DCB FINANCIAL CORP - FORM 10-Q

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EX-32.2 - EXHIBIT 32.2 - DCB FINANCIAL CORP	v446393_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - DCB FINANCIAL CORP	v446393_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - DCB FINANCIAL CORP	v446393_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - DCB FINANCIAL CORP	v446393_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: June 30, 2016

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

Commission file number: 0-22387

DCB Financial Corp

(Exact name of registrant as specified in its charter)

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

110 Riverbend Avenue, Lewis Center, Ohio 43035

(Address of principal executive offices) (Zip code)

(740) 657-7000

(Registrant’s telephone number including area code)

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

Yes x No ¨

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

Yes x No ¨

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

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

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

Yes ¨ No x

As of August 12, 2016, the latest practicable date, 7,339,259 of the registrant’s common shares, no par value, were issued and outstanding.

DCB Financial Corp

Table of Contents

	Page
Part I – Financial Information	3

Item 1 – Financial Statements	3

Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015	3

Consolidated Statements of Income (unaudited) for the three and six month periods ended June 30, 2016 and 2015	4

Consolidated Statements of Comprehensive Income (unaudited) for the three and six month periods ended June 30, 2016 and 2015	5

Consolidated Statements of Shareholders’ Equity (unaudited) for the six month periods ended June 30, 2016 and 2015	6

Consolidated Statements of Cash Flows (unaudited) for the six month periods ended June 30, 2016 and 2015	7

Notes to the Consolidated Financial Statements	8

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3 – Quantitative and Qualitative Disclosures about Market Risk	39

Item 4 – Controls and Procedures	39

Part II – Other Information	39

Item 1 – Legal proceedings	39

Item 1A – Risk Factors	39

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3 – Defaults Upon Senior Securities	39

Item 4 – Mine Safety Disclosures	39

Item 5 – Other Information	39

Item 6 – Exhibits	40

Signatures	41

Part I – Financial Information

Item 1. Financial Statements

DCB Financial Corp

Consolidated Balance Sheets

	June 30, 2016			December 31, 2015
	(unaudited)
	(Dollars in thousands, except share and per share data)
Assets:
Cash and due from financial institutions	$	5,851		$	6,929
Interest-bearing deposits		21,357			24,963
Total cash and cash equivalents		27,208			31,892

Securities available-for-sale		83,866			87,797

Loans		392,954			378,513
Less allowance for loan losses		(4,590	)		(4,333	)
Net loans		388,364			374,180

Loans held for sale		3,599			-
Real estate owned		68			68
Investment in FHLB stock		3,250			3,250
Premises and equipment, net		9,832			5,091
Premises and equipment held-for-sale		-			4,771
Bank-owned life insurance		21,167			20,760
Deferred tax asset, net		10,265			10,440
Accrued interest receivable and other assets		8,443			3,015
Total assets	$	556,062		$	541,264

Liabilities and shareholders’ equity
Liabilities:
Deposits:
Non-interest bearing	$	119,808		$	124,023
Interest bearing		347,784			350,514
Total deposits		467,592			474,537

Borrowings		17,301			4,520
Obligations under capital lease		8,096			-
Accrued interest payable and other liabilities		3,217			3,360
Total liabilities		496,206			482,417

Shareholders’ equity:
Preferred shares, no par value, 2,000,000 shares authorized, none issued and outstanding		-			-
Common shares, no par value, 17,500,000 shares authorized, 7,663,186 and 7,588,887 shares issued, and 7,340,786 and 7,281,237 shares outstanding for June 30, 2016 and December 31, 2015, respectively		16,918			16,410
Retained earnings		50,246			49,799
Treasury stock, at cost, 322,400 and 307,650 shares at June 30, 2016 and December 31, 2015, respectively		(7,520	)		(7,416	)
Accumulated other comprehensive income		1,041			436
Deferred stock-based compensation		(829	)		(382	)
Total shareholders’ equity		59,856			58,847
Total liabilities and shareholders’ equity	$	556,062		$	541,264

Common shares outstanding		7,340,786			7,281,237
Book value per common share	$	8.15		$	8.08

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

DCB Financial Corp

Consolidated Statements of Income (Unaudited)

	Three months ended June 30,					Six months ended June 30,
	2016		2015			2016			2015
	(Dollars in thousands, except share and per share data)
Interest income:
Loans	$	4,115	$	3,953		$	7,997		$	7,905
Securities		507		482			1,014			987
Federal funds sold and interest bearing deposits		16		19			52			29
Total interest income		4,638		4,454			9,063			8,921

Interest expense:
Deposits:
Savings and money market accounts		180		150			358			292
Time accounts		71		92			148			184
NOW accounts		19		17			36			33
Total		270		259			542			509

Obligation under capital lease		80		-			134			-
FHLB advances		44		36			85			71
Total interest expense		394		295			761			580

Net interest income		4,244		4,159			8,302			8,341
Provision for loan losses		-		-			-			150
Net interest income after provision for loan losses		4,244		4,159			8,302			8,191

Non-interest income:
Service charges		538		500			1,036			952
Wealth management fees		470		399			892			779
Treasury management fees		123		64			214			122
Income from bank-owned life insurance		163		165			406			408
Gain on sales of loans		478		-			478			-
Net gains (losses) on sales of REO		-		(11	)		-			1
Other non-interest income		30		63			97			76
Total non-interest income		1,802		1,180			3,123			2,338

Non-interest expense:
Salaries and employee benefits		3,128		2,819			6,170			5,531
Occupancy and equipment		974		1,023			1,947			1,986
Professional services		317		284			687			637
Advertising		228		141			398			249
Office supplies, postage and courier		75		72			163			151
FDIC insurance premium		90		97			178			207
State franchise taxes		118		75			234			150
Other non-interest expense		733		684			1,244			1,235
Total non-interest expense		5,663		5,195			11,021			10,146

Income before income tax expense (benefit)		383		144			404			383
Income tax expense (benefit)		52		-			(43	)		-
Net income	$	331	$	144		$	447		$	383

Share and Per Share Data
Basic average common shares outstanding		7,346,417		7,287,435			7,328,789			7,262,541
Diluted average common shares outstanding		7,363,802		7,303,902			7,347,733			7,278,933
Basic and diluted earnings per common share	$	0.04	$	0.02		$	0.06		$	0.05

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

DCB Financial Corp

Consolidated Statements of Comprehensive Income (Unaudited)

	Three months ended June 30,					Six months ended June 30,
	2016		2015			2016		2015
	(In thousands)
Net income	$	331	$	144		$	447	$	383

Other comprehensive income:

Net unrealized gains (losses) on securities available-for-sale, net of taxes of $154 and $310 for the three and six months ended June 30, 2016, respectively, and $(183) and $(83) for the three and six months ended June 30, 2015, respectively.		302		(355	)		605		(161	)

Total other comprehensive income (loss)		302		(355	)		605		(161	)

Comprehensive income (loss)	$	633	$	(211	)	$	1,052	$	222

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

DCB Financial Corp

Consolidated Statements of Shareholders’ Equity (Unaudited)

	Issued and													Accumulated
	Outstanding													Other			Deferred
	Common			Preferred		Common			Retained		Treasury			Comprehensive			Stock-Based
	Shares			Stock		Stock			Earnings		Stock			Income (Loss)			Compensation			Total
	(Dollars in thousands)
Balance at January 1, 2015		7,233,797		$	-	$	16,064		$	38,055	$	(7,416	)	$	654		$	(146	)	$	47,211
Net income		-			-		-			383		-			-			-			383
Other comprehensive income, net of taxes		-			-		-			-		-			(161	)		-			(161	)
Issuance of restricted stock		53,640			-		392			-		-			-			(392	)		-
Amortization of restricted stock		-			-		-			-		-			-			33			33
Balance at June 30, 2015		7,287,437		$	-	$	16,456		$	38,438	$	(7,416	)	$	493		$	(505	)	$	47,466

Balance at January 1, 2016		7,281,237		$	-	$	16,410		$	49,799	$	(7,416	)	$	436		$	(382	)	$	58,847
Net income		-			-		-			447		-			-			-			447
Other comprehensive income, net of taxes		-			-		-			-		-			605			-			605
Issuance of restricted stock		78,036			-		532			-		-			-			(532	)		-
Repurchase of common stock		(14,750	)		-		-			-		(104	)		-			-			(104	)
Restricted stock withheld upon vesting for payment of taxes		(1,732	)		-		(11	)		-		-			-			11			-
Restricted stock forfeitures		(2,005	)		-		(13	)		-		-			-			13			-
Amortization of restricted stock		-			-		-			-		-			-			61			61
Balance at June 30, 2016		7,340,786		$	-	$	16,918		$	50,246	$	(7,520	)	$	1,041		$	(829	)	$	59,856

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

DCB Financial Corp

Consolidated Statements of Cash Flows (Unaudited)

	Six months ended June 30,
	2016			2015
	(In thousands)
Cash flows from operating activities
Net income	$	447		$	383
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation		535			495
Provision for loan losses		-			150
Deferred taxes		(127	)		-
Net loss on sale of real estate owned		-			(1	)
Net gain on sale of loans		(478	)		-
Gain on sale leaseback		(86	)
Net stock-based compensation expense		22			33
Premium amortization on securities, net		472			518
Originations of loans held for sale		(3,841	)
Proceeds from loans held for sale		2,846			-
Proceeds from sale of guaranteed portion of SBA loans		4,651			-
Earnings on bank owned life insurance		(406	)		(408	)
Net changes in other assets and other liabilities		(5,622	)		15,488
Net cash (used in) provided by operating activities		(1,587	)		16,658

Cash flows from investing activities
Purchases of securities available-for-sale		(8,542	)		(15,934	)
Proceeds from maturities, principal payments and calls of securities available-for-sale		12,917			12,106
Net change in loans		(15,265	)		3,058
Net proceeds from sale of premises and equipment		2,347			-
Proceeds from sale of real estate owned		-			303
Premises and equipment expenditures		(152	)		(316	)
Net cash used in investing activities		(8,695	)		(783	)

Cash flows from financing activities
Net change in deposits		(6,945	)		17,333
Proceeds from short-term borrowings		15,000			-
Repayment of capital lease		(134	)		-
Repayment of borrowings		(2,219	)		(7,089	)
Repurchase of common stock		(104	)		-
Net cash provided by financing activities		5,598			10,244

Net change in cash and cash equivalents		(4,684	)		26,119
Cash and cash equivalents at beginning of period		31,892			21,274
Cash and cash equivalents at end of period	$	27,208		$	47,393

Supplemental disclosures of cash flow information
Cash paid during the period for interest on deposits and borrowings	$	754		$	550
Transfer from portfolio loans to loans held for sale		6,611			-
Non-cash investing and financing activities:
Loan to finance sale of premises and equipment		5,530			-
Capital lease obligation		8,230			-

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

Note 1 – Summary of Significant Accounting Policies

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

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

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

The accompanying unaudited financial statements were prepared in accordance with the instructions for Form 10-Q and Regulation S-X and, therefore, do not include information for footnotes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The material under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is written with the presumption that the users of the interim financial statements have read, or have access to, the latest audited financial statements and notes thereto of the Company, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2015, and for the two-year period then ended, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Accordingly, only material changes in the results of operations and financial condition are discussed in the remainder of Part I. Certain amounts from prior year periods are reclassified, when necessary, to conform to the current period presentation.

All adjustments, consisting of only normal recurring items, that in the opinion of management are necessary for a fair presentation of the financial statements have been included in the results of operations for the three and six months ended June 30, 2016 and 2015. The results of operations are not necessarily indicative of the results anticipated for the year.

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

Earnings per Common Share

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

Stock-Based Compensation

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

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

Significant Accounting Estimates

The Company’s consolidated financial statements are prepared in accordance with U.S. GAAP and follow general practices within the financial services industry. The application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; as this information changes, the financial statements could reflect different estimates, assumptions, and judgments.

The procedures for assessing the adequacy of the allowance for loan losses reflect the Company’s evaluation of credit risk after careful consideration of all information available to the Company. In developing this assessment, the Company must rely on estimates and exercise judgment regarding matters where the ultimate outcome is unknown, such as economic factors, developments affecting companies in specific industries and issues with respect to single borrowers. Depending on changes in circumstances, future assessments of credit risk may yield materially different results, which may require an increase or a decrease in the allowance for loan losses.

The valuation of other assets requires that management utilize a variety of estimates and analysis to determine whether an asset is impaired or other-than-temporarily impaired (“OTTI”). After determining the appropriate methodology for fair value measurement, management then evaluates whether or not declines in fair value below book value are temporary or other-than-temporary impairments. When the Company does not intend to sell a debt security, and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.

Loans

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

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

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

Allowance for Loan Losses

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

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

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

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

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

Income Taxes

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

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

10.

New Accounting Pronouncements

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 was issued to provide financial statement users with information about expected credit losses on financial instruments and other commitments to extend credit rather than the current “incurred loss” model. For public business entities, the new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the effect the guidance will have on the Company’s consolidated financial statements.

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

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

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

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

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

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

11.

Note 2 – Securities

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

	June 30, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government and agency obligations	$	19,030	$	58	$	5	$	19,083
Corporate bonds		3,204		59		3		3,260
States and municipal obligations		21,182		754		15		21,921
Collateralized mortgage obligations		22,218		173		14		22,377
Mortgage-backed securities		16,656		569		-		17,225
Total	$	82,290	$	1,613	$	37	$	83,866

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

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

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

	June 30, 2016
	(Less than 12 months)						(12 months or longer)						Total
Description of securities	Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses
U.S. Government and agency obligations		3	$	3,996	$	5		-	$	-	$	-		3	$	3,996	$	5
Corporate bonds		1		500		-		1		499		3		2		999		3
State and municipal obligations		2		905		14		1		505		1		3		1,410		15
Collateralized mortgage obligations		3		1,504		2		6		2,550		12		9		4,054		14
Mortgage-backed securities		1		1,327		-		-		-		-		1		1,327		-
Total temporarily impaired securities		10	$	8,232	$	21		8	$	3,554	$	16		18	$	11,786	$	37

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

The unrealized losses on the Company’s securities were caused primarily by changes in interest rates. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be OTTI at June 30, 2016 or December 31, 2015.

12.

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

There were no sales of securities in the six months ended June 30, 2016 and 2015.

At June 30, 2016, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.

The amortized cost and estimated fair value of all debt securities at June 30, 2016, by contractual maturity, are shown below (in thousands). Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown separately since they are not due at a single maturity date.

	Amortized Cost		Fair Value
Due in one year or less	$	3,628	$	3,632
Due after one to five years		22,391		22,671
Due after five to ten years		12,383		12,797
Due after ten years		5,017		5,164
Mortgage-backed and related securities		38,871		39,602
Total	$	82,290	$	83,866

Securities with a fair value of $75.6 million at June 30, 2016 were pledged to secure public deposits and other obligations.

Note 3 – Loans

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

	June 30, 2016			December 31, 2015

Consumer and credit card	$	37,615		$	40,587
Residential real estate and home equity		148,324			137,645
Commercial and industrial		102,990			99,213
Commercial real estate		103,408			100,743
		392,337			378,188

Net deferred loan costs		617			325
Loans	$	392,954		$	378,513
Allowance for loan losses		(4,590	)		(4,333	)
Net loans	$	388,364		$	374,180

Note 4 – Credit Quality

Allowance for Loan Losses

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

13.

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

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

	Three months ended June 30, 2016
	Consumer and Credit Card			Residential Real Estate and Home Equity			Commercial and Industrial			Commercial Real Estate		Unallocated		Total
Beginning balance	$	139		$	548		$	1,325		$	2,080	$	243	$	4,335
Charge-offs		(24	)		(9	)		-			-		-		(33	)
Recoveries		17			10			204			57		-		288
Net (charge-offs) recoveries		(7	)		1			204			57		-		255

Provision		(10	)		(5	)		(8	)		3		20		-
Ending balance	$	122		$	544		$	1,521		$	2,140	$	263	$	4,590

	Six months ended June 30, 2016
	Consumer and Credit Card			Residential Real Estate and Home Equity			Commercial and Industrial			Commercial Real Estate		Unallocated			Total
Beginning balance	$	144		$	561		$	1,321		$	1,999	$	308		$	4,333
Charge-offs		(79	)		(9	)		-			-		-			(88	)
Recoveries		32			23			218			72		-			345
Net (charge-offs) recoveries		(47	)		14			218			72		-			257

Provision		25			(31	)		(18	)		69		(45	)		-
Ending balance	$	122		$	544		$	1,521		$	2,140	$	263		$	4,590

14.

	Three months ended June 30, 2015
	Consumer and Credit Card			Residential Real Estate and Home Equity			Commercial and Industrial			Commercial Real Estate			Unallocated		Total
Beginning balance	$	183		$	268		$	1,037		$	2,317		$	284	$	4,089
Charge-offs		(17	)		(44	)		(1	)		(16	)		-		(78	)
Recoveries		31			58			52			12			-		153
Net (charge-offs) recoveries		14			14			51			(4	)		-		75

Provision		(25	)		33			(53	)		(118	)		163		-
Ending balance	$	172		$	315		$	1,035		$	2,195		$	447	$	4,164

	Six months ended June 30, 2015
	Consumer and Credit Card			Residential Real Estate and Home Equity			Commercial and Industrial			Commercial Real Estate			Unallocated		Total
Beginning balance	$	190		$	268		$	1,132		$	2,376		$	270	$	4,236
Charge-offs		(59	)		(73	)		(311	)		(64	)		-		(507	)
Recoveries		59			67			140			19			-		285
Net charge-offs		-			(6	)		(171	)		(45	)		-		(222	)

Provision		(18	)		53			74			(136	)		177		150

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

15.

Impaired Loans

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

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

	At June 30, 2016						Period ended June 30, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Three months Average Recorded Investment		Three months Interest Income Recognized		Six months Average Recorded Investment		Six months Interest Income Recognized
With no related allowance recorded:
Consumer and credit card	$	287	$	287		-	$	348	$	5	$	423	$	9
Residential real estate and home equity		645		645		-		649		-		654		-
Commercial and industrial		892		892		-		1,005		5		1,004		11
Commercial real estate		108		108		-		109		2		117		3
		1,932		1,932		-		2,111		12		2,198		23

With an allowance recorded:
Commercial and industrial	$	1,590	$	1,668	$	344	$	1,240	$	16	$	1,190	$	29
Commercial real estate		4,863		4,863		581		4,727		56		4,706		112
		6,453		6,531		925		5,967		72		5,896		141

Total:
Consumer and credit card	$	287	$	287	$	-	$	348	$	5	$	423	$	9
Residential real estate and home equity		645		645		-		649		-		654		-
Commercial and industrial		2,482		2,560		344		2,245		21		2,194		40
Commercial real estate		4,971		4,971		581		4,836		58		4,823		115
Total	$	8,385	$	8,463	$	925	$	8,078	$	84	$	8,094	$	164

	At December 31, 2015						Period ended June 30, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Three months Average Recorded Investment		Three months Interest Income Recognized		Six months Average Recorded Investment		Six months Interest Income Recognized
With no related allowance recorded:
Consumer and credit card	$	548	$	548		-	$	488	$	7	$	468	$	14
Residential real estate and home equity		668		668		-		627		2		444		8
Commercial and industrial		926		926		-		1,138		8		1,202		18
Commercial real estate		126		126		-		225		10		477		16
		2,268		2,268		-		2,478		27		2,191		56

With an allowance recorded:
Commercial and industrial	$	944	$	1,021	$	144	$	1,095	$	17	$	956	$	33
Commercial real estate		4,579		4,579		435		8,123		133		8,236		265
		5,523		5,600		579		9,218		150		9,192		298

Total:
Consumer and credit card	$	548	$	548	$	-	$	488	$	7	$	468	$	14
Residential real estate and home equity		668		668		-		627		2		444		8
Commercial and industrial		1,870		1,947		144		2,233		25		2,158		51
Commercial real estate		4,705		4,705		435		8,348		143		8,713		281
Total	$	7,791	$	7,868	$	579	$	11,696	$	177	$	11,783	$	354

16.

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

	Consumer and Credit Card		Residential Real Estate and Home Equity		Commercial and Industrial		Commercial Real Estate		Total
June 30, 2016
Individually evaluated for impairment	$	-	$	-	$	344	$	581	$	925
Collectively evaluated for impairment		122		544		1,177		1,559		3,402
Allocated	$	122	$	544	$	1,521	$	2,140		4,327
Unallocated										263
									$	4,590

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

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

	Consumer and Credit Card		Residential Real Estate and Home Equity		Commercial and Industrial		Commercial Real Estate		Total
June 30, 2016
Individually evaluated for impairment	$	287	$	645	$	2,482	$	4,971	$	8,385
Collectively evaluated for impairment		37,328		147,679		100,508		98,437		383,952
Ending balance	$	37,615	$	148,324	$	102,990	$	103,408	$	392,337

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

17.

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

	June 30,		December 31,
	2016		2015
Consumer and credit card	$	-	$	-
Residential real estate and home equity		742		668
Commercial and industrial		539		554
Commercial real estate		142		-
Total	$	1,423	$	1,222

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):

	June 30, 2016				December 31, 2015
	Commercial and Industrial		Commercial Real Estate		Commercial and Industrial		Commercial Real Estate

Pass	$	100,152	$	98,550	$	96,225	$	91,132
Special mention		1,197		4,396		925		4,592
Substandard		1,641		462		2,063		5,019
Total	$	102,990	$	103,408	$	99,213	$	100,743

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

18.

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):

	June 30, 2016				December 31, 2015
	Consumer and Credit Card		Residential Real Estate and Home Equity		Consumer and Credit Card		Residential Real Estate and Home Equity

Performing	$	37,615	$	147,582	$	40,587	$	136,975
Non-performing		-		742		-		670
Total	$	37,615	$	148,324	$	40,587	$	137,645

Age Analysis of Past Due Loans

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

	June 30, 2016
	30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due		Total Past Due		Loans Not Past Due		Total Loans
Consumer and credit card	$	44	$	2	$	-	$	46	$	37,569	$	37,615
Residential real estate and home equity		113		54		497		664		147,660		148,324
Commercial and industrial		-		168		-		168		102,822		102,990
Commercial real estate		-		-		142		142		103,266		103,408
Total	$	157	$	224	$	639	$	1,020	$	391,317	$	392,337

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

Troubled Debt Restructurings

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

	For the three months ended June 30,
	2016				2015
	Number of Contracts		Recorded Investment (as of period end)		Number of Contracts		Recorded Investment (as of period end)
Consumer and credit card		-	$	-		6	$	93
Commercial real estate		1		217		-		-

Total		1	$	217		6	$	93

19.

	For the six months ended June 30,
	2016				2015
	Number of Contracts		Recorded Investment (as of period end)		Number of Contracts		Recorded Investment (as of period end)
Consumer and credit card		-	$	-		6	$	93
Commercial real estate		4		398		-		-

Total		4	$	398		6	$	93

There were no loans modified in a TDR that subsequently defaulted within twelve months of the modification (i.e. 60 days or more past due) during the three and six months ended June 30, 2016 and 2015.

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

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

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

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

Note 5 – Fair Value Measurements

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

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

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

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

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

20.

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

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

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

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

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

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

Loans Held for Sale: The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in Level 2 classification.

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

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

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

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

21.

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

Commitments to Extend Credit: For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. At June 30, 2016 and December 31, 2015, the fair value of loan commitments was not material.

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

	June 30, 2016
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	27,208	$	27,208	$	27,208	$	-	$	-
Securities available-for-sale		83,866		83,866		-		83,866		-
Loans held for sale		3,599		3,653		-		3,653		-
Loans (net of allowance)		388,364		390,474		-		-		390,474
FHLB stock		3,250		3,250		-		3,250		-
Accrued interest receivable		1,453		1,453		-		-		1,453

Financial liabilities
Non-interest-bearing deposits	$	119,808	$	119,808	$	-	$	119,808	$	-
Interest-bearing deposits		347,784		347,711		-		347,711		-
Borrowings		17,301		17,301		-		17,301		-
Accrued interest payable		81		81		-		-		81

	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

22.

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):

	June 30, 2016
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government and agency obligations	$	19,083	$	-	$	19,083	$	-
Corporate bonds		3,260		-		3,260		-
State and municipal obligations		21,921		-		21,921		-
Collateralized mortgage obligations		22,377		-		22,377		-
Mortgage-backed securities		17,225		-		17,225		-
Total	$	83,866	$	-	$	83,866	$	-

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

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

Impaired loans

At June 30, 2016 and December 31, 2015, impaired loans consisted primarily of loans secured by commercial real estate. Management has determined fair value measurements on impaired loans primarily through evaluations of appraisals performed.

Real Estate Owned

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

23.

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).

	June 30, 2016
	Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2 )		Significant Unobservable Inputs (Level 3)
Impaired loans	$	8,385	$	-	$	-	$	8,385
Real estate owned		68		-		-		68

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

Note 6 – Sale-Leaseback and Capital Lease Obligation

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

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

At June 30, 2016, property under capital leases consists of the corporate headquarters with a cost, net of the deferred gain, of $5.0 million. Accumulated depreciation on the property under capital leases was $171,000 at June 30, 2016.

Depreciation expense on property under capital leases was $103,000 and $171,000 for the three and six months ended June 30, 2016, respectively.

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

2016	$	321
2017		655
2018		668
2019		682
2020		695
Thereafter		7,771
Total minimum lease payments		10,792
Less amounts representing interest		2,696
Present value of net minimum lease payments	$	8,096

24.

Note 7 – Federal Income Taxes

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

	Three months ended						Six months ended
	June 30,						June 30,
	2016			2015			2016			2015
Current	$	74		$	-		$	84		$	-
Deferred		(22	)		20			(127	)		-
Valuation allowance		-			(20	)		-			-
Total	$	52		$	-		$	(43	)	$	-

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

	Three months ended						Six months ended
	June 30,						June 30,
	2016			2015			2016			2015
Federal income taxes compared at the expected statutory rate	$	131		$	49		$	138		$	130
Increase (decrease) in taxes resulting from:
Nontaxable dividend and interest income		(33	)		(32	)		(40	)		(41	)
Increase in cash surrender value of life insurance - net		(55	)		(55	)		(138	)		(138	)
Other		9			58			(3	)		49
Valuation allowance		-			(20	)		-			-
Income tax expense (benefit) per financial statements	$	52		$	-		$	(43	)	$	-

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

	June 30, 2016			December 31, 2015
Deferred tax assets:
Allowance for loan losses	$	1,561		$	1,473
Deferred compensation		307			300
Alternative minimum tax carry forward		216			155
Expenses on foreclosed property		-			14
Deferred gain on sale of building		1,027			-
NOL carry forward		8,101			9,020
Other		245			98
Subtotal		11,457			11,060
Deferred tax liabilities:
FHLB stock dividends		(307	)		(307	)
Unrealized gains on available-for-sale securities		(536	)		(225	)
Depreciation		(55	)		(55	)
Other		(294	)		(33	)
Subtotal		(1,192	)		(620	)
Net deferred tax asset		10,265			10,440
Less: valuation allowance		-			-
Total	$	10,265		$	10,440

At June 30, 2016, the Company had a $23.8 million net operating loss carryforward that begins to expire in 2030.

25.

Note 8 - Earnings per Common Share

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

Basic and diluted net income per common share calculations for the three and six months ended June 30 are as follows (in thousands, except share and per share amounts):

	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
Basic
Net income	$	331		$	144		$	447		$	383
Less: undistributed earnings allocated to unvested restricted shares		(7	)		(2	)		(8	)		(4	)
Net earnings allocated to common shareholders	$	324		$	142		$	439		$	379

Weighted average common shares outstanding including shares considered participating securities		7,346,417			7,287,435			7,328,789			7,262,541
Less: average participating securities		146,912			95,085			129,323			70,191
Weighted average shares		7,199,505			7,192,350			7,199,466			7,192,350

Basic earnings per common share	$	0.04		$	0.02		$	0.06		$	0.05

Diluted
Net earnings allocated to common shareholders	$	331		$	144		$	447		$	383

Weighted average common shares outstanding for basic earnings per common share		7,199,505			7,192,350			7,199,466			7,192,350
Dilutive effect of assumed exercise of average participating securities		17,385			16,467			18,944			16,392
Average participating securities		146,912			95,085			129,323			70,191
Average common shares outstanding – diluted		7,363,802			7,303,902			7,347,733			7,278,933

Diluted per common share	$	0.04		$	0.02		$	0.06		$	0.05

The computation of earnings per share is based upon the following weighted-average shares outstanding for the three and six months ended June 30:

	Three months ended June 30,				Six months ended June 30,
	2016		2015		2016		2015
Weighted-average common shares outstanding (basic)		7,346,417		7,287,435		7,328,789		7,262,541
Dilutive effect of assumed exercise of stock options		17,385		16,467		18,944		16,392
Weighted-average common shares outstanding (diluted)		7,363,802		7,303,902		7,347,733		7,278,933

At June 30, 2016 and 2015, 14,985 of anti-dilutive stock options were excluded from the diluted weighted average common share calculations.

26.

Note 9 – Stock Based Compensation

Awards for 78,036 and 53,640 restricted shares were granted under the Company’s 2014 Restricted Stock Plan during the six months ended June 30, 2016 and 2015, respectively. The awards vest ratably over a five-year period. There were 2,005 restricted shares forfeited in the three months and six months ended June 30, 2016. There were no forfeitures of restricted shares in the six months ended June 30, 2015. There were 148,269 and 81,732 unvested restricted shares at June 30, 2016 and December 31, 2015, respectively. Compensation expense associated with the amortization of restricted stock was $61,000 and $33,000 in the six months ended June 30, 2016 and 2015, respectively. Compensation expense associated with amortization of restricted stock was $51,000 and $26,000 for the three months ended June 30, 2016 and 2015, respectively.

27.

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

Introduction

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.

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

Forward-Looking Statements

Certain statements in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements relating to the financial condition and prospects, lending risks, plans for future business development and marketing activities, capital spending and financing sources, capital structure, the effects of regulation and competition, and the prospective business of both the Company and the Bank. Where used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” and similar words and expressions, related to the Company or the Bank or their respective management, identify forward-looking statements. Such forward-looking statements reflect the current views of the Company and are based on information currently available to the management of the Company and the Bank and upon current expectations, estimates, and projections about the Company and its industry, management’s belief with respect thereto, and certain assumptions made by management. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements.

Potential risks and uncertainties include, but are not limited to: (i) significant increases in competitive pressure in the banking and financial services industries; (ii) changes in the interest rate environment which could reduce anticipated or actual margins; (iii) changes in political conditions or the legislative or regulatory environment; (iv) general economic conditions, either nationally or regionally (especially in central Ohio), becoming less favorable than expected resulting in, among other things, a deterioration in credit quality of assets; (v) changes occurring in business conditions and inflation; (vi) changes in technology; (vii) changes in monetary and tax policies; (viii) changes in the securities markets; and (ix) other risks and uncertainties detailed from time to time in the filings of the Company with the Securities and Exchange Commission.

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

28.

Overview of the second quarter of 2016

Total assets were $556.1 million at June 30, 2016, compared with $541.3 million at December 31, 2015.

Total loans were $396.6 million at June 30, 2016, compared with $378.5 million at December 31, 2015.

Total deposits were $467.6 million at June 30, 2016, compared with $474.5 million at December 31, 2015.

Net income was $331,000 for the three months ended June 30, 2016, compared with $144,000 for the year-ago quarter and $116,000 for the first quarter of 2016. For the six months ended June 30, 2016, net income was $447,000, compared with $383,000 for the first half of 2015.

Net income per diluted share was $0.04 for the three months ended June 30, 2016, compared with $0.02 for the year-ago quarter and $0.02 for the first quarter of 2016. Net income per diluted share was $0.06 for the six months ended June 30, 2016 compared with $0.05 per share for the same period in 2015.

Net interest income was $4.2 million for the three months ended June 30, 2016, compared with $4.2 million in the year-ago quarter and $4.1 million in the first quarter of 2016. Net interest income was $8.3 million for the six months ended June 30, 2016 and 2015.

The net interest margin was 3.41% for the three months ended June 30, 2016, compared with 3.40% in the year-ago quarter and 3.33% in the first quarter of 2016. The net interest margin was 3.35% in the first half of 2016, compared with 3.45% in the year-ago period.

There was no provision for loan losses recorded in the three months and six months ended June 30, 2016. The provision for loan losses was $150,000 in the first half of 2015, all of which was recorded in the first quarter of 2015.

Non-interest income was 29.8% of total revenue in the quarter ended June 30, 2016, compared to 22.2% in the year-ago quarter and 24.6% in the first quarter of 2016.

Our efficiency ratio was 93.7% for the three months ended June 30, 2016, compared to 97.1% in the year-ago quarter and 99.6% in the first quarter of 2016.

Income tax expense was $52,000 in the second quarter of 2016. An income tax benefit of $43,000 was recorded for the six months ended June 30, 2016. There was no income tax expense nor income tax benefit recorded in the first half of 2015.

Total non-performing assets (including troubled debt restructurings ”TDR’s”) were $8.0 million or 1.43% of total assets at June 30, 2016, compared to $7.7 million or 1.40% of total assets at March 31, 2016 and $7.3 million or 1.35% of total assets at December 31, 2015.

Total non-performing assets (excluding TDR’s) were $1.5 million or 0.27% of total assets at June 30, 2016, compared to $1.4 million or 0.24% of total assets at March 31, 2016 and $1.3 million or 0.24% at December 31, 2015.

Comparison of Results of Operations

General

Net income was $331,000 or $0.04 per diluted share for the three months ended June 30, 2016, compared to net income of $144,000 or $0.02 per diluted share for the same period in 2015 and to net income of $116,000 or $0.02 per diluted share for the first quarter of 2016.

Net income was $447,000 or $0.06 per diluted share for the six months ended June 30, 2016, compared to net income of $383,000 or $0.05 per diluted share for the same period in 2015.

Net Interest Income

Net interest income totaled $4.2 million in the quarter ended June 30, 2016, compared to $4.2 million in second quarter of 2015 and $4.1 million in the first quarter of 2016. The net interest margin was 3.41% in the second quarter of 2016, compared to 3.40% in the year-ago quarter and 3.33% in the first quarter of 2016.

29.

Total average interest-earning assets were $499.1 million in the second quarter of 2016, compared to $491.1 million in the year-ago quarter and $495.9 million in the first quarter of 2016. Average loans outstanding in the second quarter of 2016 were $395.7 million or 79.3% of total average interest-earning assets, compared with $378.0 million or 77.0% in the year-ago quarter and $381.7 million or 77.0% of total average interest-earning assets in the first quarter of 2016.

Total average interest-bearing deposit balances were $342.6 million in the second quarter of 2016, compared to $358.1 million in the year-ago quarter and $349.3 million in the first quarter of 2016. The average balances of interest-bearing demand, savings and money market accounts (transaction accounts) increased $7.5 million to $290.2 million in the second quarter of 2016 compared to the year-ago quarter, partially offsetting a decrease in the average balance of time deposits of $23.0 million compared to the year-ago quarter. Transaction accounts comprised 84.7% of total interest-bearing deposits in the second quarter of 2016, compared to 78.9% in the year-ago quarter and 82.3% of total interest-bearing deposits in the first quarter of 2016.

Net interest income totaled $8.3 million in the six months ended June 30, 2016 and 2015. The net interest margin was 3.35% for the six months ended June 30, 2016, compared with 3.45% in the year-ago period.

Average interest-earning assets were $497.5 million in the first half of 2016, which was an increase of $9.5 million or 1.9% from the first half of 2015. Average loans outstanding in the first half of 2016 increased $9.2 million compared to the year-ago period, and totaled 78.1% of total interest-earning assets in the six months ended June 30, 2016, compared with 77.8% in the year-ago period.

The average balance in time deposits decreased $18.8 million in the first half of 2016 compared with the year-ago period, while the average balances in lower-costing transaction accounts increased $7.9 million. Transaction accounts comprised 83.5% of total interest-bearing deposits in the first half of 2016, compared to 78.7% in the first half of 2015. The changes in the composition of average deposit balances in the three and six months ended June 30, 2016 was primarily the result of the movement of large municipal time deposit maturities into money market accounts and overnight sweep accounts.

30.

The following table presents certain information from the Company’s average balance sheet and reflects the average yield on interest-earning assets and the average cost of interest-bearing liabilities (dollars in thousands). Such yields and costs are derived by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities. Average balances are derived from daily balances. Interest on tax-exempt securities is reported on a historical basis without tax-equivalent adjustment. Average loan balances include non-accruing loans and loans held for sale. Loan income includes cash received on non-accruing loans.

	Three months ended June 30,
	2016								2015
	Outstanding balance			Interest Earned/paid		Yield/rate			Outstanding balance			Interest Earned/paid		Yield/rate
Assets
Interest earning assets:
Interest bearing deposits		15,398			16		0.42	%		28,466			19		0.27	%

Investment securities		88,009			507		2.30	%		84,614			482		2.25	%

Consumer loans and credit cards		39,165			503		5.15	%		39,520			556		5.65	%
Residential real estate loans and home equity		146,125			1,419		3.90	%		133,565			1,239		3.72	%
Commercial and industrial		104,962			1,051		3.96	%		104,018			1,035		3.93	%
Commercial real estate		105,416			1,142		4.29	%		100,882			1,123		4.46	%
Total loans		395,668			4,115		4.14	%		377,985			3,953		4.17	%
Total interest-earning assets		499,075			4,638		3.70	%		491,065			4,454		3.61	%

Non-interest-earning assets:
Other assets		64,090								44,158
Allowance for loan losses		(4,470	)							(4,162	)
Net unrealized gains on securities AFS		1,276								1,243
Total assets		559,971								532,304

Liabilities and shareholders’ equity
Interest-bearing liabilities:
Interest-bearing demand		84,430			51		0.25	%		80,065			22		0.11	%
Savings		49,473			13		0.11	%		43,881			11		0.10	%
Money market		156,289			135		0.35	%		158,782			134		0.34	%
Time accounts		52,407			71		0.55	%		75,384			92		0.49	%
Total interest-bearing deposits		342,599			270		0.32	%		358,112			259		0.29	%
Borrowed funds		12,954			44		1.38	%		4,765			36		2.97	%
Obligations under capital lease		8,148			80		3.96	%		-			-		-
Total interest-bearing liabilities		363,701			394		0.44	%		362,877			295		0.33	%

Non-interest-bearing liabilities and shareholders’ equity:
Demand deposits		124,995								119,440
Other liabilities		12,747								3,163
Shareholders’ equity		58,528								46,824

Total liabilities and shareholders’ equity		559,971								532,304

Net interest income; interest rate spread					4,244		3.26	%					4,159		3.28	%

Net interest margin (net interest income as a percent of average interest-earning assets)							3.41	%							3.40	%

Average interest-earning assets to average interest-bearing liabilities		137.22	%							135.33	%

31.

	Six months ended June 30,
	2016								2015
	Outstanding balance			Interest Earned/paid		Yield/rate			Outstanding balance			Interest Earned/paid		Yield/rate
Assets
Interest earning assets:
Interest bearing deposits		20,246			52		0.52	%		24,128			29		0.24	%

Investment securities		88,534			1,014		2.29	%		84,303			987		2.36	%

Consumer loans and credit cards		39,850			1,018		5.13	%		38,823			1,059		5.50	%
Residential real estate loans and home equity		142,841			2,737		3.84	%		133,178			2,503		3.78	%
Commercial and industrial		101,584			1,967		3.83	%		103,172			2,034		3.96	%
Commercial real estate		104,428			2,275		4.31	%		104,380			2,309		4.46	%
Total loans		388,703			7,997		4.09	%		379,553			7,905		4.19	%
Total interest-earning assets		497,483			9,063		3.63	%		487,984			8,921		3.68	%

Non-interest-earning assets:
Other assets		58,042								44,684
Allowance for loan losses		(4,405	)							(4,186	)
Net unrealized gains on securities AFS		1,196								1,212
Total assets		552,316								529,694

Liabilities and shareholders’ equity
Interest-bearing liabilities:
Interest-bearing demand		83,208			96		0.23	%		80,734			45		0.11	%
Savings		48,698			27		0.11	%		43,322			22		0.14	%
Money market		156,979			272		0.35	%		156,920			258		0.34	%
Time accounts		57,073			147		0.52	%		75,898			184		0.57	%
Total interest-bearing deposits		345,958			542		0.32	%		356,874			509		0.29	%
Borrowed funds		11,236			85		1.52	%		5,564			71		2.56	%
Obligations under capital lease		8,189			134		3.28	%		-			-		-
Total interest-bearing liabilities		365,383			761		0.42	%		362,438			580		0.32	%

Non-interest-bearing liabilities and shareholders’ equity:
Demand deposits		123,440								116,271
Other liabilities		5,192								4,269
Shareholders’ equity		58,301								46,716

Total liabilities and shareholders’ equity		552,316								529,694

Net interest income; interest rate spread					8,302		3.21	%					8,341		3.36	%

Net interest margin (net interest income as a percent of average interest-earning assets)							3.35	%							3.45	%

Average interest-earning assets to average interest-bearing liabilities		136.15	%							134.64	%

32.

Asset Quality and Allowance for Loan Losses

Delinquent loans (including non-accrual loans) totaled $1.6 million or 0.41% of total loans at June 30, 2016, compared to $1.7 million or 0.43% of total loans at March 31, 2016 and $1.5 million or 0.41% of total loans at December 31, 2015. Non-accrual loans totaled $1.4 million or 0.36% of total loans at June 30, 2016, compared to $1.2 million or 0.30% of total loans at March 31, 2016 and $1.2 million or 0.32% of total loans at December 31, 2015.

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

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

30 days past due	$	158		0.04	%	$	378		0.10	%	$	191		0.05	%
60 days past due		56		0.01	%		57		0.01	%		111		0.03	%
90 days past due and still accruing		-		0.00	%		97		0.02	%		2		0.01	%
Non-accrual		1,423		0.36	%		1,187		0.30	%		1,222		0.32	%
Total	$	1,637		0.41	%	$	1,719		0.43	%	$	1,526		0.41	%

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

Non-performing assets were $8.0 million or 1.43% of total assets at June 30, 2016, compared to $7.7 million or 1.40% of total assets at March 31, 2016 and $7.3 million or 1.35% of total assets at December 31, 2015. Troubled debt restructurings (“TDR’s”), which are performing in accordance with the restructured terms and accruing interest, but are included in non-performing assets, were $6.5 million at June 30, 2016, compared to $6.4 million at March 31, 2016 and $6.0 million at December 31, 2015.

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

Non-performing assets	June 30, 2016		March 31, 2016		December 31, 2015
Non-accruing loans:
Consumer loans and credit cards	$	-	$	-	$	-
Residential real estate loans and home equity		742		656		668
Commercial and industrial		539		531		554
Commercial real estate		142		-		-
Total non-accruing loans		1,423		1,187		1,222
Accruing loans delinquent 90 days or more		-		97		2
Total non-performing loans (excluding TDR’s)		1,423		1,284		1,224

Other real estate and repossessed assets		68		68		68
Total non-performing assets (excluding TDR’s)	$	1,491	$	1,352	$	1,292

Restructured loans not included above⁽¹⁾	$	6,486	$	6,374	$	6,040
Total non-performing loans (including TDR’s)	$	7,909	$	7,658	$	7,264
Total non-performing assets (including TDR’s)	$	7,977	$	7,726	$	7,332

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

Net recoveries of $255,000 were recorded in the second quarter of 2016, compared to net recoveries of $2,000 in the first quarter of 2016 and net recoveries of $75,000 in the year ago quarter. There was no provision for loan losses recorded in the three months and six months ended June 30, 2016. The provision for loan losses was $150,000 in first half of 2015. The allowance for loan losses was $4.6 million at June 30, 2016, compared to $4.3 million at March 31, 2016 and December 31, 2015. The ratio of the allowance for loan losses to total loans was 1.17% at June 30, 2016, compared to 1.11% at March 31, 2016 and 1.14% at December 31, 2015.

The ratio of the allowance for loan losses to non-performing loans (including TDR’s) was 58.0% at June 30, 2016, compared to 56.6% at March 31, 2016 and 59.7% at December 31, 2015. The ratio of the allowance for loan losses to non-accrual loans was 323% at June 30, 2016, compared to 365% at March 31, 2016 and 355% at December 31, 2015.

We assess a number of quantitative and qualitative factors at the individual portfolio level in determining the adequacy of the allowance for loan losses and the required provision expense each quarter. In addition, we analyze certain broader, non-portfolio specific factors in assessing the adequacy of the allowance for loan losses, such as the allowance as a percentage of total loans, the allowance as a percentage of non-performing loans and the provision expense as a percentage of net charge-offs. This portion of the allowance has been considered “unallocated,” which means it is not based on either quantitative or qualitative factors. At June 30, 2016, $263,000 or 5.7% of the allowance for loan losses was considered to be “unallocated,” compared to $243,000 or 5.6% of the allowance for loan losses at March 31, 2016 and $308,000 or 7.1% of the allowance for loan losses at December 31, 2015.

33.

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

	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
Allowance for loan losses, beginning of period	$	4,335		$	4,089		$	4,333		$	4,236

Loans charged-off		(33	)		(78	)		(88	)		(507	)
Recoveries of loans previously charged-off		288			153			345			285
Net recoveries (charge-offs)		255			75			257			(222	)
Provision for loan losses		-			-			-			150
Allowance for loan losses, end of period	$	4,590		$	4,164		$	4,590		$	4,164

Non-interest Income

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

	Three months ended June 30,											Six months ended June 30,
	2016		2015			$ Change			% Change			2016		2015		$ Change			% Change
Service charges	$	538	$	500		$	38			7.6	%	$	1,036	$	952	$	84			8.8	%
Wealth management fees		470		399			71			17.8	%		892		779		113			14.5	%
Treasury management fees		123		64			59			92.2	%		214		122		92			75.4	%
Income from Bank-owned life insurance		163		165			(2	)		(1.2	)%		406		408		(2	)		(0.5	)%
Net gain on sale of loans		478		-			478			0.0	%		478		-		478			0.0	%
Net losses on sale of REO		-		(11	)		11			(100.0	)%		-		1		(1	)		(100.0	)%
Other non-interest income		30		63			(33	)		(52.4	)%		97		76		21			27.6	%
Total non-interest income	$	1,802	$	1,180		$	622			52.7	%	$	3,123	$	2,338	$	785			33.6	%

Non-interest income was $1.8 million in the second quarter of 2016, compared to $1.2 million in the year-ago quarter and $1.3 million in the first quarter of 2016. Gains on sales of loans totaled $478,000 in the second quarter of 2016, reflecting the launch in the second quarter of secondary market sales of SBA and residential mortgage loans. The total principal amount of loan sales in the second quarter was $7.0 million, of which $4.2 million were the 75% guaranteed portion of SBA loans and $2.8 million were residential mortgages. Gains on sales of SBA loans and residential mortgages totaled $414,000 and $64,000, respectively. The Company did not sell any loans in 2015 and in the first quarter of 2016. Service charges, wealth management fees and treasury management fees increased an aggregate $168,000 or 17.4% in the second quarter of 2016 compared with the year-ago quarter, primarily from the impact of changes to certain of the Bank’s fees and service charges and from business development activities.

Non-interest income was $3.1 million in the first half of 2016, compared to $2.3 million in the first half of 2015. Gains on sales of loans accounted for approximately 61% of the increase in non-interest income, with the balance of the increase being driven by changes to certain of the Bank’s fees and service charges and from business development activities.

Non-interest income accounted for 29.8% of total revenue in the second quarter of 2016, compared to 22.2% in the year-ago quarter and 24.6% in the first quarter of 2016. Non-interest income accounted for 27.3% of total revenue in the first half of 2016, compared with 21.9% in the year-ago period.

34.

Non-interest Expense

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

	Three months ended June 30,										Six months ended June 30,
	2016		2015		$ Change			% Change			2016		2015		$ Change			% Change
Salaries and benefits	$	3,128	$	2,819	$	309			11.0	%	$	6,170	$	5,531	$	639			11.6	%
Occupancy and equipment		974		1,023		(49	)		(4.8	)%		1,947		1,986		(39	)		(2.0	)%
Professional services		317		284		33			11.6	%		687		637		50			7.9	%
Advertising		228		141		87			61.7	%		398		249		149			59.8	%
Office supplies, postage and courier		75		72		3			4.2	%		163		151		12			7.9	%
FDIC insurance premium		90		97		(7	)		(7.2	)%		178		207		(29	)		(14.0	)%
State franchise taxes		118		75		43			57.3	%		234		150		84			56.0	%
Other non-interest expense		733		684		49			7.1	%		1,244		1,235		9			0.7	%
Total non-interest expenses	$	5,663	$	5,195	$	468			9.0	%	$	11,021	$	10,146	$	875			8.6	%

Non-interest expenses were $5.7 million for the second quarter of 2016, compared with $5.2 million in the year-ago quarter and $5.4 million for the first quarter of 2016. Salaries and benefits increased $309,000 in the second quarter of 2016 compared to the year-ago quarter due primarily to the previously-announced hiring of the small business lending team and residential mortgage originators in the fourth quarter of 2015.

Non-interest expenses were $11.0 million in the first half of 2016, compared to $10.1 million in the first half of 2015. Salaries and benefits increased $639,000 due primarily to the hiring of the small business lending team and residential mortgage originators.

The Company’s efficiency ratio was 93.7% in the second quarter of 2016, compared with 97.1% in the year-ago quarter and 99.6% in the first quarter of 2016. The efficiency ratio was 96.5% for the first half of 2016, compared to 94.0% in the year-ago period.

Income Taxes

We had net deferred tax assets totaling $10.3 million at June 30, 2016, compared with $10.4 million at December 31, 2015, of which the majority are attributable to net operating loss carry-forwards and timing differences between provision for loan losses and the charge-off of loans.

An income tax benefit of $43,000 was recorded in the six months ended June 30, 2016, which was comprised of income tax expense of $52,000 in the second quarter and an income tax benefit of $95,000 in the first quarter. The effective tax rate of 13.6% in the second quarter and the tax benefit in the first quarter resulted primarily from the disproportionate amount of pre-tax income that is not subject to federal income taxes, which is comprised primarily of income from bank-owned life insurance.

Comparison of Financial Condition at June 30, 2016 and December 31, 2015

Total assets were $556.1 million at June 30, 2016, compared with $553.2 million at March 31, 2016 and $541.3 million at December 31, 2015. Much of the increase in assets in the first half of 2016 was in the Company’s loan portfolio (including held for sale), which increased $18.0 million or 4.7%, to $396.6 million at June 30, 2016.

Securities

Investment securities totaled $83.9 million at June 30, 2016, compared with $87.8 million at December 31, 2015. Our portfolio was comprised primarily of investment grade securities. The breakdown of the securities portfolio at June 30, 2016 was 26.7% collateralized mortgage obligations, 20.5% government-sponsored entity guaranteed mortgage-backed securities, 26.1% municipal securities, 22.8% obligations of U.S. government agencies and 3.9% corporate bonds.

35.

Loans

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 (dollars in thousands):

	June 30, 2016						December 31, 2015
	Amount			Percent			Amount			Percent
Loan portfolio composition
Consumer and credit card	$	37,615			9.5	%	$	40,587			10.7	%
Real estate and home equity		149,383			37.7	%		137,645			36.4	%
Commercial and industrial		105,530			26.7	%		99,213			26.2	%
Commercial real estate		103,408			26.1	%		100,743			26.7	%
Total loans	$	395,936			100.0	%	$	378,188			100.0	%

Net deferred loan costs		617						325
Loans		396,553						378,513
Allowance for loan losses		(4,590	)					(4,333	)
Net loans	$	391,963					$	374,180

Total loans were $396.6 million at June 30, 2016, compared with $378.5 million at December 31, 2015. At June 30, 2016, total loans included $3.6 million in loans held for sale, which consisted of $2.5 million in commercial and industrial small business loans and $1.1 million in residential mortgages.

Deposits

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

	June 30, 2016					March 31, 2016					December 31, 2015
	Amount		Percent			Amount		Percent			Amount		Percent
Non-interest bearing demand	$	119,808		25.6	%	$	125,106		27.0	%	$	124,023		26.1	%
Interest bearing demand		87,873		18.8	%		75,633		16.4	%		77,616		16.4	%
Total demand		207,681		44.4	%		200,739		43.4	%		201,639		42.5	%


Savings		49,722		10.6	%		48,719		10.5	%		47,333		10.0	%
Money market		157,136		33.6	%		158,779		34.4	%		154,119		32.5	%
Time deposits		53,053		11.4	%		54,000		11.7	%		71,446		15.0	%
Total deposits	$	467,592		100.0	%	$	462,237		100.0	%	$	474,537		100.0	%

Deposits totaled $467.6 million at June 30, 2016, compared with $462.2 million at March 31, 2016 and $474.5 million at December 31, 2015. Most of the increase during the quarter was the result of an increase in municipal deposit balances of $2.8 million during the quarter.

Liquidity

Liquidity is the ability of the Company to fund loan originations and customers’ needs for borrowing and deposit withdrawals. The purpose of liquidity management is to assure sufficient cash flow to meet all of the financial commitments and to capitalize on opportunities for business expansion. This ability depends on the financial strength, asset quality and types of deposit and investment instruments offered by the Company to its customers. The Company’s principal sources of funds are deposits, loan and security repayments, maturities of securities, sales of securities available for sale and other funds provided by operations. The Bank also has the ability to borrow from the FHLB. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan and mortgage-backed security prepayments are more influenced by interest rates, general economic conditions, and competition. The Company maintains investments in liquid assets based upon management’s assessment of (1) need for funds, (2) expected deposit flows, (3) yields available on short-term liquid assets and (4) objectives of the asset/liability management program.

Cash and cash equivalents totaled $27.2 million at June 30, 2016, compared to $31.9 million at December 31, 2015. Cash and cash equivalents represented 4.9% of total assets at June 30, 2016 and 5.9% of total assets at December 31, 2015. The Company has the ability to borrow funds from the FHLB and the Federal Reserve Bank should the Company need to supplement its future liquidity. Management believes the Company’s liquidity position is adequate based on its current level of cash, cash equivalents, core deposits, the stability of its other funding sources, and the support provided by its capital base.

36.

Capital Resources

Shareholders’ equity was $59.9 million at June 30, 2016, compared with $58.8 million at December 31, 2015. The increase in shareholders’ equity in the first half of 2016 was attributable primarily to net income of $447,000 and to an increase in accumulated other comprehensive income of $605,000 due to higher unrealized gains on securities available-for-sale. Treasury stock increased $104,000 during the second quarter of 2016 as the result of repurchases of 14,750 of the Company’s common shares under the stock repurchase program announced in May 2016. The Company’s tangible common equity to tangible assets ratio was 10.8% at June 30, 2016, compared with 10.9% at December 31, 2015.

Regulatory Capital Requirements

The Bank’s common equity tier 1 capital ratio was 12.51% and its total risk-based capital ratio was 13.70% at June 30, 2016, both of which were well above the regulatory thresholds required to be classified as a “well-capitalized” institution, which are 6.5% and 10.0%, respectively.

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

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

	Actual					For Capital Adequacy Purposes					To be well-capitalized under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2016
Total risk-based capital	$	52,854		13.70	%	$	30,864		8.0	%	$	38,580		10.0	%
Tier 1 capital	$	48,264		12.51	%	$	23,148		6.0	%	$	30,864		8.0	%
Common equity tier 1 capital	$	48,264		12.51	%	$	17,361		4.5	%	$	25,077		6.5	%
Leverage	$	48,264		9.02	%	$	21,403		4.0	%	$	26,754		5.0	%

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

37.

Share Repurchase Program

On April 28, 2016, the Board of Directors of Directors of the Company approved a share repurchase program of up to three percent of the Company’s outstanding common shares, or approximately 220,000 shares, up to $1.7 million. The share repurchase program is authorized for up to one year, and the repurchases may be effected through open market purchases or privately negotiated transactions. Management will use its discretion in determining the timing of the repurchases and the prices at which buybacks will be made. The extent to which shares are repurchased will depend on a number of factors including market trends and prices, economic conditions, internal and regulatory trading quiet periods and alternative uses for capital. There can be no assurance that the Company will repurchase any or all of the shares authorized for repurchase. As of June 30, 2016, the Company has repurchased 14,750 shares under this program for a total amount of $104,000.

38.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Not required.

Item 4. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of June 30, 2016, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2016.

There was no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended June 30, 2016, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting

Part II	Other Information

Item 1.	Legal Proceedings.

	There are no matters required to be reported under this item.

Item 1A.	Risk Factors.

	There has been no material change in the nature of the risk factors set forth in the Company’s Form 10-K for the year ended December 31, 2015.

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.

	a) Not applicable

	b) Not applicable

	c) On May 2, 2016, the Company announced that its Board of Directors had authorized the repurchase of up to 3% of the Company’s outstanding common stock, or approximately 220,683 shares, over a 12-month period. The table below sets forth the information with respect to purchases made by the Company of its common stock during the quarter ended June 30, 2016:

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan		Maximum Number of Shares that May Yet be Purchased Under the Plan
4/1/2016 – 4/30/2016		-	$	-		-		220,683
5/1/2016 – 5/31/2016		14,750	$	7.05		14,750		205,933
6/1/2016 – 6/30/2016		-	$	-		-		205,933
Total		14,750	$	7.05		14,750

Item 3.	Defaults upon Senior Securities.

	There are no matters required to be reported under this item.

Item 4.	Mine Safety Disclosures.

	There are no matters required to be reported under this item.

Item 5.	Other Information.

	There are no matters required to be reported under this item.

39.

Item 6.	Exhibits.

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

	Exhibit No.	Exhibit

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

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

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

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

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

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

	101*	The following information from DCB Financial Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016 formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015; (ii) the Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2016 and 2015; (iii) the Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended June 30, 2016 and 2015; (iv) the Condensed Consolidated Statements of Shareholders’ Equity (unaudited) for the six month periods ended June 30, 2016 and 2015; (v) the Consolidated Statements of Cash Flows (unaudited) for the six month periods ended June 30, 2016 and 2015; and (vi) the Notes to Consolidated Financial Statements.

* Filed herewith. ** Furnished herewith.

40.

SIGNATURES

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

		DCB FINANCIAL CORP
		(Registrant)

Dated: August 15, 2016		/s/ Ronald J. Seiffert
		Ronald J. Seiffert
		Chairman, President and Chief Executive Officer
		(Principal Executive Officer)

Dated: August 15, 2016		/s/ J. Daniel Mohr
		J. Daniel Mohr
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

41.

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