverse in nature.

 

Deterioration in local economic conditions may negatively impact our financial performance.

Our success depends primarily on the general economic conditions of central Ohio and the specific local markets in which we operate. Unlike larger national or other regional banks that are more geographically diversified, we provide banking and financial services to customers primarily in central Ohio.  The local economic conditions in these areas have a significant impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources.

 

As a lender with the majority of our loans secured by real estate or made to businesses in central Ohio, a downturn in these local economies could cause significant increases in non-performing loans, which could negatively impact our earnings. Declines in real estate values in our market areas could cause any of our loans to become inadequately collateralized, which would expose us to greater risk of loss. Additionally, a decline in real estate values could materially and adversely impact our portfolio of residential and commercial real estate loans and could result in the decline of originations of such loans, as most of our loans, and the collateral securing our loans, are located in those areas.

 

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Variations in interest rates may negatively affect our financial performance.

Our earnings and financial condition are largely dependent upon net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest rate spreads could adversely affect our earnings and financial condition. We cannot predict with certainty, or control, changes in interest rates. Regional and local economic conditions and the policies of regulatory authorities, including monetary policies of the FRB, affect interest income and interest expense.  High interest rates could also affect the amount of loans that we can originate because higher rates could cause customers to apply for fewer mortgages or cause depositors to shift funds from accounts that have a comparatively lower cost to accounts with a higher cost.  We may also experience customer attrition due to competitor pricing. With short-term interest rates at historic lows and the current Federal Funds target rate at 25-50 bps, our interest-bearing deposit accounts, particularly core deposits, have repriced to historic lows as well.  With the possibility that the FRB will continue to raise the Fed Funds target rate beyond the 25 basis points increase it implemented in December 2015, our challenge will be managing the impact of an increasing interest rate environment.  If the cost of interest-bearing deposits increases at a rate greater than the yields on interest-earning assets increase, net interest income will be negatively affected. Changes in the asset and liability mix may also affect net interest income. Similarly, lower interest rates cause higher yielding assets to prepay and floating or adjustable rate assets to reset to lower rates. If we are not able to reduce our funding costs sufficiently, due to either competitive factors or the maturity schedule of existing liabilities, then our net interest margin will decline.

 

Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial or unexpected change in, or prolonged change in market interest rates could have a material adverse effect on our business, financial condition and results of operations. See the section captioned “Net Interest Income” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosure About Market Risk for further discussion related to our management of interest rate risk.

 

Our lending, and particularly our emphasis on commercial lending, exposes us to the risk of losses upon borrower default.

There are inherent risks associated with our lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where we operate as well as those across Ohio and the entire United States. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing those loans. We are also subject to various laws and regulations that affect our lending activities. Failure to comply with applicable laws and regulations could subject our Company to regulatory enforcement action that could result in the assessment of significant civil money penalties against us.

 

As of December 31, 2015, approximately 52.9% of our loan portfolio consisted of commercial and industrial, commercial construction and commercial real estate loans. These types of loans generally expose a lender to greater risk of non-payment and loss than residential real estate loans because repayment of the loans often depends on the successful operation of the property, the income stream of the borrowers and, for construction loans, the accuracy of the estimate of the property’s value at completion of construction and the estimated cost of construction. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. Because our loan portfolio contains a significant number of these loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for loan losses and/or an increase in loan charge-offs, all of which could have a material adverse effect on our business, financial condition and results of operations. See the section captioned “Loans” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion related to commercial and industrial, agricultural, construction and commercial real estate loans.

 

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.

We maintain an allowance for loan losses, which is an allowance established through a provision for loan losses charged to expense, that represents our management’s best estimate of probable losses that could be incurred within the existing portfolio of loans. The allowance, in the judgment of our management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects our management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political, environmental, and regulatory conditions and unidentified losses inherent in the current loan portfolio.

 

The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of our management.

 

 8 
 

 

If charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses. These potential increases in the allowance for loan losses would result in a decrease in net income, and possibly capital, and may have a material adverse effect on our business, financial condition and results of operations. See the section captioned “Asset Quality and the Allowance for Loan Losses” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion related to our process for determining the appropriate level of the allowance for loan losses.

 

Strong competition within our industry and market area could hurt our performance and slow our growth.

We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and have more financial resources. Such competitors primarily include national, regional, and community banks within our market area. Additionally, various banks continue to enter or have announced plans to enter the market in which we currently operate. We also face competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking.  Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.

 

Our ability to compete successfully depends on a number of factors, including, among other things:

 

· our ability to develop, maintain and build upon long-term customer relationships based on top quality service, high ethical standards and safe, sound assets;
   
· our ability to expand our market position;
   
· our scope, relevance and pricing of products and services offered to meet customer  needs and demands;
   
· the rate at which we introduce new products and services relative to our competitors;
   
· customer satisfaction with our level of service;
   
· industry and general economic trends; and
   
· our ability to attract and retain talented employees.

 

Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our business, financial condition and results of operations.

 

Changes in the equity markets could materially affect the level of assets under management and the demand for other fee-based services.

Economic downturns could affect the volume of income from and demand for fee-based services.  Revenues from the trust and wealth management businesses depend in large part on the level of assets under management.  Market volatility that leads customers to liquidate investments, as well as lower asset values, can reduce our level of assets under management and thereby decrease our investment management revenues.

 

We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.

Primarily through the Bank and certain non-bank subsidiaries, we are subject to extensive federal regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See the section captioned “Supervision and Regulation” in Item 1. Business for further discussion.

 

 9 
 

 

Compliance with the Dodd-Frank Act and other regulatory reforms may increase our costs of operations and adversely impact our earnings and capital ratios

The Dodd-Frank Act has significantly changed the bank regulatory landscape and has impacted, and will continue to impact the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.  Among other things, the Dodd-Frank Act creates a new federal financial consumer protection agency, tightens capital standards, imposes clearing and margining requirements on many derivatives activities, and generally increases oversight and regulation of financial institutions and financial activities. 

 

The scope and impact of many of the Dodd-Frank Act’s provisions will be determined over time as regulations are issued and become effective. As a result, we cannot predict the ultimate impact of the Dodd-Frank Act on us at this time, including the extent to which it could increase costs or limit our ability to pursue business opportunities in an efficient manner, or otherwise adversely affect our business, financial condition and results of operations. However, it is expected that at a minimum such provisions will increase our operating and compliance costs.  The financial reform legislation and any rules that are ultimately issued could have adverse implications on the financial industry, the competitive environment, and our business. We will apply resources to ensure that we are in compliance with all applicable provisions of the Dodd-Frank Act and any implemented rules, which may increase our costs of operations and adversely impact our earnings.

 

We are subject to liquidity risk which could adversely affect net interest income and earnings

The purpose of our liquidity management is to meet the cash flow obligations of our customers for both deposits and loans.  The primary liquidity measurement that we utilize is called Basic Surplus which captures the adequacy of our access to reliable sources of cash relative to the stability of our funding mix of average liabilities.  This approach recognizes the importance of balancing levels of cash flow liquidity from short and long-term securities with the availability of dependable borrowing sources which can be accessed when necessary.   However, competitive pressure on deposit pricing could result in a decrease in our deposit base or an increase in funding costs. 

 

In addition, liquidity will come under additional pressure if loan growth exceeds deposit growth.  These scenarios could lead to a decrease in our basic surplus measure below the minimum policy level of 5%.  To manage this risk, we have the ability to purchase brokered time deposits and borrow against established borrowing facilities with other banks (Federal funds) and with the FHLB and FRB.  However, there can be no assurances that these liquidity sources will be available to us on favorable terms. Unfavorable terms, including without limitation interest rates, could adversely affect our net interest income, and therefore our earnings.  See the section captioned “Liquidity” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Our ability to pay dividends and otherwise pay our obligations as they come due is substantially dependent on capital distributions from our subsidiaries.

Our Company is a separate and distinct legal entity from our subsidiaries. We receive substantially all of our revenue from dividends from the Bank. These dividends are the principal source of funds to pay dividends on our common shares and interest and principal on our debt. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay to us. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. The Bank did not pay any dividends to us in 2015, and we cannot predict when, or if, any such dividends will be paid in the future. The inability of the Bank to pay dividends to us may impair our ability to pay obligations or pay dividends on our common shares. The continued inability to receive dividends from the Bank could have a material adverse effect on our business, financial condition and results of operations.

 

A breach of information security, including as a result of cyber-attacks, could disrupt our business and impact our earnings.

We depend upon data processing, communication and information exchange on a variety of computing platforms and networks, and over the internet.  In addition, we rely on the services of a variety of vendors to meet our data processing and communication needs.  Despite existing safeguards, we cannot be certain that all of our systems are free from vulnerability to attack or other technological difficulties or failures.  If information security is breached or difficulties or failures occur, despite the controls we and our third party vendors have instituted, information can be lost or misappropriated, resulting in financial loss or costs and reputational damage to us or damages to others. Such costs or losses could exceed the amount of insurance coverage, if any, which would adversely affect our business, financial condition, and results of operations.

 

 10 
 

 

We continually encounter technological change and the failure to understand and adapt to these changes could hurt our business.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological changes affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

 

Negative developments in the housing market, financial industry and the domestic and international credit markets could adversely affect our operations and results.

Dramatic declines in the housing market in recent years, with falling home prices and increased foreclosures, high unemployment and under-employment, negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions.

 

The economic pressure experienced by consumers during the recent recession and lack of confidence in the financial markets adversely affected our business, financial condition and results of operations. In particular, we saw increases in foreclosures in our markets, increases in expenses such as loan collection and other real estate owned (“OREO”) expenses, and a low reinvestment rate environment.  While we believe the financial and housing markets have recovered, we expect that the challenging conditions in these markets may reappear in the future. In particular, we may be affected in one or more of the following ways:

 

·we currently face increased regulation of our industry and compliance with such regulation may increase our costs and limit our ability to pursue business opportunities;

 

·our ability to borrow from other financial institutions or to access the debt or equity capital markets on favorable terms or at all could be adversely affected by disruptions in the capital markets; or

 

·competition in our industry could intensify as a result of the increasing consolidation of financial services companies in connection with challenging market conditions.

 

The potential withdrawal of the Bank's deposits from public institutions present possible liquidity and earnings risks.

At December 31, 2015, approximately 13.4% of the Bank's deposits were received from public institutions. The possibility of withdrawal of such deposits, which do not tend to be long-term deposits, poses liquidity and earnings risk to us.

 

We are subject to other-than-temporary impairment risk which could negatively impact our financial performance.

We recognize an impairment charge when the decline in the fair value of debt securities below their cost basis is judged to be other-than-temporary. Significant judgment is used to identify events or circumstances that would likely have a significant adverse effect on the future use of the investment. We consider various factors in determining whether an impairment is other-than-temporary, including the severity and duration of the impairment, forecasted recovery, the financial condition and near-term prospects of the investee, and whether we have the intent to sell and whether it is more likely than not we will be forced to sell the security in question.

 

Information about unrealized gains and losses is subject to changing conditions. The values of securities with unrealized gains and losses will fluctuate, as will the values of securities that we identify as potentially distressed. Our current evaluation of other-than-temporary impairments reflects our intent to hold securities for a reasonable period of time sufficient for a forecasted recovery of fair value. However, our intent to hold certain of these securities may change in future periods as a result of the facts and circumstances impacting a specific security. If our intent to hold a security with an unrealized loss changes, and we do not expect the security to fully recover prior to the expected time of disposition, we will write down the security to its fair value in the period that our intent to hold the security changes. The impairment and related write downs of these securities could have a material adverse impact on our financial condition, business, and results of operations.

 

 11 
 

 

Our controls and procedures may fail or be circumvented, which may result in a material adverse effect on our business, financial condition and results of operations.

Our management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, financial condition and results of operations.

 

The preparation of financial statements requires our management to make estimates about matters that are inherently uncertain.

Our management’s accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods in order to ensure that they comply with United States generally accepted accounting principles (“GAAP”) and reflect our management’s judgment as to the most appropriate manner in which to record and report our financial condition and results of operations. Due to the inherent nature of these estimates, we cannot provide absolute assurance that the estimates will not significantly change in subsequent periods.

 

We are exposed to risk of environmental liabilities with respect to properties to which we obtain title.

A significant portion of our loan portfolio at December 31, 2015 was secured by real estate. In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a government entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation and remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. These costs and claims could have a material adverse effect on our business, financial condition and results of operations.

 

We may be adversely affected by the soundness of other financial institutions including the FHLB of Cincinnati.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated if the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. There is no assurance that any such losses would not materially and adversely affect our business, financial condition or results of operations.

 

We own common stock of FHLB of Cincinnati in order to qualify for membership in the FHLB system, which enables the Bank to borrow funds under the FHLB of Cincinnati’s advance program.  The carrying value and fair market value of our FHLB of Cincinnati common stock was $3.2 million as of December 31, 2015.

 

There are 12 branches of the FHLB, including Cincinnati.  The 12 FHLB branches are jointly liable for the consolidated obligations of the FHLB system.  To the extent that one FHLB branch cannot meet its obligations to pay its share of the system’s debt, other FHLB branches can be called upon to make the payment.  Any such adverse effects on the FHLB of Cincinnati could adversely affect our liquidity, the value of our investment in FHLB of Cincinnati common stock, and could negatively impact our results of operations.

 

 12 
 

 

Future acquisitions and diversification of business products may materially and adversely affect our business, financial condition and results of operations.

We may acquire other financial institutions or parts of institutions in the future and may open new branches. We also may consider and enter into new lines of business or offer new products or services. For example, in December 2015 we announced that the Bank expanded its small business lending capabilities in connection with the Bank obtaining Preferred Lender status under the U.S. Small Business Administration’s (“SBA”) Preferred Lender Program (“PLP”). Beginning in January 2016, the Bank will underwrite and originate loans, using its PLP authority, under the SBA’s 7(a) and 504 loan programs to small businesses in Central Ohio and throughout the United States. Expansions of our business involve a number of expenses and risks, including:

 

·the time and costs associated with identifying and evaluating potential acquisitions;

 

·the potential inaccuracy of estimates and judgments used to evaluate credit, operations, management and market risk with respect to the target institutions or lines of business;

 

·the time and costs of evaluating new markets, hiring local management and opening new offices, and the delay between commencing these activities and the generation of profits from the expansion;

 

·our ability to finance an acquisition or other expansion and the possible dilution to our existing shareholders;

 

·the diversion of management’s attention to the negotiation of a transaction and the integration of the operations and personnel of the combining businesses;

 

·entry into unfamiliar markets;

 

·the introduction of new products and services into our existing business;

 

·the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations; and

 

·the risk of loss of key employees and customers.

 

We may incur substantial costs to expand, and we can give no assurance that such expansion will result in the levels of profits we expect. We also cannot assure that integration efforts for any future acquisitions will be successful. Our failure to make prudent acquisitions or failure to integrate acquisitions could have a material adverse impact on our financial condition, business, and results of operations.

 

We also may issue equity securities in connection with acquisitions, which could dilute the economic and voting interests of our existing shareholders, which could have a material adverse impact on the value of our shares.

 

Trading activity in our common shares is low and could result in material price fluctuations.

Trading in our common shares is not active, and the spread between the bid and the ask price is often wide. As a result, shareholders may not be able to sell their shares on short notice, and the sale of a large number of shares at one time could temporarily depress the market price. The price at which a shareholder may be able to sell his or her common shares may be significantly lower than the price at which he or she could buy our common shares at that time. This could have a material adverse impact on the value of our shares.

 

Item 1B. Unresolved Staff Comments

 

We have no unresolved staff comments.

 

Item 2.     Properties

 

We conduct business in central Ohio through eight full-service and six limited-service branch offices and our corporate headquarters. We own five of our branches, and the other nine branch offices are subject to leases and/or long-term land leases. In January 2016, we consummated a sale and leaseback of our corporate headquarters located in Lewis Center, Ohio.

 

Item 3.     Legal Proceedings

 

There is no pending litigation of a material nature, other than routine litigation incidental to the business of our Company and the Bank, to which our Company or any of our affiliates is a party or of which any of their property is the subject. Further, there are no material legal proceedings in which any director, executive officer, principal shareholder or affiliate of our Company is a party or has a material interest which is adverse to our Company or the Bank. There is no routine litigation in which our Company or the Bank is involved which is expected to have a material adverse impact on the financial position or results of operations of our Company or the Bank.

 

 13 
 

 

Item 4.     Mine Safety Disclosures

 

Not applicable.

 

PART II

 

Item 5.     Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

 

Our common shares are quoted on OTCPink under the symbol “DCBF.” The table below sets forth the high and low sale transactions for our common shares for the indicated periods. These quotations reflect inter-dealer prices, without retail markup, markdown or commission, and may not represent actual transactions.

 

   2015   2014 
   High   Low   Dividends
Declared
   High   Low   Dividends
Declared
 
1st Quarter  $7.88   $7.00   $-   $6.65   $5.98   $- 
2nd Quarter  $7.35   $6.80   $-   $7.50   $6.20   $- 
3rd Quarter  $7.40   $6.70   $-   $7.77   $7.27   $- 
4th Quarter  $7.95   $6.50   $-   $7.50   $6.86   $- 

 

As of March 22, 2016, our common shares were held of record by 1,365 shareholders.

 

Management does not have knowledge of the prices in all transactions and has not verified the accuracy of those prices that have been reported. Because of the lack of an established market for our stock, these prices may not reflect the prices at which the stock would trade in a more active market. The Company sold no securities during 2015 or 2014 that were not registered under the Securities Act of 1933.

 

Our income primarily consists of dividends, which may be declared by the Board of Directors of the Bank and paid on common shares of the Bank held by the Company. During 2009 we ceased the payment of regular cash dividends. No assurances can be given that any dividends will be declared or, if declared in the future, what the amount of any such dividends will be. The Bank did not pay dividends to the Company during 2015 or 2014, and we did not pay dividends to our shareholders. See note 13 to the Consolidated Financial Statements for a description of dividend restrictions.

 

 14 
 

 

Item 6.          Selected Financial Data

 

The following tables set forth certain information concerning the consolidated financial condition, results of operations and other data regarding the Company at the dates and for the periods indicated.

 

   Year ended December 31, 
   2015   2014   2013   2012   2011 
   (In thousands) 
Selected Financial Condition Data                         
Total assets  $541,264   $515,382   $502,419   $506,492   $522,881 
Cash and cash equivalents   31,892    21,274    25,357    63,307    39,314 
Securities available for sale   87,797    75,909    79,948    87,197    88,113 
Securities held to maturity   -    -    -    1,149    1,010 
Net loans   374,180    381,208    349,324    310,623    350,183 
Loans held for sale   -    -    7,806    -    - 
Deposits   474,537    453,192    426,859    448,290    445,428 
Deposits held for sale   -    -    22,571    -    - 
Borrowings   4,520    11,808    4,838    7,498    40,036 
Shareholders’ equity  $58,847   $47,211   $45,264   $48,389   $34,699 

 

   Year ended December 31, 
   2015   2014   2013   2012   2011 
   (In thousands, except per share data) 
Selected Operating Data                         
Interest income  $17,890   $17,380   $17,079   $18,848   $22,732 
Interest expense   1,170    1,212    1,818    3,238    5,113 
Net interest income   16,720    16,168    15,261    15,610    17,619 
Provision for loan losses   -    150    2,417    495    5,436 
Net interest income after provision for loan losses   16,720    16,018    12,844    15,115    12,183 
Non-interest income   4,822    4,460    4,967    5,024    6,358 
Non-interest expense   20,453    20,106    21,040    19,606    21,292 
Income (loss) before income tax benefit   1,089    372    (3,229)   533    (2,751)
Income tax benefit   (10,655)   -    (298)   (69)   (13)
Net income (loss)  $11,744   $372   $(2,931)  $602   $(2,738)
                          
Per Share Data:                         
Basic earnings (loss) per common share  $1.61   $0.05   $(0.41)  $0.15   $(0.74)
Diluted earnings (loss) per common share  $1.61   $0.05   $(0.41)  $0.15   $(0.74)
Dividends declared per common share  $-   $-   $-   $-   $- 

 

   At or for the year ended December 31, 
   2015   2014   2013   2012   2011 
Selected Financial Ratios                         
Interest rate spread   3.30%   3.40%   3.16%   3.20%   3.26%
Net interest margin   3.39%   3.49%   3.28%   3.35%   3.39%
Return on average assets   2.19%   0.07%   (0.58)%   0.12%   (0.49)%
Return on average equity   23.71%   0.82%   (6.01)%   1.73%   (7.41)%
Average equity to average assets   9.23%   9.06%   9.39%   6.83%   6.56%
Allowance for loan losses as a percentage of non-accrual loans   355%   306%   88%   129%   100%

 

 15 
 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

2015 Highlights and Overview

Our results of operations are dependent primarily on net interest income, which is the difference between the income earned on our loans, leases and securities and our cost of funds, which consists of the interest paid on deposits and borrowings. Results of operations are also affected by the provision for loan losses, securities and loan sale activities, loan servicing activities, service charges and fees collected on our deposit accounts, income collected from trust and investment advisory services and the income earned on our investment in bank-owned life insurance. Our expenses primarily consist of salaries and employee benefits, occupancy and equipment expense, marketing expense, professional services, technology expense, other expense and income tax expense. Results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, inflation, government policies and the actions of regulatory authorities.

 

The following is a summary of key financial results for the year ended December 31, 2015:

 

·Total assets were $541.3 million and $515.4 million and total deposits were $474.5 million and $453.2 million at December 31, 2015 and December 31, 2014, respectively.

 

·Total loans were $378.5 million at the end of 2015, compared with $385.4 million at the end of 2014.

 

·Net income in 2015 was $11.7 million, compared to $372,000 in 2014.

 

·Net income per diluted common share was $1.61 in 2015, compared to $0.05 in 2014.

 

·We reversed a valuation allowance that had previously been recorded against our net deferred tax assets, resulting in a one-time tax benefit in 2015 of $10.7 million or $1.46 per diluted share. Pre-tax income was $1.1 million or $0.15 per diluted common share for 2015, compared with $372,000 or $0.05 per diluted common share in 2014.

 

·Net interest income was $16.7 million in 2015, compared with $16.2 million in 2014.

 

·The net interest margin was 3.39% in 2015, compared with 3.49% in 2014.

 

·There was no provision for loan losses recorded in 2015. The provision for loan losses was $150,000 in 2014.

 

·Total non-performing assets were $7.3 million or 1.4% of total assets at December 31, 2015, compared with $12.6 million or 2.4% of total assets at December 31, 2014. Troubled debt restructurings which are performing in accordance with the restructured terms and are on an accrual basis, but which are classified as non-performing assets were $6.0 million at December 31, 2015, compared with $9.6 million at December 31, 2014.

 

·Non-interest income, excluding gains and losses on the sales of securities, sale of branch, loans held-for-sale and real estate owned (“REO”), was 22.3% of total revenue (net-interest income plus non-interest income less gains and losses) in 2015, compared with 21.8% in 2014.

 

·Our efficiency ratio was 94.9% in 2015, compared with 97.2% in 2014.

 

The following discussion is intended to assist in understanding our financial condition and results of operations. This discussion should be read in conjunction with our consolidated financial statements and accompanying notes contained elsewhere in this report.

 

 16 
 

 

Average Balance Sheet

The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the yields and rates thereon. Non-accrual loans have been included in the average balances. Securities are shown at average amortized cost.

 

   Year ended December 31, 
   2015   2014 
   Average
Balance
   Amount
of
Interest
   Yield/
Rate
   Average
Balance
   Amount
of
Interest
   Yield/
Rate
 
   (Dollars in thousands) 
Assets:                              
Interest-earning assets:                              
Interest-bearing deposits  $27,715   $67    0.24%  $16,576   $39    0.24%
Investment securities   85,462    1,957    2.26%   83,018    2,065    2.49%
Consumer loans and credit cards   39,636    2,142    5.40%   35,008    1,945    5.56%
Residential real estate loans and home equity   134,768    5,060    3.75%   115,404    4,322    3.74%
Commercial and industrial loans   101,374    4,036    3.93%   106,890    4,365    4.08%
Commercial real estate   104,965    4,628    4.47%   106,038    4,644    4.38%
Total loans   380,743    15,866    4.17%   363,340    15,276    4.20%
                               
Total interest-earning assets   493,920    17,890    3.62%   462,934    17,380    3.75%
                               
Non-interest-earning assets:                              
Other assets   45,612              44,769           
Allowance for loan losses   (4,209)             (5,080)          
Net unrealized gains on securities available-for-sale   1,059              724           
Total  $536,382             $503,347           
                               
                               
Liabilities and Shareholder’s Equity:                              
Interest-bearing liabilities:                              
Interest-bearing demand  $80,699   $102    0.13%  $78,447   $91    0.12%
Savings   44,095    46    0.11%   42,845    60    0.14%
Money market   155,271    524    0.34%   136,393    484    0.35%
Time deposits   74,140    357    0.48%   80,113    434    0.54%
Total interest-bearing deposits   354,205    1,029    0.29%   337,798    1,069    0.32%
Borrowings   5,883    141    2.40%   5,687    143    2.52%
Total interest-bearing liabilities   360,088    1,170    0.32%   343,485    1,212    0.35%
                               
Non-interest-bearing liabilities:                              
Demand deposits   122,780              110,457           
Other liabilities   3,987              3,791           
Shareholders’ equity   49,527              45,614           
Total  $536,382             $503,347           
                               
Net interest income; interest rate spread       $16,720    3.30%       $16,168    3.40%
Net interest margin             3.39%             3.49%
                               
Average interest-earning assets to average interest-bearing liabilities   137.2%             134.8%          

 

 17 
 

 

Rate/Volume Analysis

The following table sets forth the dollar volume of increase (decrease) in interest income and interest expense resulting from changes in the volume of interest-earning assets and interest-bearing liabilities, and from changes in rates. Volume changes are computed by multiplying the volume difference by the prior year’s rate. Rate changes are computed by multiplying the rate difference by the prior year’s volume. The change in interest due to both rate and volume has been allocated proportionally between the volume and rate variances.

 

  

2015 compared to 2014

Increase (decrease) due to

  

2014 compared to 2013

Increase (decrease) due to

 
   Volume   Rate   Net
Change
   Volume   Rate   Net
Change
 
   (In thousands) 
Interest-bearing deposits  $28   $-   $28   $(39)  $(9)  $(48)
Investment securities   66    (174)   (108)   (162)   163    1 
Consumer loans and credit cards   254    (57)   197    367    (197)   170 
Residential real estate loans and home equity   726    12    738    675    365    1,040 
Commercial and industrial loans   (192)   (137)   (329)   (560)   (280)   (840)
Commercial real estate   (68)   52    (16)   (52)   30    (22)
Total interest-earning assets   814    (304)   510    229    72    301 
                               
Interest-bearing demand   3    8    11    4    (19)   (15)
Savings   2    (16)   (14)   3    (4)   (1)
Money market   56    (16)   40    72    14    86 
Time deposits   (31)   (46)   (77)   (255)   (300)   (555)
Borrowings   5    (7)   (2)   (10)   (111)   (121)
 Total interest-bearing liabilities   35    (77)   (42)   (186)   (420)   (606)
                               
Net interest income  $779   $(227)  $552   $415   $492   $907 

 

Comparison of Operating Results for the Years Ended December 31, 2015 and 2014

 

General

Net income was $11.7 million or $1.61 per diluted common share for the year ended December 31, 2015, compared to $372,000 or $0.05 per diluted common share in 2014. We reversed a valuation allowance that had previously been recorded against our net deferred tax assets, resulting in a one-time tax benefit in 2015 of $10.7 million or $1.46 per diluted share. Pre-tax income was $1.1 million or $0.15 per diluted common share in 2015, compared with $372,000 in 2014.

 

Net interest income increased $552,000 and the provision for loan losses decreased $150,000, respectively, in 2015 compared to 2014. The return on average assets and return on average shareholders’ equity were 2.19% and 23.7%, respectively, in 2015, compared with 0.07% and 0.8%, respectively, in 2014.

 

Net Interest Income

Net interest income totaled $16.7 million in 2015, which was an increase of $552,000 or 3.4% compared to $16.2 million in 2014. The net interest margin was 3.39% in 2015, compared to 3.49% in 2014. The earning assets yield decreased 13 basis points in 2015 compared with 2014, due largely to the reinvestment of investment securities and loan portfolio amortization into assets with slightly lower yields, and to an increase in low-yielding interest-bearing deposits. The cost of interest-bearing liabilities decreased 3 basis points in 2015 compared with 2014.

 

Average interest-earning assets were $493.9 million in 2015, which was an increase of $31.0 million or 6.7% from $462.9 million in 2014. Average loans outstanding increased $17.4 million in 2015 compared to 2014, while the average balance of interest earning cash balances increased $11.1 million and average investments increased $2.4 million in 2015 when compared to 2014. Total average loans were 77.1% of average interest-earning assets in 2015, compared with 78.5% of average interest-earning assets in 2014.

 

The cost of our interest-bearing liabilities was relatively stable in 2015, with a modest decrease of 3 basis points in 2015 compared to 2014. The average cost of our money market accounts was 0.34% in 2015, compared to 0.35% in 2014, and the average cost of our time deposits decreased 6 basis points, to 0.48% in 2015. Average interest-bearing transaction accounts (non-maturity accounts) comprised 79.1% of total average interest-bearing deposits in 2015, compared to 76.3% in 2014.

 

 18 
 

 

Non-maturity transaction accounts (interest and non-interest-bearing) comprised the majority of our funding sources in 2015, as depositors continue to refrain from investing funds in time accounts because of the very low interest rate environment, and also because of the buildup of cash on corporate customers’ balance sheets. The aggregate average balance of transaction accounts was $402.8 million or 84.5% of total average deposits in 2015, compared with $368.1 million or 82.1% of total average deposits in 2014. Average time account balances in 2015 were $74.1 million or 15.5% of total average deposits, compared with $80.1 million or 17.9% in 2014. Our ability to gather and retain transaction deposits reflects a high positive awareness of our brand in the communities in which we operate. Environmental factors such as equity market volatility and risk aversion among retail investors have also played a role in the growth in our transaction accounts.

 

Non-Interest Income

 

Our non-interest income is comprised of service charges on deposits, fees from investment management trust and brokerage services, and other recurring operating income fees from normal banking operations, along with non-core components that primarily consist of net gains or losses from sales of investment securities.

 

The following table sets forth certain information on non-interest income for the years indicated:

 

   Year ended December 31,         
   2015   2014   Change 
   (Dollars in thousands)     
Service charges  $2,002   $1,963   $39    2.0%
Wealth management fees   1,644    1,474    170    11.5%
Treasury management fees   273    220    53    24.1%
Income from bank owned life insurance   733    730    3    0.4%
Gain on sales of securities available-for-sale   -    101    (101)   (100.0)%
Net gain (loss) on loans held-for-sale   3    (509)   512    (100.6)%
Net gain (loss) on sale of REO   16    (84)   100    (119.0)%
Gain on sale of branch   -    438    (438)   (100.0)%
Other non-interest income   151    127    24    18.9%
Total non-interest income  $4,822   $4,460   $362    8.1%

 

Non-interest income increased $362,000 or 8.1% in 2015, as income from service charges, wealth management and treasury management services each increased in 2015 compared to 2014 primarily from the impact of changes to certain of the Bank’s fees and service charges and from business development activities.

 

Non-interest income (net of non-recurring income, gains and losses and gains/losses on the sales of securities) accounted for 22.3% of total revenue in 2015, compared with 21.8% in 2014.

 

 19 
 

 

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

 

   Year ended December 31,         
   2015   2014   Change 
   (Dollars in thousands)     
Salaries and employee benefits  $11,263   $11,141   $122    1.1%
Occupancy and equipment   3,912    3,784    128    3.4%
Professional services   1,383    1,379    4    0.3%
Advertising   549    347    202    58.2%
Office supplies, postage and courier   305    328    (23)   (7.0)%
FDIC insurance premium   393    630    (237)   (37.6)%
State franchise taxes   295    266    29    10.9%
Other   2,353    2,231    122    5.5%
Total non-interest expenses  $20,453   $20,106   $347    1.7%

 

Non-interest expenses increased $347,000 or 1.7% in 2015. FDIC insurance premium decreased $237,000 in 2015 compared to 2014 due to the improvement in the Bank’s regulatory risk rating, which was effective in the fourth quarter of 2014, and which resulted largely from the substantial improvement in the Bank’s asset quality in 2014.

 

Our efficiency ratio was 94.9% in 2015, compared to 97.2% in 2014.

 

Income Taxes

We had net deferred tax assets totaling $10.4 million at December 31, 2015 and 2014, of which the majority are attributable to net operating loss carry-forwards and timing differences between provision for loan losses and the charge-off of loans. In the third quarter of 2015, we reversed the valuation allowance that had been previously been established against our net deferred tax assets, resulting in the recognition of a $10.7 million federal income tax benefit in our net income in the third quarter of 2015.

 

On a quarterly basis, we determine whether a valuation allowance is necessary on our net deferred tax assets. In doing so, we consider all evidence available, both positive and negative, in determining whether it is more likely than not that the net deferred tax assets will be realized. After weighing all available evidence at September 30, 2015, we concluded that it is more likely than not that our net deferred tax assets will be realized. The evidence we considered in our evaluation included, among other things, growth in our core earnings and improvement in our asset quality metrics over the past seven quarters; our current and forecast capital and liquidity positions; internal financial forecasts; and available tax planning strategies.

 

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

 

General

Total assets were $541.3 million at December 31, 2015, compared with $515.4 million at December 31, 2014. Cash and cash equivalents increased $10.6 million, and securities held-for-sale increased $11.9 million in 2015. Loans were $378.5 million at the end of 2015, which was a decrease of $6.9 million or 1.8% from the end of 2014.

 

Securities

The securities portfolio is designed to provide a favorable total return utilizing low-risk, high-quality securities while at the same time assisting in meeting the liquidity needs of our loan and deposit operations, and supporting our interest rate risk objectives. Our securities portfolio is predominately comprised of investment grade mortgage-backed securities, securities issued by U.S. government sponsored entities and municipal securities. We classify all of our securities as available-for-sale. We do not engage in securities trading or derivatives activities in carrying out our investment strategies.

 

 20 
 

 

The following table sets forth the amortized cost and market value for our available-for-sale securities portfolio:

 

   At December 31, 
   2015   2014 
   Amortized
Cost
   Fair Value   Amortized
Cost
   Fair Value 
   (In thousands) 
U.S. Government and agency obligations  $20,904   $20,842   $11,602   $11,545 
Corporate bonds   3,714    3,727    4,975    4,987 
States and municipal obligations   21,954    22,261    21,303    21,657 
Collateralized mortgage obligations   22,862    22,801    19,601    19,580 
Mortgage-backed securities   17,702    18,166    17,438    18,140 
Total  $87,136   $87,797   $74,919   $75,909 

 

Investment securities totaled $87.8 million at December 31, 2015, compared with $75.9 million at December 31, 2014. Our portfolio is comprised primarily of investment grade securities, the majority of which are rated “AAA” by one or more of the nationally recognized rating agencies. The breakdown of the securities portfolio at December 31, 2015 was 20.7% government-sponsored entity guaranteed mortgage-backed securities, 26.0% collateralized mortgage obligations, 25.4% municipal securities, 23.7% obligations of U.S. government-sponsored corporations and 4.2% corporate bonds. Mortgage-backed securities, which totaled $18.2 million at December 31, 2015, are comprised primarily of pass-through securities backed by conventional residential mortgages and guaranteed by Fannie-Mae, Freddie-Mac or Ginnie Mae, which in turn are backed by the U.S. government.

 

We had net unrealized gains of approximately $661,000 in our securities portfolio at December 31, 2015, compared with net unrealized losses of $990,000 at December 31, 2014.

 

In March 2014, we sold the remaining collateralized debt obligation in our securities portfolio and recognized a loss of $141,000 on the sale. The actual loss recognized on the sale was substantially lower than the $940,000 unrealized loss on this security at the end of 2013 as increased investor demand for these types of securities pushed prices higher in the first quarter of 2014.

 

The following table sets forth as of December 31, 2015, the maturities and the weighted-average yields of our debt securities, which have been calculated on the basis of the amortized cost, weighted for scheduled maturity of each security, and adjusted to a fully tax-equivalent basis (dollars in thousands):

 

   At December 31, 2015 
   Within
one
year or
less
   After one
year but
within five
years
   After five
years but
within ten
years
   After
ten
years
   Total 
                     
U.S. Government and agency obligations  $2,501   $13,465   $3,538   $1,400   $20,904 
Corporate bonds   903    1,988    823    -    3,714 
States and municipal obligations   931    6,820    10,634    3,569    21,954 
Collateralized mortgage obligations   -    1,200    5,835    15,827    22,862 
Mortgage-backed securities   -    1,265    5,944    10,493    17,702 
Total  $4,335   $24,738   $26,774   $31,289   $87,136 
Weighted average yield at year-end   1.25%   1.89%   2.62%   2.35%   2.25%

 

Loans

The loan portfolio is the largest component of our interest-earning assets and it generates the largest portion of our interest income. We provide a full range of credit products through our branch network and through our commercial lending line of business. Consistent with our focus on providing community banking services, we generally do not attempt to diversify geographically by making a significant amount of loans to borrowers outside of our primary service area. Loans are primarily generated internally and the majority of our lending activity takes place in the central Ohio counties of Delaware, Franklin, Union, and other nearby counties.

 

Loans (net of deferred costs) were $378.5 million at the end of 2015, compared with $385.4 million at the end of 2014. All of the decrease in our loan portfolio in 2015 occurred in the first quarter, due to significant prepayments in our commercial portfolio. Eleven commercial relationships aggregating $12.8 million paid off in early 2015, of which approximately one-third were non-performing troubled-debt restructured loans. Growth in the Company’s loan portfolio totaled $1.2 million over the last three quarters of 2015.

 

 21 
 

 

The following table sets forth the composition of our loan portfolio, excluding deferred loan costs and including loans held-for-sale at the dates indicated:

 

   At December 31, 
   2015   2014   2013   2012   2011 
   (In thousands) 
Consumer and credit card  $40,587   $37,507   $35,265   $21,620   $19,770 
Residential and home equity   137,645    129,650    98,622    72,137    83,814 
Commercial and industrial   99,213    106,222    122,901    112,300    126,225 
Commercial real estate   100,743    111,851    106,901    111,417    129,958 
Total loans  $378,188   $385,230   $363,689   $317,474   $359,767 

 

The following table shows the amount of loans outstanding as of December 31, 2015, which, based on remaining scheduled payments of principal, are due in the periods indicated:

 

   Maturing
within one
year or
less
   Maturing
after one but
within five years
   Maturing after
five but
within ten years
   Maturing after
ten years
   Total 
   (In thousands) 
Consumer and credit card  $5,810   $2,778   $6,753   $25,246   $40,587 
Residential and home equity   2,113    7,067    18,588    109,877    137,645 
Commercial and industrial   9,658    30,059    29,243    30,253    99,213 
Commercial real estate   3,625    37,962    30,971    28,185    100,743 
Total  $21,206   $77,866   $85,555   $193,561   $378,188 

 

The following table sets forth the sensitivity to changes in interest rates as of December 31, 2015:

 

   Fixed Rate   Variable Rate   Total 
   (In thousands) 
Due after one year, but within five years  $53,490   $24,377   $77,867 
Due after five years   187,990    91,125    279,115 

 

 22 
 

 

Asset Quality and the Allowance for Loan Losses

 

The following table represents a summary of delinquent loans grouped by the number of days delinquent at the dates indicated:

 

Delinquent loans  December 31, 2015   December 31, 2014 
   (Dollars in thousands(1)) 
30 days past due  $191    0.05%  $336    0.09%
60 days past due   111    0.03%   37    0.01%
90 days past due and still accruing   2    0.01%   480    0.12%
Non-accrual   1,222    0.32%   1,384    0.36%
Total  $1,526    0.41%  $2,237    0.58%

 

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

 

The following table represents information concerning the aggregate amount of non-performing assets (includes certain loans held-for-sale at December 31, 2013):

 

   At December 31, 
   2015   2014   2013   2012   2011 
   (In thousands) 
Non-accruing loans:                         
Consumer loans and credit cards  $-   $120   $-   $-   $46 
Residential real estate loans and home equity   668    334    352    321    451 
Commercial and industrial   554    632    4,702    2,815    2,381 
Commercial real estate   -    298    2,624    2,195    6,698 
Total non-accruing loans   1,222    1,384    7,678    5,331    9,576 
Accruing loans delinquent 90 days or more   2    480    560    643    1,812 
Total non-performing loans   1,224    1,864    8,238    5,974    11,388 
                          
Collateralized debt obligations   -    -    976    1,149    1,010 
Other real estate and repossessed assets   68    1,111    1,219    3,671    4,605 
Total non-performing assets  $1,292   $2,975   $10,433   $10,794   $17,003 
                          
Restructured loans not included above(1)  $6,040   $9,633   $12,788   $20,080   $22,219 
Total non-performing loans (including TDR’s)   7,264    11,497    21,026    26,054    33,607 
Total non-performing assets (including TDR’s)   7,332    12,608    23,221    30,874    39,222 

 

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

 

Delinquent loans (including loans greater than 30 days past due) totaled $1.5 million or 0.41% of total loans at December 31, 2015, compared with $2.2 million or 0.58% at December 31, 2014. Non-performing assets, defined as non-accrual loans plus loans 90 days or more past due, other real estate owned and repossessed assets, impaired investment securities, and troubled debt restructurings not included in non-accrual loans were $7.3 million or 1.35% of total assets at December 31, 2015, compared with $12.6 million or 2.45% of total assets at December 31, 2014.

 

Troubled debt restructurings (“TDR’s”) which are performing in accordance with the restructured terms and accruing interest, but are included in non-performing assets, were $6.0 million at December 31, 2015 compared with $9.6 million at December 31, 2014. Included in non-performing assets at the end of 2015 are non-performing loans totaling $1.3 million or 0.32% of total loans, compared with $1.9 million or 0.48% of total loans at December 31, 2014.

 

Other real estate owned decreased $1.0 million in 2015 due primarily to the sale of a partially developed residential subdivision in the fourth quarter of 2015, which was acquired through foreclosure in 2008. TDR’s decreased $3.6 million in 2015 due to the sale in the third quarter of 2015 of two commercial mortgage loans that had been classified as impaired TDR’s for $3.2 million, which was the aggregate outstanding amount of the loans at the time of the sale.

 

As a recurring part of our portfolio management program, we have classified certain loans as “substandard” in our loan rating system. Substandard loans (excluding loans held-for-sale) total approximately $7.1 million at December 31, 2015, compared with $13.9 million at December 31, 2014. Substandard loans are loans that are currently performing, but where the borrower’s operating performance or other relevant factors could result in potential credit problems. At December 31, 2015, substandard loans consisted of commercial loans and commercial real estate. There can be no assurance that additional loans will not become non-performing, require restructuring, or require increased provision for loan losses.

 

 23 
 

 

We have a loan monitoring program that evaluates non-performing loans and the loan portfolio in general. The loan review program continually audits the loan portfolio to confirm management’s loan risk rating system, and systematically tracks such problem loans to ensure compliance with loan policy underwriting guidelines, and to evaluate the adequacy of the allowance for loan losses.

 

Our policy is to place a loan on non-accrual status and recognize income on a cash basis when a loan is more than 90 days past due, unless in the opinion of management, the loan is well secured and in the process of collection. Interest payments received on non-accrual loans may be applied to the principal balance of the loan in situations where management believes full collection of the principal amount owed is not probable. The impact of interest not recognized on non-accrual loans was $35,000 in 2015 and $160,000 in 2014.

 

The allowance for loan losses represents our management’s best estimate of probable incurred losses in our loan portfolio. Our management’s quarterly evaluation of the allowance for loan losses is a comprehensive analysis that builds a total allowance by evaluating the probable incurred losses within each loan portfolio segment. Our portfolio segments are as follows: commercial loan and commercial real estate loans, residential real estate and consumer loans. Our allowance for losses consists of specific valuation allowances based on probable credit losses on specific loans, historical valuation allowances based on loan loss experience for similar loans with similar characteristics and trends and general valuation allowances based on general economic conditions and other qualitative risk factors both internal and external to the organization.

 

Historical valuation allowances are calculated for commercial loans based on the historical loss experience of specific types of loans and the internal risk grade 24 months prior to the time they were charged off. The internal credit risk grading process evaluates, among other things, the borrower’s ability to repay, the underlying collateral, if any, and the economic environment and industry in which the borrower operates. Historical valuation allowances for residential real estate and consumer loan segments are based on the average loss rates for each class of loans for the time period that includes the current year and two full prior years. We calculate historical loss ratios for pools of similar consumer loans based upon the product of the historical loss ratio and the principal balance of the loans in the pool. Historical loss ratios are updated quarterly based on actual loss experience. Our general valuation allowances are based on general economic conditions and other qualitative risk factors which affect our company. Factors considered include trends in our delinquency rates, macro-economic and credit market conditions, changes in asset quality, changes in loan and lease portfolio volumes, concentrations of credit risk, the changes in internal loan policies, procedures and internal controls, experience and effectiveness of lending personnel. Management evaluates the degree of risk that each one of these components has on the quality of the loan and lease portfolio on a quarterly basis.

 

For commercial loan and commercial real estate segments, we maintain a specific allocation methodology for those classified in our internal risk grading system as substandard, doubtful or loss with a principal balances of $250,000 or greater. A loan is considered impaired, based on current information and events, if it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the estimated fair value of the collateral. Loans with modified terms in which a concession to the borrower has been made that it would not otherwise consider unless the borrower was experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.  As of December 31, 2015, there was $7.8 million in impaired loans for which $579,000 in related allowance for loan losses was allocated. There was $12.2 million in impaired loans for which $1.3 million in related allowance for loan losses was allocated as of December 31, 2014.

 

Loans are charged against the allowance for loan losses, in accordance with our loan lease policy, when they are determined by management to be uncollectible. Recoveries on loans previously charged off are credited to the allowance for loan losses when they are received. When management determines that the allowance for loan losses is less than adequate to provide for probable incurred losses, a direct charge to operating income is recorded.

 

 24 
 

 

The following table summarizes changes in the allowance for loan losses arising from loans charged off, recoveries on loans previously charged off and additions to the allowance, which have been charged to expense.

 

   Year ended December 31, 
   2015   2014   2013   2012   2011 
   (Dollars in thousands) 
Balance at beginning of year  $4,236   $6,724   $6,881   $9,584   $12,247 
                          
Loans charged-off:                         
Consumer and credit card   (166)   (200)   (286)   (372)   (567)
Residential real estate and home equity   (73)   (169)   (331)   (74)   (278)
Commercial and industrial   (311)   (1,410)   (86)   (1,926)   (2,034)
Commercial real estate   (64)   (1,086)   (1,038)   (1,366)   (5,562)
Total loans charged-off   (614)   (2,865)   (1,741)   (3,738)   (8,441)
                          
Recoveries of loans previously charged-off:                         
Consumer and credit card   147    113    219    224    247 
Residential real estate and home equity   109    38    52    18    10 
Commercial and industrial   352    42    823    251    58 
Commercial real estate   103    131    38    47    27 
Total recoveries   711    324    1,132    540    342 
                          
Net loans recovered (charged-off)   97    (2,541)   (609)   (3,198)   (8,099)
                          
Allowance related to loans transferred to held-for-sale   -    (97)   (1,965)   -    - 
Provision for loan losses   -    150    2,417    495    5,436 
Balance at end of year  $4,333   $4,236   $6,724   $6,881   $9,584 
                          
Ratio of net loans (recovered) charged-off to average loans outstanding   (0.03)%   0.70%   0.18%   0.97%   2.05%

 

Net recoveries of $97,000 were recorded in 2015, compared to net charge-offs of $2.5 million or 0.70% of average loans in 2014. Three commercial relationships comprised approximately 67% of the gross charge-offs in 2014, which were charged against specific allowance allocations established in the fourth quarter of 2013.

 

There was no provision for loan losses recorded for the year-ended December 31, 2015. We recorded a negative provision for loan losses of $150,000 in the third quarter of 2015, due primarily to the net recoveries recorded in the quarter and to the favorable impact on the allowance for loan losses of the reduction in non-performing loans during the quarter. The negative provision for loan losses recorded in the third quarter had the effect of offsetting the provision for loan losses of $150,000 that was recorded in the first quarter of 2015, resulting in no provision for loan losses for 2015. The provision for loan losses was $150,000 for the year-ended December 31, 2014.

 

The allowance for loan losses was $4.3 million at December 31, 2015, compared to $4.2 million at December 31, 2014. The ratio of the allowance for loan losses to total loans was 1.14% at December 31, 2015, compared to 1.10% at December 31, 2014.

 

The ratio of the allowance for loan losses to non-performing loans (including TDR’s) was 59.7% at December 31, 2015, compared to 36.8% at December 31, 2014. The ratio of the allowance for loan losses to non-accrual loans was 355% at December 31, 2015, compared to 314% at September 30, 2015 and 306% at December 31, 2014.

 

We assess a number of quantitative and qualitative factors at the individual portfolio level in determining the adequacy of the allowance for loan losses and the required provision expense each quarter. In addition, we analyze certain broader, non-portfolio specific factors in assessing the adequacy of the allowance for loan losses, such as the allowance as a percentage of total loans, the allowance as a percentage of non-performing loans and the provision expense as a percentage of net charge-offs. This portion of the allowance has been considered “unallocated,” which means it is not based on either quantitative or qualitative factors. At December 31, 2015, $308,000 or 7.1% of the allowance for loan losses was considered to be “unallocated,” compared to $270,000 or 6.4% of the allowance for loan losses at December 31, 2014.

 

 25 
 

 

The allowance for loan losses has been allocated within the following categories of loans at the dates indicated with the corresponding percent of loans to total loans (excluding loans held-for-sale) for each category:

 

   At December 31, 
   2015   2014   2013   2012   2011 
   Amount
of
Allowance
   Percent
of
Loans
to Total
Loans
   Amount
of
Allowance
   Percent
of
Loans
to Total
Loans
   Amount
of
Allowance
   Percent
of
Loans
to Total
Loans
   Amount
of
Allowance
   Percent
of
Loans
to Total
Loans
   Amount
of
Allowance
   Percent
of
Loans
to Total
Loans
 
   (Dollars in thousands) 
Consumer and credit card   144    10.7%   190    9.7%   301    9.2%   365    6.8%   425    5.5%
Residential real estate  and home equity   561    36.4%   268    33.7%   219    27.0%   204    22.7%   291    23.3%
Commercial and industrial  $1,321    26.2%  $1,132    27.6%  $2,973    34.3%  $1,620    35.4%  $1,952    35.1%
Commercial real estate   1,999    26.7%   2,376    29.0%   3,231    29.5%   4,692    35.1%   6,916    36.1%
Unallocated   308    -    270    -    -    -    -    -    -    - 
Total  $4,333    100.0%  $4,236    100.0%  $6,724    100.0%  $6,881    100.0%  $9,584    100.0%

 

The allowance for loan losses is allocated according to the amount deemed to be reasonably necessary to provide for the probable incurred losses within each loan category. The higher amounts allocated to the commercial loan and commercial real estate portfolios reflect the higher outstanding balances of these portfolios coupled with the higher inherent risk of these portfolios compared with residential and consumer lending.

 

Deposits

Our primary source of funds is deposits, consisting of demand, savings, money market and time accounts, of retail, commercial and municipal customers gathered through our branch network. We continuously monitor market pricing, competitors’ rates, and internal interest rate spreads to maintain and promote growth and profitability.

 

The following table sets forth the composition of our deposits by business line at December 31, 2015 (dollars in thousands):

 

   Amount   Percent 
Non-interest bearing demand  $124,023    26.1%
Interest bearing demand   77,616    16.4%
Total demand   201,639    42.5%
           
           
Savings   47,333    10.0%
Money market   154,119    32.5%
Time deposits   71,446    15.0%
Total deposits  $474,537    100.0%

 

Deposits totaled $474.5 million at December 31, 2015, compared with $453.2 million at December 31, 2014. Much of the growth in deposits during 2015 was the result of higher balances maintained by existing municipal and business customers. Our deposit mix at the end of 2015 continued to be weighted heavily in lower cost demand, savings and money market accounts, which totaled $403.1 million or 84.9% of total deposits at the end of 2015, compared to $378.9 million or 83.6% of total deposits at the end of 2014, as depositors continue to avoid placing funds in time accounts in the low interest rate environment. Time deposits totaled $71.4 million or 15.1% of total deposits at December 31, 2015, compared to $74.3 million or 16.4% of total deposits at December 31, 2014.

 

Time deposits in excess of $100,000, which tend to be more volatile and sensitive to interest rates, totaled $50.1 million at December 31, 2015, representing 70.1% of total time deposits and 10.5% of total deposits. These deposits totaled $47.3 million, representing 63.6% of total time deposits and 10.4% of total deposits at the end of 2014.

 

 26 
 

 

The following table schedules the amount of our time deposits of $100,000 or more by time remaining until maturity as of December 31, 2015 (in thousands):

 

Maturing in:     
Three months or less  $21,950 
Over three through six months   2,979 
Over six through twelve months   23,431 
Over twelve months   1,690 
Total  $50,050 

 

Borrowings

We utilize advances from the FHLB as an alternative source of funding and as a liability management tool. At December 31, 2015, borrowings from the FHLB were $4.5 million, compared with $11.8 million at December 31, 2014. During 2015 we used excess cash to pay down maturing borrowings.

 

Liquidity

Our liquidity is primarily measured by our ability to provide funds to meet loan requests, to accommodate possible outflows of deposits, and to take advantage of market interest rate opportunities. Funding of loan commitments, providing for liability outflows, and management of interest rate fluctuations require continuous analysis in order to match the maturities of specific categories of short-term loans and investments with specific types of deposits and borrowings. Liquidity is normally considered in terms of the nature and mix of our sources and uses of funds. Our Asset Liability Management Committee (ALCO) is responsible for implementing the policies and guidelines for the maintenance of prudent levels of liquidity. Management believes, as of December 31, 2015, that our liquidity measurements are in compliance with our policy guidelines.

 

Our principal sources of funds for operations are cash flows generated from earnings, deposits, securities, loan repayments, and borrowings from the FHLB. During the year ended December 31, 2015, cash and cash equivalents increased by $10.6 million, as net cash provided by operating activities of $2.5 million and net cash provided by financing activities of $14.1 million offset net cash used in investing activities of $5.9 million. Net cash provided by financing activities primarily resulted from a net increase in deposits of $21.3 million which offset $7.3 million in net repayments on borrowings. Net cash used in investing activities primarily resulted from a net decrease in loans of $6.8 million which was offset by net cash used in purchases of securities exceeding proceeds from maturities and principal repayments of securities by $13.3 million.

 

As a member of the FHLB, the Bank is eligible to borrow up to an established credit limit against certain residential mortgage loans that have been pledged as collateral. As of December 31, 2015, the Bank’s credit limit with the FHLB was $115.5 million with outstanding borrowings in the amount of $4.5 million.

 

The Bank had a $25.1 million line of credit at December 31, 2015 with the Federal Reserve Bank of Cleveland through its Discount Window, and has pledged as collateral certain automobile, commercial and commercial real estate loans totaling $383,000, $13.0 million, and $43.4 million, respectively, at December 31, 2015. We did not draw any funds on this line of credit in 2015.

 

Off-Balance Sheet Arrangements

In addition to funding maturing deposits and other deposit liabilities, we also have off-balance sheet commitments in the form of lines of credit and letters of credit utilized by customers in the normal course of business. Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. These off-balance sheet commitments are not considered to have a significant effect on the liquidity position of our Company. Further, our management believes our liquidity position is adequate based on our stable level of cash equivalents and the stability of its core funding sources.

 

Capital Resources

Total shareholders’ equity was $58.8 million at December 31, 2015, which was an increase of $11.6 million from the end of 2014 resulting primarily from net income of $11.7 million and a $218,000 decrease in unrealized gains on securities available-for-sale, net of taxes.

 

 27 
 

 

Tier-1 capital is shareholders’ equity excluding the net unrealized gains or losses included in other comprehensive income and a percentage of mortgage-servicing rights. 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 our total assets after such assets are assessed for risk and assigned a weighting factor based on their inherent risk.

 

Beginning on January 1, 2015, the capital requirements for our Company and the Bank increased as a result of the phase-in of certain changes to capital requirements for U.S. banking organizations. Consistent with the international Basel III framework, the capital requirements include a new minimum ratio of common equity tier 1 capital to risk-weighted assets and a Tier 1 common capital conservation buffer of 2.5% of risk-weighted assets that applies to all supervised financial institutions. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets to 6.0% and includes a minimum leverage ratio of 4.0% for all banking organizations. These new minimum capital ratios became effective for us on January 1, 2015, and will be fully phased-in on January 1, 2019.

 

The Bank’s actual and required minimum capital ratios at December 31, 2015 are presented below.

 

   Actual   Minimum for
Purposes of Capital
Adequacy
 
Total risk-based capital ratio   14.29%   8.00%
Tier 1 capital ratio   13.11%   6.00%
Common equity Tier 1 capital ratio   13.11%   4.50%
Leverage ratio   9.11%   4.00%

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

Asset and Liability Management and Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. Our market risk arises principally from interest rate risk in our lending, investing, deposit gathering and borrowing activities. Other types of market risks do not arise in the normal course of our business activities.

 

The Bank’s Asset Liability Management Committee, or ALCO, is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and manage exposure to interest rate risk. The policies and guidelines established by the ALCO are reviewed and approved by our Board of Directors annually.

 

Interest rate risk is monitored primarily through financial modeling of net interest income and net portfolio value estimation (discounted present value of assets minus discounted present value of liabilities). Both measures are highly assumption dependent and change regularly as the balance sheet and interest rates change; however, taken together, they represent a reasonably comprehensive view of the magnitude of interest rate risk, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships. The key assumptions employed by these measures are analyzed and reviewed monthly by the ALCO.

 

The table that follows is provided pursuant to the market risk disclosure rules set forth in Item 305 of Regulation S-K promulgated by Securities and Exchange Commission. The information provided in the following table is based on significant estimates and assumptions and constitutes, like certain other statements included herein, a forward-looking statement.  The base case (no rate change) information in the table shows (1) an estimate of our Company’s net portfolio value at December 31, 2015 arrived at by discounting estimated future cash flows at current market rates and (2) an estimate of net interest income for the twelve months ending December 31, 2016, assuming that maturing assets or liabilities are replaced with new balances of the same type, in the same amount, and at current (December 31, 2015) rate levels and repricing balances are adjusted to current (December 31, 2015) rate levels.  The rate change information (rate shocks) in the table shows estimates of net portfolio value at December 31, 2015 and net interest income for the twelve months ending December 31, 2016, assuming instantaneous rate changes of up 100, 200, 300, and 400 basis points.  Cash flows for non-maturity deposits are based on a decay or runoff rate based on average account age.  Rate changes in the rate shock scenario are assumed to be shock or immediate changes and occur uniformly across the yield curve.  In projecting future net interest income under the rate shock scenarios, activity is simulated by replacing maturing balances with new balances of the same type, in the same amount, but at the assumed post shock rate levels. Balances that reprice are assumed to reprice at post shock rate levels.

 

 28 
 

 

Based on the foregoing assumptions and as depicted in the table that follows, an immediate increase in interest rates of 400 basis points would have a negative effect on our net interest income over a twelve month time period and on our current net portfolio value.  This is principally because the Bank’s interest-bearing deposit accounts are assumed to reprice faster than its loans and investment securities. In this rate scenario, certain interest-bearing non-maturity deposits are assumed to instantaneously reprice using deposit price sensitivity (“Beta”) of 75%, or 300 basis points. The difference in the estimated impact on net interest income and net portfolio value in each of the three other rate shock scenario’s is due primarily to different assumptions for Beta’s used in each of these scenarios.

 

Over a longer period of time, and assuming that interest rates remain stable after the initial rate increase and the Bank purchases securities and originates loans at yields higher than those maturing and reprices loans at higher yields, the impact of an increase in interest rates should be positive.  This occurs primarily because with the passage of time more loans and investment securities will reprice at the higher rates and there will be no offsetting increase in interest expense for those loans and investment securities funded by noninterest-bearing checking deposits and capital.  

 

In previous years, net portfolio value and net interest income resulting from an immediate and sustained rate decrease of 100 basis points or more were reported; however these measures have been omitted this year as the absolute low level of rates renders the results under these scenarios not meaningful.

 

   Net Portfolio Value at December 31, 2015  

Net Interest Income

Twelve Months Ending December 31, 2016

 
           Change from Base       Change from Base 
Rate Change Scenario  Amount   Ratio   Dollar   Percent   Amount   Dollar   Percent 
+400 basis point rate shock  $61,266    12.5%  $(5,821)   (8.7)%  $14,223   $(2,571)   (15.3)%
+300 basis point rate shock   68,757    13.7%   1,670    2.5%   16,490    (304)   (1.8)%
+200 basis point rate shock   72,863    14.1%   5,776    8.6%   17,472    677    4.0%
+100 basis point rate shock   71,062    13.5%   3,975    5.9%   17,118    324    1.9%
Base case (no rate change)   67,087    12.4%   -    -    16,794    -    - 

 

 29 
 

 

Item 8.   Financial Statements and Supplementary Data

 

Index to Financial Statements and Schedules

 

  Page(s)
   
Report of Independent Registered Public Accounting Firm 31
   
Consolidated Balance Sheets as of December 31, 2015 and 2014 32
   
Consolidated Statements of Income for the years ended December 31, 2015 and 2014 33
   
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015 and 2014 34
   
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2015 and 2014 35
   
Consolidated Statements of Cash Flow for the years ended December 31, 2015 and 2014 36
   
Notes to Consolidated Financial Statements. 37

 

 30 
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Shareholders

 

DCB Financial Corp

 

Lewis Center, Ohio

 

We have audited the accompanying consolidated balance sheets of DCB Financial Corp as of December 31, 2015 and 2014, the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DCB Financial Corp as of December 31, 2015 and 2014 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Plante & Moran PLLC

 

Columbus, OH

 

March 23, 2016

 

 31 
 

 

DCB Financial Corp and Subsidiaries

Consolidated Balance Sheets

 

   December 31, 
   2015   2014 
   (In thousands, except share and per share data) 
Assets:          
Cash and due from financial institutions  $6,929   $6,247 
Interest-bearing deposits   24,963    15,027 
Total cash and cash equivalents   31,892    21,274 
           
Securities available-for-sale   87,797    75,909 
           
Loans   378,513    385,444 
Less allowance for loan losses   (4,333)   (4,236)
Net loans   374,180    381,208 
           
Real estate owned   68    1,111 
Investment in FHLB stock   3,250    3,250 
Premises and equipment, net   5,091    10,016 
Premises and equipment held for sale   4,771    - 
Bank-owned life insurance   20,760    20,027 
Deferred tax asset, net   10,440    - 
Accrued interest receivable and other assets   3,015    2,587 
Total assets  $541,264   $515,382 
           
Liabilities and shareholders’ equity          
Liabilities:          
Deposits:          
Non-interest bearing  $124,023   $111,022 
Interest bearing   350,514    342,170 
Total deposits   474,537    453,192 
           
Borrowings   4,520    11,808 
Accrued interest payable and other liabilities   3,360    3,171 
Total liabilities   482,417    468,171 
           
Shareholders’ equity:          
Preferred stock, no par value, 2,000,000 shares authorized, none issued   and outstanding   -    - 
Common shares, 17,500,000 shares authorized, 7,588,887 and   7,541,445 shares issued, and 7,281,237 and 7,233,797 shares   outstanding for 2015 and 2014, respectively   16,410    16,064 
Retained earnings   49,799    38,055 
Treasury stock, at cost, 307,650 shares at December 31, 2015 and 2014   (7,416)   (7,416)
Accumulated other comprehensive income   436    654 
Deferred stock-based compensation   (382)   (146)
Total shareholders’ equity   58,847    47,211 
Total liabilities and shareholders’ equity  $541,264   $515,382 

 

See notes to the consolidated financial statements.

 

 32 
 

 

DCB Financial Corp and Subsidiaries

Consolidated Statements of Income

 

   Year  ended December 31, 
   2015   2014 
   (In thousands, except share and per share data) 
Interest income:          
Loans  $15,866   $15,276 
Securities   1,957    2,065 
Federal funds sold and interest bearing deposits   67    39 
Total interest income   17,890    17,380 
           
Interest expense:          
Deposits:          
Savings and money market  accounts   570    544 
Time accounts   357    434 
Interest-bearing demand accounts   102    91 
Total   1,029    1,069 
           
FHLB advances   141    143 
Total interest expense   1,170    1,212 
           
Net interest income   16,720    16,168 
Provision for loan losses   -    150 
Net interest income after provision for loan losses   16,720    16,018 
           
Non-interest income:          
Service charges   2,002    1,963 
Wealth management fees   1,644    1,474 
Treasury management fees   273    220 
Income from bank-owned life insurance   733    730 
Gain on the sale of securities available-for-sale   -    101 
Net gain (loss) on loans held for sale   3    (509)
Net gain (loss) on sale of REO   16    (84)
Gain on sale of branch   -    438 
Other non-interest income   151    127 
Total non-interest income   4,822    4,460 
           
Non-interest expense:          
Salaries and employee benefits   11,263    11,141 
Occupancy and equipment   3,912    3,784 
Professional services   1,383    1,379 
Advertising   549    347 
Office supplies, postage and courier   305    328 
FDIC insurance premium   393    630 
State franchise taxes   295    266 
Other non-interest expense   2,353    2,231 
Total non-interest expense   20,453    20,106 
           
Income before income tax benefit   1,089    372 
Income tax benefit   (10,655)   - 
Net income  $11,744   $372 
           
Share and Per Share Data          
Basic average common shares outstanding   7,272,061    7,193,372 
Diluted average common shares outstanding   7,288,350    7,232,388 
Basic and diluted earnings per common share  $1.61   $0.05 

 

See notes to the consolidated financial statements.

 

 33 
 

 

DCB Financial Corp and Subsidiaries

Consolidated Statements of Comprehensive Income

 

   Year ended December 31, 
   2015   2014 
   (In thousands) 
Net income  $11,744   $372 
           
Other comprehensive (loss) income:          
           
Net unrealized (losses) gains on securities available-for-sale, net of taxes of $(112) and $769 in 2015 and 2014, respectively   (218)   1,494 
           
Reclassification adjustment for gains included in net income, net of taxes of $(35)  in 2014   -    (66)
           
Total other comprehensive (loss) income   (218)   1,428 
           
Comprehensive income  $11,526   $1,800 

 

See notes to the consolidated financial statements.

 

 34 
 

 

DCB Financial Corp and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

Year ended December 31, 2015 and 2014

(Dollars in thousands, except share data)

 

   Issued and
Outstanding
Common
Shares
   Preferred
Stock
   Common
Stock
   Retained
Earnings
   Treasury
Stock
   Accumulated
Other
Comprehensive
(Loss) Income
   Deferred
Stock-Based
Compensation
   Total 
                                 
Balance at January 1, 2014   7,192,352   $-   $15,771   $37,683   $(7,416)  $(774)  $-   $45,264 
Net income   -    -    -    372    -    -    -    372 
Other comprehensive income, net of taxes   -    -    -    -    -    1,428    -    1,428 
Issuance of restricted stock in exchange for cancelled stock options   41,445    -    293    -    -    -    (146)   147 
Balance at December 31, 2014   7,233,797   $-   $16,064   $38,055   $(7,416)  $654   $(146)  $47,211 
                                         
Net income   -    -    -    11,744    -    -    -    11,744 
Other comprehensive loss, net of taxes   -    -    -    -    -    (218)   -    (218)
Issuance of restricted stock   57,243    -    417    -    -    -    (417)   - 
Forfeiture of restricted stock   (9,290)   -    (71)   -    -    -    71    - 
Restricted stock withheld upon vesting for payment of taxes   (513)   -    -    -    -    -    -    - 
Amortization of restricted stock   -    -    -    -    -    -    110    110 
Balance at December 31, 2015   7,281,237   $-   $16,410   $49,799   $(7,416)  $436   $(382)  $58,847 

 

See notes to consolidated financial statements.

 

 35 
 

 

DCB Financial Corp and Subsidiaries

Consolidated Statements of Cash Flows

 

 

   Year ended December 31 
   2015   2014 
   (Dollars in thousands) 
Cash flows from operating activities          
Net income  $11,744   $372 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation   932    1,070 
Provision for loan losses   -    150 
Deferred income taxes   (10,665)   - 
Gain on sale of securities   -    (101)
(Gain) loss on loans held-for-sale, net   (3)   509 
(Gain) loss on sale of real estate owned, net   (16)   84 
Gain on sale of branch   -    (438)
Net stock based compensation   225    190 
Premium amortization on securities, net   1,041    1,064 
Earnings on bank owned life insurance   (733)   (730)
Net changes in other assets and other liabilities   (17)   543 
Net cash provided by operating activities   2,508    2,713 
           
Cash flows from investing activities          
Purchases of securities available-for-sale   (38,701)   (25,136)
Proceeds from maturities, principal payments and calls of securities available-for-sale   25,442    23,234 
Proceeds from sales of securities available-for-sale   -    7,140 
Net change in loans   6,762    (31,076)
Proceeds from sales of loans held-for-sale   269    845 
Proceeds from sale of real estate owned   1,059    768 
Net cash paid with sale of branch   -    (12,464)
Proceeds from redemption of FHLB stock   -    549 
Premises and equipment expenditures   (778)   (445)
Net cash used in investing activities   (5,947)   (36,585)
           
Cash flows from financing activities          
Net change in deposits   21,345    22,819 
Proceeds from short-term borrowings   -    7,000 
Repayment of borrowings   (7,288)   (30)
Net cash provided by financing activities   14,057    29,789 
           
Net change in cash and cash equivalents   10,618    (4,083)
Cash and cash equivalents at beginning of year   21,274    25,357 
Cash and cash equivalents at end of year  $31,892   $21,274 
           
Supplemental disclosures of cash flow information          
Cash paid during the period for interest on deposits and borrowings  $1,132   $1,288 
           
Non-cash investing and financing activities:          
Transfer of premises and equipment to held for sale  $4,771    - 
Transfer of loans to real estate owned   -    744 
Transfer of loans to held for sale   -    913 
Transfer of loans held for sale to held for investment   -    769 
Transfer of deposits from held for sale   -    (3,210)

 

See notes to consolidated financial statements.

 

 36 
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2015 and 2014

 

Note 1 – Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of DCB Financial Corp (“DCB”) and its direct and indirect wholly-owned subsidiaries, The Delaware County Bank and Trust Company (the “Bank”), DCB Title Services, LLC, DCB Insurance Services, Inc., DataTasx LLC, ORECO, Inc. and 110 Riverbend, LLC. (collectively referred to hereinafter as the “Company”). All intercompany transactions and balances have been eliminated in the consolidated financial statements.

 

Nature of Operations

 

The Company provides financial services in Delaware and Franklin counties in Ohio, as well as nearby counties, through its eight full-service and six limited-service banking locations. Its primary deposit products are checking, savings, and term certificate accounts and its primary lending products are residential mortgage, commercial and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Real estate loans are secured by both residential and commercial real estate. The Bank also operates a trust department and engages in other personal wealth management activities, including brokerage services and private banking.

 

Business Segments

 

While the Company’s management monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company’s operations are considered by management to be aggregated into one operating segment.

 

Critical Accounting Estimates and Policies

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management has identified the allowance for loan losses, income taxes, and the fair value of financial instruments to be the accounting areas that require the most subjective and complex judgments, and as such could be the most subject to revision as new information becomes available. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand, federal funds sold and deposits with other financial institutions with original maturities of less than 90 days. Net cash flows are reported for customer loan and deposit transactions, federal funds purchased and other short-term borrowings.

 

Securities

 

Securities are classified as held-to-maturity and carried at adjusted amortized cost when management has the positive intent and ability to hold them to maturity. Securities classified as available-for-sale might be sold before maturity. Securities classified as available-for-sale are carried at fair value, with temporary unrealized holding gains and losses excluded from earnings and reported as a component of other comprehensive income. Realized gains and losses on sale of securities are recognized using the specific identification method. The Company does not engage in securities trading activities. Interest income includes premium amortization and accretion of discounts on securities.

 

For securities with unrealized losses, management considers, in determining whether other-than-temporary impairment exists, (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

 37 
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2015 and 2014

 

For securities with other-than-temporary impairment, further analysis is required to determine the appropriate accounting. If management neither intends to sell the impaired security nor expects it will be required to sell the security prior to recovery, only the credit loss component of the other-than-temporary impairment is recognized in earnings while the non-credit loss is recognized in other comprehensive income. The credit loss component recognized in earnings is identified as the principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections.

 

Loans

 

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

 

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

 

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

 

Allowance for Loan Losses

 

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

 

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

 

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

 

 38 
 

 

DCB Financial Corp and Subsidiaries

Notes To Consolidated Financial Statements

Years ended December 31, 2015 and 2014

 

Management also analyzes certain broader, non-portfolio specific factors in assessing the adequacy of the allowance for loan losses, such as the allowance as a percentage of total loans, the allowance as a percentage of non-performing loans and the provision expense as a percentage of net charge-offs. This portion of the allowance, when applicable, is reported as an “unallocated” component of the allowance for loan losses in the Company’s financial statements

 

Uncollectibility is usually determined based on a pre-determined number of days delinquent in the case of consumer loans, or, in the case of commercial loans, is based on a combination of factors including delinquency, collateral and other legal considerations. Consumer loans are charged-off prior to 120 days of delinquency, but could be charged off earlier, depending on the individual circumstances. Mortgage loans are charged down prior to 120 days of delinquency, but could be charged off sooner, again, depending upon individual circumstance. Typically, loans collateralized by residential real estate are partially charged down to the estimated liquidation value, which is generally based on appraisal less costs to hold and liquidate. Commercial and commercial real estate loans are evaluated for impairment and typically reserved based on the results of the analysis, then subsequently charged down to a recoverable value when loan repayment is deemed to be collateral dependent. Loans can be partially charged down depending on a number of factors including: the remaining strength of the borrower and guarantor; the type and value of the collateral, and the ease of liquidating collateral; and whether or not collateral is brought onto the bank’s balance sheet via repossession. In the case of commercial and commercial real estate loans, charge-offs, partial or whole, take place when management determines that full collectability of principal balance is unlikely to occur. Subsequent recoveries, if any, are credited to the allowance. Management’s policies for determining impairment, reserves and charge-offs are reviewed and approved by the Board of Directors on an annual basis, and were not materially changed in 2015.

 

Troubled debt restructuring of loans is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule.  All modified loans are evaluated to determine whether the loans should be reported as a Troubled Debt Restructuring (TDR).  A loan is a TDR when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower by modifying or renewing a loan that the Company would not otherwise consider. To make this determination, the Company must determine whether (a) the borrower is experiencing financial difficulties and (b) the Company granted the borrower a concession. This determination requires consideration of all of the facts and circumstances surrounding the modification.  An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean the borrower is experiencing financial difficulties.

 

Investment in Federal Home Loan Bank Stock

 

The Company is required as a condition of membership in the Federal Home Loan Bank of Cincinnati (“FHLB”) to maintain an investment in FHLB common stock. The stock is redeemable at par and, therefore, its cost is equivalent to its redemption value. The Company’s ability to redeem FHLB shares is dependent on the redemption practices of the FHLB. The stock is carried at cost and evaluated for impairment.

 

Premises and Equipment

 

Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the assets’ useful lives, estimated to be five to 39 years for buildings, improvements and leasehold improvements. The Company generally uses three to five years for the useful lives of furniture, fixtures, and equipment, using the straight line method, depending on the nature of the asset. Premises and equipment are reviewed for impairment when events indicate the carrying amount may not be recoverable. Maintenance and repairs are expensed and major improvements are capitalized.

 

Premises and equipment held for sale is carried at the lower of cost or fair value. The Company ceases recognition of depreciation expense at the time that premises and equipment is transferred to held for sale.

 

Foreclosed Assets

 

Assets acquired through foreclosure are initially recorded at the lower of cost or fair value less expected selling costs. Subsequent declines in fair value below the recorded amount are recorded as a direct write-down to expense. The Company generally evaluates fair market values of foreclosed assets on a quarterly basis, and adjusts accordingly. Holding costs after acquisition are expensed as incurred, but construction costs to improve a property’s value may be capitalized as part of the asset value.

 

 39 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

Servicing Assets

 

Servicing assets represent the allocated value of retained servicing on loans sold. Servicing assets are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the assets, using groupings of the underlying loans as to interest rates, and then secondarily as to geographic and prepayment characteristics. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance.

 

Bank Owned Life Insurance

 

The Company has purchased life insurance policies on certain key executives and directors. Bank owned life insurance is recorded at its cash surrender value.

 

Income Taxes

 

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

 

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

 

Financial Instruments

 

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

 

Earnings per Common Share

 

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

 

 40 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

Stock-Based Compensation

 

Compensation cost is recognized for restricted stock awards issued to employees and directors based on the fair value of these awards at the date of grant. The market price of the Company’s common shares at the date of grant is used to determine the fair value for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

 

The Company’s outstanding stock options may be settled for cash at the recipient’s discretion; therefore, liability accounting applies to the Company’s 2004 Long-Term Stock Incentive Plan under which such stock options were granted. Compensation expense is recognized based on the fair value of these awards at the reporting date. A Black Scholes model is utilized to estimate the fair value of stock options at the date of grant and subsequent re-measurement dates. Compensation cost is recognized over the required service period, generally defined as the vesting period. The Company’s stock option awards contain terms that provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period.  Changes in fair value of the options between the vesting date and option expiration date are also recognized in the Consolidated Statement of Income.

 

Comprehensive Income

 

Comprehensive income consists of net income and other comprehensive income, net of applicable income tax effects. Other comprehensive income includes unrealized gains and losses on securities available-for-sale securities and reclassification adjustments for gains and losses included in income. Accumulated comprehensive income at December 31, 2015 and 2014 consists solely of unrecognized gains on available for sale securities, net of tax, of $225,000 and $337,000, respectively.

 

Restrictions on Cash

 

Other deposits at the Federal Reserve Bank above the clearing balance requirements earn interest at an overnight rate, and are not restricted. In addition, $1.1 million is held in another institution and is under the control of a third party due to a contractual agreement.

 

Dividend Restrictions

 

Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to DCB or by DCB to shareholders.

 

Fair Value of Financial Instruments

 

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or market conditions could significantly affect the estimates.

 

Reclassification

 

Certain amounts in the prior year consolidated financial statements have been reclassified to conform to the current presentation. These reclassifications had no effect on prior year net income or shareholders’ equity.

 

 41 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

New Accounting Pronouncements

 

Recently Adopted Accounting Standards

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ASU 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. This guidance requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based upon the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. This guidance should be applied using a prospective transition method or a modified retrospective transition method. The adoption of this guidance did not have a significant effect on the Company’s financial position or results of operations.

 

In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amended guidance clarifies that an in-substance repossession or foreclosure occurs and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amended guidance also requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure according to local requirements of the applicable jurisdiction. This guidance became effective January 1, 2015. The adoption of this guidance did not have a significant effect on the Company’s financial position or results of operations.

 

Recently Issued Accounting Standards

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

 

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

 

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

 

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

 

 42 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

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

 

In June 2014, the FASB issued ASU 2014–12, Compensation – Stock Compensation (Topic 718) - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period. The amended guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. This guidance is effective for annual periods and interim periods within those annual periods beginning after December 31, 2015, with earlier adoption permitted. The adoption of this guidance is not expected to have a material effect on the Company’s financial position or results of operations.

 

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

 

 43 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

2. Securities

 

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

 

   December 31, 2015 
  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

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

 

   December 31, 2014 
  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

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

 

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

 

   December 31, 2015 
   (Less than 12 months)   (12 months or longer)   Total 
Description of securities 

Number of

investments

  

Fair

value

  

Unrealized

losses

  

Number of

investments

   Fair
value
  

Unrealized

losses

  

Number of

investments

  

Fair

value

  

Unrealized

losses

 
U.S. Government and agency obligations   14   $15,333   $55    2   $1,964   $33    16   $17,297   $88 
Corporate bonds   2    759    5    3    1,400    8    5    2,159    13 
State and municipal obligations   9    3,902    48    4    1,355    33    13    5,257    81 
Collateralized mortgage obligations   13    11,298    63    6    2,551    44    19    13,849    107 
Mortgage-backed  securities and other   5    5,176    41    -    -    -    5    5,176    41 
Total temporarily impaired securities   43   $36,468   $212    15   $7,270   $118    58   $43,738   $330 

 

   December 31, 2014 
   (Less than 12 months)   (12 months or longer)   Total 
Description of securities 

Number of

investments

  

Fair

value

  

Unrealized

losses

  

Number of

investments

  

Fair

value

  

Unrealized

losses

  

Number of

investments

  

Fair

value

  

Unrealized

losses

 
U.S. Government and agency obligations   3   $2,488   $9    4   $4,446   $79    7   $6,934   $88 
Corporate bonds   1    503    1    4    1,664    21    5    2,167    22 
State and municipal obligations   8    2,699    18    4    1,915    51    12    4,614    69 
Collateralized mortgage obligations   9    5,649    20    4    3,649    85    13    9,298    105 
Mortgage-backed securities and other   -    -    -    -    -    -    -    -    - 
Total temporarily impaired securities   21   $11,339   $48    16   $11,674   $236    37   $23,013   $284 

 

 44 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

The unrealized losses on the Company’s investments in U.S. Government and agency obligations, corporate bonds, 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 basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2015.

 

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”).

 

No other-than-temporary impairment was recognized in 2015 or 2014. There was no accumulated other-than-temporary impairment as of December 31, 2015 or 2014.

 

There are no securities from the same issuer, besides agency investments, greater than 10% of total equity at December 31, 2015.

 

The amortized cost and estimated fair value of debt securities, at December 31, 2015, by contractual maturity, are shown below (in thousands). Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown separately since they are not due at a single maturity date.

 

   Amortized Cost   Fair Value 
Due in one year or less  $4,335   $4,333 
Due after one to five years   23,473    23,534 
Due after five to ten years   20,830    21,009 
Due after ten years   20,796    20,755 
Mortgage-backed and related securities   17,702    18,166 
Total  $87,136   $87,797 

 

Sales of investment securities during the years ended December 31, 2015 and 2014 were as follows (in thousands):

 

   2015   2014 
Proceeds from investment sales  $-   $7,140 
Gross gains on investment sales  $-   $242 
Gross losses on investment sales  $-   $(141)

 

Securities with a carrying amount of $78.8 million and $65.5 million at December 31, 2015 and 2014, respectively, were pledged to secure public deposits and other obligations.

 

 45 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

3. Loans

 

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

 

  

December 31,

2015

   December 31,
2014
 
Consumer and credit card  $40,587   $37,507 
Residential real estate and home equity   137,645    129,650 
Commercial and industrial   99,213    106,222 
Commercial real estate   100,743    111,851 
    378,188    385,230 
Net deferred loan costs   325    214 
Loans   378,513    385,444 
Allowance for loan losses   (4,333)   (4,236)
Net loans  $374,180   $381,208 

 

Loans to principal officers, directors, and their related affiliates during 2015 in the normal course of business were as follows (in thousands):

 

   2015 
Balance at beginning of year  $8,107 
New loans   - 
Repayments   (3,195)
Balance at end of year  $4,912 

 

Loans serviced for others totaled $1.8 million and $2.1 million at December 31, 2015 and 2014, respectively. The Company had net servicing assets of $3,000 at December 31, 2015 and 2014, respectively.

 

4. Credit Quality

 

Allowance for Loan Losses

 

The Company’s methodology for estimating probable future losses on loans utilizes a combination of probability of loss by loan grade and loss given defaults for its loan portfolio by class. The probability of default is based on both market data from a third-party independent source and actual historical default rates within the Company’s loan classes. A loan is impaired when full payment of interest and principal under the original contractual loan terms is not expected. Commercial and industrial loans, commercial real estate, including construction and land development, and multi-family real estate loans are individually evaluated for impairment. If a loan is impaired, the loan amount exceeding fair value, based on the most current information available is reserved. Management has developed a process by which commercial and commercial real estate loan relationships with balances of $250,000 or greater are assigned an internal risk grade based on relevant information about the ability of the borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. Borrower’s receiving an internal risk grade of substandard or doubtful are individually evaluated for impairment through a loan quality review (LQR). The LQR details the various attributes of the relationship and collateral and determines based on the most recent available information if a specific reserve needs to be applied and at what level. The LQR process for all loans meeting the specific review criteria is completed on a quarterly basis. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, such loans are not separately identified for impairment disclosures. This methodology recognizes portfolio behavior while allowing for reasonable loss ratios on which to estimate allowance calculations.

 

 46 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

Further, the process for estimating probable loan losses is divided into reviewing impaired loans on an individual basis for probable losses and, as noted above, calculating probable future losses based on historical and market data for homogenous loan portfolios. As the Company’s troubled loans have been reduced through paydowns, payoffs, credit improvement and charge-offs, the remaining loan portfolios possess better overall credit characteristics, and based on the Company’s methodology require lower rates of reserving than recent historical levels.

 

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

 

   Year ended December 31, 2015 
  

Consumer

and

Credit
Card

  

Commercial

and

Industrial

  

Commercial

Real Estate

  

Residential

Real Estate

and Home

Equity

   Unallocated   Total 
Beginning balance  $190   $1,132   $2,376   $268   $270   $4,236 
Charge-offs   (166)   (311)   (64)   (73)        (614)
Recoveries   147    352    103    109         711 
Net (charge-offs) recoveries   (19)   41    39    36         97 
                               
Provision   (27)   148    (416)   257    38    - 
Ending balance  $144   $1,321   $1,999   $561   $308   $4,333 

 

   Year ended December 31, 2014 
  

Consumer

and

Credit

Card

  

Commercial

and

Industrial

  

Commercial

Real Estate

  

Residential

Real Estate

and Home

Equity

   Unallocated   Total 
Beginning balance  $301   $3,231   $2,973   $219   $-   $6,724 
Charge-offs   (200)   (1,410)   (1,086)   (169)        (2,865)
Recoveries   113    42    131    38         324 
Transfer to held for sale   -    -    (97)   -         (97)
Net charge-offs   (87)   (1,368)   (1,052)   (131)        (2,638)
                               
Provision   (24)   (731)   455    180    270    150 
Ending balance  $190   $1,132   $2,376   $268   $270   $4,236 

 

Impaired Loans

 

A loan is considered impaired when based on current information and events it is probable the Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include non-performing commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

 

 47 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

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

 

  At December 31, 2015  

Period ended December 31,

2015

 
  

Recorded

Investment

  

Unpaid

Principal

Balance

  

Related

Allowance

  

Twelve

months

Average

Recorded

Investment

  

Twelve

months

Interest

Income

Recognized

 
With no related allowance recorded:                         
Consumer and credit card  $548   $548        $496   $27 
Residential real estate and home equity   668    668         576    - 
Commercial and industrial   926    926         1,063    35 
Commercial real estate   126    126         391    8 
   $2,268   $2,268        $2,526   $70 
                          
With an allowance recorded:                         
Commercial and industrial   944    1,021    144    1,024    55 
Commercial real estate   4,579    4,579    435    6,942    211 
    5,523    5,600    579    7,966    266 
                          
Total:                         
Consumer and credit card  $548   $548   $-   $496   $27 
Residential real estate and home equity   668    668    -    576    - 
Commercial and industrial   1,870    1,947    144    2,087    90 
Commercial real estate   4,705    4,705    435    7,333    219 
Total  $7,791   $7,868   $579   $10,492   $336 

 

   At December 31, 2014  

Period ended December 31,

2014

 
  

Recorded

Investment

  

Unpaid

Principal

Balance

  

Related

Allowance

  

Twelve

months

Average

Recorded

Investment

  

Twelve

months

Interest

Income

Recognized

 
With no related allowance recorded:                         
Consumer and credit card  $455   $455        $474   $25 
Commercial and industrial   1,288    1,288         1,531    45 
Commercial real estate   1,088    1,088         6,714    70 
    2,831    2,831         8,719    140 
                          
With an allowance recorded:                         
Commercial and industrial   740    817    256    1,772    43 
Commercial real estate   8,602    8,602    1,042    6,048    595 
    9,342    9,419    1,298    7,820    638 
                          
Total:                         
Consumer and credit card  $455   $455   $-   $474   $25 
Commercial and industrial   2,028    2,105    256    3,303    88 
Commercial real estate   9,690    9,690    1,042    12,762    665 
Total  $12,173   $12,250   $1,298   $16,539   $778 

 

 48 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

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

 

   December 31, 2015 
  

Consumer

and Credit

card

  

Residential

Real Estate

and Home

Equity

  

Commercial

and

Industrial

  

Commercial

Real Estate

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

 

   December 31, 2014 
  

Consumer

and Credit

card

  

Residential

Real Estate

and Home

Equity

  

Commercial

and

Industrial

  

Commercial

Real Estate

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

 

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

 

   December 31, 2015 
  

Consumer

and Credit

card

  

Residential

Real Estate

and Home

Equity

  

Commercial

and

Industrial

  

Commercial

Real Estate

   Total 
                     
Individually evaluated for impairment  $548   $668   $1,870   $4,705   $7,791 
Collectively evaluated for impairment   40,039    136,977    97,343    96,038    370,397 
Ending balance  $40,587   $137,645   $99,213   $100,743   $378,188 

 

   December 31, 2014 
  

Consumer

and Credit

card

  

Residential

Real Estate

and Home

Equity

  

Commercial

and

Industrial

  

Commercial

Real Estate

   Total 
                     
Individually evaluated for impairment  $455   $-   $2,028   $9,690   $12,173 
Collectively evaluated for impairment   37,052    129,650    104,194    102,161    373,057 
Ending balance  $37,507   $129,650   $106,222   $111,851   $385,230 

 

 49 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

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

 

   December 31,   December 31, 
   2015   2014 
Consumer and credit card  $-   $120 
Residential real estate and home equity   668    334 
Commercial and industrial   554    632 
Commercial real estate   -    298 
Total  $1,222   $1,384 

 

Credit Quality Indicators

 

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

 

Special Mention

 

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

 

Substandard

 

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

 

Doubtful

 

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

 

Loss

 

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

 

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

 

   December 31, 2015   December 31, 2014 
  

Commercial

and Industrial

  

Commercial

Real Estate

  

Commercial

and Industrial

  

Commercial

Real Estate

 
Pass  $96,225   $91,132   $100,961   $96,217 
Special mention   925    4,592    823    6,146 
Substandard   2,063    5,019    4,438    9,488 
Total  $99,213   $100,743   $106,222   $111,851 

 

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

 

 50 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

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

 

   December 31, 2015   December 31, 2014 
  

Consumer

and Credit

Card

  

Residential

Real Estate

and Home

Equity

  

Consumer

and Credit

Card

  

Residential

Real Estate

and Home

Equity

 
Performing  $40,587   $136,975   $37,387   $128,836 
Non-performing   -    670    120    814 
Total  $40,587   $137,645   $37,507   $129,650 

 

Age Analysis of Past Due Loans

 

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

 

   December 31, 2015 
  

30-59 Days

Past Due

  

60-89 Days

Past Due

  

90 Days or

more Past

Due

  

Total

Past Due

  

Loans Not

Past Due

   Total Loans 
Consumer and credit card  $48   $13   $-   $61   $40,526   $40,587 
Residential real estate and home equity   160    98    401    659    136,986    137,645 
Commercial and industrial   236    -    -    236    98,977    99,213 
Commercial real estate   -    -    -    -    100,743    100,743 
Total  $444   $111   $401   $956   $377,232   $378,188 

 

   December 31, 2014 
  

30-59 Days

Past Due

  

60-89 Days

Past Due

  

90 Days or

more Past

Due

  

Total

Past Due

  

Loans Not

Past Due

   Total Loans 
Consumer and credit card  $66   $7   $120   $193   $37,314   $37,507 
Residential real estate and home equity   220    30    642    892    128,758    129,650 
Commercial and industrial   68    -    -    68    106,154    106,222 
Commercial real estate   49    -    306    355    111,496    111,851 
Total  $403   $37   $1,068   $1,508   $383,722   $385,230 

 

Troubled Debt Restructurings

 

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

 

   For the year ended December 31, 
   2015   2014 
  

Number of

Contracts

  

Recorded

Investment (as of

period end)

  

Number of

Contracts

  

Recorded

Investment (as of

period end)

 
Consumer and credit card   7   $273    -   $- 
Commercial and industrial   2    44    -    - 
                     
Total   9   $317    -   $- 

 

During 2015 and 2014, there were no loans modified in a TDR that subsequently defaulted within twelve months of the modification.

 

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

 

 51 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

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

 

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

 

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

 

5. Premises and Equipment

 

Premises and equipment were as follows at the dates indicated (in thousands):

 

   December 31, 
   2015   2014 
         
Land  $14   $1,266 
Buildings   8,121    13,287 
Furniture and equipment   10,249    9,948 
Subtotal   18,384    24,501 
Accumulated depreciation   (13,733)   (15,115)
Subtotal   4,651    9,386 
Software, net of accumulated amortization   440    630 
Total premises and equipment  $5,091   $10,016 

 

Depreciation expense totaled $932,000 and $1.1 million for the years ended December 31, 2015 and 2014.

 

The Company has entered into operating lease agreements for branch offices and equipment, which expire at various dates through 2025, and provide options for renewals. Rental expense on lease commitments for 2015 and 2014 amounted to $643,000 and $566,000, respectively.

 

 52 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

The total future minimum lease commitments at December 31, 2015 under these leases are summarized as follows (in thousands):

 

2016  $633 
2017   405 
2018   263 
2019   164 
2020   69 
Thereafter   238 
Total  $1,772 

 

The Company had $4.8 million in premises and equipment held for sale at December 31, 2015 associated with the sale and leaseback of the corporate headquarters that was completed in January 2016.

 

In January 2016, the Company entered into a lease agreement in connection with the sale and leaseback of its corporate headquarters. The lease has a fifteen year term, with options to extend the term of the lease for two additional periods of ten years each. Minimum lease payments total $642,000 in the first year of the lease, with increases of 2% annually thereafter.

 

6. Deposits

 

Deposits consisted of the following at December 31 (in thousands):

 

   2015   2014 
Non-interest-bearing demand  $124,023   $111,022 
Interest-bearing demand   77,616    77,534 
Savings   47,333    42,634 
Money market   154,119    147,667 
Time deposits   71,446    74,335 
Total deposits  $474,537   $453,192 

 

The following table indicates the maturities of the Company’s time deposits at December 31 (in thousands):

 

   2015   2014 
Due in one year  $64,959   $48,431 
Due in two years   3,693    23,343 
Due in three years   2,480    2,154 
Due in four years   314    346 
Due in five years or more   -    61 
Total time deposits  $71,446   $74,335 

 

Total time deposits in excess of $250,000 as of December 31, 2015 and 2014 were $11.2 million and $9.6 million, respectively.

 

7. Borrowings

 

As a member of the FHLB of Cincinnati, the Bank has the ability to obtain borrowings based on its investment in FHLB stock and other qualified collateral. FHLB advances are collateralized by a blanket pledge of the Bank’s qualifying 1-4 family loan portfolio and all shares of FHLB stock. At December 31, 2015, total pledged loans were $137.9 million and investment in FHLB Stock was $3.2 million. Those amounts at December 31, 2014 were $141.8 million and $3.2 million respectively. The Bank had a $25.1 million line of credit with no outstanding balance at December 31, 2015 with the Federal Reserve Bank of Cleveland through its Discount Window. The Bank has pledged loans totaling $56.8 million at December 31, 2015.

 

Advances from the FHLB totaled $4.5 million and $11.8 million, respectively, at December 31, 2015 and 2014.

 

 53 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

The contractual amounts of FHLB borrowings mature as follows at December 31, 2015 (dollars in thousands):

 

Maturing  Amount  

Weighted

Average Rate

 
2016  $1,530    0.84%
2017   590    1.12%
2018   2,034    1.79%
2019   366    5.44%
2020 and after   -    -%
   $4,520    1.68%

 

8. Earnings per Common Share

 

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

 

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

 

   2015   2014 
Basic          
Net income  $11,744   $372 
Less: undistributed earnings allocated to unvested restricted shares   (129)   - 
Net earnings allocated to common shareholders  $11,615   $372 
           
Weighted average common shares outstanding including shares considered participating securities   7,272,061    7,193,372 
Less: average participating securities   (79,709)   - 
Weighted average shares   7,192,352    7,193,372 
           
Basic earnings per common share  $1.61   $0.05 
           
Diluted          
Net earnings allocated to common shareholders  $11,615   $372 
           
Weighted average common shares outstanding for basic earnings per common share   7,192,352    7,193,372 
Dilutive effect of assumed exercise of average participating securities   16,289    39,016 
Average participating securities   79,709    - 
Average common shares outstanding – diluted   7,288,350    7,232,388 
           
Diluted per common share  $1.61   $0.05 

 

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

 

   2015   2014 
Weighted-average common shares outstanding (basic)   7,272,061    7,193,372 
Dilutive effect of assumed exercise of stock options   16,289    39,016 
Weighted-average common shares outstanding (diluted)   7,288,350    7,232,388 

 

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

 

 54 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

9. Retirement Plans

 

The Company provides a 401(k) savings plan (the “Plan”) for all eligible employees. To be eligible, an individual must complete six months of employment and be 20 or more years of age. Under provisions of the Plan, participants can contribute a certain percentage of their compensation to the Plan up to the maximum allowed by the IRS. The Company also matches a certain percentage of those contributions up to a maximum match of up to 3% of the participant’s compensation. The Company may also provide additional discretionary contributions, but did not do so in 2015 or 2014. Employee voluntary contributions are vested immediately and Company contributions are fully vested after three years. The 2015 and 2014 expenses related to the Plan were $164,000 and $176,000, respectively.

 

The Company maintains a deferred compensation plan for the benefit of certain officers. The plan is designed to provide post-retirement benefits to supplement other sources of retirement income such as social security and 401(k) benefits. The amount of each officer’s benefit will generally depend on their salary, and their length of employment. The Company accrues the cost of this deferred compensation plan during the working careers of the officers. Expense under this plan totaled $2,000 and $38,000 in 2015 and 2014, respectively. The total accrued liability under this plan was $888,000 and $928,000 at December 31, 2015 and 2014, respectively. In addition to recognizing expense associated with the plan, the Company funds the vested amounts, $761,000 and $768,000, into separate accounts held in custody by the Company’s trust department at December 31, 2015 and 2014, respectively.

 

The Company has purchased insurance contracts on the lives of the participants in the supplemental post-retirement benefit plan and has named the Company as the beneficiary. While no direct connection exists between the deferred compensation plan and the life insurance contracts, it is management’s current intent that the earnings on the insurance contracts be used as a funding source for benefits payable under the plan.

 

10. Stock-Based Compensation

 

The 2014 Restricted Stock Plan (“2014 Plan”) was approved by shareholders in October 2014 authorizing the issuance of 350,000 common shares of DCB. The purpose of the 2014 Plan is to promote the growth and profitability of the Company and its affiliated companies; to attract and retain directors, key officers and employees of outstanding competence; to provide eligible directors, certain key officers and employees of the Company and its affiliated companies with an incentive to achieve corporate objectives; and to provide such directors, officers and employees with an equity interest in the Company and its affiliated companies. Awards granted under this plan generally vest ratably over a five year period.

 

Restricted stock awards are recorded as deferred compensation, a component of shareholders’ equity, at fair value at the date of the grant and amortized to compensation expense over the specified vesting periods.

 

Compensation expense associated with the amortization of restricted stock was $110,000 in 2015. The Company did not record any compensation expense associated with restricted stock in 2014. The fair value of the vested restricted shares was $54,000 in 2015.

 

Total unrecognized stock-based compensation expense, adjusted for the amortized fair value of stock options cancelled in exchange for restricted stock in December 2014, was $382,000 at December 31, 2015, which will be recognized as compensation expense over a weighted average period of 4.2 years.

 

The following is a summary of the Company’s restricted stock activity for the year ended December 31, 2015:

 

  

Non-vested

Shares

  

Weighted

Average

Grant Date

Fair Value

 
Outstanding at beginning of year   41,445   $7.07 
Granted   57,243   $7.29 
Forfeited   (9,290)  $7.22 
Vested   (7,666)  $7.07 
Outstanding at end of year   81,732   $7.20 

 

 55 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

The Company also has a long-term stock incentive compensation plan (the “2004 Plan”), under which certain employees were granted options to purchase shares of the Company’s common stock at a predetermined price. The 2004 Plan, which is limited to 300,000 shares, expired in 2014 and no further awards will be granted from the 2004 Plan. Options granted under the 2004 Plan vest 20% per year over a five year period, and expire after ten years. There were no options granted in 2015 and 2014.

 

The Company recorded $134,000 and $190,000 in compensation expense for its outstanding stock options for the years ended December 31, 2015 and 2014, respectively.

 

Stock option activity in the 2004 Plan for the year ended December 31, 2015 was as follows:

 

   Shares  

Weighted Average

Exercise Price

 
Outstanding at beginning of year   85,629   $6.81 
Exercised   9,329    3.69 
Forfeited   2,293    19.49 
Outstanding at end of year   74,007   $6.66 
           
Options exercisable at end of year   62,082   $7.07 

 

The following table summarizes the Company’s stock options at December 31, 2015:

 

   Options Outstanding   Options Exercisable 

Range of

Exercise Prices

 

Options

Outstanding

  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Life (Years)

  

Options

Exercisable

  

Weighted

Average

Exercise

Price

 
$ 3.50 - $ 6.00   59,022   $3.96    5.9    47,097   $3.83 
$ 6.01 - $ 9.00   5,196   $9.00    3.5    5,196   $9.00 
$9.01 - $17.00   4,783   $16.90    2.1    4,783   $16.90 
$17.01 - $31.00   5,006   $26.21    1.1    5,006   $26.21 

 

The total intrinsic value of options exercised during 2015 and 2014 was $32,000 and $57,000, respectively. At December 31, 2015, the aggregate intrinsic value of outstanding options was $208,000 and the aggregate intrinsic value of exercisable options was $172,000.

 

At December 31, 2015, unrecognized compensation expense to be recognized over the remaining vesting period of outstanding options was $224,000.

 

On November 25, 2014, the Company commenced a tender offer to exchange (the “Exchange Offer”) 190,104 options outstanding under the Company’s 2004 Plan, for shares of restricted stock to be granted under the Company’s 2014 Plan. The Exchange Offer was subject to the terms and conditions described in Schedule TO (“TO”) which was filed with the SEC on November 25, 2014.

 

The stock options subject to the TO were any or all options to purchase the Company’s common shares held by employees, executive officers and non-employee directors, whether vested or unvested, out-of-the-money or in-the-money, which had not expired or terminated prior to the expiration of the Exchange Offer on December 23, 2014.

 

The primary reason for making the Exchange Offer was to reduce the compensation expense we are required to recognize for the Company’s options which are accounted for under the liability accounting method, under which changes in the fair value of the options between the vesting date and expiration date are recognized in the Company’s financial statements. The shares of restricted stock offered in exchange for the eligible options are not subject to liability accounting and, accordingly, would allow the Company to better manage its compensation expense.

 

 56 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

Additionally, the exercise prices of some of the outstanding eligible options are significantly higher than the market price of the Company’s common shares. The Company believes that these significantly “out of the money” options may be unlikely to be exercised in the near future and were therefore not providing the incentives intended for our employees, executive officers and non-employee directors. By making the Exchange Offer, the Company believes it was able to re-establish some of the intended incentive value of these options by realigning its compensation programs to more closely reflect the current market and economic conditions. The Company established eight exchange ratios for eligible options depending on their exercise price, ranging from 0.029 shares of restricted stock per Option to 0.672 shares of restricted stock per option, as specifically set forth in the TO.  

 

Thirty holders of eligible options tendered, and the Company accepted for cancellation, eligible options to purchase an aggregate of 113,873 common shares, representing approximately 64% of the total common shares underlying options eligible for exchange in the Exchange Offer. On December 23, 2014, a total of 41,445 shares of restricted stock were issued to holders of eligible options in exchange for the cancellation of such eligible options pursuant to the Offer to Exchange. The restricted stock granted under the Exchange Offer had a grant date fair value of $7.07 per share, and vests ratably over a five-year period.

 

The excess of the aggregate grant date fair value of the restricted stock of $293,000 over the fair value of the stock options canceled of $147,000 was recorded as deferred stock-based compensation, a component of shareholders’ equity, and is being amortized over the vesting period of the restricted stock.

 

11. Federal Income Taxes

 

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

 

   Year ended December 31, 
   2015   2014 
Current  $10   $- 
Deferred   119    384 
Valuation allowance   (10,784)   (384)
Total  $(10,655)  $- 

 

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

 

   Year ended December 31, 
   2015   2014 
Federal income taxes compared at the expected statutory rate  $370   $127 
Increase (decrease) in taxes resulting from:          
Nontaxable dividend and interest income   (91)   (82)
Increase in cash surrender value of life insurance - net   (250)   (248)
Valuation allowance   (10,784)   (384)
Other   100    587 
Income tax benefit per financial statements  $(10,655)  $- 

 

 57 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

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

 

   Year ended December 31, 
   2015   2014 
Deferred tax assets:          
Allowance for loan losses  $1,473   $1,440 
Depreciation   -    103 
Deferred compensation   300    316 
Alternative minimum tax carry forward   155    145 
Expenses on foreclosed property   14    10 
NOL carry forward   9,020    8,910 
Other   98    284 
Subtotal   11,060    11,208 
Deferred tax liabilities:          
FHLB stock dividends   (307)   (389)
Unrealized gains on available-for-sale securities   (225)   (337)
Depreciation   (55)   - 
Other   (33)   (35)
Subtotal   (620)   (761)
Net deferred tax asset   10,440    10,447 
Less: valuation allowance   -    (10,784)
Total  $10,440   $(337)

 

At December 31 2015, the Company had a $26.5 million net operating loss carryforward that begins to expire in 2030.

 

12. Commitments, Contingencies and Financial Instruments with Off-Balance Sheet Risk

 

Some financial instruments such as loan commitments, credit lines, letters of credit and overdraft protection are issued to meet customer financing needs. These financing arrangements to provide credit typically have predetermined expiration dates, but can be withdrawn if certain conditions are not met. The commitments may expire without ever having been drawn on by the customer; therefore the total commitment amount does not necessarily represent future cash requirements. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used for loans, including obtaining various forms of collateral, such as real estate or securities at exercise of the commitment or letter of credit.

 

The Bank grants retail, commercial and commercial real estate loans in central Ohio. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based upon management’s credit evaluation of each customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income producing commercial properties.

 

The contractual amount of financing instruments with off-balance sheet risk was as follows at year-end (in thousands).

 

   2015   2014 
  

Fixed

rate

  

Variable

rate

  

Fixed

rate

  

Variable

rate

 
                 
Commitments to extend credit  $8,124   $2,706   $2,290   $8,300 
Unused lines of credit and letters of credit  $11,403   $107,157   $4,953   $127,076 

 

 58 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

Commitments to make loans are generally made for periods of 30 days or less. Maturities for loans subject to these fixed-rate commitments range from up to 1 to 30 years. In the opinion of management, outstanding loan commitments equaled or exceeded prevalent market interest rates at December 31, 2015, such commitments were underwritten in accordance with normal loan underwriting policies, and all disbursements will be funded via normal cash flows from operations and existing excess liquidity.

 

Legal Proceedings

 

There is no pending material litigation, other than routine litigation incidental to the business of the Company and Bank. Further, there are no material legal proceedings in which any director, executive officer, principal shareholder or affiliate of the Company is a party or has a material interest, which is adverse to the Company or Bank. Finally, there is no litigation in which the Company or Bank is involved which is expected to have a material adverse impact on the financial position or results of operations of the Company or Bank.

 

13. Regulatory Capital

 

The Company is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Capital adequacy guidelines and, additionally for banks, prompt corrective-action regulations, involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet various capital requirements can initiate regulatory action.

 

The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The Bank met the well-capitalized requirements, as publicly defined, at December 31, 2015.

 

In December 2010, the Basel Committee on Banking Supervision issued final rules to global regulatory standards on bank capital adequacy and liquidity (commonly referred to as “Basel III”) previously agreed on by the Group of Governors and Heads of Supervision (the oversight body of the Basel Committee). U.S. federal banking agencies adopted final rules during 2013 to bring U.S. banking organizations into compliance with Basel III. The new rules were effective for the Bank beginning January 1, 2015, subject to a phase-in period for certain provisions extending through January 1, 2019.

 

Under the new rules, the Bank will be required to maintain additional levels of Tier 1 common equity over the minimum risk-based capital levels before it may pay dividends or pay discretionary bonuses. Under Basel III, the Bank will be required to maintain a minimum CET1 ratio of 4.5% of risk-weighted assets. CET1 consists of common stock, related surplus and retained earnings less certain deductions that primarily include goodwill, other intangible assets and deferred tax assets. These deductions to CET1 will be phased-in over a four-year period beginning at 40% on January 1, 2015 and an additional 20% per year thereafter. The minimum Tier 1 capital ratio increased to 6% from 4%, while the total capital ratio and leverage ratio remained unchanged at 8% and 4%, respectively. Changes to risk-weighted assets include: (i) 150% risk weighting for non-residential mortgage loans past due more than 90 days or classified as nonaccrual; (ii) 150% risk weighting (from 100%) for certain high volatility commercial real estate acquisition, development and construction loans; (iii) a 20% (from 0%) credit conversion factor for the unused portion of commitments with an original maturity of one year or less (except those unconditionally cancellable by the Bank); and, (iv) a 250% (from 100%) risk weighting for mortgage servicing and deferred tax assets that are not deducted from CET1.

 

In order to avoid restrictions on distributions, including dividend payments and discretionary bonus payments to its executives, the Bank will be required to maintain a capital conservation buffer of an additional 2.5% of risk-weighted assets once fully phased in. The capital conservation buffer is designed to create incentives for banking organizations to conserve capital during periods of economic stress. The addition of the capital conservation buffer effectively results in minimum ratios of 7%, 8.5% and 10.5% for CET1, Tier 1 capital and total capital, respectively, in order to avoid restrictions on distributions and discretionary bonus payments to executives. The capital conservation buffer is set to be phased in over a four year period beginning in 2016 by increments of 0.625% annually until reaching 2.5%. The capital conservation buffer does not apply to the Tier 1 leverage ratio.

 

 59 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

Under the new capital rules, the effects of certain accumulated other comprehensive income items included in capital (primarily unrealized gains and losses on available for sale investment securities) are not excluded; however, banks with less than $250 billion in assets were permitted to make a one-time permanent election to continue excluding these items comparable to their prior treatment. The Bank made this election in order to avoid potentially significant fluctuations in its capital levels which can occur from the impact of changing market interest rates on the fair value of the Company’s investment securities portfolio.

 

Actual and required capital ratios for the Bank are presented below at the dates indicated (dollars in thousands):

 

   Actual   For Capital Adequacy
Purposes
   To be well-capitalized
under Prompt Corrective
Action Provisions
 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
December 31, 2015                              
Total risk-based capital  $52,500    14.29%  $29,391    8.0%  $36,739    10.0%
Tier 1 capital  $48,167    13.11%  $22,044    6.0%  $29,393    8.0%
Common equity Tier 1 capital  $48,167    13.11%  $16,533    4.5%  $23,881    6.5%
Leverage  $48,167    9.11%  $21,149    4.0%  $26,436    5.0%
                               
December 31, 2014                              
                               
Total risk-based capital  $49,602    13.56%  $29,264    8.0%  $36,580    10.0%
Tier-1 capital  $45,366    12.40%  $14,634    4.0%  $21,951    6.0%
Leverage  $45,366    9.00%  $20,163    4.0%  $25,203    5.0%

 

Banking regulations limit capital distributions by the Bank. Generally, capital distributions are limited to undistributed net income for the current and prior two years. At December 31, 2015, there was $9.2 million available for the declaration of dividends by the Bank.

 

14. Fair Value Measurements

 

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

 

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

 

Level 1Quoted prices in active markets for identical assets or liabilities
Level 2Observable 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 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

 

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

 

 60 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

Fair value is defined as the price that would be received to sell an asset or transfer a liability between market participants at the balance sheet date. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to observable market data for similar assets and liabilities. However, certain assets and liabilities are not traded in observable markets and the Company must use other valuation methods to develop a fair value. The fair value of impaired loans is based on the fair value of the underlying collateral, which is estimated through third party appraisals or internal estimates of collateral values.

 

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

 

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

 

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

 

The Company utilizes information provided by a third-party investment securities portfolio manager in analyzing the investment securities portfolio in accordance with the fair value hierarchy of ASC 820. The portfolio manager’s evaluation of investment security portfolio pricing is performed using a combination of prices and data from other sources, along with internally developed matrix pricing models. The third-party’s month-end pricing process includes a series of quality assurance activities where prices are compared to recent market conditions, previous evaluation prices, and between the various pricing services. These processes produce a series of quality assurance reports on which price exceptions are identified, reviewed and where appropriate, securities are re-priced. In the event of a materially different price, the third party will report the variance and review the pricing methodology in detail. The results of the quality assurance process are incorporated into the selection of pricing providers by the third party.

 

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

 

Federal Home Loan Bank Stock: The carrying amount presented in the consolidated statements of financial condition is deemed to approximate fair value.

 

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

 

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

 

Advances from the Federal Home Loan Bank: The fair value of these advances is estimated using the rates currently offered for similar advances of similar remaining maturities or, when available, quoted market prices.

 

 61 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

Commitments to Extend Credit: For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. At December 31, 2015 and December 31, 2014, the fair value of loan commitments was not material.

 

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

 

   December 31, 2015 
   Carrying
amount
   Fair
Value
   Level 1   Level 2   Level 3 
Financial assets                         
Cash and cash equivalents  $31,892   $31,892   $31,892   $-   $- 
Securities available-for-sale   87,797    87,797    -    87,797    - 
Loans (net of allowance)   374,180    371,930    -    -    371,930 
FHLB stock   3,250    3,250    -    3,250    - 
Accrued interest receivable   1,307    1,307    -    -    1,307 
                          
Financial liabilities                         
Non-interest-bearing deposits  $124,023   $124,023   $-   $124,023   $- 
Interest-bearing deposits   350,514    350,957    -    350,957    - 
Borrowings   4,520    4,520    -    4,520    - 
Accrued interest payable   74    74    -    -    74 

 

   December 31, 2014 
   Carrying
amount
   Fair
Value
   Level 1   Level 2   Level 3 
Financial assets                         
Cash and cash equivalents  $21,274   $21,274   $21,274   $-   $- 
Securities available-for-sale   75,909    75,909    -    75,909    - 
Loans (net of allowance)   381,208    381,224    -    -    381,224 
FHLB stock   3,250    3,250    -    3,250    - 
Accrued interest receivable   1,234    1,234    -    -    1,234 
                          
Financial liabilities                         
Non-interest-bearing deposits  $111,022   $111,022   $-   $111,022   $- 
Interest-bearing deposits   342,170    342,318    -    342,318    - 
Borrowings   11,808    11,808    -    11,808    - 
Accrued interest payable   36    36    -    -    36 

 

 62 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

The following table presents the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at the dates indicated (in thousands):

 

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

 

   December 31, 2014 
       Fair Value Measurements Using 
   Fair Value   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
U.S. Government and agency obligations  $11,545   $-   $11,545   $- 
Corporate bonds   4,987    -    4,987    - 
State and municipal obligations   21,657    -    21,657    - 
Collateralized mortgage obligations   19,580    -    19,580    - 
Mortgage-backed securities   18,140    -    18,140    - 
Total  $75,909   $-   $75,909   $- 

 

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

 

Impaired loans

 

At December 31, 2015 and December 31, 2014, impaired loans consisted primarily of loans secured by commercial real estate. Management has determined fair value measurements on impaired loans primarily through evaluations of appraisals performed.

 

Real Estate Owned

 

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

 

 63 
 

 

DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

The following table presents the fair value measurements of assets measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at the dates indicated (in thousands).

 

   December 31, 2015 
   Fair Value Measurements Using 
   Fair Value  

Quoted Prices in
Active Markets for
Identical Assets

(Level 1)

  

Significant Other
Observable
Inputs

(Level 2 )

  

Significant
Unobservable
Inputs

(Level 3)

 
Impaired loans  $7,791   $-   $-   $7,791 
Real estate owned   68    -    -    68 

 

 

   December 31, 2014 
   Fair Value Measurements Using 
   Fair Value  

Quoted Prices in
Active Markets for
Identical Assets

(Level 1)

  

Significant Other
Observable
Inputs

(Level 2 )

  

Significant
Unobservable
Inputs

(Level 3)

 
Impaired loans  $12,173   $   $   $12,173 
Real estate owned   1,111            1,111 

 

15. Parent Company Financial Information

 

Condensed financial information of DCB Financial Corp for the years ended December 31 is as follows:

 

Condensed Balance Sheets        
   2015   2014 
Assets          
Cash  $935   $948 
Investment in subsidiaries   57,882    46,283 
Deferred tax asset, net   38    - 
Total assets  $58,855   $47,231 
           
Liabilities          
Other liabilities  $8   $20 
           
Shareholders’ Equity   58,847    47,211 
Total liabilities and shareholders’ equity  $58,855   $47,231 

 

Condensed Statements of Income

          
    2015    2014 
Equity in undistributed net income of subsidiaries  $11,816   $372 
Total income   11,816    372 
Operating expenses   110    - 
Income tax benefit   (38)   - 
Net income  $11,744   $372 

 

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DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

Condensed Statements of Cash Flows        
   2015   2014 
Cash flows from operating activities          
Net income  $11,744   $372 
Adjustments to reconcile net income to cash provided by operating activities:          
Equity in undistributed net income of subsidiaries   (11,816)   (372)
Restricted stock expense   110    - 
Net change in other assets and liabilities   (51)   - 
Net cash used in operating activities   (13)   - 
           
Cash flows from investing activities   -    - 
           
Cash flows from financing activities   -    - 
           
Net change in cash   (13)   - 
Cash at beginning of year   948    948 
Cash at end of year  $935   $948 

 

16. Details of Operating Expenses

 

The following table details the composition of occupancy and equipment expenses for the years ended December 31, 2015 and 2014:

 

   2015   2014 
   (in thousands) 
Bank maintenance and utilities  $732   $812 
Rent expense   643    566 
Depreciation and software amortization   932    1,071 
Software maintenance   994    704 
Other   611    631 
Total occupancy and equipment expenses  $3,912   $3,784 

 

The following table details the composition of other operating expenses for the years ended December 31, 2015 and 2014:

 

   2015   2014 
   (in thousands) 
ATM and debit cards  $697   $690 
Telephone   220    269 
Loan   279    344 
REO expenses   11    26 
Other   1,146    902 
Total other operating expense  $2,353   $2,231 

 

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DCB Financial Corp and Subsidiaries
Notes To Consolidated Financial Statements
Years ended December 31, 2015 and 2014

 

17. Quarterly Financial Data (Unaudited)

 

The following tables summarize the Company’s quarterly results for the years ended December 31, 2015 and 2014:

 

   2015 
   Fourth   Third   Second   First 
   (in thousands, except share and per share data) 
Interest income  $4,500   $4,469   $4,454   $4,467 
Interest expense   298    292    295    285 
Net interest income   4,202    4,177    4,159    4,182 
Provision for loan losses   -    (150)   -    150 
Net interest income after provision for loan losses   4,202    4,327    4,159    4,032 
Other non-interest income   1,261    1,223    1,180    1,158 
Other non-interest expense   5,157    5,150    5,195    4,951 
Income before income tax expense (benefit)   306    400    144    239 
Income tax expense (benefit)   33    (10,688)   -    - 
Net income  $273   $11,088   $144   $239 
                     
Stock and related per share data                    
Basic and diluted earnings per common share  $0.04   $1.52   $0.02   $0.03 
Basic weighted average common shares outstanding   7,280,480    7,282,365    7,287,435    7,237,371 
Diluted weighted average common shares outstanding   7,297,496    7,302,174    7,303,902    7,253,840 
                     

 

   2014 
   Fourth   Third   Second   First 
   (in thousands, except share and per share data) 
Interest income  $4,536   $4,278   $4,262   $4,304 
Interest expense   291    306    299    316 
Net interest income   4,245    3,972    3,963    3,988 
Provision for loan losses   150             
Net interest income after provision for loan losses   4,095    3,972    3,963    3,988 
Other non-interest income   1,132    1,140    996    1,192 
Other non-interest expense   5,059    5,062    4,922    5,063 
Income before income tax expense   168    50    37    117 
Income tax expense                
Net income  $168   $50   $37   $117 
                     
Stock and related per share data                    
Basic and diluted earnings per common share  $0.02   $0.01   $0.01   $0.02 
Basic weighted average common shares outstanding   7,196,404    7,192,350    7,192,350    7,192,350 
Diluted weighted average common shares outstanding   7,232,961    7,249,194    7,250,702    7,244,716 
                     

The sum of the quarterly earnings per share amounts may not equal the total for the year due to the effects of rounding.

 

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None

 

Item 9A. Controls and Procedures

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

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

 

There was no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended December 31, 2015, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Management’s Report on Internal Control over Financial Reporting

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934. The Company’s management, including the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting at December 31, 2015, as required by Section 404 of the Sarbanes Oxley Act of 2002. Management’s assessment is based on criteria established in the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013) and was designed to provide reasonable assurance that the Company maintained effective internal control over financial reporting as of December 31, 2015. Based on this assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2015.

 

Item 9B. Other Information

 

None

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

The information required by this item will be set forth in our Proxy Statement to Shareholders in connection with our 2016 Annual Meeting (the “2016 Proxy Statement”), under the headings “Proposal 1 — Election of Directors and Information with Respect to Directors and Officers,” “Board of Directors and Selected Committees,” “Corporate Governance,” and “Section 16(a) Beneficial Ownership Reporting Compliance.” Such information is incorporated herein by reference.

 

Our Board of Directors has adopted a Code of Ethics and Business Conduct that applies to all of its directors, officers, and employees, including its principal executive, principal financial, and principal accounting officers. A copy of the code of ethics will be provided, at no cost, upon written request to the attention of Mr. J. Daniel Mohr, Executive Vice President and Chief Financial Officer, at our main office, 110 Riverbend Avenue Lewis Center, Ohio 43035. In addition, a copy of the Code of Ethics and Business Conduct is posted on our website at http://www.dcbfinancialcorp.com. In the event we make any amendment to, or grant any waiver of, a provision of the Code of Ethics and Business Conduct that applies to the principal executive officer, a principal financial officer, principal accounting officer, or controller, or persons performing similar functions that require disclosure under applicable SEC rules, we intend to disclose such amendment or waiver, the reasons for it, and the nature of any waiver, the name of the person to whom it was granted, and the date, on our internet website.

 

 67 
 

 

Item 11. Executive Compensation

 

The information required by this item will be set forth in our 2016 Proxy Statement under the headings “Executive Compensation and Other Information” and “Board of Directors and Selected Committees.” Such information is incorporated herein by reference.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information about beneficial ownership of our common shares required by this item will be set forth in our 2016 Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management.” Such information is incorporated herein by reference.

 

Item 13. Certain Relationships and Related Transactions and Director Independence

 

Information required by this item will be set forth in our 2016 Proxy Statement under the headings “Certain Relationships and Related Transactions” and “Board of Directors and Selected Committees”, “Selection of Auditors” and “Principal Accounting Firm Fees.” Such information is incorporated herein by reference.

 

Item 14. Principal Accountant Fees and Services

 

Information required by this item will be set forth in our 2016 Proxy Statement under the heading "Information Concerning Independent Registered Public Accountants.” Such information is incorporated herein by reference.

 

 68 
 

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules

 

(a)The following documents are filed as part of this report:

 

(1)The report of independent registered public accounting firm and consolidated financial statements appearing in Item 8.

 

  (2) None.

 

  (3) The exhibits required by this item and item (b) are listed below under the heading “Exhibit Index.”

 

(b)The exhibits required by item (a)(3) and this item are listed below under the heading “Exhibit Index.

 

(c)None.

 

Exhibit Index

 

Exhibit No.   Exhibit Description
     
2.1   Branch Purchase and Assumption Agreement by and between The Delaware County Bank & Trust Company and Merchants National Bank dated January 10, 2014 (incorporated by reference to Registrant’s Current Report Form 8-K filed on January 10, 2014, Exhibit 2.1 (File No. 000-22387))
2.2   Agreement of Purchase and Sale, dated as of November 24, 2015, by and between JASS Realty Company, LLC, Seth Evan Frankenthal, Jeremy Scott Frankenthal, Andrew Marc Frankenthal, and 110 Riverbend, LLC (incorporated by reference to Registrant’s Current Report on Form 8-K filed on November 30, 2015, Exhibit 2.1 (File No. 000-22387))
3.1   Amended and Restated Articles of Incorporation of DCB Financial Corp (incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, Exhibit 3.1 (File No. 000-22387))
3.2   Amended and Restated Code of Regulations of DCB Financial Corp (incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, Exhibit 3.2 (File No. 000-22387))
4.1   Agreement to furnish instruments and agreements defining rights of holders of long-term debt. (incorporated by reference to Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2011, Exhibit 4.1 (File No. 000-22387))
10.1*   Employment agreement with Ronald J. Seiffert (incorporated by reference to Registrant’s Current Report on Form 8-K filed on August 15, 2014, Exhibit 4.1 (File No. 000-22387))
10.2*   Employment agreement with Daniel J. Mohr (incorporated by reference to Registrant’s Current Report on Form 8-K filed on August 15, 2014, Exhibit 4.1 (File No. 000-22387))
10.3*   DCB Financial Corp 2004 Long-Term Stock Incentive Plan (incorporated by reference to Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2011, Exhibit 4.1 (File No. 000-22387))
10.4*   DCB Financial Corp 2014 Restricted Stock Plan (incorporated by reference to the Registrant’s Proxy Statement for a Special Meeting of Shareholders held October 30, 2014, filed on September 18, 2014))
10.5*   DCB Financial Corp 2014 Restricted Stock Plan Form of Restricted Stock Award Notice (incorporated by reference to Registrant’s Current Report on Form 8-K filed on November 4, 2014, Exhibit 10.1 (File No. 000-22387))

 

 69 
 

  

10.6*   Special Incentive Agreement with Ronald J. Seiffert (incorporated by reference to Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2011, Exhibit 4.1 (File No. 000-22387))
10.7*   The Delaware County Bank & Trust Company Executive Deferred Compensation Plan, with amendments (incorporated by reference to Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2011, Exhibit 4.1 (File No. 000-22387))
10.8*   Form of Change of Control Agreement, dated August 11, 2014 by and between the Bank, the Company and David A. Archibald, Daniel M. Roberts, and Roger A. Lossing (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on August 15, 2014 (File No. 000-22387))
21**   Subsidiaries of DCB Financial Corp
23**   Consent of Plante & Moran PLLC
31.1**   Rule 13a-14 (a) Certifications
31.2**   Rule 13a-14 (a) Certifications
32.1**   Section 1350 Certifications
32.2**   Section 1350 Certifications
101**   The following materials from DCB Financial Corp’s Annual Report on Form 10-K for the year ended December 31, 2015 formatted in Extensible Business Reporting Language (“XBRL”): (i) Consolidated Statements of Financial Condition; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Changes in Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to the Consolidated Financial Statements.

 

*Compensatory agreement or arrangement.

 

**Filed herewith.

 

 70 
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

Dated:  March 23, 2016   DCB FINANCIAL CORP
       
By: /s/ Ronald J. Seiffert   President and Chief Executive Officer
Ronald J. Seiffert   (Principal Executive Officer)
       
By: /s/ J. Daniel Mohr   Executive Vice President and Chief Financial
J. Daniel Mohr   Officer (Principal Financial and Accounting
    Officer) 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant on March 23, 2016 and in the capacities indicated.

 

Signatures   Title
     
/s/ Ronald J. Seiffert   Chairman, President and Chief Executive Officer
Ronald J. Seiffert   (Principal Executive Officer), Director
     
/s/ J. Daniel Mohr   Executive Vice President and Chief Financial Officer
J. Daniel Mohr   (Principal Financial and Accounting Officer)
     
/s/ Jerome Harmeyer   Director
Jerome Harmeyer    
     
/s/ Bart E. Johnson   Director
Bart E. Johnson    
     
/s/ Gerald L. Kremer, MD   Director
Gerald L. Kremer    
     
/s/ Vicki J. Lewis   Director
Vicki J. Lewis    
     
/s/ Tomislav Mitevski   Director
Tomislav Mitevski    
     
/s/ Edward A. Powers   Director
Edward A. Powers    
     
/s/ Michael A. Priest   Director
Michael A. Priest    
     
/s/ Mark H. Shipps   Director
Mark H. Shipps    
     
  Director
Adam Stevenson    
     
/s/ Donald J. Wolf   Director
Donald J. Wolf    

 

 71