10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: JUNE 30, 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 August 5, 2013, the latest practicable date, 7,192,350 shares of the registrant’s no par value common stock were issued and outstanding.

DCB FINANCIAL CORP

FORM 10-Q

For the Three and Six Month Periods Ended June 30, 2013 and 2012

Table of Contents

	Page
PART I – FINANCIAL INFORMATION
ITEM 1 – Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2013 (unaudited) and December 31, 2012	3
Condensed Consolidated Statements of Operations (unaudited) for the three and six month periods ended June 30, 2013 and 2012	4
Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six month periods ended June 30, 2013 and 2012	5
Condensed Consolidated Statements of Cash Flows (unaudited) for the six month period ended June 30, 2013 and 2012	6
Notes to the Condensed Consolidated Financial Statements	7
ITEM 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk	31
ITEM 4 – Controls and Procedures	32
PART II – OTHER INFORMATION	33
ITEM 1 - Legal Proceedings	33
ITEM 1A – Risk Factors	33
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds	33
ITEM 3 - Defaults upon Senior Securities	33
ITEM 4 - Mine Safety Disclosures	33
ITEM 5 - Other Information	33
ITEM 6 - Exhibits	33
SIGNATURES	34

2.

Item 1. Financial Statements

DCB FINANCIAL CORP

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, except per share data)

	June 30,			December 31,
	2013			2012
	(Unaudited)
ASSETS
Cash and due from financial institutions	$	9,439		$	9,663
Interest-bearing deposits		28,861			53,644
Total cash and cash equivalents		38,300			63,307
Securities available-for-sale		87,499			87,197
Securities held-to-maturity		-			1,149
Total securities		87,499			88,346
Loans		345,637			317,504
Less allowance for loan losses		(6,503	)		(6,881	)
Net Loans		339,134			310,623
Real estate owned		2,100			3,671
Investment in FHLB Stock		3,799			3,799
Premises and equipment, net		12,110			12,036
Bank owned life insurance		18,969			18,564
Accrued interest receivable and other assets		3,246			6,146
Total assets	$	505,157		$	506,492
LIABILITIES
Noninterest bearing deposits	$	96,875		$	95,847
Interest bearing deposits		349,313			352,443
Total deposits		446,188			448,290
FHLB advances		5,760			7,498
Accrued interest payable and other liabilities		3,980			2,315
Total liabilities		455,928			458,103
STOCKHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized, 7,500,000 shares issued, and 7,192,350 shares outstanding at June 30, 2013 and December 31, 2012		15,771			15,771
Retained earnings		40,912			40,614
Treasury stock, at cost, 307,650 shares at June 30, 2013 and December 31, 2012		(7,416	)		(7,416	)
Accumulated other comprehensive loss		(38	)		(580	)
Total stockholders' equity		49,229			48,389
Total liabilities and stockholders' equity	$	505,157		$	506,492

See Notes to the consolidated financial statements.

3.

DCB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share data)

	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012
Interest and dividend income
Loans	$	3,735		$	4,081		$	7,286		$	8,447
Taxable securities		442			560			962			1,151
Tax-exempt securities		47			56			93			117
Federal funds sold and other		21			28			50			49
Total interest income		4,245			4,725			8,391			9,764
Interest expense
Deposits		422			631			873			1,296
Borrowings		72			226			151			594
Total interest expense		494			857			1,024			1,890
Net interest income		3,751			3,868			7,367			7,874
Provision for loan losses		(240	)		255			(890	)		730
Net interest income after provision for loan losses		3,991			3,613			8,257			7,144
Non-interest income
Service charges on deposit accounts		447			596			1,122			1,194
Trust department income		184			224			372			450
Gain on sales of securities		135			-			135			475
Net gain (loss) on sale of REO		2			(42	)		86			(161	)
Treasury management fees		64			65			126			132
Earnings on bank owned life insurance		165			166			405			410
Other		354			225			413			422
Total noninterest income		1,351			1,234			2,659			2,922
Noninterest expense
Salaries and other employee benefits		2,864			2,358			5,836			4,613
Occupancy and equipment		734			695			1,593			1,538
Professional services		511			307			967			698
Advertising		66			104			173			188
Postage, freight and courier		44			32			97			83
Supplies		65			51			135			89
State franchise taxes		42			104			254			208
Federal deposit insurance premiums		137			284			344			575
Other		977			847			1,497			1,661
Total noninterest expense		5,440			4,782			10,896			9,653
Net income (loss) before income taxes		(98	)		65			20			413
Income tax expense (benefit)		(254	)		(218	)		(278	)		(29	)
Net income	$	156		$	283		$	298		$	442
Basic and diluted earnings per common share	$	0.01		$	0.08		$	0.03		$	0.12
Dividends per share	$	-		$	-		$	-		$	-

See Notes to consolidated financial statements.

4.

DCB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Dollars in thousands)

	For the three months ended					For the six months ended
	June 30,					June 30,
	2013			2012		2013			2012
Net income	$	156		$	283	$	298		$	442
Other comprehensive income (loss):
Reclassification of previously recognized noncredit other-than-temporary impairment on sale of security, net of tax of $512		995			-		995			-
Unrealized gains (losses) on securities available-for-sale, net of related taxes of $(398), $206, $(386), and $24 in 2013 and 2012, respectively		(772	)		400		(749	)		46
Unrealized gains on securities transferred into available-for-sale, net of related taxes of $131		254			-		254			-
Amortization of unrealized losses on held-to-maturity securities, net of taxes of $9, $12, $21, and $5 in 2013 and 2012 respectively		19			23		42			10
Total other comprehensive income		496			423		542			56
Comprehensive income	$	652		$	706	$	840		$	498

See Notes to consolidated financial statements.

5.

DCB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

(Dollars in thousands)

For the six months ended June 30,

	2013			2012
Cash flows provided by (used in) operating activites		6,315		$	5,389
Cash flows provided by (used in) investing activities
Securities
Purchases		(17,035	)		(37,563	)
Proceeds from maturities, principal payments and calls		15,417			17,149
Sales		2,561			12,934
Net change in loans		(30,012	)		36,554
Proceeds from sale of real estate owned		1,314			1,672
Premises and equipment expenditures		(351	)		(44	)
Net cash flows provided by (used in) investing activities		(28,106	)		30,702
Cash flows used in financing activities
Net change in deposits		(2,102	)		4,216
Repayment of FHLB advances		(1,114	)		(22,468	)
Net cash used in financing activities		(3,216	)		(18,252	)
Net change in cash and cash equivalents		(25,007	)		17,839
Cash and cash equivalents at beginning of period		63,307			39,314
Cash and cash equivalents at end of period	$	38,300		$	57,153
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings	$	1,042		$	1,866
Supplemental disclosures of non-cash investing and financing activites
Transfers from loans to real estate owned	$	10		$	2,158

See Notes to consolidated financial statements.

6.

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These consolidated interim financial statements are prepared without audit and reflect all adjustments which, in the opinion of management, are necessary to present fairly the financial position of DCB Financial Corp (the “Corporation”) at June 30, 2013 and December 31, 2012, and its results of operations and cash flows for the three and six month periods ended June 30, 2013 and 2012. All such adjustments are normal and recurring in nature. The accompanying consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not purport to contain all necessary financial disclosures required by accounting principles generally accepted in the United States of America that might otherwise be necessary in the circumstances, and should be read in conjunction with the consolidated financial statements, and notes thereto, included in its Annual Report as of December 31, 2012. Refer to the accounting policies of the Corporation described in the Notes to Consolidated Financial Statements contained in the Corporation’s Annual Report as of December 31, 2012. The Corporation has consistently followed these policies in preparing this Form 10-Q. The results of operations for the three and six months ended June 30, 2013, are not necessarily indicative of the results that may be expected for the entire year.

The accompanying consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries, The Delaware County Bank and Trust Company (the “Bank”), DCB Title Services LLC, Datatasx LLC, DCB Insurance Services, Inc. and ORECO, Inc. (collectively referred to herein after as the “Corporation”). All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Management considers the Corporation to operate within one business segment, banking. Datatasx LLC was inactive for all of 2012 and 2013.

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

The income tax benefit recognized in the Statement of Operations represents the tax effect related to the unrealized gain on available for sale investment securities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A full valuation allowance was taken in 2010, reducing the deferred tax assets, and management is maintaining its full allowance tax position each quarter.

Earnings per share

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

	Three Months Ended June 30,				Six Months Ended June 30,
	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		35,551		22,964		33,223		15,745
Weighted-average common shares outstanding (diluted)		7,227,901		3,740,349		7,225,573		3,733,130

Options to purchase 252,086 shares of common stock with a weighted-average exercise price of $9.87 were outstanding at June 30, 2013. There were 144,344 shares included in the computation of common share equivalents for the three-month and six-month periods then ended because the average fair value of the shares was greater than the exercise price.

Options to purchase 199,856 shares of common stock with a weighted-average exercise price of $12.52 were outstanding at June 30, 2012. There were 17,707 and 15,745 shares included in the computation of common share equivalents for the three-month and six-month periods then ended because the average fair value of the shares was greater than the exercise price.

Equity compensation plan

The corporation 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 these awards at the reporting date. A Black-Scholes model is utilized to estimate the fair value of stock options at the date of grant and subsequent remeasurement dates. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards. The Corporation’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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Application of Critical Accounting Policies

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

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

The valuation of other assets requires that management utilize a variety of estimates and analyses to determine whether an asset is impaired or other-than-temporarily impaired (“OTTI”). After determining the appropriate methodology for fair value measurement, management then evaluates whether or not declines in fair value below book value are temporary or OTTIs. When the Corporation does not intend to sell a debt security, and it is more likely than not that the Corporation will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an OTTI of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an OTTI recorded in other comprehensive income for the noncredit portion of a previous OTTI is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

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

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

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

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

8.

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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

Uncollectability is usually determined based on a pre-determined number of days delinquent in the case of consumer loans, or, in the case of commercial loans, is based on a combination of factors including delinquency, collateral and other legal considerations. Consumer loans are charged-off prior to 120 days of delinquency, but could be charged off earlier, depending on the individual circumstances. Mortgage loans are charged down prior to 180 days of delinquency, but could be charged off sooner, again, depending upon individual circumstance. Typically, loans collateralized by consumer real estate are partially charged down to the estimated liquidation value, which is generally based on appraisal less costs to hold and liquidate. Commercial and commercial real estate loans are evaluated for impairment and typically reserved based on the results of the analysis, then subsequently charged down to a recoverable value when loan repayment is deemed to be collateral dependent. Loans can be partially charged down depending on a number of factors including: the remaining strength of the borrower and guarantor; the type and value of the collateral, and the ease of liquidating collateral; and whether or not collateral is brought onto the bank’s balance sheet via repossession. In the case of commercial and commercial real estate loans, charge-offs, partial or whole, take place when Management determines that full collectability of principal balance is unlikely to occur. Subsequent recoveries, if any, are credited to the allowance. Management’s policies for determining impairment, reserves and charge-offs are reviewed and approved by the Board of Directors on an annual basis, and have not materially changed in 2013.

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

9.

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 2 – SECURITIES

As of June 30, 2013:

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

	Adjusted Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government and agency obligations	$	17,848	$	36	$	156	$	17,728
Corporate bonds		6,716		57		58		6,715
States and municipal obligations		20,612		628		163		21,077
Collateralized debt obligations		1,916		-		912		1,004
Mortgage-backed securities		40,465		742		232		40,975
Total	$	87,557	$	1,463	$	1,521	$	87,499

During the quarter ended June 30, 2013, the Corporation 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 held-to-maturity securities have been reclassified as available-for-sale and are included in the table above.

As of December 31, 2012:

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

	Adjusted Amortized Cost		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

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

	Adjusted Amortized Cost		Gross Unrealized Gains		Estimated Fair Value
Collateralized debt obligations	$	1,149	$	941	$	2,090

There were no credit losses recognized on investments in the three and six months ended June 30, 2013 and 2012.

10.

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 2 – SECURITIES (continued)

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at June 30, 2013 and December 31, 2012:

June 30, 2013

	(Less than 12 months)						(12 months or longer)						Total
Description of securities	Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses
U.S. Government and agency obligations		9	$	8,968	$	156		-	$	-	$	-		9	$	8,968	$	156
Collateralized debt obligations		-		-		-		1		1,004		912		1		1,004		912
Corporate bonds		6		2,497		58		-		-		-		6		2,497		58
State and municipal  obligations		17		5,971		152		1		498		11		18		6,469		163
Mortgage-backed securities and other		14		10,807		230		1		476		2		15		11,283		232
Total temporarily impaired securities		46	$	28,243	$	596		2	$	974	$	13		48	$	29,217	$	609

December 31, 2012

	(Less than 12 months)						(12 months or longer)						Total
Description of securities	Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses
U.S. Government and agency obligations		3	$	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 Corporation’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 Corporation does not intend to sell the investments and it is not more likely than not the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation did not consider those investments to be OTTI June 30, 2013 or December 31, 2012.

11.

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 2 – SECURITIES (continued)

The Corporation’s investments in collateralized debt obligations relate to an original investment of $8,000 in pooled trust securities. In 2009, the Corporation recognized an OTTI 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 Corporation evaluates the investments on a quarterly basis for OTTI and other unrealized gains or losses due to temporary market factors. Historically these securities were classified as held-to-maturity. As previously mentioned above, one security was sold from this portfolio during the six months ended June 30, 2013. In connection with this sale, the remaining securities in this portfolio have been reclassified as available-for-sale as of June 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 June 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 June 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.

	Available-for-sale				Held-to-maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	1,547	$	1,557	$	-	$	-
Due after one to five years		8,041		8,110		-		-
Due after five to ten years		25,011		25,150		-		-
Due after ten years		12,493		11,707		-		-
Mortgage-backed and related securities		40,465		40,975		-		-
Total	$	87,557	$	87,499	$	-	$	-

Securities with a fair value of $76,709 at June 30, 2013 were pledged to secure public deposits and other obligations.

NOTE 3 - LOANS

At June 30, 2013 and December 31, 2012, loans were comprised of the following:

	June 30, 2013		December 31, 2012
Commercial and industrial	$	125,309	$	112,300
Commercial real estate		107,498		111,417
Residential real estate and home equity		83,472		72,137
Consumer and credit card		29,277		21,620
Subtotal		345,556		317,474
Add: Net deferred loan origination fees		81		30
Total loans	$	345,637	$	317,504

12.

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 4 – CREDIT QUALITY

Allowance for Credit Losses

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

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

13.

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 4 – CREDIT QUALITY (continued)

The table below presents allowance for credit losses by loan portfolio. As presented within this note, commercial real estate includes real estate construction and land development loans.

Three Months Ended June 30, 2013

	Consumer and Credit Card			Commercial and Industrial			Commercial Real Estate			Residential Real Estate and Home Equity			Total
Beginning balance	$	287		$	1,586		$	4,724		$	161		$	6,758
Charge-offs		(98	)		(15	)		(28	)		(46	)		(187	)
Recoveries		50			86			13			22			172
Provision		129			(85	)		(346	)		63			(240	)
Ending balance	$	368		$	1,572		$	4,363		$	200		$	6,503
Individually evaluated for impairment	$	-		$	733		$	2,532		$	-		$	3,265
Collectively evaluated for impairment		368			839			1,831			200			3,238
Ending balance	$	368		$	1,572		$	4,363		$	200		$	6,503
Loans
Individually evaluated for impairment	$	-		$	5,586		$	20,980		$	-		$	26,566
Collectively evaluated for impairment		29,277			119,723			86,518			83,472			318,990
Total	$	29,277		$	125,309		$	107,498		$	83,472		$	345,556

14.

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 4 – CREDIT QUALITY (continued)

Three Months Ended June 30, 2012

	Consumer and Credit Card			Commercial and Industrial			Commercial Real Estate			Residential Real Estate and Home Equity			Total
Beginning balance	$	393		$	2214		$	6,524		$	212		$	9,343
Charge-offs		(88	)		(30	)		(414	)		(20	)		(552	)
Recoveries		47			43			5			7			102
Provision		21			(95	)		321			8			255
Ending balance	$	373		$	2132		$	6,436		$	207		$	9,148
Individually evaluated for impairment	$	-		$	494		$	5,353		$	-		$	5,847
Collectively evaluated for impairment		373			1,638			1,083			207			3,301
Ending balance	$	373		$	2,132		$	6,436		$	207		$	9,148
Loans
Individually evaluated for impairment	$	-		$	11,079		$	27,443		$	-		$	38,522
Collectively evaluated for impairment		18,312			100,727			89,744			75,437			284,220
Total	$	18,312		$	111,806		$	117,187		$	75,437		$	322,742

Six months ended June 30, 2013

	Consumer and Credit Card			Commercial and Industrial			Commercial Real Estate			Residential Real Estate and Home Equity			Total
Beginning balance	$	365		$	1,621		$	4,692		$	204		$	6,882
Charge-offs		(136	)		(79	)		(130	)		(89	)		(434	)
Recoveries		110			774			23			38			945
Provision		29			(744	)		(222	)		47			(890	)
Ending balance	$	368		$	1,572		$	4,363		$	200		$	6,503

Six months ended June 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
Charge-offs		(212	)		(147	)		(1,074	)		(19	)		(1,451	)
Recoveries		111			151			13			11			285
Provision		49			176			581			(76	)		730
Ending balance	$	373		$	2,132		$	6,436		$	207		$	9,148

15.

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 4 – CREDIT QUALITY (continued)

Impaired Loans

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

The following presents by class, information related to the Corporation’s impaired loans as of June 30, 2013 and December 31, 2012.

At June 30, 2013

	Recorded Investment		Unpaid Principal Balance		Related Allowance		6 Months Average Recorded Investment		6 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		3,050		3,127		-		3,532		73		3,233		40
Commercial Real Estate		11,068		13,152		-		9,221		333		9,751		166
Residential RE and Home Equity		-		-		-		-		-		-		-
With Allowance Recorded
Consumer and Credit Card		-		-		-		-		-		-		-
Commercial and Industrial		2,536		4,179		733		1,957		111		2,393		85
Commercial Real Estate		9,912		10,837		2,532		11,792		164		11,005		78
Residential RE and Home Equity		-		-		-		-		-		-		-
Total
Consumer and Credit Card	$	-	$	-	$	-	$	-	$	-	$	-		-
Commercial and Industrial		5,586		7,306		733		5,489		184		5,626		125
Commercial Real Estate		20,980		23,989		2,532		21,013		497		20,756		244
Residential RE and Home Equity		-		-		-		-		-		-		-
Total	$	26,566	$	31,295	$	3,265	$	26,502	$	681	$	26,382		369

16.

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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

17.

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 4 – CREDIT QUALITY (continued)

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

Loans on nonaccrual status at June 30, 2013 and December 31, 2012 are as follows:

	June 30,		December 31,
	2013		2012
Consumer and credit card	$	-	$	-
Commercial and industrial		1,794		2,815
Commercial real estate		3,632		2,195
Residential real estate and home equity		271		321
Total	$	5,697	$	5,331

Credit Quality Indicators

Corporate risk exposure by risk profile was as follows at June 30, 2013:

Category	Commercial and Industrial		Commercial Real Estate
Pass-1-4	$	104,963	$	76,539
Vulnerable-5		11,195		13,704
Substandard-6		9,151		17,255
Doubtful-7		-		-
Loss-8		-		-
Total	$	125,309	$	107,498

Corporate risk exposure by risk profile was as follows 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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 4 – CREDIT QUALITY (continued)

Risk Category Descriptions

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

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

Vulnerable (Special Mention) – 5

Loans which possess some credit deficiency or potential weakness which deserves close attention, but which do not yet warrant substandard classification. Such loans pose unwarranted financial risk that, if not corrected, could weaken the loan and increase risk in the future. The key distinctions of a 5 (Special Mention) classification are that (1) it is indicative of an unwarranted level of risk, and (2) weaknesses are considered “potential”, versus “well-defined”, impairments to the primary source of loan repayment.

Substandard – 6

Loans that are inadequately protected by the current sound 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, which 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 lender 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 lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

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

Doubtful – 7

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

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

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

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

Loss – 8

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

19.

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 4 – CREDIT QUALITY (continued)

Consumer Risk

Consumer risk based on payment activity at June 30, 2013 is as follows.

Payment Category	Consumer and Credit Card		Residential Real Estate and Home Equity
Performing	$	29,201	$	83,201
Non-performing		76		271
Total	$	29,277	$	83,472

Consumer risk based on payment activity at December 31, 2012 is as follows.

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

Age Analysis of Past Due Loans

The following table presents past due loans aged as of June 30, 2013.

Category	30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 days and Accruing
Consumer and credit card	$	59	$	43	$	76	$	178	$	29,099	$	29,277	$	76
Commercial and industrial		1,296		289		-		1,585		123,724		125,309		-
Commercial real estate		-		212		2,586		2,798		104,700		107,498		-
Residential real estate and home equity		281		40		271		592		82,880		83,472		-
Total	$	1,636	$	584	$	2,933	$	5,153	$	340,403	$	345,556	$	76

20.

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 4 – CREDIT QUALITY (continued)

The following table presents past due loans aged as of 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

Troubled Debt Restructurings

Information regarding Troubled Debt Restructuring (“TDR”) loans for the three and six month periods ended June 30, 2013 and 2012 is as follows:

	Three Months Ended				Six Months Ended
	June 30, 2013				June 30, 2013
	Number of Contracts		Recorded Investment (as of period end)		Number of Contracts		Recorded Investment (as of period end)
Consumer and Credit Card		1	$	1		1	$	1
Commercial and Industrial		-		-		3		903
Commercial Real Estate		3		163		5		3,600
Residential Real Estate and Home Equity		-		-		-		-
Total		4	$	164		9	$	4,504

	Three Months Ended				Six Months Ended
	June 30, 2012				June 30, 2012
	Number of Contracts		Recorded Investment (as of period end)		Number of Contracts		Recorded Investment (as of period end)
Consumer and Credit Card		5	$	92		6	$	93
Commercial and Industrial		-		-		-		-
Commercial Real Estate		2		3,929		2		3,929
Residential Real Estate and Home Equity		-		-		-		-
Total		7	$	4,021		8	$	4,022

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

The following presents by class loans modified in a TDR from July 1, 2012 through June 30, 2013 that subsequently defaulted (i.e. 60 days or more past due following a modification) during the three and six month periods ended June 30, 2013.

	Three Months Ended				Six Months Ended
	June 30, 2013				June 30, 2013
	Number of Contracts		Recorded Investment as of period end (1)		Number of Contracts		Recorded Investment as of period end (1)
Consumer and Credit Card		1	$	8		1	$	8
Commercial and Industrial		-		-		-		-
Commercial Real Estate		2		114		2		114
Residential Real Estate and Home Equity		-		-		-		-
Total		3	$	122		3	$	122

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

	Three Months Ended				Six Months Ended
	June 30, 2012				June 30, 2012
	Number of Contracts		Recorded Investment as of period end (1)		Number of Contracts		Recorded Investment as of period end (1)
Consumer and Credit Card		-	$	-		-		-
Commercial and Industrial		-		-		-		-
Commercial Real Estate		1		1,540		1		1,540
Residential Real Estate and Home Equity		-		-		-		-
Total		1	$	1,540		1	$	1,540

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

21.

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 4 – CREDIT QUALITY (continued)

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

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

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

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

22.

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 5 – FAIR VALUE MEASUREMENTS

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

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

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

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

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

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 Corporation looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Corporation looks to observable market data for similar assets and liabilities. However, certain assets and liabilities are not traded in observable markets and the Corporation 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 Corporation to measure different financial assets and liabilities at fair value and in estimating its fair value disclosures for financial instruments.

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

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

The Corporation 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.

23.

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 5 – FAIR VALUE MEASUREMENTS (continued)

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 Corporation 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 June 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 Corporation’s financial instruments are as follows:

At June 30, 2013:

	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	38,300	$	38,300	$	38,300	$	-	$	-
Securities available-for-sale		87,499		87,499		-		86,495		1,004
Securities held-to-maturity		-		-		-		-		-
Loans (net of allowance)		339,134		331,564						331,564
FHLB stock		3,799		3,799				3,799
Accrued interest receivable		1,529		1,529						1,529
Financial liabilities
Noninterest-bearing deposits	$	96,875	$	96,875			$	96,875
Interest-bearing deposits		349,313		349,871				349,871
FHLB advances		5,760		5,760				5,760
Accrued interest payable		189		189						189

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 5 – FAIR VALUE MEASUREMENTS (continued)

The following table presents the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2013 and December 31, 2012:

			Fair Value Measurements Using
June 30, 2013			Quoted Prices
	Fair Value		in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government and agency obligations	$	17,728	$	-	$	17,728	$	-
State and municipal obligations		21,077		-		21,077		-
Collateralized debt obligations		1,004		-		-		1,004
Corporate bonds		6,715		-		6,715		-
Mortgage-backed securities and other		40,975		-		40,975		-
Total	$	87,499	$	-	$	86,495	$	1,004

			Fair Value Measurements Using
December 31, 2012			Quoted Prices
	Fair Value		in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government and agency  obligations	$	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 Corporation previously recognized other-than-temporary impairment on the securities classified as collateralized debt obligations, based upon a Level 3 estimate of fair value, including a discounted cash flows calculation and a fair value estimate from an independent evaluation of the securities.

Impaired loans

At June 30, 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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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 June 30, 2013 and December 31, 2012.

June 30, 2013

			Fair Value Measurements Using
	Fair  Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans		26,566						26,566
Real estate owned		2,100		-		-		2,100

December 31, 2012

			Fair Value Measurements Using
	Fair  Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateralized debt obligations	$	2,090	$	-	$	-	$	2,090
Impaired loans		23,370		-		-		23,370
Real estate owned		3,671		-		-		3,671

26.

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 6 – STOCK BASED COMPENSATION

The Corporation’s shareholders approved the 2004 Long-Term Stock Incentive Plan (the “Plan”) in May 2004. This Plan provides for grants of equity-based awards to certain employees. The Plan is limited to 300,000 common shares. The shares granted to employees vest 20% per year over a five year period. The options expire after ten years. At June 30, 2013, options to purchase 115,987 shares were vested and exercisable, and 45,596 shares remained available for grant under the Plan.

The Corporation recognizes compensation cost for vested equity-based awards based on their June 30, 2013 fair value. The Corporation recorded $30 and $79 in compensation cost for equity-based awards that vested during the three months ended June 30, 2013 and 2012, respectively.

In determining the fair value of the stock options at June 30, 2013, the Corporation 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 Plan as of and for the six months ended June 30, 2013, and changes during the period then ended are presented below:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding at beginning of year		261,098		$	10.38		6.9 years
Granted		13,889			5.40		9.6 years
Exercised		(2,250	)		3.50		—
Forfeited		(20,651	)		13.98		—
Outstanding at end of period		252,086		$	9.87		6.9 years	$	188
Options exercisable at period end		118,333		$	16.39		4.9 years	$	52
Weighted-average fair value of options granted during the six months ended ended June 30, 2013				$	1.73
Weighted-average fair value of options granted during the year ended December 31, 2012				$	1.97

At June 30, 2013, unrecognized compensation expense to be recognized over the remaining life of outstanding options is $262,000.

The following information applies to options outstanding at June 30, 2013:

Number Outstanding		Range Of Exercise Prices
	72,275	$3.50 - $4.00
	72,069	$4.01 - $4.95
	36,091	$4.96 - $12.95
	40,049	$12.96 - $23.20
	31,602	$23.21 – $30.70

27.

DCB FINANCIAL CORP

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except per share data)

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

INTRODUCTION

In the following pages, management presents an analysis of the consolidated financial condition of DCB Financial Corp (the “Corporation”) at June 30, 2013, compared to December 31, 2012, and the consolidated results of operations for the three and six months ended June 30, 2013, compared to the same period in 2012. This discussion is designed to provide shareholders with a more comprehensive review of the operating results and financial position than could be obtained from reading the consolidated financial statements alone. This analysis should be read in conjunction with the consolidated financial statements and related footnotes and the selected financial data included elsewhere in this report.

FORWARD-LOOKING STATEMENTS

Certain statements in this report constitute “forward-looking statements”. Such as statements relating to the financial condition and prospects, lending risks, plans for future business development and marketing activities, capital spending and financing sources, capital structure, the effects of regulation and competition, and the prospective business of both the Corporation and its wholly-owned subsidiary The Delaware County Bank & Trust Company. Where used in this report, the word “anticipate,” “believe,” “estimate,” “expect,” “intend,” and similar words and expressions, as they relate to the Corporation or the Bank or their respective management, identify forward-looking statements. Such forward-looking statements reflect the current views of the Corporation and are based on information currently available to the management of the Corporation and the Bank and upon current expectations, estimates, and projections about the Corporation and its industry, management’s belief with respect thereto, and certain assumptions made by management. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to: (i) significant increases in competitive pressure in the banking and financial services industries; (ii) changes in the interest rate environment which could reduce anticipated or actual margins; (iii) changes in political conditions or the legislative or regulatory environment; (iv) general economic conditions, either nationally or regionally (especially in central Ohio), becoming less favorable than expected resulting in, among other things, a deterioration in credit quality of assets; (v) changes occurring in business conditions and inflation; (vi) changes in technology; (vii) changes in monetary and tax policies; (viii) changes in the securities markets; and (ix) other risks and uncertainties detailed from time to time in the filings of the Corporation with the Securities and Exchange Commission.

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

Overview of the Second Quarter of 2013

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

The Corporation, through the Bank, grants residential real estate, commercial real estate, consumer and commercial loans to customers located primarily in Delaware, Franklin, Licking, Morrow, Marion and Union Counties, Ohio. The Corporation’s current economic environment was driven down by the recession and has yet to return to pre-recession levels. General economic conditions in the Corporation’s market area have been stable, and, progress is being seen in a low unemployment rate and stabilized real estate values. The Bank has also been impacted by the low interest rate environment and its impact on net interest margin. Overall, the local economy is recovering.

28.

DCB FINANCIAL CORP

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except per share data)

ANALYSIS OF FINANCIAL CONDITION

The Corporation’s assets totaled $505.2 million at June 30, 2013, compared to $506.5 million at December 31, 2012. The previously mentioned growth in the loan portfolio has been funded primarily through cash and proceeds from repayments of investment securities and sales of OREO. OREO has decreased $1.6 million or 42.8% since December 31, 2012. Deposits remained relatively flat from December 31, 2012, while Federal Home Loan Bank (“FHLB”) borrowings are continuing to be paid down and have decreased $1.7 million or 23.2% since December 31, 2012. The changes to other assets and other liabilities offset as they relate to ending balances to sweep accounts for treasury management customers that are re-invested daily. Certain customers, primarily public funds, transfer significant balances throughout the year between operating and investment accounts based on the timing of tax revenue receipts and payouts for their regular operations and capital projects.

COMPARISON OF RESULTS OF OPERATIONS

Net Income. The Corporation reported net income of $156,000 for the three months ended June 30, 2013, compared to net income of $283,000 for the same period in 2012. Net income for the six months ended June 30, 2013 is $298,000, compared to net income of $442,000 in the prior year. On a year-to-date basis, the Bank experienced a significant increase in loans of $28.5 million or 9.2%. In addition, recoveries of loans previously charged off resulted in a benefit from the allowance for loan losses of $240,000 for the quarter and $890,000 for the six months ended June 30, 2013. The positive effects of these two improvements on the income statement were partially offset by a year-over-year increase in non-interest expense of $658,000 and $1.2 million for the three and six months ended, driven principally by salaries and benefits associated with new business development officers and increased collection expenses.

Net Interest Income.Net interest income quarter-over-quarter has increased $135,000 or 3.8%. This increase is attributable to the 9.2% growth in loans at the Bank since the end of 2012. Net interest income of $3.8 million for the three months ended June 30, 2013 reflected a slight decrease from $3.9 million for the same quarter in the prior year. This change is attributed to a decline in yield on loans, offset by the growth in the loan portfolio and a decline in borrowings from the FHLB. The average yield on loans has decreased to 4.47% for the three months ended June 30, 2013 from 4.95% for the prior year quarter. This is offset by a decline in interest expense as average borrowings fell to $6.1 million in the current year quarter from $22.0 million in the prior year quarter. The decline in interest rates is a result of the overall decline in market interest rates. The decline in interest expense reflects the utilization of excess cash to take advantage of early repayments of FHLB borrowings.

Net interest income of $7.4 million for the six months ended June 30, 2013 is a decrease of $507,000 or 6.4% from the same period in the prior year. This change is attributed to the previously mentioned year-over-year decline in earning assets and a decline in net interest margin. The change in the margin is primarily a result of a $20 million decline in higher yielding problem loans, coupled with the effect of the current low interest rate environment on new and refinanced loans. Deposit levels have remained relatively flat for that same period with a slight decline in rates.

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

For the six months ended June 30, 2013, an $890,000 benefit was recognized in the provision for loan losses, compared to expense of $730,000 for the same period in the prior year. This release from the allowance is primarily attributable to gross recoveries of $946,000, and continued improvement in the quality of the Bank’s loan portfolio. This is seen in the decline of the ratio of Criticized and Classified Assets to Tier-1 Capital plus the Allowance for Loan Loss as it has decreased to 55.8% at June 30, 2013 from 72.5% at the end of 2012.

For the three months ended June 30, 2013, a $240,000 benefit was recognized in the provision for loan losses, compared to expense of $255,000 for the same period in 2012. This release from the allowance is primarily attributable to gross recoveries during the quarter of $172,000, and continued improvement in the quality of the Bank’s loan portfolio has required lower release levels in the current year.

The allowance for loan losses was $6.5 million, or 1.88% of total loans at June 30, 2013, compared to $6.9 million, or 2.17% of total loans at December 31, 2012. Net recoveries for the year are $511,000, which is mainly attributed to residential and commercial real estate loans. The decrease in the allowance for loan losses is attributable to the overall improvement in credit quality.

Noninterest Income. Total noninterest income for the quarter was $1.4 million, compared to $1.2 million for the second quarter 2012. The increase is primarily due to recognition of gains from sales of investment securities in the current year quarter of $135,000 and increased fee income in Wealth Management as a result of additional business development officers that were added at the end of 2012.

The gain on sale of investment securities is comprised of one sale of pooled trust preferred securities that were previously classified as held-to-maturity. These securities were initially deemed other than temporarily impaired in 2009. In the last twelve months, the securities’ performance has improved, and management realized there was an opportunity to sell one of these securities at a gain in the current quarter. This sale further reduced the troubled assets of the Bank. The Bank’s remaining investment in this pool of trust preferred securities totals $1.0 million.

Total noninterest income for the six months ended June 30, 2013 was $2.7 million, a decrease of 9.0% from the $2.9 million recognized for the same period in the prior year. The decrease is primarily due to $340,000 less from gains on the sales of securities in the current year, a $78,000 decline in Trust fee income, and a $72,000 decline in service charges on deposit accounts, partially offset by a $247,000 improvement in gains from sales of other real estate owned (“OREO”). The decline in sales from securities is attributable to securities sold in 2012 that were in a significant gain position. This opportunity has not been available in the current year. The decrease in Trust fee income is a result of concessions and other reductions made in order to remain competitive in the market. The decline in service charges is due to the continuing impact of regulatory changes on fee income related to debit card and ATM transactions. The change in gains on sales of other real estate owned is due to properties being sold at a gain in the current year, compared to properties primarily being written down and sold for losses in the prior year.

29.

DCB FINANCIAL CORP

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except per share data)

Noninterest Expense. Total noninterest expense of $5.4 million for the second quarter represents an increase of $658,000, or 13.8%, from the second quarter 2012. The increase in operating expense is primarily due to an increase in salary and benefits, $506,000 or 21.5%; professional services, $204,000 or 66.5%; and other operating expenses $70,000 or 8.3%, offset by a decline in Federal Deposit Insurance Corporation (“FDIC”) deposit insurance premiums of $147,000 or 51.8%. The increase in salary and benefits is driven by the addition of new business development officers. The effect of these officers has already had an impact in growing the loan portfolio and increasing fee income in Wealth Management. The increase in professional services is primarily related to managing the troubled asset portfolio and a full year of utilizing an outsourced internal audit function. The increase in other operating expenses is attributable to increases in loan expenses due to significantly increased application volume in the current year and additional shareholder related expenses subsequent to the capital raise increasing the number of outstanding shares.

The total noninterest expense of $10.9 million for the six months ended June 30, 2013 represents an increase of $1.2 million, or 12.9%, from the same period in the prior year. The increase in operating expense is attributed to increases in salary and benefits, professional expenses, and state franchise taxes, partially offset by a decrease in other operating expenses. The $1.2 million increase in salaries and benefits expenses is attributable to the previously mentioned addition of business development officers. The $269,000 increase in professional fees is attributable to the managing and recovery work on the troubled assets of the bank and the full year of outsourcing the internal audit function. The $96,000 increase in state franchise taxes is a result of the previously mentioned capital raise and its impact on this assessment. The $231,000 decrease in FDIC insurance premium is attributed to a decline in the premium rate when compared to the prior year. The $164,000 decrease in other operating expenses is primarily attributable to lower expenses in the current year for maintaining OREO properties.

Income Taxes. The Corporation recorded a tax benefit of $254,000 for the three months ended June 30, 2013, compared to a tax benefit of $218,000 in the second quarter of 2012. The change in taxes reflects the recognition of unrealized losses and the impact on the deferred tax asset and related valuation allowance to these now realized losses. These losses were recognized as part of the previously mentioned sale of pooled trust securities. This is partially offset by the impact a decline in the fair value of the available for sale investment portfolio on the fully reserved deferred tax assets.

LIQUIDITY

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

Cash and cash equivalents totaled $38.3 million at June 30, 2013, compared to $63.3 million at December 31, 2012. Cash and equivalents represented 7.6% of total assets at June 30, 2013 and 12.5% of total assets at December 31, 2012. The Corporation has the ability to borrow funds from the FHLB and the Federal Reserve Bank should the Corporation need to supplement its future liquidity. Management believes the Corporation’s liquidity position is adequate based on its current level of cash, cash equivalents, core deposits, the stability of its other funding sources, and the support provided by its capital base.

CAPITAL RESOURCES

Total shareholders’ equity increased $840,000 between December 31, 2012 and June 30, 2013. The increase was due to a decrease in accumulated other comprehensive loss and the period’s net income of $298,000.

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

The Corporation and its subsidiaries meet all published regulatory capital requirements. The ratio of Tier 1 capital to risk-weighted assets was 9.51% at June 30, 2013, while the Tier 1 risk-based capital ratio was 13.25%. Regulatory minimums call for a total risk-based capital ratio of 8.0%, at least half of which must be Tier 1 capital. The Corporation’s leverage ratio, defined as Tier 1 capital divided by average assets, was 9.74% at June 30, 2013. The Bank reported total capital to risk-weighted assets of 14.82% at June 30, 2013. As previously reported, in October 2010, the Bank subsidiary entered into a Consent Agreement with the FDIC which requires that Tier-1 and Total Risk Based Capital percentages reach 9.0% and 13.0%, respectively.

30.

DCB FINANCIAL CORP

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except per share data)

The following table sets forth the Corporation’s obligations and commitments to make future payments under contract as of June 30, 2013.

Contractual Obligations	Payment Due by Year
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
FHLB advances	$	5,760	$	2,116	$	2,099	$	394	$	1,151
Federal funds purchased and other  short-term borrowings		-		-		-		-		-
Operating lease obligations		2,167		573		935		525		134
Loan and line of credit commitments		112,365		80,564				-		32,071
Total Contractual Obligations	$	120,562	$	83,253	$	3,034	$	919	$	33,356

Item 3. Quantitative and Qualitative Disclosure about Market Risk

ASSET AND LIABILITY MANAGEMENT AND MARKET RISK

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

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

The Corporation’s Annual Report includes a table depicting the changes in the Coproration’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 Corporation 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 Corporation’s balance sheet has changed, the Corporation remains vafoorably impacted in a rising rate environment and negatively impacted in a decreasing rate environment. Further, the Corporations net interest income since December 31, 2012, continues to display afavorable impact in a rising interest rate environment. The overall favorability reflects the Corporation’s efforts to emply 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 Corporation 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.

31.

DCB FINANCIAL CORP

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(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 Corporation 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 Corporation carried out an evaluation, under the supervision and with the participation of the Corporation's management, including the Corporation's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of June 30, 2013, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Principal Financial Officer concluded that the Corporation's disclosure controls and procedures were effective as of June 30, 2013.

There was no change in the Corporation’s internal control over financial reporting that occurred during the Corporation’s fiscal quarter ended June 30, 2013, that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

32.

DCB FINANCIAL CORP

FORM 10-Q

Quarter ended June 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 Corporation’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:

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 Articles of Incorporation 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 March 31, 2013 formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of June 30, 2013 (unaudited) and December 31, 2012; (ii) the Condensed Consolidated Statements of Operations for the three months ended June 30, 2013 and 2012 (unaudited); (iii) the Condensed Consolidated Statements of Comprehensive Income for the three months ended June 30, 2013 and 2012 (unaudited); (iv) the Condensed Consolidated Statements of Cash Flow for the three months ended June 30, 2013 and 2012 (unaudited); (v) the Consolidated Condensed Statements of Cash Flows for the three months ended June 30, 2013 and 2012 (unaudited); and (vi) 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 files 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.

33.

DCB FINANCIAL CORP

SIGNATURES

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

	DCB FINANCIAL CORP
	(Registrant)
Date: August 14, 2013	/s/ Ronald J. Seiffert
	Ronald J. Seiffert
	President and Chief Executive Officer
Date: August 14, 2013	/s/ Michael B. Shannon
	Michael B. Shannon
	Controller and Principal Financial Officer

34.

EX-31.1

DCB FINANCIAL CORP

Exhibit 31.1

CERTIFICATIONS

I, Ronald J. Seiffert certify that:

1. I have reviewed this quarterly report on Form 10-Q of DCB Financial Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 14, 2013	/s/ Ronald J. Seiffert
	Ronald J. Seiffert
	Title: President and Chief Executive Officer

EX-31.2

DCB FINANCIAL CORP

Exhibit 31.2

CERTIFICATIONS

I, Michael B. Shannon, certify that:

1. I have reviewed this quarterly report on Form 10-Q of DCB Financial Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  August 14, 2013	/s/ Michael B. Shannon
	Michael B. Shannon
	Title: Controller and Principal Financial Officer

EX-32.1

DCB FINANCIAL CORP

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ENACTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of DCB Financial Corp (the "Corporation") on Form 10-Q for the period ending June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ronald J. Seiffert, President and Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. § 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

/s/ Ronald J. Seiffert

Ronald J. Seiffert

President and Chief Executive Officer

August 14, 2013

EX-32.2

DCB FINANCIAL CORP

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ENACTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of DCB Financial Corp (the "Corporation") on Form 10-Q for the period ending June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael B. Shannon, Controller and Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. § 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

/s/ Michael B. Shannon

Michael B. Shannon

Controller and Principal Financial Officer

August 14, 2013

XML

Loans (Tables)

6 Months Ended

Jun. 30, 2013

Receivables [Abstract]

Loans

At June 30, 2013 and December 31, 2012, loans were comprised of the following:

	June 30,  2013		December 31,  2012
Commercial and industrial	$	125,309	$	112,300
Commercial real estate		107,498		111,417
Residential real estate and home equity		83,472		72,137
Consumer and credit card		29,277		21,620
Subtotal		345,556		317,474
Add: Net deferred loan origination fees		81		30
Total loans	$	345,637	$	317,504

XML

CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Interest and dividend income
Loans	$ 3,735	$ 4,081	$ 7,286	$ 8,447
Taxable securities	442	560	962	1,151
Tax-exempt securities	47	56	93	117
Federal funds sold and other	21	28	50	49
Total interest income	4,245	4,725	8,391	9,764
Interest expense
Deposits	422	631	873	1,296
Borrowings	72	226	151	594
Total interest expense	494	857	1,024	1,890
Net interest income	3,751	3,868	7,367	7,874
Provision for loan losses	(240)	255	(890)	730
Net interest income after provision for loan losses	3,991	3,613	8,257	7,144
Non-interest income
Service charges on deposit accounts	447	596	1,122	1,194
Trust department income	184	224	372	450
Gain on sales of securities	135	0	135	475
Net gain (loss) on sale of REO	2	(42)	86	(161)
Treasury management fees	64	65	126	132
Earnings on bank owned life insurance	165	166	405	410
Other	354	225	413	422
Total noninterest income	1,351	1,234	2,659	2,922
Noninterest expense
Salaries and other employee benefits	2,864	2,358	5,836	4,613
Occupancy and equipment	734	695	1,593	1,538
Professional services	511	307	967	698
Advertising	66	104	173	188
Postage, freight and courier	44	32	97	83
Supplies	65	51	135	89
State franchise taxes	42	104	254	208
Federal deposit insurance premiums	137	284	344	575
Other	977	847	1,497	1,661
Total noninterest expense	5,440	4,782	10,896	9,653
Net income (loss) before income taxes	(98)	65	20	413
Income tax expense (benefit)	(254)	(218)	(278)	(29)
Net income	$ 156	$ 283	$ 298	$ 442
Basic and diluted earnings per common share (in dollars per share)	$ 0.01	$ 0.08	$ 0.03	$ 0.12
Dividends per share (in dollars per share)	$ 0	$ 0	$ 0	$ 0

XML

Loans

6 Months Ended

Jun. 30, 2013

Receivables [Abstract]

LOANS

NOTE 3 - LOANS

At June 30, 2013 and December 31, 2012, loans were comprised of the following:

	June 30,  2013		December 31,  2012
Commercial and industrial	$	125,309	$	112,300
Commercial real estate		107,498		111,417
Residential real estate and home equity		83,472		72,137
Consumer and credit card		29,277		21,620
Subtotal		345,556		317,474
Add: Net deferred loan origination fees		81		30
Total loans	$	345,637	$	317,504

XML

Securities (Details 1) (USD $) In Thousands, unless otherwise specified		12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012 Collateralized debt obligations [Member]
Fair values of securities held-to-maturity
Adjusted Amortized Cost		$ 1,149
Gross Unrealized Gains		941
Held-to-maturity, Fair Value, Total	$ 0	$ 2,090

XML

Credit Quality (Tables)

6 Months Ended

Jun. 30, 2013

Credit Quality [Abstract]

Allowance for Credit Losses

The table below presents allowance for credit losses by loan portfolio. As presented within this note, commercial real estate includes real estate construction and land development loans.

Three Months Ended June 30, 2013

	Consumer and Credit Card			Commercial and Industrial			Commercial Real Estate			Residential Real Estate and Home Equity			Total
Beginning balance	$	287		$	1,586		$	4,724		$	161		$	6,758
Charge-offs		(98	)		(15	)		(28	)		(46	)		(187	)
Recoveries		50			86			13			22			172
Provision		129			(85	)		(346	)		63			(240	)
Ending balance	$	368		$	1,572		$	4,363		$	200		$	6,503
Individually evaluated for impairment	$	-		$	733		$	2,532		$	-		$	3,265
Collectively evaluated for impairment		368			839			1,831			200			3,238
Ending balance	$	368		$	1,572		$	4,363		$	200		$	6,503
Loans
Individually evaluated for impairment	$	-		$	5,586		$	20,980		$	-		$	26,566
Collectively evaluated for impairment		29,277			119,723			86,518			83,472			318,990
Total	$	29,277		$	125,309		$	107,498		$	83,472		$	345,556

Three Months Ended June 30, 2012

	Consumer and Credit Card			Commercial and Industrial			Commercial Real Estate			Residential Real Estate and Home Equity			Total
Beginning balance	$	393		$	2214		$	6,524		$	212		$	9,343
Charge-offs		(88	)		(30	)		(414	)		(20	)		(552	)
Recoveries		47			43			5			7			102
Provision		21			(95	)		321			8			255
Ending balance	$	373		$	2132		$	6,436		$	207		$	9,148
Individually evaluated for impairment	$	-		$	494		$	5,353		$	-		$	5,847
Collectively evaluated for impairment		373			1,638			1,083			207			3,301
Ending balance	$	373		$	2,132		$	6,436		$	207		$	9,148
Loans
Individually evaluated for impairment	$	-		$	11,079		$	27,443		$	-		$	38,522
Collectively evaluated for impairment		18,312			100,727			89,744			75,437			284,220
Total	$	18,312		$	111,806		$	117,187		$	75,437		$	322,742

Six months ended June 30, 2013

	Consumer and Credit Card			Commercial and Industrial			Commercial Real Estate			Residential Real Estate and Home Equity			Total
Beginning balance	$	365		$	1,621		$	4,692		$	204		$	6,882
Charge-offs		(136	)		(79	)		(130	)		(89	)		(434	)
Recoveries		110			774			23			38			945
Provision		29			(744	)		(222	)		47			(890	)
Ending balance	$	368		$	1,572		$	4,363		$	200		$	6,503

Six months ended June 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
Charge-offs		(212	)		(147	)		(1,074	)		(19	)		(1,451	)
Recoveries		111			151			13			11			285
Provision		49			176			581			(76	)		730
Ending balance	$	373		$	2,132		$	6,436		$	207		$	9,148

Recorded investment, unpaid balance and related allowance

The following presents by class, information related to the Corporation’s impaired loans as of June 30, 2013 and December 31, 2012.

At June 30, 2013

	Recorded Investment		Unpaid Principal Balance		Related Allowance		6 Months Average Recorded Investment		6 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		3,050		3,127		-		3,532		73		3,233		40
Commercial Real Estate		11,068		13,152		-		9,221		333		9,751		166
Residential RE and Home Equity		-		-		-		-		-		-		-
With Allowance Recorded
Consumer and Credit Card		-		-		-		-		-		-		-
Commercial and Industrial		2,536		4,179		733		1,957		111		2,393		85
Commercial Real Estate		9,912		10,837		2,532		11,792		164		11,005		78
Residential RE and Home Equity		-		-		-		-		-		-		-
Total
Consumer and Credit Card	$	-	$	-	$	-	$	-	$	-	$	-		-
Commercial and Industrial		5,586		7,306		733		5,489		184		5,626		125
Commercial Real Estate		20,980		23,989		2,532		21,013		497		20,756		244
Residential RE and Home Equity		-		-		-		-		-		-		-
Total	$	26,566	$	31,295	$	3,265	$	26,502	$	681	$	26,382		369

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

Loans on nonaccrual status

Loans on nonaccrual status at June 30, 2013 and December 31, 2012 are as follows:

	June 30,		December 31,
	2013		2012
Consumer and credit card	$	-	$	-
Commercial and industrial		1,794		2,815
Commercial real estate		3,632		2,195
Residential real estate and home equity		271		321
Total	$	5,697	$	5,331

Credit Quality Indicators

Corporate risk exposure by risk profile was as follows at June 30, 2013:

Category	Commercial and Industrial		Commercial Real Estate
Pass-1-4	$	104,963	$	76,539
Vulnerable-5		11,195		13,704
Substandard-6		9,151		17,255
Doubtful-7		-		-
Loss-8		-		-
Total	$	125,309	$	107,498

Corporate risk exposure by risk profile was as follows 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

Consumer risk

Consumer risk based on payment activity at June 30, 2013 is as follows.

Payment Category	Consumer and Credit Card		Residential Real Estate and Home Equity
Performing	$	29,201	$	83,201
Non-performing		76		271
Total	$	29,277	$	83,472

Consumer risk based on payment activity at December 31, 2012 is as follows.

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

Age Analysis of Past Due Loans

The following table presents past due loans aged as of June 30, 2013.

Category	30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 days and Accruing
Consumer and credit card	$	59	$	43	$	76	$	178	$	29,099	$	29,277	$	76
Commercial and industrial		1,296		289		-		1,585		123,724		125,309		-
Commercial real estate		-		212		2,586		2,798		104,700		107,498		-
Residential real estate and home equity		281		40		271		592		82,880		83,472		-
Total	$	1,636	$	584	$	2,933	$	5,153	$	340,403	$	345,556	$	76

The following table presents past due loans aged as of 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

Troubled Debt Restructurings

Information regarding Troubled Debt Restructuring (“TDR”) loans for the three and six month periods ended June 30, 2013 and 2012 is as follows:

	Three Months Ended				Six Months Ended
	June 30, 2013				June 30, 2013
	Number of Contracts		Recorded Investment (as of period end)		Number of Contracts		Recorded Investment (as of period end)
Consumer and Credit Card		1	$	1		1	$	1
Commercial and Industrial		-		-		3		903
Commercial Real Estate		3		163		5		3,600
Residential Real Estate and Home Equity		-		-		-		-
Total		4	$	164		9	$	4,504

	Three Months Ended				Six Months Ended
	June 30, 2012				June 30, 2012
	Number of Contracts		Recorded Investment (as of period end)		Number of Contracts		Recorded Investment (as of period end)
Consumer and Credit Card		5	$	92		6	$	93
Commercial and Industrial		-		-		-		-
Commercial Real Estate		2		3,929		2		3,929
Residential Real Estate and Home Equity		-		-		-		-
Total		7	$	4,021		8	$	4,022

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

The following presents by class loans modified in a TDR from July 1, 2012 through June 30, 2013 that subsequently defaulted (i.e. 60 days or more past due following a modification) during the three and six month periods ended June 30, 2013.

	Three Months Ended				Six Months Ended
	June 30, 2013				June 30, 2013
	Number of Contracts		Recorded Investment as of period end (1)		Number of Contracts		Recorded Investment as of period end (1)
Consumer and Credit Card		1	$	8		1	$	8
Commercial and Industrial		-		-		-		-
Commercial Real Estate		2		114		2		114
Residential Real Estate and Home Equity		-		-		-		-
Total		3	$	122		3	$	122

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

	Three Months Ended				Six Months Ended
	June 30, 2012				June 30, 2012
	Number of Contracts		Recorded Investment as of period end (1)		Number of Contracts		Recorded Investment as of period end (1)
Consumer and Credit Card		-	$	-		-		-
Commercial and Industrial		-		-		-		-
Commercial Real Estate		1		1,540		1		1,540
Residential Real Estate and Home Equity		-		-		-		-
Total		1	$	1,540		1	$	1,540

XML

Fair Value Measurements (Details 1) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Fair value measurements of assets recurring basis
Securities available-for-sale	$ 87,499	$ 87,197
Collateralized Debt Obligations [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	1,004
State and municipal obligations [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	21,077	20,761
Corporate bonds [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	6,715	5,165
Mortgage-backed securities and other [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	40,975	44,334
Fair Value, Measurements, Recurring [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	87,499	87,197
Fair Value, Measurements, Recurring [Member] | Collateralized Debt Obligations [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	1,004
Fair Value, Measurements, Recurring [Member] | U.S. Government and agency obligations [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	17,728	16,937
Fair Value, Measurements, Recurring [Member] | State and municipal obligations [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	21,077	20,761
Fair Value, Measurements, Recurring [Member] | Corporate bonds [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	6,715	5,165
Fair Value, Measurements, Recurring [Member] | Mortgage-backed securities and other [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	40,975	44,334
Fair Value, Measurements, Recurring [Member] | Quoted Prices in Active Markets for Identical Assets, Level 1 [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	0	0
Fair Value, Measurements, Recurring [Member] | Quoted Prices in Active Markets for Identical Assets, Level 1 [Member] | Collateralized Debt Obligations [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	0
Fair Value, Measurements, Recurring [Member] | Quoted Prices in Active Markets for Identical Assets, Level 1 [Member] | U.S. Government and agency obligations [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	0	0
Fair Value, Measurements, Recurring [Member] | Quoted Prices in Active Markets for Identical Assets, Level 1 [Member] | State and municipal obligations [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	0	0
Fair Value, Measurements, Recurring [Member] | Quoted Prices in Active Markets for Identical Assets, Level 1 [Member] | Corporate bonds [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	0	0
Fair Value, Measurements, Recurring [Member] | Quoted Prices in Active Markets for Identical Assets, Level 1 [Member] | Mortgage-backed securities and other [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	0	0
Fair Value, Measurements, Recurring [Member] | Significant Other Observable Inputs, Level 2 [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	86,495	87,197
Fair Value, Measurements, Recurring [Member] | Significant Other Observable Inputs, Level 2 [Member] | Collateralized Debt Obligations [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	0
Fair Value, Measurements, Recurring [Member] | Significant Other Observable Inputs, Level 2 [Member] | U.S. Government and agency obligations [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	17,728	16,937
Fair Value, Measurements, Recurring [Member] | Significant Other Observable Inputs, Level 2 [Member] | State and municipal obligations [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	21,077	20,761
Fair Value, Measurements, Recurring [Member] | Significant Other Observable Inputs, Level 2 [Member] | Corporate bonds [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	6,715	5,165
Fair Value, Measurements, Recurring [Member] | Significant Other Observable Inputs, Level 2 [Member] | Mortgage-backed securities and other [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	40,975	44,334
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs, Level 3 [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	1,004	0
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs, Level 3 [Member] | Collateralized Debt Obligations [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	1,004
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs, Level 3 [Member] | U.S. Government and agency obligations [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	0	0
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs, Level 3 [Member] | State and municipal obligations [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	0	0
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs, Level 3 [Member] | Corporate bonds [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	0	0
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs, Level 3 [Member] | Mortgage-backed securities and other [Member]
Fair value measurements of assets recurring basis
Securities available-for-sale	$ 0	$ 0

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Securities (Details Textual) (USD $)	6 Months Ended	12 Months Ended		3 Months Ended
	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012	Jun. 30, 2013 Collateralized debt obligations [Member]
Securities (Textual) [Abstract]
Fair value securities, deposits and other obligation				$ 76,709,000
Unrealized loss on investments in collateralized debt obligations	8,000,000
Holdings of securities, issuer other than shareholders equity	10.00%
Credit losses recognized on investments	0		0
Major securities holding	0
Proceeds from Sale of Available-for-sale Securities, Total				2,600,000
Available-for-sale Securities, Gross Unrealized Gain, Total	$ 1,463,000	$ 2,069,000		$ 135,000,000

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Securities (Details 3) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Amortized cost and estimated fair value of all debt securities
Available-for-sale, Amortized Cost, Due in one year or less	$ 1,547
Available-for-sale, Amortized Cost, Due after one to five years	8,041
Available-for-sale, Amortized Cost, Due after five to ten years	25,011
Available-for-sale, Amortized Cost, Due after ten years	12,493
Available-for-sale, Amortized Cost, Mortgage-backed and related securities	40,465
Available-for-sale, Amortized Cost, Total	87,557
Available-for-sale, Fair Value, Due in one year or less	1,557
Available-for-sale, Fair Value, Due after one to five years	8,110
Available-for-sale, Fair Value, Due after five to ten years	25,150
Available-for-sale, Fair Value, Fair value, Due after ten years	11,707
Available-for-sale, Fair Value, Mortgage-backed and related securities	40,975
Available-for-sale, Fair Value, Total	87,499
Held-to-maturity, Amortized Cost, Due in one year or less	0
Held-to-maturity, Amortized Cost, Due after one to five years	0
Held-to-maturity, Amortized Cost, Due after five to ten years	0
Held-to-maturity, Amortized Cost, Due after ten years	0
Held-to-maturity, Amortized Cost, Mortgage-backed and related securities	0
Held-to-maturity, Amortized Cost, Total	0	1,149
Held-to-maturity, Fair Value, Due in one year or less	0
Held-to-maturity, Fair Value, Due after one to five years	0
Held-to-maturity, Fair Value, Due after five to ten years	0
Held-to-maturity, Fair Value, Due after ten years	0
Held-to-maturity, Fair Value, Mortgage-backed and related securities	0
Held-to-maturity, Fair Value, Total	$ 0

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Credit Quality (Details 5) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Age analysis of past due loans
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	$ 1,636	$ 1,039
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	584	504
Financing Receivable, Recorded Investment, Greater than 90 Days Past Due	2,933	2,570
Financing Receivable, Recorded Investment, Past Due, Total	5,153	4,113
Current	340,403	313,361
Total Loans	345,556	317,474
Recorded Investment greater than 90 days and Accruing	76	28
Consumer and Credit Card [Member]
Age analysis of past due loans
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	59	37
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	43	101
Financing Receivable, Recorded Investment, Greater than 90 Days Past Due	76	28
Financing Receivable, Recorded Investment, Past Due, Total	178	166
Current	29,099	21,454
Total Loans	29,277	21,620
Recorded Investment greater than 90 days and Accruing	76	28
Commercial and Industrial [Member]
Age analysis of past due loans
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	1,296	20
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	289	0
Financing Receivable, Recorded Investment, Greater than 90 Days Past Due	0	26
Financing Receivable, Recorded Investment, Past Due, Total	1,585	46
Current	123,724	112,254
Total Loans	125,309	112,300
Recorded Investment greater than 90 days and Accruing	0	0
Commercial Real Estate [Member]
Age analysis of past due loans
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	0	538
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	212	114
Financing Receivable, Recorded Investment, Greater than 90 Days Past Due	2,586	2,195
Financing Receivable, Recorded Investment, Past Due, Total	2,798	2,847
Current	104,700	108,570
Total Loans	107,498	111,417
Recorded Investment greater than 90 days and Accruing	0	0
Residential Real Estate and Home Equity [Member]
Age analysis of past due loans
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	281	444
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	40	289
Financing Receivable, Recorded Investment, Greater than 90 Days Past Due	271	321
Financing Receivable, Recorded Investment, Past Due, Total	592	1,054
Current	82,880	71,083
Total Loans	83,472	72,137
Recorded Investment greater than 90 days and Accruing	$ 0	$ 0

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Stock Based Compensation (Details) (USD $) In Thousands, except Share data, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012
Summary of stock option plan
Outstanding at beginning of year, Shares	261,098		199,856
Outstanding at beginning of year, Weighted Average Exercise Price	$ 10.38
Outstanding at beginning of year, Weighted Average Remaining Contractual Life	6 years 10 months 24 days
Granted, shares	13,889
Granted, Weighted Average Exercise Price	$ 5.40
Granted, Weighted Average Remaining Contractual Life	9 years 7 months 6 days
Exercised, Shares	(2,250)
Exercised, Weighted Average Exercise Price	$ 3.50
Forfeited, Shares	(20,651)
Forfeited, Weighted Average Exercise Price	$ 13.98
Outstanding at end of period, Shares	252,086	261,098	199,856
Outstanding at end of period, Weighted Average Exercise Price	$ 9.87	$ 10.38
Outstanding at end of period, Weighted Average Remaining Contractual Life	6 years 10 months 24 days
Options exercisable at period end, Shares	118,333
Options exercisable at period end, Weighted Average Exercise Price	$ 16.39
Options exercisable at period end, Weighted Average Remaining Contractual Life	4 years 10 months 24 days
Option exercisable at period end, Aggregate Intrinsic value	$ 52
Weighted-average fair value of options granted	$ 1.73	$ 1.97
Outstanding at Ending of year, Aggregate Intrinsic Value	$ 188

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Credit Quality (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Financing receivables on nonaccrual status
Financing receivables on nonaccrual status	$ 5,697	$ 5,331
Consumer and credit card [Member]
Financing receivables on nonaccrual status
Financing receivables on nonaccrual status	0	0
Commercial and industrial [Member]
Financing receivables on nonaccrual status
Financing receivables on nonaccrual status	1,794	2,815
Commercial real estate [Member]
Financing receivables on nonaccrual status
Financing receivables on nonaccrual status	3,632	2,195
Residential Real Estate and Home Equity [Member]
Financing receivables on nonaccrual status
Financing receivables on nonaccrual status	$ 271	$ 321

XML

Securities (Details 2) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Unrealized loss
Number of investments	48	15
Fair value	$ 29,217	$ 9,845
Unrealized losses	609	80
Collateralized Debt Obligations [Member]
Unrealized loss
Number of investments	1
Fair value	1,004
Unrealized losses	912
Less than 12 months [Member]
Unrealized loss
Number of investments	46	15
Fair value Less than 12 months	28,243	9,845
Unrealized losses Less than 12 months	596	80
Less than 12 months [Member] | Collateralized Debt Obligations [Member]
Unrealized loss
Number of investments	0
Fair value Less than 12 months	0
Unrealized losses Less than 12 months	0
12 months or longer [Member]
Unrealized loss
Number of investments	2	0
Fair value, 12 months or longer	974	0
Unrealized losses, 12 months or longer	13	0
12 months or longer [Member] | Collateralized Debt Obligations [Member]
Unrealized loss
Number of investments	1
Fair value, 12 months or longer	1,004
Unrealized losses, 12 months or longer	912
U.S. Government and agency obligations [Member]
Unrealized loss
Number of investments	9	3
Fair value	8,968	3,649
Unrealized losses	156	18
U.S. Government and agency obligations [Member] | Less than 12 months [Member]
Unrealized loss
Number of investments	9	3
Fair value Less than 12 months	8,968	3,649
Unrealized losses Less than 12 months	156	18
U.S. Government and agency obligations [Member] | 12 months or longer [Member]
Unrealized loss
Number of investments	0	0
Fair value, 12 months or longer	0	0
Unrealized losses, 12 months or longer	0	0
Corporate bonds [Member]
Unrealized loss
Number of investments	6	1
Fair value	2,497	501
Unrealized losses	58	2
Corporate bonds [Member] | Less than 12 months [Member]
Unrealized loss
Number of investments	6	1
Fair value Less than 12 months	2,497	501
Unrealized losses Less than 12 months	58	2
Corporate bonds [Member] | 12 months or longer [Member]
Unrealized loss
Number of investments	0	0
Fair value, 12 months or longer	0	0
Unrealized losses, 12 months or longer	0	0
State and municipal obligations [Member]
Unrealized loss
Number of investments	18	5
Fair value	6,469	1,630
Unrealized losses	163	31
State and municipal obligations [Member] | Less than 12 months [Member]
Unrealized loss
Number of investments	17	5
Fair value Less than 12 months	5,971	1,630
Unrealized losses Less than 12 months	152	31
State and municipal obligations [Member] | 12 months or longer [Member]
Unrealized loss
Number of investments	1	0
Fair value, 12 months or longer	498	0
Unrealized losses, 12 months or longer	11	0
Mortgage-backed securities and other [Member]
Unrealized loss
Number of investments	15	6
Fair value	11,283	4,065
Unrealized losses	232	29
Mortgage-backed securities and other [Member] | Less than 12 months [Member]
Unrealized loss
Number of investments	14	6
Fair value Less than 12 months	10,807	4,065
Unrealized losses Less than 12 months	230	29
Mortgage-backed securities and other [Member] | 12 months or longer [Member]
Unrealized loss
Number of investments	1	0
Fair value, 12 months or longer	476	0
Unrealized losses, 12 months or longer	$ 2	$ 0

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Other Than Temporary Impairment Losses Investment Reclassification Adjustment Of Previously Recognized Sale Of Security Tax	$ 512		$ 512
Other than Temporary Impairment Losses, Investments, Portion in Other Comprehensive Loss, Tax, Portion Attributable to Parent, Held-to-maturity Securities	(398)	206	(386)	24
Other Comprehensive Income (Loss), Unrealized Holding Gain (Loss) on Securities Arising During Period, Tax	131		131
Other Comprehensive Income Amortization Of Unrealized Gain (Losses) On Held To Maturity Securities Tax	$ 9	$ 12	$ 21	$ 5

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Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These consolidated interim financial statements are prepared without audit and reflect all adjustments which, in the opinion of management, are necessary to present fairly the financial position of DCB Financial Corp (the “Corporation”) at June 30, 2013 and December 31, 2012, and its results of operations and cash flows for the three and six month periods ended June 30, 2013 and 2012. All such adjustments are normal and recurring in nature. The accompanying consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not purport to contain all necessary financial disclosures required by accounting principles generally accepted in the United States of America that might otherwise be necessary in the circumstances, and should be read in conjunction with the consolidated financial statements, and notes thereto, included in its Annual Report as of December 31, 2012. Refer to the accounting policies of the Corporation described in the Notes to Consolidated Financial Statements contained in the Corporation’s Annual Report as of December 31, 2012. The Corporation has consistently followed these policies in preparing this Form 10-Q. The results of operations for the three and six months ended June 30, 2013, are not necessarily indicative of the results that may be expected for the entire year.

The accompanying consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries, The Delaware County Bank and Trust Company (the “Bank”), DCB Title Services LLC, Datatasx LLC, DCB Insurance Services, Inc. and ORECO, Inc. (collectively referred to herein after as the “Corporation”). All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Management considers the Corporation to operate within one business segment, banking. Datatasx LLC was inactive for all of 2012 and 2013.

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

The income tax benefit recognized in the Statement of Operations represents the tax effect related to the unrealized gain on available for sale investment securities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A full valuation allowance was taken in 2010, reducing the deferred tax assets, and management is maintaining its full allowance tax position each quarter.

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" labelrole="verboseLabel" userrole="Summary of Significant Accounting Policies (Tables)">Weighted-average shares for basic and diluted earnings per share are presented below.

	Three Months Ended June 30,		Six Months Ended  June 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	35,551	22,964	33,223	15,745
Weighted-average common shares outstanding (diluted)	7,227,901	3,740,349	7,225,573	3,733,130

Options to purchase 252,086 shares of common stock with a weighted-average exercise price of $9.87 were outstanding at June 30, 2013. There were 144,344 shares included in the computation of common share equivalents for the three-month and six-month periods then ended because the average fair value of the shares was greater than the exercise price.

Options to purchase 199,856 shares of common stock with a weighted-average exercise price of $12.52 were outstanding at June 30, 2012. There were 17,707 and 15,745 shares included in the computation of common share equivalents for the three-month and six-month periods then ended because the average fair value of the shares was greater than the exercise price.

Equity compensation plan

The corporation 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 these awards at the reporting date. A Black-Scholes model is utilized to estimate the fair value of stock options at the date of grant and subsequent remeasurement dates. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards. The Corporation’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.

Application of Critical Accounting Policies

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

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

The valuation of other assets requires that management utilize a variety of estimates and analyses to determine whether an asset is impaired or other-than-temporarily impaired (“OTTI”). After determining the appropriate methodology for fair value measurement, management then evaluates whether or not declines in fair value below book value are temporary or OTTIs. When the Corporation does not intend to sell a debt security, and it is more likely than not that the Corporation will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an OTTI of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an OTTI recorded in other comprehensive income for the noncredit portion of a previous OTTI is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

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

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

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

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

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

Uncollectability is usually determined based on a pre-determined number of days delinquent in the case of consumer loans, or, in the case of commercial loans, is based on a combination of factors including delinquency, collateral and other legal considerations. Consumer loans are charged-off prior to 120 days of delinquency, but could be charged off earlier, depending on the individual circumstances. Mortgage loans are charged down prior to 180 days of delinquency, but could be charged off sooner, again, depending upon individual circumstance. Typically, loans collateralized by consumer real estate are partially charged down to the estimated liquidation value, which is generally based on appraisal less costs to hold and liquidate. Commercial and commercial real estate loans are evaluated for impairment and typically reserved based on the results of the analysis, then subsequently charged down to a recoverable value when loan repayment is deemed to be collateral dependent. Loans can be partially charged down depending on a number of factors including: the remaining strength of the borrower and guarantor; the type and value of the collateral, and the ease of liquidating collateral; and whether or not collateral is brought onto the bank’s balance sheet via repossession. In the case of commercial and commercial real estate loans, charge-offs, partial or whole, take place when Management determines that full collectability of principal balance is unlikely to occur. Subsequent recoveries, if any, are credited to the allowance. Management’s policies for determining impairment, reserves and charge-offs are reviewed and approved by the Board of Directors on an annual basis, and have not materially changed in 2013.

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

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Credit Quality

6 Months Ended

Jun. 30, 2013

Credit Quality [Abstract]

CREDIT QUALITY

NOTE 4 – CREDIT QUALITY

Allowance for Credit Losses

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

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

The table below presents allowance for credit losses by loan portfolio. As presented within this note, commercial real estate includes real estate construction and land development loans.

Three Months Ended June 30, 2013

	Consumer and Credit Card			Commercial and Industrial			Commercial Real Estate			Residential Real Estate and Home Equity			Total
Beginning balance	$	287		$	1,586		$	4,724		$	161		$	6,758
Charge-offs		(98	)		(15	)		(28	)		(46	)		(187	)
Recoveries		50			86			13			22			172
Provision		129			(85	)		(346	)		63			(240	)
Ending balance	$	368		$	1,572		$	4,363		$	200		$	6,503
Individually evaluated for impairment	$	-		$	733		$	2,532		$	-		$	3,265
Collectively evaluated for impairment		368			839			1,831			200			3,238
Ending balance	$	368		$	1,572		$	4,363		$	200		$	6,503
Loans
Individually evaluated for impairment	$	-		$	5,586		$	20,980		$	-		$	26,566
Collectively evaluated for impairment		29,277			119,723			86,518			83,472			318,990
Total	$	29,277		$	125,309		$	107,498		$	83,472		$	345,556

Three Months Ended June 30, 2012

	Consumer and Credit Card			Commercial and Industrial			Commercial Real Estate			Residential Real Estate and Home Equity			Total
Beginning balance	$	393		$	2214		$	6,524		$	212		$	9,343
Charge-offs		(88	)		(30	)		(414	)		(20	)		(552	)
Recoveries		47			43			5			7			102
Provision		21			(95	)		321			8			255
Ending balance	$	373		$	2132		$	6,436		$	207		$	9,148
Individually evaluated for impairment	$	-		$	494		$	5,353		$	-		$	5,847
Collectively evaluated for impairment		373			1,638			1,083			207			3,301
Ending balance	$	373		$	2,132		$	6,436		$	207		$	9,148
Loans
Individually evaluated for impairment	$	-		$	11,079		$	27,443		$	-		$	38,522
Collectively evaluated for impairment		18,312			100,727			89,744			75,437			284,220
Total	$	18,312		$	111,806		$	117,187		$	75,437		$	322,742

Six months ended June 30, 2013

	Consumer and Credit Card			Commercial and Industrial			Commercial Real Estate			Residential Real Estate and Home Equity			Total
Beginning balance	$	365		$	1,621		$	4,692		$	204		$	6,882
Charge-offs		(136	)		(79	)		(130	)		(89	)		(434	)
Recoveries		110			774			23			38			945
Provision		29			(744	)		(222	)		47			(890	)
Ending balance	$	368		$	1,572		$	4,363		$	200		$	6,503

Six months ended June 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
Charge-offs		(212	)		(147	)		(1,074	)		(19	)		(1,451	)
Recoveries		111			151			13			11			285
Provision		49			176			581			(76	)		730
Ending balance	$	373		$	2,132		$	6,436		$	207		$	9,148

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. Commercial and commercial real estate loans with risk grades Substandard, Vulnerable, Doubtful, or Loss are evaluated for impairment.

The following presents by class, information related to the Corporation’s impaired loans as of June 30, 2013 and December 31, 2012.

At June 30, 2013

	Recorded Investment		Unpaid Principal Balance		Related Allowance		6 Months Average Recorded Investment		6 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		3,050		3,127		-		3,532		73		3,233		40
Commercial Real Estate		11,068		13,152		-		9,221		333		9,751		166
Residential RE and Home Equity		-		-		-		-		-		-		-
With Allowance Recorded
Consumer and Credit Card		-		-		-		-		-		-		-
Commercial and Industrial		2,536		4,179		733		1,957		111		2,393		85
Commercial Real Estate		9,912		10,837		2,532		11,792		164		11,005		78
Residential RE and Home Equity		-		-		-		-		-		-		-
Total
Consumer and Credit Card	$	-	$	-	$	-	$	-	$	-	$	-		-
Commercial and Industrial		5,586		7,306		733		5,489		184		5,626		125
Commercial Real Estate		20,980		23,989		2,532		21,013		497		20,756		244
Residential RE and Home Equity		-		-		-		-		-		-		-
Total	$	26,566	$	31,295	$	3,265	$	26,502	$	681	$	26,382		369

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

Loans on nonaccrual status at June 30, 2013 and December 31, 2012 are as follows:

	June 30,		December 31,
	2013		2012
Consumer and credit card	$	-	$	-
Commercial and industrial		1,794		2,815
Commercial real estate		3,632		2,195
Residential real estate and home equity		271		321
Total	$	5,697	$	5,331

Credit Quality Indicators

Corporate risk exposure by risk profile was as follows at June 30, 2013:

Category	Commercial and Industrial		Commercial Real Estate
Pass-1-4	$	104,963	$	76,539
Vulnerable-5		11,195		13,704
Substandard-6		9,151		17,255
Doubtful-7		-		-
Loss-8		-		-
Total	$	125,309	$	107,498

Corporate risk exposure by risk profile was as follows 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

Risk Category Descriptions

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

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

Vulnerable (Special Mention) – 5

Loans which possess some credit deficiency or potential weakness which deserves close attention, but which do not yet warrant substandard classification. Such loans pose unwarranted financial risk that, if not corrected, could weaken the loan and increase risk in the future. The key distinctions of a 5 (Special Mention) classification are that (1) it is indicative of an unwarranted level of risk, and (2) weaknesses are considered “potential”, versus “well-defined”, impairments to the primary source of loan repayment.

Substandard – 6

Loans that are inadequately protected by the current sound 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, which 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 lender 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 lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

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

Doubtful – 7

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

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

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

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

Loss – 8

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

Consumer Risk

Consumer risk based on payment activity at June 30, 2013 is as follows.

Payment Category	Consumer and Credit Card		Residential Real Estate and Home Equity
Performing	$	29,201	$	83,201
Non-performing		76		271
Total	$	29,277	$	83,472

Consumer risk based on payment activity at December 31, 2012 is as follows.

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

Age Analysis of Past Due Loans

The following table presents past due loans aged as of June 30, 2013.

Category	30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 days and Accruing
Consumer and credit card	$	59	$	43	$	76	$	178	$	29,099	$	29,277	$	76
Commercial and industrial		1,296		289		-		1,585		123,724		125,309		-
Commercial real estate		-		212		2,586		2,798		104,700		107,498		-
Residential real estate and home equity		281		40		271		592		82,880		83,472		-
Total	$	1,636	$	584	$	2,933	$	5,153	$	340,403	$	345,556	$	76

The following table presents past due loans aged as of 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

Troubled Debt Restructurings

Information regarding Troubled Debt Restructuring (“TDR”) loans for the three and six month periods ended June 30, 2013 and 2012 is as follows:

	Three Months Ended				Six Months Ended
	June 30, 2013				June 30, 2013
	Number of Contracts		Recorded Investment (as of period end)		Number of Contracts		Recorded Investment (as of period end)
Consumer and Credit Card		1	$	1		1	$	1
Commercial and Industrial		-		-		3		903
Commercial Real Estate		3		163		5		3,600
Residential Real Estate and Home Equity		-		-		-		-
Total		4	$	164		9	$	4,504

	Three Months Ended				Six Months Ended
	June 30, 2012				June 30, 2012
	Number of Contracts		Recorded Investment (as of period end)		Number of Contracts		Recorded Investment (as of period end)
Consumer and Credit Card		5	$	92		6	$	93
Commercial and Industrial		-		-		-		-
Commercial Real Estate		2		3,929		2		3,929
Residential Real Estate and Home Equity		-		-		-		-
Total		7	$	4,021		8	$	4,022

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

The following presents by class loans modified in a TDR from July 1, 2012 through June 30, 2013 that subsequently defaulted (i.e. 60 days or more past due following a modification) during the three and six month periods ended June 30, 2013.

	Three Months Ended				Six Months Ended
	June 30, 2013				June 30, 2013
	Number of Contracts		Recorded Investment as of period end (1)		Number of Contracts		Recorded Investment as of period end (1)
Consumer and Credit Card		1	$	8		1	$	8
Commercial and Industrial		-		-		-		-
Commercial Real Estate		2		114		2		114
Residential Real Estate and Home Equity		-		-		-		-
Total		3	$	122		3	$	122

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

	Three Months Ended				Six Months Ended
	June 30, 2012				June 30, 2012
	Number of Contracts		Recorded Investment as of period end (1)		Number of Contracts		Recorded Investment as of period end (1)
Consumer and Credit Card		-	$	-		-		-
Commercial and Industrial		-		-		-		-
Commercial Real Estate		1		1,540		1		1,540
Residential Real Estate and Home Equity		-		-		-		-
Total		1	$	1,540		1	$	1,540

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

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

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

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

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

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Securities

6 Months Ended

Jun. 30, 2013

Investments, Debt and Equity Securities [Abstract]

SECURITIES

NOTE 2 – SECURITIES

As of June 30, 2013:

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

	Adjusted Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government and agency obligations	$	17,848	$	36	$	156	$	17,728
Corporate bonds		6,716		57		58		6,715
States and municipal obligations		20,612		628		163		21,077
Collateralized debt obligations		1,916		-		912		1,004
Mortgage-backed securities		40,465		742		232		40,975
Total	$	87,557	$	1,463	$	1,521	$	87,499

As of December 31, 2012: 

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

	Adjusted Amortized Cost		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

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

	Adjusted Amortized Cost		Gross Unrealized Gains		Estimated Fair Value
Collateralized debt obligations	$	1,149	$	941	$	2,090

There were no credit losses recognized on investments in the three and six months ended June 30, 2013 and 2012.

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at June 30, 2013 and December 31, 2012:

June 30, 2013

	(Less than 12 months)						(12 months or longer)					Total
Description of securities	Number of  investments		Fair value		Unrealized  losses		Number of  investments	Fair value		Unrealized  losses		Number of  investments		Fair value		Unrealized  losses
U.S. Government and agency obligations		9	$	8,968	$	156	-	$	-	$	-		9	$	8,968	$	156
Collateralized debt obligations		-		-		-	1		1,004		912		1		1,004		912
Corporate bonds		6		2,497		58	-		-		-		6		2,497		58
State and municipal obligations		17		5,971		152	1		498		11		18		6,469		163
Mortgage-backed securities and other		14		10,807		230	1		476		2		15		11,283		232
Total temporarily impaired securities		46	$	28,243	$	596	2	$	974	$	13		48	$	29,217	$	609

December 31, 2012

	(Less than 12 months)						(12 months or longer)						Total
Description of securities	Number of  investments		Fair value		Unrealized  losses		Number of  investments		Fair value		Unrealized  losses		Number of  investments		Fair value		Unrealized  losses
U.S. Government and agency obligations		3	$	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 Corporation’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 Corporation does not intend to sell the investments and it is not more likely than not the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation did not consider those investments to be OTTI June 30, 2013 or December 31, 2012.

The Corporation’s investments in collateralized debt obligations relate to an original investment of $8,000 in pooled trust securities. In 2009, the Corporation recognized an OTTI 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 Corporation evaluates the investments on a quarterly basis for OTTI and other unrealized gains or losses due to temporary market factors. Historically these securities were classified as held-to-maturity. As previously mentioned above, one security was sold from this portfolio during the six months ended June 30, 2013. In connection with this sale, the remaining securities in this portfolio have been reclassified as available-for-sale as of June 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 June 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 June 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.

	Available-for-sale				Held-to-maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	1,547	$	1,557	$	-	$	-
Due after one to five years		8,041		8,110		-		-
Due after five to ten years		25,011		25,150		-		-
Due after ten years		12,493		11,707		-		-
Mortgage-backed and related securities		40,465		40,975		-		-
Total	$	87,557	$	87,499	$	-	$	-

Securities with a fair value of $76,709 at June 30, 2013 were pledged to secure public deposits and other obligations.

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Stock Based Compensation (Details 1) (USD $)	6 Months Ended
	Jun. 30, 2013
Range One [Member]
Stock options outstanding
Number Outstanding	72,275
Exercise Prices, Lower Range	$ 3.50
Exercise Prices, Higher Range	$ 4.00
Range Two [Member]
Stock options outstanding
Number Outstanding	72,069
Exercise Prices, Lower Range	$ 4.01
Exercise Prices, Higher Range	$ 4.95
Range Three [Member]
Stock options outstanding
Number Outstanding	36,091
Exercise Prices, Lower Range	$ 4.96
Exercise Prices, Higher Range	$ 12.95
Range Four [Member]
Stock options outstanding
Number Outstanding	40,049
Exercise Prices, Lower Range	$ 12.96
Exercise Prices, Higher Range	$ 23.20
Range Five [Member]
Stock options outstanding
Number Outstanding	31,602
Exercise Prices, Lower Range	$ 23.21
Exercise Prices, Higher Range	$ 30.70

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Loans (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Loans
Commercial and industrial	$ 125,309	$ 112,300
Commercial real estate	107,498	111,417
Residential real estate and home equity	83,472	72,137
Consumer and credit card	29,277	21,620
Total Loans	345,556	317,474
Add: Net deferred loan origination fees	81	30
Total loans	$ 345,637	$ 317,504

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Credit Quality (Details 3) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Credit Quality Indicators
Loans	$ 345,637	$ 317,504
Commercial and Industrial [Member]
Credit Quality Indicators
Loans	125,309	112,300
Commercial and Industrial [Member] | Pass-1-4 [Member]
Credit Quality Indicators
Loans	104,963	90,516
Commercial and Industrial [Member] | Vulnerable-5 [Member]
Credit Quality Indicators
Loans	11,195	12,240
Commercial and Industrial [Member] | Substandard-6 [Member]
Credit Quality Indicators
Loans	9,151	9,544
Commercial and Industrial [Member] | Doubtful-7 [Member]
Credit Quality Indicators
Loans	0	0
Commercial and Industrial [Member] | Loss-8 [Member]
Credit Quality Indicators
Loans	0	0
Commercial Real Estate [Member]
Credit Quality Indicators
Loans	107,498	111,417
Commercial Real Estate [Member] | Pass-1-4 [Member]
Credit Quality Indicators
Loans	76,539	76,708
Commercial Real Estate [Member] | Vulnerable-5 [Member]
Credit Quality Indicators
Loans	13,704	12,289
Commercial Real Estate [Member] | Substandard-6 [Member]
Credit Quality Indicators
Loans	17,255	22,420
Commercial Real Estate [Member] | Doubtful-7 [Member]
Credit Quality Indicators
Loans	0	0
Commercial Real Estate [Member] | Loss-8 [Member]
Credit Quality Indicators
Loans	$ 0	$ 0

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Fair Value Measurements (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012	Dec. 31, 2011
Financial assets
Cash and cash equivalents, Carrying amount	$ 38,300	$ 63,307	$ 57,153	$ 39,314
Securities available-for-sale, Carrying amount	87,499	87,197
Securities held-to-maturity , Carrying amount	0	1,149
Securities held-to-maturity, Fair Value	0
Loans (net of allowance), Carrying amount	339,134	310,623
FHLB stock, Carrying amount	3,799	3,799
Financial liabilities
Noninterest-bearing deposits, Carrying amount	96,875	95,847
Interest-bearing deposits, Carrying amount	349,313	352,443
FHLB advances, Carrying amount	5,760	7,498
Level 1 [Member]
Financial assets
Cash and cash equivalents, Fair value	38,300	63,307
Securities available-for-sale, Fair value	0
Securities held-to-maturity, Fair Value	0
Loans (net of allowance), Fair value
FHLB stock, Fair value
Accrued interest receivable, Fair value
Financial liabilities
Noninterest-bearing deposits, Fair value
Interest-bearing deposits, Fair value
FHLB advances, Fair value
Accrued interest payable, Fair value
Level 2 [Member]
Financial assets
Cash and cash equivalents, Fair value	0
Securities available-for-sale, Fair value	86,495	87,197
Securities held-to-maturity, Fair Value	0
Loans (net of allowance), Fair value
FHLB stock, Fair value	3,799	3,799
Accrued interest receivable, Fair value
Financial liabilities
Noninterest-bearing deposits, Fair value	96,875	95,847
Interest-bearing deposits, Fair value	349,871	352,759
FHLB advances, Fair value	5,760	7,498
Accrued interest payable, Fair value
Level 3 [Member]
Financial assets
Cash and cash equivalents, Fair value	0
Securities available-for-sale, Fair value	1,004
Securities held-to-maturity, Fair Value	0	2,090
Loans (net of allowance), Fair value	331,564	307,729
FHLB stock, Fair value
Accrued interest receivable, Fair value	1,529	1,287
Financial liabilities
Noninterest-bearing deposits, Fair value
Interest-bearing deposits, Fair value
FHLB advances, Fair value
Accrued interest payable, Fair value	189	208
Carrying amount [Member]
Financial assets
Cash and cash equivalents, Carrying amount	38,300	63,307
Securities available-for-sale, Carrying amount	87,499	87,197
Securities held-to-maturity , Carrying amount	0	1,149
Loans (net of allowance), Carrying amount	339,134	310,623
FHLB stock, Carrying amount	3,799	3,799
Accrued interest receivable, Carrying amount	1,529	1,287
Financial liabilities
Noninterest-bearing deposits, Carrying amount	96,875	95,847
Interest-bearing deposits, Carrying amount	349,313	352,443
FHLB advances, Carrying amount	5,760	7,498
Accrued interest payable, Carrying Amount	189	208
Fair value [Member]
Financial assets
Cash and cash equivalents, Fair value	38,300	63,307
Securities available-for-sale, Fair value	87,499	87,197
Securities held-to-maturity, Fair Value	0	2,090
Loans (net of allowance), Fair value	331,564	307,729
FHLB stock, Fair value	3,799	3,799
Accrued interest receivable, Fair value	1,529	1,287
Financial liabilities
Noninterest-bearing deposits, Fair value	96,875	95,847
Interest-bearing deposits, Fair value	349,871	352,759
FHLB advances, Fair value	5,760	7,498
Accrued interest payable, Fair value	$ 189	$ 208

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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Common stock, par value (in dollars per share)	$ 0	$ 0
Common stock, shares authorized	7,500,000	7,500,000
Common stock, shares issued	7,500,000	7,500,000
Common Stock, Shares, Outstanding	7,192,350	7,192,350
Treasury stock, shares	307,650	307,650

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

Earnings per share

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" labelrole="verboseLabel" userrole="Summary of Significant Accounting Policies (Tables)">Weighted-average shares for basic and diluted earnings per share are presented below.

	Three Months Ended June 30,		Six Months Ended  June 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	35,551	22,964	33,223	15,745
Weighted-average common shares outstanding (diluted)	7,227,901	3,740,349	7,225,573	3,733,130

Options to purchase 252,086 shares of common stock with a weighted-average exercise price of $9.87 were outstanding at June 30, 2013. There were 144,344 shares included in the computation of common share equivalents for the three-month and six-month periods then ended because the average fair value of the shares was greater than the exercise price.

Options to purchase 199,856 shares of common stock with a weighted-average exercise price of $12.52 were outstanding at June 30, 2012. There were 17,707 and 15,745 shares included in the computation of common share equivalents for the three-month and six-month periods then ended because the average fair value of the shares was greater than the exercise price.

Stock-Based Compensation

Equity compensation plan

The corporation 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 these awards at the reporting date. A Black-Scholes model is utilized to estimate the fair value of stock options at the date of grant and subsequent remeasurement dates. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards. The Corporation’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.

Application of Critical Accounting Policies

Application of Critical Accounting Policies

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

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

The valuation of other assets requires that management utilize a variety of estimates and analyses to determine whether an asset is impaired or other-than-temporarily impaired (“OTTI”). After determining the appropriate methodology for fair value measurement, management then evaluates whether or not declines in fair value below book value are temporary or OTTIs. When the Corporation does not intend to sell a debt security, and it is more likely than not that the Corporation will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an OTTI of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an OTTI recorded in other comprehensive income for the noncredit portion of a previous OTTI is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

Loans

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

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

Allowance for Loan Losses

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

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

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

Uncollectability is usually determined based on a pre-determined number of days delinquent in the case of consumer loans, or, in the case of commercial loans, is based on a combination of factors including delinquency, collateral and other legal considerations. Consumer loans are charged-off prior to 120 days of delinquency, but could be charged off earlier, depending on the individual circumstances. Mortgage loans are charged down prior to 180 days of delinquency, but could be charged off sooner, again, depending upon individual circumstance. Typically, loans collateralized by consumer real estate are partially charged down to the estimated liquidation value, which is generally based on appraisal less costs to hold and liquidate. Commercial and commercial real estate loans are evaluated for impairment and typically reserved based on the results of the analysis, then subsequently charged down to a recoverable value when loan repayment is deemed to be collateral dependent. Loans can be partially charged down depending on a number of factors including: the remaining strength of the borrower and guarantor; the type and value of the collateral, and the ease of liquidating collateral; and whether or not collateral is brought onto the bank’s balance sheet via repossession. In the case of commercial and commercial real estate loans, charge-offs, partial or whole, take place when Management determines that full collectability of principal balance is unlikely to occur. Subsequent recoveries, if any, are credited to the allowance. Management’s policies for determining impairment, reserves and charge-offs are reviewed and approved by the Board of Directors on an annual basis, and have not materially changed in 2013.

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

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Net income	$ 156	$ 283	$ 298	$ 442
Other comprehensive income (loss):
Reclassification of previously recognized noncredit other-than-temporary impairment on sale of security, net of tax of $512	995	0	995	0
Unrealized gains (losses) on securities available-for-sale, net of related taxes of $(398), $206, $(386), and $24 in 2013 and 2012, respectively	(772)	400	(749)	46
Unrealized gains on securities transferred into available-for-sale, net of related taxes of $131	254	0	254	0
Amortization of unrealized losses on held-to-maturity securities, net of taxes of $9, $12, $21, and $5 in 2013 and 2012 respectively	19	23	42	10
Total other comprehensive income	496	423	542	56
Comprehensive income	$ 652	$ 706	$ 840	$ 498

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CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
ASSETS
Cash and due from financial institutions	$ 9,439	$ 9,663
Interest-bearing deposits	28,861	53,644
Total cash and cash equivalents	38,300	63,307
Securities available-for-sale	87,499	87,197
Securities held-to-maturity	0	1,149
Total securities	87,499	88,346
Loans	345,637	317,504
Less allowance for loan losses	(6,503)	(6,881)
Net Loans	339,134	310,623
Real estate owned	2,100	3,671
Investment in FHLB Stock	3,799	3,799
Premises and equipment, net	12,110	12,036
Bank owned life insurance	18,969	18,564
Accrued interest receivable and other assets	3,246	6,146
Total assets	505,157	506,492
LIABILITIES
Noninterest bearing deposits	96,875	95,847
Interest bearing deposits	349,313	352,443
Total deposits	446,188	448,290
FHLB advances	5,760	7,498
Accrued interest payable and other liabilities	3,980	2,315
Total liabilities	455,928	458,103
STOCKHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized, 7,500,000 shares issued, and 7,192,350 shares outstanding at June 30, 2013 and December 31, 2012	15,771	15,771
Retained earnings	40,912	40,614
Treasury stock, at cost, 307,650 shares at June 30, 2013 and December 31, 2012	(7,416)	(7,416)
Accumulated other comprehensive loss	(38)	(580)
Total stockholders' equity	49,229	48,389
Total liabilities and stockholders' equity	$ 505,157	$ 506,492

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Credit Quality (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Allowance for credit losses
Beginning balance	$ 6,758	$ 9,343	$ 6,881	$ 9,584
Charge-offs	(187)	(552)	(434)	(1,451)
Recoveries	172	102	945	285
Provision	(240)	255	(890)	730
Individually evaluated for impairment	3,265	5,847	3,265	5,847
Collectively evaluated for impairment	3,238	3,301	3,238	3,301
Ending balance	6,503	9,148	6,503	9,148
Loans
Individually evaluated for impairment	26,566	38,522	26,566	38,522
Collectively evaluated for impairment	318,990	284,220	318,990	284,220
Total	345,556	322,742	345,556	322,742
Consumer and Credit Card [Member]
Allowance for credit losses
Beginning balance	287	393	365	425
Charge-offs	(98)	(88)	(136)	(212)
Recoveries	50	47	110	111
Provision	129	21	29	49
Individually evaluated for impairment	0	0	0	0
Collectively evaluated for impairment	368	373	368	373
Ending balance	368	373	368	373
Loans
Individually evaluated for impairment	0	0	0	0
Collectively evaluated for impairment	29,277	18,312	29,277	18,312
Total	29,277	18,312	29,277	18,312
Commercial and Industrial [Member]
Allowance for credit losses
Beginning balance	1,586	2,214	1,621	1,952
Charge-offs	(15)	(30)	(79)	(147)
Recoveries	86	43	774	151
Provision	(85)	(95)	(744)	176
Individually evaluated for impairment	733	494	733	494
Collectively evaluated for impairment	839	1,638	839	1,638
Ending balance	1,572	2,132	1,572	2,132
Loans
Individually evaluated for impairment	5,586	11,079	5,586	11,079
Collectively evaluated for impairment	119,723	100,727	119,723	100,727
Total	125,309	111,806	125,309	111,806
Commercial Real Estate [Member]
Allowance for credit losses
Beginning balance	4,724	6,524	4,692	6,916
Charge-offs	(28)	(414)	(130)	(1,074)
Recoveries	13	5	23	13
Provision	(346)	321	(222)	581
Individually evaluated for impairment	2,532	5,353	2,532	5,353
Collectively evaluated for impairment	1,831	1,083	1,831	1,083
Ending balance	4,363	6,436	4,363	6,436
Loans
Individually evaluated for impairment	20,980	27,443	20,980	27,443
Collectively evaluated for impairment	86,518	89,744	86,518	89,744
Total	107,498	117,187	107,498	117,187
Residential Real Estate and Home Equity [Member]
Allowance for credit losses
Beginning balance	161	212	204	291
Charge-offs	(46)	(20)	(89)	(19)
Recoveries	22	7	38	11
Provision	63	8	47	(76)
Individually evaluated for impairment	0	0	0	0
Collectively evaluated for impairment	200	207	200	207
Ending balance	200	207	200	207
Loans
Individually evaluated for impairment	0	0	0	0
Collectively evaluated for impairment	83,472	75,437	83,472	75,437
Total	$ 83,472	$ 75,437	$ 83,472	$ 75,437

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Securities (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Fair values of securities available-for-sale
Adjusted Amortized Costs	$ 87,557	$ 85,208
Gross Unrealized Gains	1,463	2,069
Gross Unrealized Losses	1,521	80
Fair Value	87,499	87,197
Collateralized Debt Obligations [Member]
Fair values of securities available-for-sale
Adjusted Amortized Costs	1,916
Gross Unrealized Gains	0
Gross Unrealized Losses	912
Fair Value	1,004
U.S. Government and agency obligations [Member]
Fair values of securities available-for-sale
Adjusted Amortized Costs	17,848	16,821
Gross Unrealized Gains	36	134
Gross Unrealized Losses	156	18
Fair Value	17,728	16,937
Corporate bonds [Member]
Fair values of securities available-for-sale
Adjusted Amortized Costs	6,716	5,081
Gross Unrealized Gains	57	86
Gross Unrealized Losses	58	2
Fair Value	6,715	5,165
States and municipal obligations [Member]
Fair values of securities available-for-sale
Adjusted Amortized Costs	20,612	19,874
Gross Unrealized Gains	628	918
Gross Unrealized Losses	163	31
Fair Value	21,077	20,761
Mortgage-backed securities [Member]
Fair values of securities available-for-sale
Adjusted Amortized Costs	40,465	43,432
Gross Unrealized Gains	742	931
Gross Unrealized Losses	232	29
Fair Value	$ 40,975	$ 44,334

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Fair Value Measurements (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value	$ 0
Quoted Prices in Active Markets for Identical Assets, Level 1 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value	0
Significant Other Observable Inputs, Level 2 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value	0
Significant Unobservable Inputs, Level 3 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value	0	2,090
Collateralized debt obligations [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value		2,090
Collateralized debt obligations [Member] | Fair Value, Measurements, Nonrecurring [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value		2,090
Collateralized debt obligations [Member] | Fair Value, Measurements, Nonrecurring [Member] | Quoted Prices in Active Markets for Identical Assets, Level 1 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value		0
Collateralized debt obligations [Member] | Fair Value, Measurements, Nonrecurring [Member] | Significant Other Observable Inputs, Level 2 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value		0
Collateralized debt obligations [Member] | Fair Value, Measurements, Nonrecurring [Member] | Significant Unobservable Inputs, Level 3 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value		2,090
Impaired loans [Member] | Fair Value, Measurements, Nonrecurring [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value	26,566	23,370
Impaired loans [Member] | Fair Value, Measurements, Nonrecurring [Member] | Quoted Prices in Active Markets for Identical Assets, Level 1 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value		0
Impaired loans [Member] | Fair Value, Measurements, Nonrecurring [Member] | Significant Other Observable Inputs, Level 2 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value		0
Impaired loans [Member] | Fair Value, Measurements, Nonrecurring [Member] | Significant Unobservable Inputs, Level 3 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value	26,566	23,370
Real estate owned [Member] | Fair Value, Measurements, Nonrecurring [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value	2,100	3,671
Real estate owned [Member] | Fair Value, Measurements, Nonrecurring [Member] | Quoted Prices in Active Markets for Identical Assets, Level 1 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value	0	0
Real estate owned [Member] | Fair Value, Measurements, Nonrecurring [Member] | Significant Other Observable Inputs, Level 2 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value	0	0
Real estate owned [Member] | Fair Value, Measurements, Nonrecurring [Member] | Significant Unobservable Inputs, Level 3 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value	$ 2,100	$ 3,671

XML

Credit Quality (Details 6) (USD $) In Thousands, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2013		Jun. 30, 2012		Jun. 30, 2013		Jun. 30, 2012
Troubled Debt Restructurings
Number of Contracts	4		7		9		8
Recorded Investment	$ 164		$ 4,021		$ 4,504		$ 4,022
Number of Contracts modified	3		1		3		1
Recorded Investment modified	122	[1]	1,540	[1]	122	[1]	1,540	[1]
Consumer and Credit Card [Member]
Troubled Debt Restructurings
Number of Contracts	1		5		1		6
Recorded Investment	1		92		1		93
Number of Contracts modified	1		0		1		0
Recorded Investment modified	8	[1]	0	[1]	8	[1]	0	[1]
Commercial and Industrial [Member]
Troubled Debt Restructurings
Number of Contracts	0		0		3		0
Recorded Investment	0		0		903		0
Number of Contracts modified	0		0		0		0
Recorded Investment modified	0	[1]	0	[1]	0	[1]	0	[1]
Commercial Real Estate [Member]
Troubled Debt Restructurings
Number of Contracts	3		2		5		2
Recorded Investment	163		3,929		3,600		3,929
Number of Contracts modified	2		1		2		1
Recorded Investment modified	114	[1]	1,540	[1]	114	[1]	1,540	[1]
Residential Real Estate and Home Equity [Member]
Troubled Debt Restructurings
Number of Contracts	0		0		0		0
Recorded Investment	0		0		0		0
Number of Contracts modified	0		0		0		0
Recorded Investment modified	$ 0	[1]	$ 0	[1]	$ 0	[1]	$ 0	[1]

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

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Credit Quality (Details Textual)	6 Months Ended
	Jun. 30, 2013
Credit Quality (Textual) [Abstract]
Non-accrual eligibility accruing status	6 months
Troubled Debt Restructuring extension period, Minimum	1 year
Troubled Debt Restructuring extension period, Maximum	3 years

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Stock Based Compensation

6 Months Ended

Jun. 30, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

STOCK-BASED COMPENSATION

NOTE 6 – STOCK BASED COMPENSATION

The Corporation’s shareholders approved the 2004 Long-Term Stock Incentive Plan (the “Plan”) in May 2004. This Plan provides for grants of equity-based awards to certain employees.  The Plan is limited to 300,000 common shares. The shares granted to employees vest 20% per year over a five year period. The options expire after ten years. At June 30, 2013, options to purchase 115,987 shares were vested and exercisable, and  45,596 shares remained available for grant under the Plan.

The Corporation recognizes compensation cost for vested equity-based awards based on their June 30, 2013 fair value. The Corporation recorded $30 and $79 in compensation cost for equity-based awards that vested during the three months ended June 30, 2013 and 2012, respectively.

In determining the fair value of the stock options at June 30, 2013, the Corporation 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 Plan as of and for the six months ended June 30, 2013, and changes during the period then ended are presented below:

 

	Shares	Weighted   Average  Exercise   Price		Weighted   Average  Remaining   Contractual  Life		Aggregate Intrinsic Value
Outstanding at beginning of year	261,098	$	10.38		6.9 years
Granted	13,889		5.40		9.6 years
Exercised	(2,250)		3.50		—
Forfeited	(20,651)		13.98		—
Outstanding at end of period	252,086	$	9.87		6.9 years	$	188
Options exercisable at period end	118,333	$	16.39		4.9 years	$	52
Weighted-average fair value of options granted during the six months ended ended June 30, 2013		$	1.73
Weighted-average fair value of options granted during the year ended December 31, 2012		$	1.97

At June 30, 2013, unrecognized compensation expense to be recognized over the remaining life of outstanding options is $262,000.

The following information applies to options outstanding at June 30, 2013:

Number Outstanding	Range Of Exercise Prices
72,275	$3.50 - $4.00
72,069	$4.01 - $4.95
36,091	$4.96 - $12.95
40,049	$12.96 - $23.20
31,602	$23.21 – $30.70

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Credit Quality (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2013	Dec. 31, 2012
Impaired Loans
Recorded Investment	$ 26,566	$ 26,566	$ 27,354
Unpaid Principal Balance	31,295	31,295	31,691
Related Allowance	3,265	3,265	3,740
Average Recorded Investment	26,382	26,502	35,797
Interest Income Recognized	369	681	1,394
Consumer and Credit Card [Member]
Impaired Loans
Recorded Investment	0	0	0
Unpaid Principal Balance	0	0	0
Related Allowance	0	0	0
Average Recorded Investment	0	0	0
Interest Income Recognized	0	0	0
Commercial and Industrial [Member]
Impaired Loans
Recorded Investment	5,586	5,586	5,471
Unpaid Principal Balance	7,306	7,306	5,685
Related Allowance	733	733	340
Average Recorded Investment	5,626	5,489	9,765
Interest Income Recognized	125	184	333
Commercial Real Estate [Member]
Impaired Loans
Recorded Investment	20,980	20,980	21,883
Unpaid Principal Balance	23,989	23,989	26,006
Related Allowance	2,532	2,532	3,400
Average Recorded Investment	20,756	21,013	26,032
Interest Income Recognized	244	497	1,061
Residential RE and Home Equity [Member]
Impaired Loans
Recorded Investment	0	0	0
Unpaid Principal Balance	0	0	0
Related Allowance	0	0	0
Average Recorded Investment	0	0	0
Interest Income Recognized	0	0	0
With No Related Allowance Recorded [Member] | Consumer and Credit Card [Member]
Impaired Loans
Recorded Investment	0	0	0
Unpaid Principal Balance	0	0	0
Related Allowance	0	0	0
Average Recorded Investment	0	0	0
Interest Income Recognized	0	0	0
With No Related Allowance Recorded [Member] | Commercial and Industrial [Member]
Impaired Loans
Recorded Investment	3,050	3,050	4,288
Unpaid Principal Balance	3,127	3,127	4,437
Related Allowance	0	0	0
Average Recorded Investment	3,233	3,532	3,557
Interest Income Recognized	40	73	268
With No Related Allowance Recorded [Member] | Commercial Real Estate [Member]
Impaired Loans
Recorded Investment	11,068	11,068	5,507
Unpaid Principal Balance	13,152	13,152	5,998
Related Allowance	0	0	0
Average Recorded Investment	9,751	9,221	10,067
Interest Income Recognized	166	333	241
With No Related Allowance Recorded [Member] | Residential RE and Home Equity [Member]
Impaired Loans
Recorded Investment	0	0	0
Unpaid Principal Balance	0	0	0
Related Allowance	0	0	0
Average Recorded Investment	0	0	0
Interest Income Recognized		0	0
With Allowance Recorded [Member] | Consumer and Credit Card [Member]
Impaired Loans
Recorded Investment	0	0	0
Unpaid Principal Balance	0	0	0
Related Allowance	0	0	0
Average Recorded Investment	0	0	0
Interest Income Recognized	0	0	0
With Allowance Recorded [Member] | Commercial and Industrial [Member]
Impaired Loans
Recorded Investment	2,536	2,536	1,183
Unpaid Principal Balance	4,179	4,179	1,248
Related Allowance	733	733	340
Average Recorded Investment	2,393	1,957	6,208
Interest Income Recognized	85	111	65
With Allowance Recorded [Member] | Commercial Real Estate [Member]
Impaired Loans
Recorded Investment	9,912	9,912	16,376
Unpaid Principal Balance	10,837	10,837	20,008
Related Allowance	2,532	2,532	3,400
Average Recorded Investment	11,005	11,792	15,965
Interest Income Recognized	78	164	820
With Allowance Recorded [Member] | Residential RE and Home Equity [Member]
Impaired Loans
Recorded Investment	0	0	0
Unpaid Principal Balance	0	0	0
Related Allowance	0	0	0
Average Recorded Investment	0	0	0
Interest Income Recognized	$ 0	$ 0	$ 0

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Stock Based Compensation (Details Textual) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013
Stock Based Compensation (Textual) [Abstract]
Employee share option plan	300,000,000		300,000,000
Options exercisable	118,333		118,333
Available for grant	45,596		45,596
Unvested equity-based awards based on their grant-date fair value	$ 30,000	$ 79,000
Expected common stock price volatility			30.00%
Employee share option plan granted			20.00%
Expiry term of option			10 years
Expected dividend yield			0.00%
Expected life			8 years
Unrecognized compensation expense to be recognized over the remaining life of outstanding options	$ 262,000		$ 262,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested, Number of Shares			115,987

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Securities (Tables)

6 Months Ended

Jun. 30, 2013

Investments, Debt and Equity Securities [Abstract]

Fair values of securities available-for-sale

As of June 30, 2013:

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

	Adjusted Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government and agency obligations	$	17,848	$	36	$	156	$	17,728
Corporate bonds		6,716		57		58		6,715
States and municipal obligations		20,612		628		163		21,077
Collateralized debt obligations		1,916		-		912		1,004
Mortgage-backed securities		40,465		742		232		40,975
Total	$	87,557	$	1,463	$	1,521	$	87,499

As of December 31, 2012: 

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

	Adjusted Amortized Cost		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

Fair values of securities held-to-maturity

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

	Adjusted Amortized Cost		Gross Unrealized Gains		Estimated Fair Value
Collateralized debt obligations	$	1,149	$	941	$	2,090

Unrealized loss

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at June 30, 2013 and December 31, 2012:

June 30, 2013

	(Less than 12 months)						(12 months or longer)					Total
Description of securities	Number of  investments		Fair value		Unrealized  losses		Number of  investments	Fair value		Unrealized  losses		Number of  investments		Fair value		Unrealized  losses
U.S. Government and agency obligations		9	$	8,968	$	156	-	$	-	$	-		9	$	8,968	$	156
Collateralized debt obligations		-		-		-	1		1,004		912		1		1,004		912
Corporate bonds		6		2,497		58	-		-		-		6		2,497		58
State and municipal obligations		17		5,971		152	1		498		11		18		6,469		163
Mortgage-backed securities and other		14		10,807		230	1		476		2		15		11,283		232
Total temporarily impaired securities		46	$	28,243	$	596	2	$	974	$	13		48	$	29,217	$	609

December 31, 2012

	(Less than 12 months)						(12 months or longer)						Total
Description of securities	Number of  investments		Fair value		Unrealized  losses		Number of  investments		Fair value		Unrealized  losses		Number of  investments		Fair value		Unrealized  losses
U.S. Government and agency obligations		3	$	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

Amortized cost and estimated fair value of all debt securities

The amortized cost and estimated fair value of all debt securities at June 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.

	Available-for-sale				Held-to-maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	1,547	$	1,557	$	-	$	-
Due after one to five years		8,041		8,110		-		-
Due after five to ten years		25,011		25,150		-		-
Due after ten years		12,493		11,707		-		-
Mortgage-backed and related securities		40,465		40,975		-		-
Total	$	87,557	$	87,499	$	-	$	-

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Fair Value Measurements

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

NOTE 5 – FAIR VALUE MEASUREMENTS

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

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

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

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

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

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 Corporation looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Corporation looks to observable market data for similar assets and liabilities. However, certain assets and liabilities are not traded in observable markets and the Corporation 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 Corporation to measure different financial assets and liabilities at fair value and in estimating its fair value disclosures for financial instruments.

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

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

The Corporation 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 Corporation 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 June 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 Corporation’s financial instruments are as follows:

At June 30, 2013:

	Carrying  Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	38,300	$	38,300	$	38,300	$	-	$	-
Securities available-for-sale		87,499		87,499		-		86,495		1,004
Securities held-to-maturity		-		-		-		-		-
Loans (net of allowance)		339,134		331,564						331,564
FHLB stock		3,799		3,799				3,799
Accrued interest receivable		1,529		1,529						1,529
Financial liabilities
Noninterest-bearing deposits	$	96,875	$	96,875			$	96,875
Interest-bearing deposits		349,313		349,871				349,871
FHLB advances		5,760		5,760				5,760
Accrued interest payable		189		189						189

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

The following table presents the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2013 and December 31, 2012:

June 30, 2013			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets  (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government and agency obligations	$	17,728	$	-	$	17,728	$	-
State and municipal obligations		21,077		-		21,077		-
Collateralized debt obligations		1,004		-		-		1,004
Corporate bonds		6,715		-		6,715		-
Mortgage-backed securities and other		40,975		-		40,975		-
Total	$	87,499	$	-	$	86,495	$	1,004

December 31, 2012			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government and agency obligations	$	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 Corporation previously recognized other-than-temporary impairment on the securities classified as collateralized debt obligations, based upon a Level 3 estimate of fair value, including a discounted cash flows calculation and a fair value estimate from an independent evaluation of the securities.

Impaired loans

At June 30, 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.

Real Estate Owned

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

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2013 and December 31, 2012.

June 30, 2013			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans		26,566						26,566
Real estate owned		2,100		-		-		2,100

December 31, 2012			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateralized debt obligations	$	2,090	$	-	$	-	$	2,090
Impaired loans		23,370		-		-		23,370
Real estate owned		3,671		-		-		3,671

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Cash flows provided by (used in) operating activites	$ 6,315	$ 5,389
Cash flows provided by (used in) investing activities
Purchases	(17,035)	(37,563)
Proceeds from maturities, principal payments and calls	15,417	17,149
Sales	2,561	12,934
Net change in loans	(30,012)	36,554
Proceeds from sale of real estate owned	1,314	1,672
Premises and equipment expenditures	(351)	(44)
Net cash flows provided by (used in) investing activities	(28,106)	30,702
Cash flows used in financing activities
Net change in deposits	(2,102)	4,216
Repayment of FHLB advances	(1,114)	(22,468)
Net cash used in financing activities	(3,216)	(18,252)
Net change in cash and cash equivalents	(25,007)	17,839
Cash and cash equivalents at beginning of period	63,307	39,314
Cash and cash equivalents at end of period	38,300	57,153
Supplemental disclosures of cash flow information:
Interest on deposits and borrowings	1,042	1,866
Supplemental disclosures of non-cash investing and financing activites
Transfers from loans to real estate owned	$ 10	$ 2,158

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Credit Quality (Details 4) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Consumer Risk
Consumer risk based on payment activity	$ 345,637	$ 317,504
Consumer and Credit Card [Member]
Consumer Risk
Consumer risk based on payment activity	29,277	21,620
Consumer and Credit Card [Member] | Performing [Member]
Consumer Risk
Consumer risk based on payment activity	29,201	21,592
Consumer and Credit Card [Member] | Non-Performing [Member]
Consumer Risk
Consumer risk based on payment activity	76	28
Residential Real Estate and Home Equity [Member]
Consumer Risk
Consumer risk based on payment activity	83,472	72,137
Residential Real Estate and Home Equity [Member] | Performing [Member]
Consumer Risk
Consumer risk based on payment activity	83,201	71,816
Residential Real Estate and Home Equity [Member] | Non-Performing [Member]
Consumer Risk
Consumer risk based on payment activity	$ 271	$ 321

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Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

Carrying amount and estimated fair values of financial instruments

Based on the foregoing methods and assumptions, the carrying value and fair value of the Corporation’s financial instruments are as follows:

At June 30, 2013:

	Carrying  Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	38,300	$	38,300	$	38,300	$	-	$	-
Securities available-for-sale		87,499		87,499		-		86,495		1,004
Securities held-to-maturity		-		-		-		-		-
Loans (net of allowance)		339,134		331,564						331,564
FHLB stock		3,799		3,799				3,799
Accrued interest receivable		1,529		1,529						1,529
Financial liabilities
Noninterest-bearing deposits	$	96,875	$	96,875			$	96,875
Interest-bearing deposits		349,313		349,871				349,871
FHLB advances		5,760		5,760				5,760
Accrued interest payable		189		189						189

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

Fair value measurements of assets recurring basis

The following table presents the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2013 and December 31, 2012:

June 30, 2013			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets  (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government and agency obligations	$	17,728	$	-	$	17,728	$	-
State and municipal obligations		21,077		-		21,077		-
Collateralized debt obligations		1,004		-		-		1,004
Corporate bonds		6,715		-		6,715		-
Mortgage-backed securities and other		40,975		-		40,975		-
Total	$	87,499	$	-	$	86,495	$	1,004

December 31, 2012			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government and agency obligations	$	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	$	-

Fair value measurements of assets nonrecurring basis

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2013 and December 31, 2012.

June 30, 2013			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans		26,566						26,566
Real estate owned		2,100		-		-		2,100

December 31, 2012			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateralized debt obligations	$	2,090	$	-	$	-	$	2,090
Impaired loans		23,370		-		-		23,370
Real estate owned		3,671		-		-		3,671

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Summary of Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

Weighted-average shares for basic and diluted earnings per share

Weighted-average shares for basic and diluted earnings per share" labelrole="verboseLabel" userrole="Summary of Significant Accounting Policies (Tables)">Weighted-average shares for basic and diluted earnings per share are presented below.

	Three Months Ended June 30,		Six Months Ended  June 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	35,551	22,964	33,223	15,745
Weighted-average common shares outstanding (diluted)	7,227,901	3,740,349	7,225,573	3,733,130

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Summary of Significant Accounting Policies (Details Textual) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Summary of Significant Accounting Policies (Textual) [Abstract]
Interest income on mortgage and commercial loans			90 days
Consumer loans charged off delinquency period			120 days
Mortgage loans charge off delinquency period			180 days
Options to purchase of common stock	252,086	199,856	252,086	199,856	261,098
Number Of Shares Included In Computation Of Common Shares Equivalents	144,344	17,707	144,344	15,745
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Period Increase (Decrease), Weighted Average Exercise Price			$ 9.87	$ 12.52

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Stock Based Compensation (Tables)

6 Months Ended

Jun. 30, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Summary of the status of the Corporation's stock option plan

A summary of the status of the Plan as of and for the six months ended June 30, 2013, and changes during the period then ended are presented below:

 

	Shares	Weighted   Average  Exercise   Price		Weighted   Average  Remaining   Contractual  Life		Aggregate Intrinsic Value
Outstanding at beginning of year	261,098	$	10.38		6.9 years
Granted	13,889		5.40		9.6 years
Exercised	(2,250)		3.50		—
Forfeited	(20,651)		13.98		—
Outstanding at end of period	252,086	$	9.87		6.9 years	$	188
Options exercisable at period end	118,333	$	16.39		4.9 years	$	52
Weighted-average fair value of options granted during the six months ended ended June 30, 2013		$	1.73
Weighted-average fair value of options granted during the year ended December 31, 2012		$	1.97

Stock options outstanding

The following information applies to options outstanding at June 30, 2013:

Number Outstanding	Range Of Exercise Prices
72,275	$3.50 - $4.00
72,069	$4.01 - $4.95
36,091	$4.96 - $12.95
40,049	$12.96 - $23.20
31,602	$23.21 – $30.70

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Document And Entity Information	6 Months Ended
	Jun. 30, 2013	Aug. 05, 2013
Document Information [Line Items]
Entity Registrant Name	DCB FINANCIAL CORP
Entity Central Index Key	0001025877
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Trading Symbol	DCBF
Entity Common Stock, Shares Outstanding		7,192,350
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2013
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2013

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Summary of Significant Accounting Policies (Details)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Weighted-average shares for basic and diluted earnings per share
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	35,551	22,964	33,223	15,745
Weighted-average common shares outstanding (diluted)	7,227,901	3,740,349	7,225,573	3,733,130