UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: SEPTEMBER 30, 2013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 0-22387
DCB Financial Corp
(Exact name of registrant as specified in its charter)
| Ohio | 31-1469837 | |
| (State or other jurisdiction of | (I.R.S. Employer Identification Number) | |
| incorporation or organization) |
110 Riverbend Avenue, Lewis Center, Ohio 43035
(Address of principal executive offices)
(740) 657-7000
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filers ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes ¨ No x
As of November 11, 2013, the latest practicable date, 7,192,350 shares of the registrant’s common stock, no par value, were issued and outstanding.
DCB FINANCIAL CORP
FORM 10-Q
Table of Contents
| Page | |
| PART I – FINANCIAL INFORMATION | |
| ITEM 1 – Financial Statements | |
| Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012 | 2 |
| Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012 | 3 |
| Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2013 and 2012 | 4 |
| Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 | 5 |
| Notes to the Condensed Consolidated Financial Statements | 6 |
| ITEM 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations | 28 |
| ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk | 38 |
| ITEM 4 – Controls and Procedures | 39 |
| PART II – OTHER INFORMATION | |
| ITEM 1 - Legal Proceedings | 40 |
| ITEM 1A - Risk Factors | 40 |
| ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds | 40 |
| ITEM 3 - Default upon Senior Securities | 40 |
| ITEM 4 – Mine Safety Disclosures | 40 |
| ITEM 5 - Other Information | 40 |
| ITEM 6 - Exhibits | 40 |
| SIGNATURES | 41 |
Item 1. Financial Statements
DCB FINANCIAL CORP
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, except per share data)
| September 30, | December 31, | ||||||
| 2013 | 2012 | ||||||
| (Unaudited) | |||||||
| ASSETS | |||||||
| Cash and due from financial institutions | $ | 7,294 | $ | 9,663 | |||
| Interest-bearing deposits | 27,488 | 53,644 | |||||
| Total cash and cash equivalents | 34,782 | 63,307 | |||||
| Securities available-for-sale | 81,071 | 87,197 | |||||
| Securities held-to-maturity | - | 1,149 | |||||
| Total securities | 81,071 | 88,346 | |||||
| Loans | 358,290 | 317,504 | |||||
| Less allowance for loan losses | (6,471) | (6,881) | |||||
| Net Loans | 351,819 | 310,623 | |||||
| Real estate owned | 1,291 | 3,671 | |||||
| Investment in FHLB Stock | 3,799 | 3,799 | |||||
| Premises and equipment, net | 12,151 | 12,036 | |||||
| Bank owned life insurance | 19,135 | 18,564 | |||||
| Accrued interest receivable and other assets | 2,774 | 6,146 | |||||
| Total assets | $ | 506,822 | $ | 506,492 | |||
| LIABILITIES | |||||||
| Noninterest bearing deposits | $ | 103,762 | $ | 95,847 | |||
| Interest bearing deposits | 347,303 | 352,443 | |||||
| Total deposits | 451,065 | 448,290 | |||||
| Federal Home Loan Bank advances | 5,140 | 7,498 | |||||
| Accrued interest payable and other liabilities | 2,138 | 2,315 | |||||
| Total liabilities | 458,343 | 458,103 | |||||
| STOCKHOLDERS' EQUITY | |||||||
| Common stock, no par value, 7,500,000 shares authorized, 7,500,000 shares issued, and 7,500,000 shares outstanding at September 30, 2013 and December 31, 2012 | 15,771 | 15,771 | |||||
| Retained earnings | 40,785 | 40,614 | |||||
| Treasury stock, at cost, 307,650 shares at September 30, 2013 and December 31, 2012 | (7,416) | (7,416) | |||||
| Accumulated other comprehensive loss | (661) | (580) | |||||
| Total stockholders' equity | 48,479 | 48,389 | |||||
| Total liabilities and stockholders' equity | $ | 506,822 | $ | 506,492 | |||
See Notes to the consolidated financial statements.
| 2 | ||
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share data)
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||
| 2013 | 2012 | 2013 | 2012 | ||||||||||
| Interest and dividend income | |||||||||||||
| Loans | $ | 3,814 | $ | 3,967 | $ | 11,100 | $ | 12,414 | |||||
| Taxable securities | 434 | 537 | 1,396 | 1,688 | |||||||||
| Tax-exempt securities | 47 | 54 | 140 | 171 | |||||||||
| Federal funds sold and other | 21 | 21 | 71 | 70 | |||||||||
| Total interest income | 4,316 | 4,579 | 12,707 | 14,343 | |||||||||
| Interest expense | |||||||||||||
| Deposits | 362 | 566 | 1,235 | 1,862 | |||||||||
| Borrowings | 63 | 177 | 214 | 771 | |||||||||
| Total interest expense | 425 | 743 | 1,449 | 2,633 | |||||||||
| Net interest income | 3,891 | 3,836 | 11,258 | 11,710 | |||||||||
| Provision for loan losses | - | 65 | (890) | 795 | |||||||||
| Net interest income after provision for loan losses | 3,891 | 3,771 | 12,148 | 10,915 | |||||||||
| Non-interest income | |||||||||||||
| Service charges | 543 | 718 | 1,665 | 1,912 | |||||||||
| Trust department income | 181 | 224 | 553 | 674 | |||||||||
| Gain on sales of securities | - | - | 135 | 508 | |||||||||
| Net gain (loss) on sale of REO | (51) | (52) | 35 | (309) | |||||||||
| Treasury management fees | 57 | 61 | 183 | 193 | |||||||||
| Earnings on bank owned life insurance | 166 | 165 | 571 | 575 | |||||||||
| Other | 296 | 42 | 709 | 527 | |||||||||
| Total noninterest income | 1,192 | 1,158 | 3,851 | 4,080 | |||||||||
| Noninterest expense | |||||||||||||
| Salaries and other employee benefits | 2,924 | 2,542 | 8,760 | 7,155 | |||||||||
| Occupancy and equipment | 685 | 745 | 2,278 | 2,283 | |||||||||
| Professional services | 359 | 172 | 1,326 | 870 | |||||||||
| Advertising | 66 | 134 | 239 | 322 | |||||||||
| Postage, freight and courier | 52 | 11 | 149 | 94 | |||||||||
| Supplies | 79 | 35 | 214 | 124 | |||||||||
| State franchise taxes | 120 | 70 | 374 | 278 | |||||||||
| Federal deposit insurance premiums | 187 | 287 | 531 | 862 | |||||||||
| Other | 758 | 754 | 2,255 | 2,415 | |||||||||
| Total noninterest expense | 5,230 | 4,750 | 16,126 | 14,403 | |||||||||
| Net income (loss) before income taxes | (147) | 179 | (127) | 592 | |||||||||
| Income tax benefit | (20) | (127) | (298) | (156) | |||||||||
| Net income (loss) | $ | (127) | $ | 306 | $ | 171 | $ | 748 | |||||
| Basic and diluted earnings (loss) per common share | $ | (0.02) | $ | 0.08 | $ | 0.02 | $ | 0.20 | |||||
| Dividends per share | $ | - | $ | - | $ | - | $ | - | |||||
See Notes to consolidated financial statements.
| 3 | ||
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Dollars in thousands)
| For the three months ended | For the nine months ended | ||||||||||||
| September 30, | September 30, | ||||||||||||
| 2013 | 2012 | 2013 | 2012 | ||||||||||
| Net income (loss) | $ | (127) | $ | 306 | $ | 171 | $ | 748 | |||||
| Other comprehensive income (loss): | |||||||||||||
| Reclassification adjustment of previously recognized noncredit other-than-temporary impairment on sale of security, net of tax of $512 | - | - | 995 | - | |||||||||
| Reclassification adjustment for realized gains included in net income, net of taxes of $46 and $173. | - | - | (89) | (335) | |||||||||
| Unrealized gains (losses) on securities available-for-sale, net of related taxes of $(326), $116, $(667), and $294 in 2013 and 2012, respectively | (633) | 225 | (1,294) | 570 | |||||||||
| Unrealized gains on securities transferred into available-for-sale, net of related taxes of $131 | - | - | 254 | - | |||||||||
| Amortization of unrealized losses on held-to-maturity securities, net of taxes of $5, $12, $27, and $35 in 2013 and 2012 respectively | 10 | 23 | 53 | 69 | |||||||||
| Total other comprehensive income (loss) | (623) | 248 | (81) | 304 | |||||||||
| Comprehensive income (loss) | $ | (750) | $ | 554 | $ | 90 | $ | 1,052 | |||||
See Notes to consolidated financial statements.
| 4 | ||
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the nine months ended September 30,
| 2013 | 2012 | ||||||
| Cash flows provided by (used in) operating activites | $ | 3,509 | $ | (1,500) | |||
| Cash flows provided by (used in) investing activities | |||||||
| Securities | |||||||
| Purchases | (17,268) | (42,868) | |||||
| Proceeds from maturities, principal payments and calls | 20,757 | 19,627 | |||||
| Sales | 2,561 | 12,934 | |||||
| Net change in loans | (40,033) | 36,096 | |||||
| Proceeds from sale of real estate owned | 2,442 | 2,358 | |||||
| Premises and equipment expenditures | (910) | (348) | |||||
| Net cash flows provided by (used in) investing activities | (32,451) | 27,799 | |||||
| Cash flows provided by (used in) financing activities | |||||||
| Net change in deposits | 2,775 | 5,891 | |||||
| Repayment of Federal Home Loan Bank advances | (2,358) | (23,347) | |||||
| Net cash provided by (used in) financing activities | 417 | (17,456) | |||||
| Net change in cash and cash equivalents | (28,525) | 8,843 | |||||
| Cash and cash equivalents at beginning of period | 63,307 | 39,314 | |||||
| Cash and cash equivalents at end of period | $ | 34,782 | $ | 48,157 | |||
| Supplemental disclosures of cash flow information: | |||||||
| Cash paid during the period for: | |||||||
| Interest on deposits and borrowings | $ | 1,519 | $ | 2,687 | |||
| Supplemental disclosures of non-cash investing and financing activites | |||||||
| Transfers from loans to real estate owned | $ | 27 | $ | 2,187 | |||
See Notes to consolidated financial statements.
| 5 | ||
DCB FINANCIAL CORP
(Dollars in thousands, except per share data)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Throughout this report, the terms “Company,” “DCB,” “we,” “our” and “us” refers to the consolidated entity of DCB Financial Corp and its wholly owned subsidiaries, The Delaware County Bank and Trust Company (the “Bank”), DCB Title Services LLC, Datatasx LLC, and DCB Insurance Services, Inc.
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, 2012, 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, 2012. 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 nine months ended September 30, 2013 and 2012. The results of operations for the nine months ended September 30, 2013 are not necessarily indicative of the results anticipated for the year.
| 6 | ||
DCB FINANCIAL CORP
(Dollars in thousands, except per share data)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings per share
Earnings per common share is net income divided by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed including the dilutive effect of additional potential common shares under stock options. Weighted-average shares for basic and diluted earnings per share are presented below.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
| 2013 | 2012 | 2013 | 2012 | ||||||||||
| Weighted-average common shares outstanding (basic) | 7,192,350 | 3,717,385 | 7,192,350 | 3,717,385 | |||||||||
| Dilutive effect of assumed exercise of stock options | - | 22,309 | 34,020 | 17,795 | |||||||||
| Weighted-average common shares outstanding (diluted) | 7,192,350 | 3,739,694 | 7,226,370 | 3,735,180 | |||||||||
Options to purchase 251,400 shares of common stock with a weighted-average exercise price of $9.89 were outstanding at September 30, 2013. There were 143,658 shares included in the computation of common share equivalents for the nine-month period then ended because the average fair value of the shares was greater than the exercise price. Diluted loss per common share is not computed for the three months ended September 30, 2013 in which an operating loss is sustained.
Options to purchase 194,707 shares of common stock with a weighted-average exercise price of $12.65 were outstanding at September 30, 2012. There were 83,965 shares included in the computation of common share equivalents for the three-month and nine-month periods then ended because the average fair value of the shares was greater than the exercise price.
Equity compensation plan
The company has a stock option plan for employees and directors as described in Note 6 (Stock-Based Compensation). In addition to equity settlement, the stock option plan also allows for cash settlement of options at the recipient’s discretion; therefore, liability accounting applies to this plan. Compensation expense is recognized based on the fair value of vested 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 for stock option awards. 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 Operations.
| 7 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
NOTE 2 – SECURITIES
The amortized cost and estimated fair values of securities available-for-sale were as follows for the dates indicated (in thousands):
September 30, 2013:
| Adjusted Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||
| U.S. Government and agency obligations | $ | 16,793 | $ | 9 | $ | 396 | $ | 16,406 | |||||
| Corporate bonds | 6,202 | 51 | 70 | 6,183 | |||||||||
| States and municipal obligations | 20,723 | 331 | 497 | 20,557 | |||||||||
| Collateralized debt obligations | 1,932 | - | 928 | 1,004 | |||||||||
| Mortgage-backed securities | 36,439 | 746 | 264 | 36,921 | |||||||||
| Total | $ | 82,089 | $ | 1,137 | $ | 2,155 | $ | 81,071 | |||||
December 31, 2012:
| Amortized Costs | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||
| U.S. Government and agency obligations | $ | 16,821 | $ | 134 | $ | 18 | $ | 16,937 | |||||
| Corporate bonds | 5,081 | 86 | 2 | 5,165 | |||||||||
| States and municipal obligations | 19,874 | 918 | 31 | 20,761 | |||||||||
| Mortgage-backed securities | 43,432 | 931 | 29 | 44,334 | |||||||||
| Total | $ | 85,208 | $ | 2,069 | $ | 80 | $ | 87,197 | |||||
During the nine months ended September 30, 2013, the Company sold investments in collateralized debt obligations for proceeds of $2.6 million. This reflects a gain on sale of $135,000 from this transaction. These securities that were sold were from the held-to-maturity portfolio and as a result of the sale the remaining securities have been reclassified as available-for-sale.
Realized gains on sales of investment securities for the three and nine months ended September 30, 2013 were $0 and $135,000, respectively. Realized gains on sales of investment securities for the three and nine months ended September 30, 2012 were $0 and $508,000, respectively.
The amortized cost and estimated fair values of securities held-to-maturity at December 31, 2012 were as follows (in thousands):
| Adjusted Amortized Cost | Gross Unrealized Gains | Estimated Fair Value | ||||||||
| Collateralized debt obligations | $ | 1,149 | $ | 941 | $ | 2,090 | ||||
There were no credit losses recognized on investments in the three and nine months ended September 30, 2013 and 2012.
| 8 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
NOTE 2 – SECURITIES (continued)
The table below indicates the length of time individual available for sale securities have been in a continuous unrealized loss position at the dates indicated (in thousands):
September 30, 2013
| (Less than 12 months) | (12 months or longer) | Total | |||||||||||||||||||||||
| Description of securities | Number of investment | Fair Value | Unrealized losses | Number of investments | Fair value | Unrealized losses | Number of investments | Fair value | Unrealized losses | ||||||||||||||||
| U.S. Government and agency obligations | 13 | $ | 13,285 | $ | 396 | - | $ | - | $ | - | 13 | $ | 13,285 | $ | 396 | ||||||||||
| Corporate bonds | 7 | 3,023 | 70 | - | - | - | 7 | 3,023 | 70 | ||||||||||||||||
| State and municipal obligations | 33 | 11,139 | 464 | 1 | 475 | 33 | 34 | 11,614 | 497 | ||||||||||||||||
| Collateralized | |||||||||||||||||||||||||
| debt obligations | - | - | - | 1 | 1,004 | 928 | 1 | 1,004 | 928 | ||||||||||||||||
| Mortgage-backed securities and other | 9 | 7,047 | 264 | - | - | 9 | 7,047 | 264 | |||||||||||||||||
| Total temporarily impaired securities | 62 | $ | 34,494 | $ | 1,194 | 2 | $ | 1,479 | $ | 961 | 64 | $ | 35,973 | $ | 2,155 | ||||||||||
December 31, 2012
| (Less than 12 months) | (12 months or longer) | Total | |||||||||||||||||||||||
| Description of securities | Number of investment | 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 | $ | 3,649 | $ | 18 | - | $ | - | $ | - | 3 | $ | 3,649 | $ | 18 | ||||||||||
| Corporate bonds | 1 | 501 | 2 | - | - | - | 1 | 501 | 2 | ||||||||||||||||
| State and municipal obligations | 5 | 1,630 | 31 | - | - | - | 5 | 1,630 | 31 | ||||||||||||||||
| Mortgage-backed securities and other | 6 | 4,065 | 29 | - | - | - | 6 | 4,065 | 29 | ||||||||||||||||
| Total temporarily impaired securities | 15 | $ | 9,845 | $ | 80 | - | $ | - | $ | - | 15 | $ | 9,845 | $ | 80 | ||||||||||
The unrealized losses on the Company’s investments in U.S. Government and agency obligations, state and political subdivision obligations, corporate bonds and mortgage-backed securities were caused primarily by changes in interest rates. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2013 or December 31, 2012.
| 9 | ||
DCB FINANCIAL CORP
(Dollars in thousands, except per share data)
NOTE 2 – SECURITIES (continued)
The Company’s investments in collateralized debt obligations relates to an original investment of $8.0 million in pooled trust securities. In 2009, the Company recognized an other-than-temporary impairment on these securities and recognized a loss equal to the credit loss, establishing a new, lower amortized cost basis. The credit loss was calculated by comparing expected discounted cash flows based on performance indicators of the underlying assets in the security to the carrying value of the investment. The Company evaluates the investments on a quarterly basis for other-than-temporary impairment and other unrealized gains or losses due to temporary market factors. Historically these securities were classified as held-to-maturity. As mentioned above, one security was sold from this portfolio during the nine months ended September 30, 2013. In connection with this sale, the remaining securities in this portfolio have been reclassified as available-for-sale as of September 30, 2013.
Substantially all mortgage-backed securities are backed by pools of mortgages that are insured or guaranteed by the Federal National Mortgage Association (“FNMA”), the Government National Mortgage Association (“GNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”).
At September 30, 2013, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.
The amortized cost and estimated fair value of all debt securities at September 30, 2013, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown separately since they are not due at a single maturity date (in thousands).
| Available-for-sale | Held-to-maturity | ||||||||||||
| Amortized | Fair | Amortized | Fair | ||||||||||
| Cost | Value | Cost | Value | ||||||||||
| Due in one year or less | $ | 1,041 | $ | 1,048 | $ | - | $ | - | |||||
| Due after one to five years | 8,256 | 8,320 | - | - | |||||||||
| Due after five to ten years | 24,156 | 23,836 | - | - | |||||||||
| Due after ten years | 12,197 | 10,946 | - | - | |||||||||
| Mortgage-backed and related securities | 36,439 | 36,921 | - | - | |||||||||
| Total | $ | 82,089 | $ | 81,071 | $ | - | $ | - | |||||
Securities with a fair value of $70.9 million at September 30, 2013 were pledged to secure public deposits and other obligations.
NOTE 3 –LOANS
The following table presents major classifications of loans at the dates indicated (in thousands):
| September 30, 2013 | December 31, 2012 | ||||||
| Commercial and industrial | $ | 122,687 | $ | 112,300 | |||
| Commercial real estate | 109,933 | 111,417 | |||||
| Residential real estate and home equity | 93,349 | 72,137 | |||||
| Consumer and credit card | 32,169 | 21,620 | |||||
| Subtotal | 358,138 | 317,474 | |||||
| Add: Net deferred loan origination fees | 152 | 30 | |||||
| Total loans receivable | $ | 358,290 | $ | 317,504 | |||
| 10 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
NOTE 4 – CREDIT QUALITY
Allowance for Credit Losses
The following tables summarize activity in the allowance for loan losses for the periods indicated (in thousands):
For the Three Months Ended September 30, 2013:
| Consumer and Credit Card | Commercial and Industrial | Commercial Real Estate | Residential Real Estate and Home Equity | Total | ||||||||||||
| Beginning balance: | $ | 368 | $ | 1,572 | $ | 4,363 | $ | 200 | $ | 6,503 | ||||||
| Chargeoffs | (83) | (6) | (5) | (52) | (146) | |||||||||||
| Recoveries | 82 | 5 | 20 | 7 | 114 | |||||||||||
| Provision | 8 | (101) | 9 | 84 | - | |||||||||||
| Ending balance: | $ | 375 | $ | 1,470 | $ | 4,387 | $ | 239 | $ | 6,471 | ||||||
For the Nine Months Ended September 30, 2013:
| Consumer and Credit Card | Commercial and Industrial | Commercial Real Estate | Residential Real Estate and Home Equity | Total | ||||||||||||
| Beginning balance: | $ | 365 | $ | 1,620 | $ | 4,692 | $ | 204 | $ | 6,881 | ||||||
| Chargeoffs | (219) | (85) | (135) | (141) | (580) | |||||||||||
| Recoveries | 192 | 780 | 43 | 45 | 1,060 | |||||||||||
| Provision | 37 | (845) | (213) | 131 | (890) | |||||||||||
| Ending balance: | $ | 375 | $ | 1,470 | $ | 4,387 | $ | 239 | $ | 6,471 | ||||||
| 11 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
NOTE 4 – CREDIT QUALITY (continued)
The following tables summarize activity in the allowance for loan losses for the periods indicated, cont. (in thousands):
For the Three Months Ended September 30, 2012:
| Consumer and Credit Card | Commercial and Industrial | Commercial Real Estate | Residential Real Estate and Home Equity | Total | ||||||||||||
| Beginning balance: | $ | 373 | $ | 2,132 | $ | 6,436 | $ | 207 | $ | 9,148 | ||||||
| Chargeoffs | (82) | (833) | (250) | (43) | (1,209) | |||||||||||
| Recoveries | 51 | 62 | 29 | 4 | 146 | |||||||||||
| Provision | 30 | 777 | (783) | 41 | 66 | |||||||||||
| Ending balance: | $ | 372 | $ | 2,138 | $ | 5,432 | $ | 209 | $ | 8,151 | ||||||
For the Nine Months Ended September 30, 2012:
| Consumer and Credit Card | Commercial and Industrial | Commercial Real Estate | Residential Real Estate and Home Equity | Total | ||||||||||||
| Beginning balance: | $ | 425 | $ | 1,952 | $ | 6,916 | $ | 291 | $ | 9,584 | ||||||
| Chargeoffs | (294) | (981) | (1,323) | (62) | (2,660) | |||||||||||
| Recoveries | 162 | 213 | 42 | 15 | 432 | |||||||||||
| Provision | 79 | 954 | (203) | (35) | 795 | |||||||||||
| Ending balance: | $ | 372 | $ | 2,138 | $ | 5,432 | $ | 209 | $ | 8,151 | ||||||
Impaired Loans
A loan is considered impaired when based on current information and events, it is probable the Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Generally, commercial and commercial real estate loans with risk grades Substandard, Vulnerable, Doubtful, or Loss, with aggregate relationships greater than $250,000 are evaluated for impairment. Interest income on impaired loans is recognized when accrued, for loans that remain in a performing status. Loans that are not performing and in a nonaccrual status recognize interest only on cash basis if circumstances warrant.
| 12 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
NOTE 4 – CREDIT QUALITY (continued)
The following table presents information related to the recorded investment, unpaid balance and related allowance on impaired loans at the dates indicated (in thousands):
At September 30, 2013
| Recorded Investment | Unpaid Principal Balance | Related Allowance | 9 Months Average Recorded Investment | 9 Months Interest Income Recognized | 3 Months Average Recorded Investment | 3 Months Interest Income Recognized | ||||||||||||||||
| With No Related Allowance | ||||||||||||||||||||||
| Recorded | ||||||||||||||||||||||
| Consumer and Credit Card | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||
| Commercial and Industrial | 2,658 | 2,735 | - | 3,420 | 81 | 3,198 | 26 | |||||||||||||||
| Commercial Real Estate | 10,790 | 12,833 | - | 9,839 | 498 | 11,075 | 166 | |||||||||||||||
| Residential RE and Home Equity | - | - | - | - | - | - | - | |||||||||||||||
| With Allowance Recorded | ||||||||||||||||||||||
| Consumer and Credit Card | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||
| Commercial and Industrial | 2,928 | 2,572 | 609 | 2,349 | 71 | 3,132 | 24 | |||||||||||||||
| Commercial Real Estate | 10,190 | 10,609 | 2,537 | 10,947 | 265 | 9,256 | 103 | |||||||||||||||
| Residential RE and Home Equity | - | - | - | - | - | - | - | |||||||||||||||
| Total | ||||||||||||||||||||||
| Consumer and Credit Card | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||
| Commercial and Industrial | 5,586 | 5,307 | 609 | 5,769 | 152 | 6,330 | 50 | |||||||||||||||
| Commercial Real Estate | 20,980 | 23,442 | 2,537 | 20,786 | 763 | 20,331 | 269 | |||||||||||||||
| Residential RE and Home Equity | - | - | - | - | - | - | - | |||||||||||||||
| Total | $ | 26,566 | $ | 28,749 | $ | 3,146 | $ | 26,555 | $ | 915 | $ | 26,661 | $ | 319 | ||||||||
| 13 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
NOTE 4 – CREDIT QUALITY (continued)
At December 31, 2012:
| Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | ||||||||||||
| With No Related Allowance | ||||||||||||||||
| Recorded | ||||||||||||||||
| Consumer and Credit Card | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||
| Commercial and Industrial | 4,288 | 4,437 | - | 3,557 | 268 | |||||||||||
| Commercial Real Estate | 5,507 | 5,998 | - | 10,067 | 241 | |||||||||||
| Residential RE and Home Equity | - | - | - | - | - | |||||||||||
| With Allowance Recorded | ||||||||||||||||
| Consumer and Credit Card | - | - | - | - | - | |||||||||||
| Commercial and Industrial | 1,183 | 1,248 | 340 | 6,208 | 65 | |||||||||||
| Commercial Real Estate | 16,376 | 20,008 | 3,400 | 15,965 | 820 | |||||||||||
| Residential RE and Home Equity | - | - | - | - | - | |||||||||||
| Total | ||||||||||||||||
| Consumer and Credit Card | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||
| Commercial and Industrial | 5,471 | 5,685 | 340 | 9,765 | 333 | |||||||||||
| Commercial Real Estate | 21,883 | 26,006 | 3,400 | 26,032 | 1,061 | |||||||||||
| Residential RE and Home Equity | - | - | - | - | - | |||||||||||
| Total | $ | 27,354 | $ | 31,691 | $ | 3,740 | $ | 35,797 | $ | 1,394 | ||||||
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):
At September 30, 2013:
| Consumer and Credit Card | Commercial and Industrial | Commercial Real Estate | Residential Real Estate and Home Equity | Total | ||||||||||||
| Individually evaluated for impairment | $ | - | $ | 609 | $ | 2,537 | $ | - | $ | 3,146 | ||||||
| Collectively evaluated for impairment | 375 | 861 | 1,850 | 239 | 3,325 | |||||||||||
| Ending balance: | $ | 375 | $ | 1,470 | $ | 4,387 | $ | 239 | $ | 6,471 | ||||||
At December 31, 2012:
| Consumer and Credit Card | Commercial and Industrial | Commercial Real Estate | Residential Real Estate and Home Equity | Total | ||||||||||||
| Individually evaluated for impairment | $ | - | $ | 340 | $ | 3,400 | $ | - | $ | 3,740 | ||||||
| Collectively evaluated for impairment | 365 | 1,280 | 1,292 | 204 | 3,141 | |||||||||||
| Ending balance: | $ | 365 | $ | 1,620 | $ | 4,692 | $ | 204 | $ | 6,881 | ||||||
| 14 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
NOTE 4 – CREDIT QUALITY (continued)
The recorded investment in loans summarized on the basis of the Company’s impairment methodology at the dates indicated was as follows (in thousands):
As of September 30, 2013:
| Consumer and Credit Card | Commercial and Industrial | Commercial Real Estate | Residential Real Estate and Home Equity | Total | ||||||||||||
| Loans: | ||||||||||||||||
| Individually evaluated for impairment | $ | - | $ | 5,586 | $ | 20,980 | $ | - | $ | 26,566 | ||||||
| Collectively evaluated for impairment | 32,169 | 117,101 | 88,953 | 93,349 | 331,572 | |||||||||||
| Ending balance: | $ | 32,169 | $ | 122,687 | $ | 109,933 | $ | 93,349 | $ | 358,138 | ||||||
As of December 31, 2012:
| Consumer and Credit Card | Commercial and Industrial | Commercial Real Estate | Residential Real Estate and Home Equity | Total | ||||||||||||
| Loans: | ||||||||||||||||
| Individually evaluated for impairment | $ | - | $ | 5,471 | $ | 21,883 | $ | - | $ | 27,354 | ||||||
| Collectively evaluated for impairment | 21,620 | 106,829 | 89,534 | 72,137 | 290,120 | |||||||||||
| Ending balance: | $ | 21,620 | $ | 112,300 | $ | 111,417 | $ | 72,137 | $ | 317,474 | ||||||
The following table summarizes loans on nonaccrual status at the dates indicated (in thousands):
| September 30, | December 31, | ||||||
| 2013 | 2012 | ||||||
| Consumer and credit card | $ | - | $ | - | |||
| Commercial and industrial | 1,765 | 2,815 | |||||
| Commercial real estate | 3,529 | 2,195 | |||||
| Residential real estate and home equity | 257 | 321 | |||||
| Total | $ | 5,551 | $ | 5,331 | |||
Credit Quality Indicators
Risk Category Descriptions
Pass (Prime – 1, Good – 2, Fair – 3, Compromised – 4)
Loans with a pass grade have a higher likelihood that the borrower will be able to service its obligations in accordance with the terms of the loan than those loans graded 5, 6, 7, or 8. The borrower’s ability to meet its future debt service obligations is the primary focus for this determination. Generally, a borrower’s expected performance is based on the borrower’s financial strength as reflected by its historical and projected balance sheet and income
NOTE 4 – CREDIT QUALITY (continued)
statement proportions, its performance, and its future prospects in light of conditions that may occur during the term of the loan.
Vulnerable (Special Mention) – 5
Loans which possess some credit deficiency or potential weakness which deserves close attention, but which do not yet warrant substandard classification. Such loans pose unwarranted financial risk that, if not corrected, could weaken the loan and increase risk in the future. The key distinctions of a Vulnerable (Special Mention) classification are that (1) it is indicative of an unwarranted level of risk, and (2) weaknesses are considered “potential”, versus “well-defined”, impairments to the primary source of loan repayment.
| 15 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
Substandard – 6
Loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. One or more of the following characteristics may be exhibited in loans classified Substandard:
· | Loans that possess a defined credit weakness and the likelihood that a loan will be paid from the primary source is uncertain. Financial deterioration is underway and very close attention is warranted to ensure that the loan is collected without loss. |
· | Loans are inadequately protected by the current net worth and paying capacity of the obligor. |
· | The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment such as collateral liquidation or guarantees. | |
· | Loans are characterized by the distinct possibility that the Bank will sustain some loss if deficiencies are not corrected. | |
· | Unusual courses of action are needed to maintain a high probability of repayment. | |
· | The borrower is not generating enough cash flow to repay loan principal; however, continues to make interest payments. | |
· | The Bank is forced into a subordinated or unsecured position due to flaws in documentation. | |
· | Loans have been restructured so that payment schedules, terms and collateral represent concessions to the borrower when compared to the normal loan terms. | |
· | The Bank is contemplating foreclosure or legal action due to the apparent deterioration in the loan. | |
· | There is a significant deterioration in the market conditions and the borrower is highly vulnerable to these conditions. |
| 16 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
NOTE 4 – CREDIT QUALITY (continued)
Doubtful – 7
One or more of the following characteristics may be exhibited in loans classified Doubtful:
· | Loans have all of the weaknesses of those classified as Substandard. Additionally, however, these weaknesses make collection or liquidation in full based on existing conditions improbable. | |
· | The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment. | |
· | The possibility of loss is high, but, because of certain important pending factors, which may strengthen the loan, loss classification is deferred until its exact status is known. A Doubtful classification is established during this period of deferring the realization of the loss. |
| 17 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
NOTE 4 – CREDIT QUALITY (continued)
Loss – 8
Loans are considered uncollectible and of such little value that continuing to carry them as assets on the Bank’s financial statements is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.
The following table presents as of the dates indicated and based on the most recent analysis performed, the recorded investment by risk category of loans (in thousands):
At September 30, 2013:
| Category | Commercial and Industrial | Commercial Real Estate | |||||
| Pass - 1 through 4 | $ | 105,435 | $ | 82,212 | |||
| Vulnerable – 5 | 9,021 | 8,826 | |||||
| Substandard – 6 | 8,231 | 18,895 | |||||
| Doubtful – 7 | - | - | |||||
| Loss – 8 | - | - | |||||
| Total | $ | 122,687 | $ | 109,933 | |||
At December 31, 2012:
| Category | Commercial and Industrial | Commercial Real Estate | |||||
| Pass-1-4 | $ | 90,516 | $ | 76,708 | |||
| Vulnerable-5 | 12,240 | 12,289 | |||||
| Substandard-6 | 9,544 | 22,420 | |||||
| Doubtful-7 | - | - | |||||
| Loss-8 | - | - | |||||
| Total | $ | 112,300 | $ | 111,417 | |||
| 18 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
NOTE 4 – CREDIT QUALITY (continued)
Consumer Risk
The following table presents the recorded investment in consumer and residential real estate loans based on payment activity as of the dates indicated (in thousands):
At September 30, 2013:
| Payment Category | Consumer and Credit Card | Residential Real Estate and Home Equity | |||||
| Performing | $ | 32,169 | $ | 93,051 | |||
| Nonperforming | - | 298 | |||||
| Total | $ | 32,169 | $ | 93,349 | |||
At December 31, 2012:
| Payment Category | Consumer and Credit Card | Residential Real Estate and Home Equity | |||||
| Performing | $ | 21,592 | $ | 71,816 | |||
| Non-Performing | 28 | 321 | |||||
| Total | $ | 21,620 | $ | 72,137 | |||
The following table presents the aging of past due loans aged at the date indicated (in thousands):
At September 30, 2013:
| Category | 30-59 Days Past Due | 60-89 Days Past Due | Greater than 90 Days Past Due | Total Past Due | Current | Loans | Recorded Investment > 90 days and Accruing | |||||||||||||||
| Consumer and credit card | $ | 53 | $ | 103 | $ | - | $ | 156 | $ | 32,013 | $ | 32,169 | $ | - | ||||||||
| Commercial and industrial | 17 | - | 1,049 | 1,066 | 121,621 | 122,687 | 47 | |||||||||||||||
| Commercial real estate | - | - | 2,711 | 2,711 | 107,222 | 109,933 | - | |||||||||||||||
| Residential real estate and home equity | 78 | 198 | 298 | 574 | 92,775 | 93,349 | 40 | |||||||||||||||
| Total | $ | 168 | $ | 412 | $ | 4,058 | $ | 4,507 | $ | 353,631 | $ | 358,138 | $ | 87 | ||||||||
| 19 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
NOTE 4 – CREDIT QUALITY (continued)
The following table presents the aging of past due loans aged at the date indicated, cont. (in thousands):
At December 31, 2012:
| Category | 30-59 Days Past Due | 60-89 Days Past Due | Greater than 90 Days Past Due | Total Past Due | Current | Total Loans | Recorded Investment > 90 days and Accruing | |||||||||||||||
| Consumer and Credit Card | $ | 37 | $ | 101 | $ | 28 | $ | 166 | $ | 21,454 | $ | 21,620 | $ | 28 | ||||||||
| Commercial and Industrial | 20 | - | 26 | 46 | 112,254 | 112,300 | - | |||||||||||||||
| Commercial Real Estate | 538 | 114 | 2,195 | 2,847 | 108,570 | 111,417 | - | |||||||||||||||
| Residential Real Estate and Home Equity | 444 | 289 | 321 | 1,054 | 71,083 | 72,137 | - | |||||||||||||||
| Total | $ | 1,039 | $ | 504 | $ | 2,570 | $ | 4,113 | $ | 313,361 | $ | 317,474 | $ | 28 | ||||||||
| 20 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
NOTE 4 – CREDIT QUALITY (continued)
Troubled Debt Restructurings
Information regarding troubled debt restructuring (“TDR”) loans for the three and nine month periods ended September 30, 2013 and 2012 is as follows:
| Three Months Ended | |||||||||||
| September 30, 2013 | September 30, 2012 | ||||||||||
| Number of Contracts | Recorded Investment (as of period end) | Number of Contracts | Recorded Investment (as of period end) | ||||||||
| Consumer and credit card | - | $ | - | 2 | $ | 11 | |||||
| Commercial and industrial | - | - | - | - | |||||||
| Commercial real estate | - | - | - | - | |||||||
| Residential real estate and home equity | - | - | - | - | |||||||
| Total | - | $ | - | 2 | $ | 11 | |||||
| Nine Months Ended | |||||||||||
| September 30, 2013 | September 30, 2012 | ||||||||||
| Number of Contracts | Recorded Investment (as of period end) | Number of Contracts | Recorded Investment (as of period end) | ||||||||
| Consumer and credit card | - | $ | - | 6 | $ | 56 | |||||
| Commercial and industrial | 1 | 61 | - | - | |||||||
| Commercial real estate | 5 | 3,552 | 2 | 2,803 | |||||||
| Residential real estate and home equity | - | - | - | - | |||||||
| Total | 6 | $ | 3,613 | 8 | $ | 2,859 | |||||
The following presents by class loans modified in a TDR from January 1, 2012 through September 30, 2013 that subsequently defaulted (i.e. 60 days or more past due following a modification) during the three and nine month periods ended September 30, 2013.
TDRs that defaulted during the period, within twelve months of their modification date:
| Three Months Ended | |||||||||||
| September 30, 2013 | September 30, 2012 | ||||||||||
| Number of Contracts | Recorded Investment as of period end (1) | Number of Contracts | Recorded Investment as of period end (1) | ||||||||
| Consumer and credit card | - | $ | - | - | $ | - | |||||
| Commercial and industrial | - | - | - | - | |||||||
| Commercial real estate | 3 | 163 | 1 | 1,110 | |||||||
| Residential real estate and home equity | - | - | - | - | |||||||
| Total | 3 | $ | 163 | 1 | $ | 1,110 | |||||
(1) Period end balances are inclusive of all partial pay downs and chargeoffs since the modification date. Loans modified in a TDR that were fully paid down, charged off, or foreclosed upon by period end are not reported.
| 21 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
NOTE 4 – CREDIT QUALITY (continued)
| Nine Months Ended | |||||||||||
| September 30, 2013 | September 30, 2012 | ||||||||||
| Number of Contracts | Recorded Investment as of period end (1) | Number of Contracts | Recorded Investment as of period end (1) | ||||||||
| Consumer and credit card | - | $ | - | - | $ | - | |||||
| Commercial and industrial | - | - | - | - | |||||||
| Commercial real estate | 3 | 163 | 1 | 1,110 | |||||||
| Residential real estate and home equity | - | - | - | - | |||||||
| Total | 3 | $ | 163 | 1 | $ | 1,110 | |||||
(1) Period end balances are inclusive of all partial pay downs and chargeoffs since the modification date. Loans modified in a TDR that were fully paid down, charged off, or foreclosed upon by period end are not reported.
NOTE 5 – FAIR VALUE MEASUREMENTS
The Company accounts for fair value measurements in accordance with FASB ASC 820, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair value:
Level 1 | Quoted prices in active markets for identical assets or liabilities |
Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities |
Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities |
The carrying value of certain financial assets and liabilities is impacted by the application of fair value measurements, either directly or indirectly. In certain cases, an asset or liability is measured and reported at fair value on a recurring basis, such as available-for-sale investment securities. In other cases, management must rely on estimates or judgments to determine if an asset or liability not measured at fair value warrants an impairment write-down or whether a valuation reserve should be established. Given the inherent volatility, the use of fair value measurements may have a significant impact on the carrying value of assets or liabilities, or result in material changes to the financial statements, from period to period.
Fair value is defined as the price that would be received to sell an asset or transfer a liability between market participants at the balance sheet date. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to observable market data for similar assets and liabilities. However, certain assets and liabilities are not traded in observable markets and the Company must use other valuation methods to develop a fair value. The fair value of impaired loans is based on the fair value of the underlying collateral, which is estimated through third party appraisals or internal estimates of collateral values.
The following methods, assumptions, and valuation techniques were used by the Company to measure different financial assets and liabilities at fair value and in estimating its fair value disclosures for financial instruments.
Cash and Cash Equivalents: The carrying amounts reported in the consolidated statements of financial condition for cash and cash equivalents is deemed to 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 stimated using matrix pricing, which is a mathematical technique widely used in the industry to value investment securities
| 22 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
NOTE 5 – FAIR VALUE MEASUREMENTS (continued)
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.
Held to Maturity Investment Securities: Estimated fair value for held-to-maturity securities is based on independent third-party evaluations including discounted cash flows and other market assumptions. The methods used to estimate the fair value of the securities do not necessarily represent an exit price and due to the significant judgment involved, these securities are classified within the Level 3 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.
Accrued Interest Receivable and Payable: The fair value for accrued interest approximates its carrying amounts due to the short duration before collection. The valuation is a Level 3 classification which is consistent with its underlying asset or liability.
Deposits: The fair values of deposits with no stated maturity, such as money market demand deposits, savings and NOW accounts have been analyzed by management and assigned estimated maturities and cash flows which are then discounted to derive a value. The fair value of fixed-rate certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The Company classifies the estimated fair value of deposit liabilities as Level 2 in the fair value hierarchy.
Advances from the Federal Home Loan Bank: The fair value of these advances is estimated using the rates currently offered for similar advances of similar remaining maturities or, when available, quoted market prices.
Commitments to Extend Credit: For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. At September 30, 2013 and December 31, 2012, the fair value of loan commitments was not material.
Based on the foregoing methods and assumptions, the carrying value and fair value of the Company’s financial instruments are as follows (in thousands):
| 23 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
NOTE 5 – FAIR VALUE MEASUREMENTS (continued)
At September 30, 2013:
| Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| Financial assets | ||||||||||||||||
| Cash and cash equivalents | $ | 34,782 | $ | 34,782 | $ | 34,782 | $ | - | $ | - | ||||||
| Securities available-for-sale | 81,071 | 81,071 | - | 80,067 | 1,004 | |||||||||||
| Securities held-to-maturity | - | - | - | - | - | |||||||||||
| Loans (net of allowance) | 351,819 | 343,306 | - | - | 343,306 | |||||||||||
| FHLB stock | 3,799 | 3,799 | - | 3,799 | - | |||||||||||
| Accrued interest receivable | 1,537 | 1,537 | - | - | 1,537 | |||||||||||
| Financial liabilities | ||||||||||||||||
| Noninterest-bearing deposits | $ | 103,762 | $ | 103,762 | $ | - | $ | 103,762 | $ | - | ||||||
| Interest-bearing deposits | 347,303 | 347,591 | - | 347,591 | - | |||||||||||
| FHLB advances | 5,140 | 5,140 | - | 5,140 | - | |||||||||||
| Accrued interest payable | 138 | 138 | - | - | 138 | |||||||||||
At December 31, 2012:
| Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| Financial assets | ||||||||||||||||
| Cash and cash equivalents | $ | 63,307 | $ | 63,307 | $ | 63,307 | $ | - | $ | - | ||||||
| Securities available-for-sale | 87,197 | 87,197 | - | 87,197 | - | |||||||||||
| Securities held-to-maturity | 1,149 | 2,090 | - | - | 2,090 | |||||||||||
| Loans (net of allowance) | 310,623 | 307,729 | - | - | 307,729 | |||||||||||
| FHLB stock | 3,799 | 3,799 | - | 3,799 | - | |||||||||||
| Accrued interest receivable | 1,287 | 1,287 | - | - | 1,287 | |||||||||||
| Financial liabilities | ||||||||||||||||
| Noninterest-bearing deposits | $ | 95,847 | $ | 95,847 | $ | - | $ | 95,847 | $ | - | ||||||
| Interest-bearing deposits | 352,443 | 352,759 | - | 352,759 | - | |||||||||||
| FHLB advances | 7,498 | 7,498 | - | 7,498 | - | |||||||||||
| Accrued interest payable | 208 | 208 | - | - | 208 | |||||||||||
| 24 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
NOTE 5 – FAIR VALUE MEASUREMENTS (continued)
The following table presents the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2013 and December 31, 2012:
September 30, 2013
| Fair Value Measurements Using | |||||||||||||
| Quoted Prices | |||||||||||||
| in Active | Significant | ||||||||||||
| Markets for | Other | Significant | |||||||||||
| Identical | Observable | Unobservable | |||||||||||
| Assets | Inputs | Inputs | |||||||||||
| Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||
| U.S. Government and agency obligations | $ | 16,406 | $ | - | $ | 16,406 | $ | - | |||||
| State and municipal obligations | 20,557 | - | 20,557 | - | |||||||||
| Collateralized debt obligations | 1,004 | - | - | 1,004 | |||||||||
| Corporate bonds | 6,183 | - | 6,183 | - | |||||||||
| Mortgage-backed securities and other | 36,921 | - | 36,921 | - | |||||||||
| Total | $ | 81,071 | $ | - | $ | 80,067 | $ | 1,004 | |||||
December 31, 2012
| Fair Value Measurements Using | |||||||||||||
| Quoted Prices | |||||||||||||
| in Active | Significant | ||||||||||||
| Markets for | Other | Significant | |||||||||||
| Identical | Observable | Unobservable | |||||||||||
| Assets | Inputs | Inputs | |||||||||||
| Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||
| U.S. Government and agency obligations | $ | 16,937 | $ | - | $ | 16,937 | $ | - | |||||
| State and municipal obligations | 20,761 | - | 20,761 | - | |||||||||
| Corporate bonds | 5,165 | - | 5,165 | - | |||||||||
| Mortgage-backed securities and other | 44,334 | - | 44,334 | - | |||||||||
| Total | $ | 87,197 | $ | - | $ | 87,197 | $ | - | |||||
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.
Securities
The Company previously recognized other-than-temporary impairment on the securities classified as collateralized debt obligations as of September 30, 2013, based upon a Level 3 estimate of fair value, including a discounted cash flows calculation and a fair value estimate from an independent evaluation of the securities.
Impaired loans
At September 30, 2013 and December 31, 2012, impaired loans consisted primarily of loans secured by nonresidential and commercial real estate. Management has determined fair value measurements on impaired loans primarily through evaluations of appraisals performed.
| 25 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
NOTE 5 – FAIR VALUE MEASUREMENTS (continued)
Real Estate Owned Real estate acquired through, or in lieu of, loan foreclosure is held for sale and initially recorded at fair value (based on current appraised value) at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Management has determined fair value measurements on real estate owned primarily through evaluations of appraisals performed.
The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2013 and December 31, 2012.
September 30, 2013
| Fair Value Measurements Using | |||||||||||||
| Quoted Prices | |||||||||||||
| in Active | Significant | ||||||||||||
| Markets for | Other | Significant | |||||||||||
| Identical | Observable | Unobservable | |||||||||||
| Fair | Assets | Inputs | Inputs | ||||||||||
| Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||
| Impaired loans | $ | 10,035 | $ | - | $ | - | $ | 10,035 | |||||
| Real estate owned | 1,291 | - | - | 1,291 | |||||||||
December 31, 2012
| Fair Value Measurements Using | |||||||||||||
| Quoted Prices | |||||||||||||
| in Active | Significant | ||||||||||||
| Markets for | Other | Significant | |||||||||||
| Identical | Observable | Unobservable | |||||||||||
| Fair | Assets | Inputs | Inputs | ||||||||||
| Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||
| Collateralized debt obligations | $ | 2,090 | $ | - | $ | - | $ | 2,090 | |||||
| Impaired loans | 23,370 | - | - | 23,370 | |||||||||
| Real estate owned | 3,671 | - | - | 3,671 | |||||||||
| 26 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
NOTE 6 – STOCK BASED COMPENSATION
The Company’s shareholders approved an employee share option Plan (the “Plan”) in May 2004. This Plan grants certain employees the right to purchase shares at a predetermined price. The Plan is limited to 300,000 shares. The shares granted to employees vest 20% per year over a five year period. The options expire after ten years. At September 30, 2013, options to purchase 117,891 shares were vested and exercisable, and 45,596 shares remained available for grant under this plan.
The Company recognizes compensation cost for vested equity-based awards based on their September 30, 2013 fair value. The Company recorded $60,000 and $79,000 in compensation cost for equity-based awards that vested during the three months ended September 30, 2013 and 2012, respectively. The Company recorded $135,000 and $22,000 in compensation cost for equity-based awards for the nine months ended September 30, 2013 and 2012, respectively.
In determining the fair value of the stock options at September 30, 2013, the Company utilized a Black-Scholes valuation model with a risk-free interest rate that corresponds to the expected remaining life of each award, an expected dividend yield of 0%, an expected common stock price volatility of 30%, and an expected life of 8 years from the grant date.
A summary of the status of the Company’s equity compensation plan as of and for the nine months ended September 30, 2013, and changes during the periods then ended are presented below:
| Weighted | Weighted | Aggregate | |||||||||
| Average Exercise | Average Remaining | Intrinsic | |||||||||
| Shares | Price | Contractual Life | Value | ||||||||
| Outstanding at beginning of year | 261,098 | $ | 10.38 | 6.9 years | |||||||
| Granted | 13,889 | 5.40 | 9.6 years | ||||||||
| Exercised | (2,936) | 3.50 | — | ||||||||
| Forfeited | (20,651) | 13.98 | — | ||||||||
| Outstanding at end of period | 251,400 | $ | 9.89 | 6.7 years | $ | 187 | |||||
| Options exercisable at period end | 117,891 | $ | 16.09 | 4.9 years | $ | 52 | |||||
| Weighted-average fair value of options granted during the nine months ended September 30, 2013 | $ | 1.77 | |||||||||
| Weighted-average fair value of options granted during the year ended December 31, 2012 | $ | 2.13 | |||||||||
At September 30, 2013, unrecognized compensation expense to be recognized over the remaining life of outstanding options is $168,000.
The following information applies to options outstanding at September 30, 2013:
| Number Outstanding | Range Of Exercise Prices | ||
| 157,547 | $3.50 - $5.40 | ||
| 22,202 | $7.50 - $9.00 | ||
| 25,612 | $14.15 - $16.90 | ||
| 46,039 | $23.00 - $31.00 |
| 27 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
Nature of Operations
DCB Financial Corp (the “Company” or “DCB”) is a financial holding company formed under the laws of the State of Ohio. The Company is the parent of The Delaware County Bank & Trust Company (the “Bank”), DCB Title Services LLC, Datatasx LLC and DCB Insurance Services, Inc. The Bank is a state-chartered commercial bank, which conducts business from its main offices at 110 Riverbend Avenue in Lewis Center, Ohio, and through its 14 branch offices located in Delaware County, Ohio and surrounding communities. The Bank provides customary retail and commercial banking services to its customers, including checking and savings accounts, time deposits, IRAs, safe deposit facilities, personal loans, commercial loans, commercial leases, real estate mortgage loans, night depository facilities and trust and personalized wealth management services. The Bank also provides cash management, bond registrar and payment services. The Bank operates a wholly-owned subsidiary, ORECO, Inc., which is engaged in the ownership and disposition of the Bank’s foreclosed real estate.
Highlights and Overview
The Company, through the Bank, provides customary retail banking services to its customers, including checking and savings accounts, time deposits, IRAs, safe deposit facilities, personal loans, real estate mortgage loans and installment loans. The Bank also provides trust and wealth management products and services through its own trust department and its Raymond James affiliation. It also offers a variety of commercial and commercial real estate loans along with treasury management services to various commercial businesses. The Company, through the Bank, grants residential real estate, commercial real estate, consumer and commercial loans to customers located primarily in Delaware, Franklin, Union, Licking, Morrow, and Marion Counties, Ohio.
Our results of operations are dependent primarily on net interest income, which is the difference between the income earned on our loans and leases and securities and our cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the provision for credit losses, securities and loan sale activities, service charges and fees collected on our deposit accounts, income collected from trust and investment advisory services and the income earned on our investment in bank-owned life insurance. Our expenses primarily consist of salaries and employee benefits, occupancy and equipment expense, marketing expense, professional services, technology expense, other expense and income tax expense. Results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, inflation, government policies and the actions of regulatory authorities.
The following is a summary of key financial results for the quarter and nine months ended September 30, 2013:
• Total assets were $506.8 million and total deposits were $451.1 million at September 30, 2013, compared with $506.5 million and $448.3 million at December 31, 2012, respectively.
• A net loss of $127,000 was recorded for the three months ended September 30, 2013, compared with net income of $306,000 for the same period in 2012. For the nine months ended September 30, 2013, net income was $171,000 compared with $748,000 for the first nine months of 2012.
• Net loss per share was $0.02 for the three months ending September 30, 2013, compared with net income per diluted share of $0.08 for the year-ago period. Net income per diluted share was $0.02 for the
nine months ending September 30, 2013 compared with $0.20 per share for the same period in 2012.
• The net interest margin was 3.34% in the third quarter of 2013 compared with 3.36% in the third quarter of 2012.
• Provision for loan losses of $0 in the quarter and a negative provision for loan losses of $890,000 for the nine months ended September 30, 2013, compared with provision expense of $65,000 and $795,000 in the year ago periods, respectively.
• Total non-performing assets were $21.8 million or 4.31% of total assets at September 30, 2013 compared with $29.3 million, or 5.94% at September 30, 2012 and $30.2 million or 5.97% at December 31, 2012.
• Noninterest income was 25.5% of total revenue in the first nine months of 2013 compared with 25.8% in the year ago period.
• Our efficiency ratio was 106.7% in the nine months ended September 30, 2013 compared with 91.2% for the same period in 2012.
The following discussion is intended to assist in understanding our financial condition and results of operations. This discussion should be read in conjunction with our consolidated financial statements and accompanying notes contained elsewhere in this report.
| 28 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
Comparison of Operating Results for the Three and Nine Months Ended September 30, 2013 and 2012
General
A net loss of $127,000 or $0.02 per share was recorded for the quarter ended September 30, 2013, compared with net income of $306,000 or $0.08 per diluted share in the year-ago quarter. The return on average assets and return on average stockholders’ equity were -0.10% and -1.04%, respectively, for the third quarter of 2013, compared with 0.24% and 3.48%, respectively, for the third quarter of 2012. The third quarter loss is attributable in large part to salaries and incentive compensation for new business development professionals added over the past year in support of the Company’s growth objectives, as well as to expenses related to the continuing efforts to further reduce the level of criticized and classified assets.
Net income for the nine months ended September 30, 2013 was $171,000 or $0.02 per diluted share compared with $748,000 or $0.20 per diluted share in the year ago period. The return on average assets and return on average stockholders’ equity were 0.05% and 0.48%, respectively, for the first nine months of 2013, compared with 0.20% and 2.88%, respectively, for the first nine months of 2012.
Net Interest Income
Net interest income totaled $3.9 million in the three months ended September 30, 2013, compared with $3.8 million in the year-ago quarter and in the second quarter of 2013. The net interest margin was 3.34% in the third quarter of 2013, compared with 3.36% in the year-ago quarter and 3.27% in the second quarter of 2013. The earning asset yield decreased 31 and 1 basis points, respectively, in the third quarter compared with the year-ago period and the second quarter of 2013. These declines were partially offset by a decrease of 27 and 17 basis points, respectively, in the cost of interest-bearing liabilities over the same periods.
Average interest-earning assets totaled $462.6 million in the third quarter, compared with $454.2 million in the year-ago quarter and $459.3 million in the second quarter of 2013. Average loans comprised 76.5% of average interest-earning assets in the third quarter, which is an increase from 70.8% in the year-ago quarter and 73.0% in the second quarter of 2013.
Net interest income for the nine months ended September 30, 2013 totaled $11.3 million, which was down $452,000 or 3.9% compared with the year-ago period. The net interest margin was 3.28% for the nine months ended September 30, 2013, compared to 3.39% for the first nine months of 2012. The earning assets yield decreased 40 basis points in the first nine months of 2013 compared with the year-ago period, which was partially offset by a decrease of 31 basis points in the cost of interest-bearing liabilities over the same period.
Average interest-earning assets were $458.9 million in the first nine months of 2013, compared with $467.8 million in the year-ago period. Total average loans and leases were 73.2% of total interest-earning assets in the first nine months of 2013, compared with 71.4% in the year-ago period.
Since December 2008 the Federal Reserve has maintained its target fed funds rate between zero and 0.25%, and has carried out a number of policy actions designed to lower long-term interest rates. These monetary policy actions, along with weak economic conditions and federal government economic stimulus efforts, among other factors, have caused yields on U.S. Treasury securities to drop to exceptionally low levels throughout much of the past five years. This persistently low interest rate environment has caused an ongoing decline over the past five years in the returns on our interest-earning assets, consistent with much of the financial industry. As a result the yield on our securities portfolio decreased 26 basis points in the third quarter of 2013 compared to the year-ago quarter. The yield on our loans decreased 63 basis points in the third quarter of 2013 compared to the third quarter of 2012.
The cost of our interest-bearing liabilities decreased in the third quarter of 2013 compared to the year-ago quarter due to a combination of the low interest rate environment, our deposit pricing strategies and a deposit mix that currently is more heavily weighted in low-cost interest-bearing transaction accounts (demand, savings and money market) whose rates can be immediately changed at our discretion, instead of higher costing, longer term time deposits. The average cost of time deposits dropped 38 basis points in the third quarter compared to the year-ago quarter. Average time deposits comprised 24.4% of total average interest-bearing deposits in the third quarter, compared to 34.8% in the year-ago period.
| 29 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
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. 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 nonaccruing loans. Loan income includes cash received on nonaccruing loans.
| Three months ending September 30, | |||||||||||||||||||||
| 2013 | 2012 | ||||||||||||||||||||
| Average | Interest | Average | Interest | ||||||||||||||||||
| outstanding | earned/ | Yield/ | outstanding | earned/ | Yield/ | ||||||||||||||||
| balance | paid | rate | balance | paid | rate | ||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||
| Federal funds sold and other short term | $ | 23,879 | $ | 21 | 0.35 | % | $ | 38,617 | $ | 21 | 0.22 | % | |||||||||
| Taxable securities | 80,131 | 433 | 2.14 | 88,689 | 537 | 2.41 | |||||||||||||||
| Tax-exempt securities | 4,912 | 47 | 3.80 | 5,380 | 54 | 3.99 | |||||||||||||||
| Loans (includes nonaccrual loans) | 353,697 | 3,815 | 4.28 | 321,559 | 3,967 | 4.91 | |||||||||||||||
| Total interest-earning assets | 462,619 | 4,316 | 3.70 | 454,245 | 4,579 | 4.01 | |||||||||||||||
| Noninterest-earning assets | 44,632 | 46,692 | |||||||||||||||||||
| Total assets | $ | 507,251 | $ | 500,937 | |||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||
| Interest-bearing demand and money market deposits | $ | 297,045 | $ | 131 | 0.17 | % | $ | 255,532 | $ | 101 | 0.16 | % | |||||||||
| Savings deposits | 42,186 | 16 | 0.15 | 35,328 | 13 | 0.15 | |||||||||||||||
| Time deposits | 109,777 | 215 | 0.78 | 155,216 | 452 | 1.16 | |||||||||||||||
| Total deposits | 449,008 | 362 | 0.32 | 446,076 | 566 | 0.50 | |||||||||||||||
| Borrowed funds | 5,482 | 63 | 4.56 | 17,214 | 177 | 4.09 | |||||||||||||||
| Total interest-bearing liabilities | 454,490 | 425 | 0.37 | 463,290 | 743 | 0.64 | |||||||||||||||
| Noninterest-bearing liabilities | 5,033 | 3,017 | |||||||||||||||||||
| Total liabilities | 459,523 | 465,805 | |||||||||||||||||||
| Shareholders’ equity | 47,728 | 34,630 | |||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 507,251 | $ | 500,937 | |||||||||||||||||
| Net interest income; interest rate spread | $ | 3,891 | 3.33 | % | $ | 3,836 | 3.37 | % | |||||||||||||
| Net interest margin (net interest income as a percent of average interest-earning assets) | 3.34 | % | 3.36 | % | |||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities | 101.79 | % | 98.05 | % | |||||||||||||||||
| 30 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
| Nine months ending September 30, | |||||||||||||||||||||
| 2013 | 2012 | ||||||||||||||||||||
| Average | Interest | Average | Interest | ||||||||||||||||||
| outstanding | earned/ | Yield/ | outstanding | earned/ | Yield/ | ||||||||||||||||
| balance | paid | rate | balance | paid | rate | ||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||
| Federal funds sold and other short term | $ | 36,001 | $ | 71 | 0.26 | % | $ | 40,044 | $ | 70 | 0.23 | % | |||||||||
| Taxable securities | 82,409 | 1,396 | 2.26 | 87,984 | 1,688 | 2.56 | |||||||||||||||
| Tax-exempt securities | 4,704 | 140 | 3.98 | 5,704 | 171 | 4.00 | |||||||||||||||
| Loans (includes nonaccrual loans) | 335,749 | 11,100 | 4.42 | 334,020 | 12,414 | 4.96 | |||||||||||||||
| Total interest-earning assets | 458,863 | 12,707 | 3.70 | 467,752 | 14,343 | 4.10 | |||||||||||||||
| Noninterest-earning assets | 46,759 | 45,977 | |||||||||||||||||||
| Total assets | $ | 505,622 | $ | 513,729 | |||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||
| Interest-bearing demand and money market deposits | $ | 285,685 | $ | 367 | 0.17 | % | $ | 252,265 | $ | 293 | 0.16 | % | |||||||||
| Savings deposits | 40,201 | 45 | 0.15 | 34,716 | 39 | 0.15 | |||||||||||||||
| Time deposits | 122,842 | 823 | 0.90 | 164,258 | 1,530 | 1.24 | |||||||||||||||
| Total deposits | 448,728 | 1,235 | 0.37 | 451,239 | 1,862 | 0.55 | |||||||||||||||
| Borrowed funds | 6,213 | 214 | 4.61 | 24,611 | 771 | 4.18 | |||||||||||||||
| Total interest-bearing liabilities | 454,941 | 1,449 | 0.43 | 475,850 | 2,633 | 0.74 | |||||||||||||||
| Noninterest-bearing liabilities | 3,073 | 3,249 | |||||||||||||||||||
| Total liabilities | 458,014 | 479,099 | |||||||||||||||||||
| Shareholders’ equity | 47,608 | 34,630 | |||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 505,622 | $ | 513,729 | |||||||||||||||||
| Net interest income; interest rate spread | $ | 11,258 | 3.28 | % | $ | 17,619 | 3.25 | % | |||||||||||||
| Net interest margin (net interest income as a percent of average interest-earning assets) | 3.28 | % | 3.39 | % | |||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities | 100.86 | % | 114.37 | % | |||||||||||||||||
| 31 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
Asset Quality and the Allowance for Loan Losses
Delinquent loans (30 days or more past due) were $4.5 million at September 30, 2013, compared to $5.2 million at June 30, 2013 and $4.1 million at December 31, 2012. This represents 1.26%, 1.49%, and 1.30% of total loans, respectively.
Nonperforming assets were $21.8 million or 4.31% of total assets compared with $23.8 million or 4.71% of total assets at June 30, 2013 and $30.2 million or 5.97% of total assets at December 31, 2012.
| September 30, 2013 | June 30, 2013 | December 31, 2012 | ||||||||
| Nonaccrual loans | $ | 5,551 | $ | 5,698 | $ | 5,331 | ||||
| Accruing troubled debt restructurings | 13,992 | 14,987 | 20,080 | |||||||
| Other real estate owned | 1,291 | 2,100 | 3,671 | |||||||
| Impaired investment securities | 1,004 | 1,004 | 1,149 | |||||||
| Total nonperforming assets | $ | 21,838 | $ | 23,789 | $ | 30,231 | ||||
As a recurring part of our portfolio management program, we identified approximately $6.1 million in potential problem loans at September 30, 2013, compared with $4.3 million in potential problem loans at June 30, 2013 and $4.8 million at December 31, 2012. Potential problem loans are loans that are currently performing, but where the borrower’s operating performance or other relevant factors could result in potential credit problems, and are typically classified by our loan rating system as “substandard.” At September 30, 2013, potential problem loans primarily consisted of commercial real estate and commercial loans. There can be no assurance that additional loans will not become nonperforming, require restructuring, or require increased provision for loan losses.
Net chargeoffs were $32,000 in the three months ended September 30, 2013, compared with $1.1 million in the year-ago quarter. Net recoveries of $480,000 were recorded in the first nine months of 2013, compared with net chargeoffs of $2.2 million in the year-ago period.
Net chargeoffs (annualized) equaled 0.04% and net recoveries equaled 0.19% of average loans and leases in the three months and nine months ended September 30, 2013, respectively, compared to net chargeoffs of 1.32% and 0.89%, respectively, in the year ago periods.
No provision for loan losses was recorded in the third quarter compared to a negative provision expense of $240,000 in the second quarter, and provision expense of $65,000 in the year-ago quarter. The provision for loan losses as a percentage of net chargeoffs was 0.00% in the third quarter of 2013. The provision for loan losses as a percentage of net chargeoffs was not meaningful for the nine months ended September 30, 2013 due to the negative provision that was recorded in that quarter. The provision for loan losses as a percentage of net chargeoffs was 6.12% and 35.67%, respectively, in the quarter and nine months ended September 30, 2012.
The ratio of the allowance for loan losses to total loans was 1.81% at September 30, 2013, compared with 1.88% at June 30, 2013 and 2.17% at December 31, 2012. The ratio of the allowance for credit losses to non-performing loans was 33.1% at September 30, 2013, compared with 31.4% at June 30, 2013 and 27.1% at December 31, 2012.
| 32 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
Noninterest Income
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||
| 2013 | 2012 | % Change | 2013 | 2012 | % Change | |||||||||||||
| Service charges | $ | 543 | $ | 718 | (24.37) | % | $ | 1,665 | $ | 1,912 | (12.92) | % | ||||||
| Trust department income | 181 | 224 | (19.20) | % | 553 | 674 | (17.95) | % | ||||||||||
| Gain on sale of securities | - | - | 0.00 | % | 135 | 508 | (73.43) | % | ||||||||||
| Net gain (loss) on sales of REO | (51) | (52) | 1.92 | % | 35 | (309) | 111.33 | % | ||||||||||
| Treasury management fees | 57 | 61 | (6.56) | % | 183 | 193 | (5.18) | % | ||||||||||
| Earnings on bank owned life insurance | 166 | 165 | 0.61 | % | 571 | 575 | (0.70) | % | ||||||||||
| Other | 296 | 42 | 604.80 | % | 709 | 464 | 52.80 | % | ||||||||||
| Total noninterest income | $ | 1,192 | $ | 1,158 | 2.90 | % | $ | 3,851 | $ | 4,080 | (5.60) | % | ||||||
Noninterest income was $1.2 million in the third quarter of 2013 and in the year-ago quarter, and was $1.4 million in the second quarter of 2013. An increase in fee income from wealth management of $165,000 compared to the year-ago quarter substantially offset a decline in service charges of $175,000. The increase in wealth management income is attributable primarily to an increase in assets under management resulting from gains in stock market indexes and to new business generated by the business development officers that were added at the end of 2012. The decline in service charges is the result of lower fee-based transaction volume due to changes in customer deposit account utilization as well as regulatory changes relating to the manner in which financial institutions administer fee-based services, and to a decline in fees collected on referrals of mortgage loans as we retained most mortgage originations in portfolio in the current year.
Noninterest income accounted for 23.5% of total revenue in the third quarter of 2013, compared with 23.2% in the year-ago quarter and 26.5% in the second quarter of 2013.
Noninterest income for the nine months ended September 30, 2013 was $3.9 million, a decrease of 5.6% from $4.1 million in the prior year period. A decline in service charges of $150,000 was offset by a $256,000 increase in fee income from wealth management. In addition, noninterest income in the year-ago period included gains from sales of loans and investments, net of writedowns on other real estate owned, aggregating $262,000.
Noninterest income was 25.5% of total revenue in the first nine months of 2013 compared with 25.8% in the year-ago period.
| 33 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
Noninterest Expense
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||
| 2013 | 2012 | % Change | 2013 | 2012 | % Change | |||||||||||||
| Salaries and other employee benefits | $ | 2,924 | $ | 2,542 | 15.0 | % | $ | 8,760 | $ | 7,155 | 22.4 | % | ||||||
| Occupancy and equipment | 685 | 745 | (8.1) | % | 2,278 | 2,283 | (0.2) | % | ||||||||||
| Professional services | 359 | 172 | 108.7 | % | 1,326 | 870 | 52.4 | % | ||||||||||
| Advertising | 66 | 134 | (50.7) | % | 239 | 322 | (25.8) | % | ||||||||||
| Postage, freight and courier | 52 | 11 | 372.7 | % | 149 | 94 | 58.5 | % | ||||||||||
| Supplies | 79 | 35 | 125.7 | % | 214 | 124 | 72.6 | % | ||||||||||
| State franchise taxes | 120 | 70 | 71.4 | % | 374 | 278 | 34.5 | % | ||||||||||
| Federal deposit insurance premiums | 187 | 287 | (34.8) | % | 531 | 862 | (38.4) | % | ||||||||||
| Other | 758 | 754 | 0.5 | % | 2,255 | 2,415 | (6.6) | % | ||||||||||
| Total noninterest expense | $ | 5,230 | $ | 4,750 | 10.1 | % | $ | 16,126 | $ | 14,403 | 12.0 | % | ||||||
Noninterest expenses were $5.2 million in the quarter ended September 30, 2013, compared with $4.8 million in the year-ago quarter and $5.4 million in the second quarter of 2013. The increase in noninterest expenses compared with the year-ago quarter is attributed to an increase in salary and benefits and professional expenses, offset by a decline in FDIC deposit insurance premiums that resulted from improvement over the past nine months in the Company’s overall operating performance and capital position. The increase in salary and benefits is driven by the addition of new business development officers, which has contributed to higher wealth management income and growth in loans and net interest income in the current quarter. The increase in professional expenses primarily relates to expenses related to the workout and disposition of criticized and classified assets.
Income Taxes
We had net deferred tax assets totaling $10.4 million and $9.5 million, respectively, at September 30, 2013 and December 31, 2012, of which approximately 75.7% and 77.0%, respectively, were attributable to net operating loss carry-forwards and previously recognized book losses from other than temporary impairments of securities. Valuation allowances are maintained in amounts equal to the amount of the deferred tax assets attributable to the net operating losses and previously recognized book losses from other than temporary impairments of securities. Deferred tax assets at September 30, 2013 were comprised entirely of the tax asset generated by the unrealized loss position of the available for sale securities portfolio.
Comparison of Financial Condition at September 30, 2013 and December 31, 2012
General
Total assets were $506.8 million at September 30, 2013, compared with $505.2 million at June 30, 2013 and $506.5 million at December 31, 2012.
Securities
Investment securities totaled $81.1 million at September 30, 2013, compared with $88.3 million at December 31, 2012. Our portfolio is comprised primarily of investment grade securities. The breakdown of the securities portfolio at September 30, 2013 was 45.6% government-sponsored entity guaranteed mortgage-backed securities, 25.4% municipal securities, 20.2% obligations of U.S. government-sponsored corporations, 7.6% corporate bonds and 1.2% of private issue trust preferred securities. Mortgage-backed securities, which totaled $36.9 million at September 30, 2013, are comprised primarily of pass-through securities backed by conventional residential mortgages and guaranteed by Fannie-Mae, Freddie-Mac or Ginnie Mae, which in turn are backed by the U.S. government.
| 34 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
Loans
| September 30, 2013 | December 31, 2012 | |||||||||||
| Commercial and industrial | $ | 122,687 | 34.3 | % | $ | 112,300 | 35.4 | % | ||||
| Commercial real estate | 109,933 | 30.7 | 111,417 | 35.1 | ||||||||
| Residential real estate and home equity | 93,349 | 26.0 | 72,137 | 22.7 | ||||||||
| Consumer and credit card | 32,169 | 9.0 | 21,620 | 6.8 | ||||||||
| 358,139 | 100.0 | % | 317,474 | 100.0 | % | |||||||
| Net deferred loan fees costs | 151 | 30 | ||||||||||
| Total loans and leases | 358,290 | 317,504 | ||||||||||
| Allowance for credit losses | (6,471) | (6,881) | ||||||||||
| Net loans and leases | $ | 351,819 | $ | 310,623 | ||||||||
Loans receivable, net, totaled $351.8 million at the end of the third quarter, which was an increase of $12.7 million (14.9% annualized growth) from the end of the second quarter and $41.2 million (17.7% annualized growth) from the end of 2012. Residential mortgages increased $9.9 million and $21.2 million in the quarter and year-to-date periods, respectively, as the result of additions to the Company's lending staff over the past year and the Company's decision to retain more of its originations in portfolio.
Consumer loans increased $2.9 million and $10.5 million in the quarter and year-to-date periods, respectively, as the result of additions to the Company's lending staff over the past year along with enhancements to its incentive compensation and loan referral programs.
Commercial and industrial loans and commercial real estate loans decreased $186,000 in the third quarter but increased $8.9 million in the year-to-date period, as the result of new positions added to our commercial lending group over the past year and enhanced business development initiatives and client prospecting. Payoffs of criticized and classified loans in the third quarter of $2.0 million contributed to the decline in the commercial portfolios in the third quarter.
The growth in the loan portfolio was funded primarily through cash and proceeds from repayments of investment securities.
Deposits
Deposits remained relatively unchanged from December 31, 2012, increasing 0.6%. Stockholders' equity increased slightly, with the addition of net income of $171,000 for the year being partially offset by an increase in unrealized loss on securities of $81,000.
LIQUIDITY
Liquidity is the ability of the Company to fund customers’ needs for borrowing and deposit withdrawals. The purpose of liquidity management is to assure sufficient cash flow to meet all of the financial commitments and to capitalize on opportunities for business expansion. This ability depends on the financial strength, asset quality and types of deposit and investment instruments offered by the 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 $34.8 million at September 30, 2013, compared to $63.3 million at December 31, 2012. Cash and equivalents represented 6.9% of total assets at September 30, 2013 and 12.5% of total assets at December 31, 2012. The Company has the ability to borrow funds from the FHLB and the Federal Reserve Bank should the Company need to supplement its future liquidity. Management believes the Company’s liquidity position is adequate based on its current level of cash, cash equivalents, core deposits, the stability of its other funding sources, and the support provided by its capital base.
CAPITAL RESOURCES
Stockholders’ equity was $48.5 million at September 30, 2013, compared with $49.2 million at June 30, 2013. The decline is attributable to the net loss in the quarter of $127,000 and to a decline in other comprehensive income of $623,000, due primarily to a decrease in unrealized gains on securities available for sale. The Bank’s Tier 1 leverage ratio was 9.44% and its total risk-based capital ratio was 14.39% at the end of the third quarter, both of which comfortably exceeded the regulatory thresholds required to be classified as a “well-capitalized” institution, which are 5.0% and 10.0%, respectively.
| 35 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and its subsidiary bank to maintain minimum amounts and ratios (set forth in the following tables) of total and Tier 1 Capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 Capital (as defined) to average assets (as defined).
In July 2013, the Federal Reserve Board adopted new rules implementing the Basel III capital standards (“Basel III Capital Rules”), which significantly revise the regulatory capital standards for U.S. financial institutions, including community banks. Among other things, the Basel III Capital Rules revise the definition of various regulatory capital components and related calculation methods, increase the minimum required Tier 1 Capital, implement a new capital conservation buffer and restrict dividends and certain discretionary bonus payments when the buffer is not maintained. The Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies' rules. The new rules are effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period). Management is evaluating the potential impact of the new capital rules on the Company and the Bank and monitoring related developments.
| 36 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
The following table compares our actual capital amounts and ratios with those needed to qualify for the “well-capitalized” category, which is the highest capital category as defined in the regulations, dollars in thousands:
| Actual | For Capital Adequacy Purposes | To Be Well-Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
| As of September 30, 2013 | ||||||||||||||||||||
| Total risk-based capital | ||||||||||||||||||||
| DCB Financial Corp | $ | 53,728 | 14.70 | % | $ | 29,222 | ≥ 8.00 % | $ | N/A | N/A | ||||||||||
| Bank | 52,560 | 14.38 | % | 29,222 | ≥ 8.00 % | 36,528 | ≥10.00 % | |||||||||||||
| Tier 1 capital | ||||||||||||||||||||
| DCB Financial Corp | 49,139 | 13.44 | % | 14,611 | ≥ 4.00 % | N/A | N/A | |||||||||||||
| Bank | 47,971 | 13.12 | % | 14,611 | ≥ 4.00 % | 21,917 | ≥ 6.00 % | |||||||||||||
| Leverage | ||||||||||||||||||||
| DCB Financial Corp | 49,139 | 9.67 | % | 20,320 | ≥ 4.00 % | N/A | N/A | |||||||||||||
| Bank | 47,971 | 9.44 | % | 20,320 | ≥ 4.00 % | 25,400 | ≥ 5.00 % | |||||||||||||
| As of December 31, 2012 | ||||||||||||||||||||
| Total risk-based capital | ||||||||||||||||||||
| DCB Financial Corp | $ | 53,808 | 13.46 | % | $ | 31,975 | ≥ 8.00 % | $ | N/A | N/A | ||||||||||
| Bank | 44,505 | 11.02 | % | 32,320 | ≥ 8.00 % | 40,400 | ≥10.00 % | |||||||||||||
| Tier 1 capital | ||||||||||||||||||||
| DCB Financial Corp | 48,968 | 12.25 | % | 15,987 | ≥ 4.00 % | N/A | N/A | |||||||||||||
| Bank | 39,665 | 9.82 | % | 16,160 | ≥ 4.00 % | 24,240 | ≥ 6.00 % | |||||||||||||
| Leverage | ||||||||||||||||||||
| DCB Financial Corp | 48,968 | 9.79 | % | 20,017 | ≥ 4.00 % | N/A | N/A | |||||||||||||
| Bank | 39,665 | 7.93 | % | 20,017 | ≥ 4.00 % | 25,021 | ≥ 5.00 % | |||||||||||||
The following table sets forth the Company’s obligations and commitments to make future payments under contract as of September 30, 2013.
| Payment Due by Year | ||||||||||||||||
| Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||
| FHLB advances | $ | 5,140 | $ | 1,694 | $ | 2,751 | $ | 330 | $ | 365 | ||||||
| Operating lease obligations | 2,612 | 548 | 1,076 | 753 | 235 | |||||||||||
| Loan and line of credit commitments | 115,559 | 83,926 | - | - | 31,633 | |||||||||||
| Total Contractual Obligations | $ | 123,311 | $ | 86,168 | $ | 3,827 | $ | 1,083 | $ | 32,233 | ||||||
| 37 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
Item 3. Quantitative and Qualitative Disclosure about Market Risk
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
The Company’s primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. Interest rate risk is the possibility that the Company’s financial condition will be adversely affected due to movements in interest rates. The income of financial institutions is primarily derived from the excess of interest earned on interest-earning assets over the interest paid on interest-bearing liabilities. Accordingly, the Company places great importance on monitoring and controlling interest rate risk. The measurement and analysis of the exposure of the Bank to changes in the interest rate environment are referred to as asset/liability management. One method used to analyze the Company’s sensitivity to changes in interest rates is the “net portfolio value” (“NPV”) methodology.
NPV is generally considered to be the present value of the difference between expected incoming cash flows on interest-earning and other assets and expected outgoing cash flows on interest-bearing and other liabilities. For example, the asset/liability model that the Company currently employs attempts to measure the change in NPV for a variety of interest rate scenarios, typically for up and down parallel shifts of -100 to +400 basis points in market rates.
| Change in | September 30, 2013 | December 31, 2012 | |||||||||||||||||
| Interest Rate | $ Change | % Change | NPV | $ Change | % Change | NPV | |||||||||||||
| (Basis Points) | in NPV | in NPV | Ratio | in NPV | in NPV | Ratio | |||||||||||||
| +400 | $ | 1,382 | 2.00 | % | 15.08 | % | $ | 11,300 | 21.91 | % | 13.32 | % | |||||||
| +300 | 7,866 | 11.40 | 16.10 | 14,430 | 27.98 | 13.74 | |||||||||||||
| +200 | 9,828 | 14.24 | 16.16 | 13,938 | 27.03 | 13.39 | |||||||||||||
| +100 | 5,362 | 7.77 | 14.93 | 7,744 | 15.02 | 11.92 | |||||||||||||
| Base | - | - | - | - | - | - | |||||||||||||
| -100 | (8,510) | (12.33) | 11.70 | (10,892) | (21.12) | 7.95 | |||||||||||||
The Company’s Annual Report includes a table depicting the changes in the Company’s interest rate risk as of December 31, 2012, as measured by changes in NPV for instantaneous and sustained parallel shifts of -100 to +400 basis points in market interest rates. These parallel shifts were used to more accurately represent the current interest rate environment in which the Company operates. Certain shortcomings are inherent in this method of analysis in the computation of estimated NPV. Since December 31, 2012, while the ratio of rate sensitive assets to rate sensitive liabilities in the Company’s balance sheet has changed, the Company remains positively impacted in a rising rate environment and negatively impacted in a decreasing rate environment. The overall favorability reflects the Company’s efforts to employ variable loan structures to better match the varying time frames for liabilities and the use of matched funding principles for longer term loans, where longer term liability structures are used to provide similar cash flow structures. Such tactics are employed by management realizing that as interest rates rise borrowers are less likely to refinance or payoff loans prior to contractual maturity, which potentially increases the risk that the Company may hold below market rate loans in a rising rate environment.
As with any method of measuring interest rate risk, certain shortcomings are inherent in the NPV approach. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and mortgage-backed securities and early withdrawal levels from certificates of deposit would likely deviate significantly from those assumed in
making risk calculations.
| 38 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
The ability to generate earnings is impacted in part by competitive pricing on loans and deposits, and by changes in the rates on various U.S. Treasury, U. S. Government Agency and state and political subdivision issues which comprise a significant portion of the Bank’s investment portfolio. The Bank is competitive with interest rates and loan fees that it charges and in its pricing on the variety of accounts it offers to the depositor. The Company confirms its pricing strategies by measuring its rates, costs and fees against competing financial services companies. The dominant pricing mechanism on loans is the prime interest rate as published in the Wall Street Journal, on a fixed rate plus a spread over the index. The interest spread depends on the overall account relationship and the creditworthiness of the borrower. Deposit rates are reviewed weekly by management and are generally discussed by the Asset/Liability Committee on a monthly basis. The Bank’s primary objective in setting deposit rates is to remain competitive in the market area and develop funding opportunities while earning an adequate interest rate margin.
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 Company's disclosure controls and procedures as of September 30, 2013, 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 (as defined in Exchange Act Rule 13a-15(e)) were effective as of September 30, 2013.
There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended September 30, 2013, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
| 39 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
| FORM 10-Q |
| Quarter ended September 30, 2013 |
| 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, 2012. | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
| There are no matters required to be reported under this item. | |
Item 3. | Defaults Upon Senior Securities: |
| There are no matters required to be reported under this item. | |
Item 4. | Mine Safety Disclosures |
| There are no matters required to be reported under this item. | |
Item 5. | Other Information: |
| There are no matters required to be reported under this item. | |
Item 6. | Exhibits: |
| Exhibits – The following exhibits are filed as a part of this report: |
| Exhibit No. | Exhibit | ||
| 3.1 | Amended and Restated Articles of Incorporation of DCB Financial Corp. incorporated by reference to Exhibit 3.1 to the Corporation’s Quarterly Report on Form 10-Q filed November 14, 2003 (File No 000-22387). | ||
| 3.2 | Amended and Restated Code of Regulations of DCB Financial Corp. incorporated by reference to Exhibit 3.2 to the Corporation’s Quarterly Report on Form 10-Q filed November 14, 2003 (File No 000-22387). | ||
| 31.1 | Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 31.2 | Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 32.1 | Certification pursuant to 18 U.S.C. 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 | ||
| 32.2 | Certification pursuant to 18 U.S.C. 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 | ||
| 101 | The following information from DCB Financial Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013 formatted in XBRL (eXtensible Business Reporting Language ) pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012; (ii) the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012 (unaudited); (iii) the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012 (unaudited); (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 (unaudited); (v) the Notes to Condensed Consolidated Financial Statements (furnished herewith). | ||
| Pursuant to Rule 406T of Regulation S-T, the interactive data files included as Exhibit 101 are furnished and not deemed filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those Sections. |
| 40 | ||
| DCB FINANCIAL CORP |
| (Dollars in thousands, except per share data) |
SIGNATURES |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DCB FINANCIAL CORP | |
| (Registrant) |
Date: November 14, 2013 | /s/ Ronald J. Seiffert |
| Ronald J. Seiffert | |
| President and Chief Executive Officer | |
Date: November 14, 2013 | /s/ J. Daniel Mohr |
| J. Daniel Mohr | |
| Executive Vice President and Chief Financial Officer |
| 41 | ||