UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark one)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
EXCHANGE | ACT OF 1934 |
For the fiscal year ended December 31, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-22387
DCB FINANCIAL CORP
(Exact name of registrant as specified in its charter)
OHIO | 31-1469837 | |
(State or other jurisdiction of | (IRS Employer | |
incorporation or organization) | Identification No.) | |
110 Riverbend Ave., Lewis Center, Ohio | 43035 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code (740) 657-7000
Securities registered pursuant to Section 12(b) of the Act: None | ||
Securities registered pursuant to Section 12(g) of the Act: Common Shares, No par value |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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
At June 30, 2011, the aggregate market value of the voting and non-voting common equity held by nonaffiliates of the registrant, based on a common share price of $3.47 per share (such price being the closing stock price on such date) was $12,899,326.
At March 29, 2012, the registrant had 3,717,385 common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I and II of Form 10-K Portions of the Annual Report to Shareholders for the year ended December 31, 2011.
Part III of Form 10-K Portions of the Proxy Statement for the 2012 Annual Meeting of Shareholders of DCB Financial Corp.
EXPLANATION
The Annual Report on Form 10-K of DCB Financial Corp (DCB) for the fiscal year ended December 31, 2011 (the Form 10-K) is being amended to: (1) add discussion of additional regulations applicable to DCB; (2) add risk factors; (3) add a share purchase table to Item 5; (4) correct the headings of sections of DCBs proxy statement being incorporated by reference into the Form 10-K; (5) correct references in the index to exhibits with respect to exhibits being incorporated by reference into the Form 10-K; (6) add Exhibit 4.1 and compensatory contracts and other arrangement descriptions to the exhibits; and (7) make immaterial changes to wording in the description of the business, the annual report to shareholders of DCB attached as Exhibit 13 and the list of subsidiaries at Exhibit 21.
Except as described above, no other changes have been made to the Form 10-K. The Form 10-K/A continues to speak as of the date of the Form 10-K, and DCB has not updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the filing of the Form 10-K.
PART I
Item 1 Business
(a) | General Development of Business |
DCB Financial Corp (DCB or the Corporation) is a financial holding company headquartered in Lewis Center, Ohio. The Corporation has one wholly-owned subsidiary bank, The Delaware County Bank and Trust Company (the Bank). The Corporation also has two additional wholly owned subsidiaries, DCB Title and DCB Insurance Services LLC. DCB Title provides standard real estate title services, while DCB Insurance Services LLC provides a variety of insurance products. However, neither nonbank subsidiary is material to the financial results of the Corporation. The Bank has one wholly-owned subsidiary, ORECO, which is used to process other real estate owned.
The Corporation was incorporated under the laws of the State of Ohio in 1997, as a financial holding company under the Bank Holding Company Act of 1956, as amended, by acquiring all outstanding shares of the Bank. The Corporation acquired all such shares of the Bank after an interim bank merger, consummated on March 14, 1997. The Bank is a commercial bank, chartered under the laws of the State of Ohio, and was organized in 1950.
2
(b) | Narrative Description of Business |
The Bank provides customary retail and commercial banking services to its customers, including checking and savings accounts, time deposits, IRAs, safe deposit facilities, personal loans, commercial loans, real estate mortgage loans, installment loans, trust and other wealth management services. The Bank also provides cash management, bond registrar and paying agent services for commercial and public unit entities. Through its subsidiary Datatasx, the Bank provided data processing and other bank operational services to other financial institutions. Those services were discontinued in September 2011, and were not a significant part of operations or revenue.
The Bank grants residential real estate, commercial real estate, consumer and commercial loans to customers located primarily in Delaware, Franklin and Union Counties, Ohio. General economic conditions in the Corporations market area have been pressured by a slowing economic environment. Real estate values, especially in the Banks core geographic area, experienced a decline since 2009 and continue to remain under market pressure.
The Banks core business is not significantly affected by a single industry; however, a number of the Corporations depositors are public fund units which operate within the Banks geographic footprint. Though this groups deposit base is significant, overall balances do not fluctuate materially. No material industry or group concentrations exist in the loan portfolio.
Certain risks are involved in granting loans, primarily related to the borrowers ability and willingness to repay the debt. Before the Bank extends a loan to a customer, these risks are assessed through a review of the borrowers repayment capacity, past and current credit history, the collateral being used to secure the transaction in the event that the customer does not repay the debt, the borrowers character and other factors. Once the decision has been made to extend credit, the Banks loan officers, credit administration and loan review personnel monitor these factors throughout the life of the loan. Commercial and commercial real estate loans are assigned a risk rating at inception, and are reviewed annually thereafter when financial statements are received, and at other times when there is an indication that a credit may have weakened or improved. Risk rating changes require the signature of the Chief Credit Officer or his or her designee. The risk rating is also updated after it is reviewed through the process of annual reviews, loan quality reports, extensions, renewals, modifications or audits by external loan review or regulatory agencies. In addition, any loan identified as a problem credit is assigned to the Banks watch list, and is subject to ongoing monitoring by the Banks credit quality and workout committees to ensure proactive action is taken to mitigate loss potential.
Commercial, industrial and agricultural loans are primarily variable rate and include operating lines of credit and term loans made to small businesses primarily based on their ability to repay the loan from the business cash flow. These loans are typically secured by business assets such as equipment, accounts receivable, inventory, commercial real estate, agricultural real estate and, occasionally, by the business owners principal residence. When the borrower is not an individual, the Bank generally obtains the personal guarantee of the business owner. Commercial lending entails significant risks. These loans typically involve larger loan balances and are generally dependent on the business cash flow and, thus, may be subject to adverse conditions in the general economy or in a specific industry. Management reviews the borrowers historical cash flow to determine if the company has the ability to service proposed and existing obligations.
3
Commercial real estate and agricultural real estate loans are primarily secured by borrower-occupied business real estate and are dependent on the ability of the related business to generate adequate cash flow to service the debt. Such loans primarily carry adjustable interest rates. Commercial real estate and agricultural real estate loans are typically secured by real property and related improvements that are owned by the borrower. These loans are dependent on the borrowers ability to generate cash flows from the real estate, which can either be in the form of rental income or, as it relates to agriculture, in the form of crop or livestock revenues. Commercial real estate loans are generally originated with loan-to-value ratios of 75% or less and can require fixed or adjustable interest rates. Owner-occupied real estate loans are generally originated with loan-to-value ratios of 80% or less. Management performs much of the same analysis whether deciding to grant a commercial real estate loan or a commercial loan.
Residential real estate loans and home equity lines of credit can either be fixed rate or carry an adjustable rate. These loans are secured by the borrowers residence. Such loans are made based on the borrowers ability to repay the debt from employment and other income. Management assesses the borrowers ability to repay the debt through a review of credit history and ratings, verification of employment and other income, review of debt-to-income ratios and other measures of repayment ability. Residential real estate loans are generally originated with loan-to-value ratios of 80% or less. An appraisal is obtained from a qualified real estate appraiser for substantially all new loans secured by real estate.
Due to lower levels of economic development in the Banks market area, construction lending has become a smaller portion of the Banks lending strategy. Construction loans are secured by residential and business real estate, generally occupied by the borrower on completion. The Banks construction lending program is established in a manner to minimize risk of this type of lending by not making a significant amount of loans on speculative projects. While not contractually required to do so, the Bank usually makes the permanent loan at the end of the construction phase. Construction loans are generally originated with loan-to-value ratios of 75% or less.
Consumer installment loans are loans granted to individuals and include loans secured by automobiles and other consumer assets, including second mortgages on personal residences. Consumer loan advances generally do not exceed 90% of the purchase price, plus any add-ons such as tax, title and license fees. Loans for used cars generally do not exceed average wholesale or trade-in value as stipulated in a recent auto industry used car price guide. Credit card and overdraft protection loans are unsecured personal lines of credit to individuals of demonstrated good credit character with reasonably assured sources of income and satisfactory credit histories. Consumer loans generally involve more risk than residential mortgage loans because of the type and nature of the collateral and, in certain types of consumer loans, the absence of collateral. Since these loans are generally repaid from ordinary income of an individual or family unit, repayment may be adversely affected by job loss, divorce, ill health or by general decline in economic conditions. The Bank assesses the borrowers ability to make repayment through a review of credit history, credit ratings, debt-to-income ratios and other measures of repayment ability.
4
Employees
At December 31, 2011, the Bank employed 166 employees, 128 of whom were full-time. The Bank offers a number of employee benefits such as health, dental and life insurance, as well as education assistance for qualified employees. A 401(k) retirement plan is also available for eligible employees. No employee is represented by a union or collective bargaining group. Management considers its employee relations to be good. All of the Corporations employees are employed by the Bank.
Competition
The Bank operates in a highly competitive industry due to statewide and interstate branching by banks, savings and loan associations and credit unions. In its primary market area of Delaware County, Ohio and surrounding counties, the Bank competes for new deposit dollars and loans with several financial service companies, including large regional and smaller community banks, as well as savings and loan associations, credit unions, finance companies, insurance companies, brokerage firms and investment companies. According to the most recent market data, there are approximately fourteen other deposit-taking and lending institutions competing in the Banks primary market. In addition, according to the most recent FDIC market data, the Bank ranks second in market share with approximately 23.1% of the deposits in the primary market. 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, State and Municipal subdivision issues which comprise a significant portion of the Banks investment portfolio, and which rates are used as indices on various loan products. The Bank is competitive with interest rates and loan fees that it charges, and in pricing and the variety of accounts it offers to the depositor. The dominant pricing mechanism on loans is the prime interest rate (Prime) as published in the Wall Street Journal. The interest spread in relation to Prime depends on the overall account relationship and the creditworthiness of the borrower. Deposit rates are reviewed weekly by management and are discussed by the Asset/Liability Committee on a monthly basis. The Banks primary objective in setting deposit rates is to remain competitive in the market area, while developing funding opportunities that earn an adequate interest rate margin.
Supervision and Regulation
The business in which the Corporation and its subsidiaries are engaged is subject to extensive supervision, regulation and examination by various bank regulatory authorities and other governmental agencies. The Bank is subject to supervision, regulation and periodic examination by the State of Ohio Division of Financial Institutions (the ODFI) and the Federal Deposit Insurance Corporation (the FDIC). The supervision, regulation and examination to which the Corporation and its subsidiaries are subject are intended primarily for the protection of depositors and the deposit insurance funds that insure the deposits of banks, rather than for the protection of security holders.
5
Earnings of the Bank are affected by state and federal laws and regulations, and by policies of various regulatory authorities. These policies include, for example, statutory maximum lending rates, requirements on maintenance of reserves against deposits, domestic monetary policies of the Board of Governors of the Federal Reserve System, United States fiscal policy, international currency regulations and monetary policies, certain restrictions on banks relationships with many phases of the securities business and capital adequacy and liquidity restraints.
As a financial holding company, the Corporation is subject to supervision, regulation and periodic examination by the Federal Reserve Board and, as a publicly traded corporation, is subject to the rules of the U.S. Securities and Exchange Commission (SEC).
Federal Reserve Board. The Federal Reserve Act requires banks to maintain reserves against their net transaction accounts (primarily checking and NOW accounts). The amounts are subject to adjustment by the FRB. At December 31, 2011, the Bank was in compliance with its reserve requirements.
Transactions between DCB and the Bank are subject to statutory limits in Sections 23A and 23B of the Federal Reserve Act, which limit the amounts of such transactions and require that the terms of the transactions be at least as favorable to the Bank as the terms would be of a similar transaction between the Bank and an unrelated party. DCB and the Bank were in compliance with these requirements and restrictions at December 31, 2011.
The FRB must approve the application of a bank holding company to acquire any bank or savings association. The Companys ability to pay dividends to its shareholders may be restricted. Current FRB policy requires bank holding companies to act as a source of financial strength to its banking subsidiaries. Under this policy, the FRB may require the Company to commit resources or contribute additional capital to the Bank, which could restrict the amount of cash available for dividends to the Companys shareholders. The FRB has issued guidance on the payment of dividends by bank holding companies, which includes conditions under which bank holding companies must provide advance notification of their intentions to declare and pay dividends.
6
Under Federal Reserve Board policy, a financial holding company is expected to act as a source of financial and managerial strength for its subsidiary bank and to commit resources to its support. This support may be required at times when the financial holding company may not have the resources to provide it. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, the FDIC can hold any FDIC-insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with (1) the default of a commonly controlled FDIC-insured depository institution; or (2) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default.
Federal Deposit Insurance Corporation. The Federal Deposit Insurance Corporation Act of 1991 (FDICIA), and the regulations promulgated under FDICIA, among other things, established five capital categories for insured depository institutionswell capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, and requires federal bank regulatory agencies to implement systems for prompt corrective action for insured depository institutions that do not meet minimum capital requirements based on these categories. Unless a bank is well capitalized, it is subject to restrictions on its ability to offer brokered deposits and on certain other aspects of its operations. As of December 31, 2011, the Corporation and the Bank were both considered well capitalized based on the published guidelines implemented by FDIC. However, the Bank has entered into a Consent Order with the FDIC and a Written Agreement with the ODFI that requires tier-1 capital and total risk-based capital to reach levels of 9% and 13% respectively. The Bank has not yet reached those required levels, and continues to operate under certain restrictions as noted in the Consent Order and Written Agreement.
For information about the Banks capital, see Note 11 to the Consolidated Financial Statements in Item 8
Financial Modernization and the Dodd-Frank Act. The Gramm-Leach-Bliley Act (GLBA) was signed into law in 1999 and became effective in 2000. It permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies, and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized under regulatory prompt corrective action provisions, is well managed and has at least a satisfactory rating under the Community Reinvestment Act (CRA) by filing a declaration that the bank holding company wishes to become a financial holding company. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board.
The GLBA defines financial in nature to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Board has determined to be closely related to banking. Subsidiary banks of a financial holding company must continue to be well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has CRA rating of satisfactory or better.
7
On July 21, 2010, President Obama signed into law the Dodd-Frank Act. This new law will significantly change the regulation of financial institutions and the financial services industry. Because the Dodd-Frank Act requires various federal agencies to adopt a broad range of regulations with significant discretion, many of the details of the new law and the effects they will have on our company will not be known for months and even years.
Many of the provisions of the Dodd-Frank Act apply directly only to institutions much larger than ours, and some will affect only institutions with different charters than ours or institutions that engage in activities in which we do not engage. Among the changes to occur pursuant to the Dodd-Frank Act that can be expected to have an effect on our business are the following:
| the Dodd-Frank Act creates a Consumer Financial Protection Bureau with broad powers to adopt and enforce consumer protection regulations; |
| new capital regulations for bank holding companies will be adopted, which may impose stricter requirements, and any new trust preferred securities will no longer count toward Tier I capital; |
| the federal law prohibition on the payment of interest on commercial demand deposit accounts was eliminated effective in July 2011; |
| the standard maximum amount of deposit insurance per customer is permanently increased to $250,000, and non-interest bearing transaction accounts will have unlimited insurance through December 31, 2012; |
| the assessment base for determining deposit insurance premiums will be expanded to include liabilities other than just deposits; |
| new corporate governance requirements applicable generally to all public companies in all industries will require new compensation practices, including requiring companies to claw back incentive compensation under certain circumstances, to provide shareholders the opportunity to cast a non-binding vote on executive compensation, and to consider the independence of compensation advisers, and new executive compensation disclosure requirements. |
New regulations pertaining to debit card fees were enacted by the Federal Reserve in October 2011. The new rules cap debit interchange fees for banks with more than $10 billion in assets. While there is no cap for smaller banks and this regulation has no direct impact on the Corporations fee income, it is still unclear what other market changes may impact debit card fees.
8
In addition, the FDIC has recently issued guidance prescribing the order in which Banks may process customer debit items and imposing limits on the overdraft fees Banks may charge. These limitations could negatively impact the Corporations earnings.
Although it is impossible for us to predict at this time all the effects the Dodd-Frank Act will have on us and the rest of our industry, it is possible that our non-interest income could decrease, both our interest expense and our non-interest expense could increase, deposit insurance premiums could change, and steps may need to be taken to increase qualifying capital. We expect that our operating and compliance costs will increase and could adversely affect our financial condition and results of operations.
Federal Home Loan Banks. The Federal Home Loan Banks (the FHLBs) provide credit to their members in the form of advances. As a member, the Bank must maintain an investment in the capital stock of the FHLB of Cincinnati in an amount equal to the greater of 1% of the aggregate outstanding principal amount of the Banks residential real estate loans, home purchase contracts and similar obligations at the beginning of each year, or 5% of its advances from the FHLB. The Bank is in compliance with this requirement with an investment in FHLB of Cincinnati stock having a book value of $9.1 million at December 31, 2011. The FHLB advances are secured by collateral in one or more specified categories. The amount a member may borrow from the FHLB is limited based upon the amounts of various assets held by the member.
Insurance Agency Regulation The Corporations insurance agency subsidiaries are subject to insurance laws and regulations of the State of Ohio and the Ohio Department of Insurance. The insurance laws and regulations require education and licensing of agencies and individual agents, require reports and impose business conduct rules.
(c) | Available Information |
The Corporation maintains a website at the following website address: www.dcbfinancialcorp.com. The Corporation makes available, free of charge through its internet address, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports as soon as reasonably practicable after such materials have been filed with or furnished to the SEC. Copies of these documents may also be obtained, either in electronic or paper form, by contacting Jay D. Wolf, Vice President of Marketing and Customer Relations at 740-657-7000.
9
Item 1A Risk Factors
DCB Financial Corps business and results of operations are subject to a number of risks, including economic, competitive, credit, market, liquidity, regulatory and reputational. Though many of these risks are outside the Corporations control, DCB Financial Corp has developed a risk management function which has established a framework for identifying, monitoring and controlling these risks on a corporate-wide basis. The following discussion focuses on the major business risks encountered in the Corporations operating environment.
Required compliance with a regulatory agreement and a consent order to which the Bank is subject could have an adverse affect on shareholder interests, including profitability, dividends and share price.
The Corporations wholly-owned subsidiary, The Delaware County Bank and Trust, entered into a written agreement with the Ohio Division of Financial Institutions (ODFI) and a Consent Order with the Federal Deposit Insurance Corporation (FDIC) effective October 28, 2010 which address matters pertaining to, among other things: management and operations of the Bank; credit risk management practices and credit administration policies and procedures; Bank actions with respect to problem assets; reserves for loan and lease losses; strengthening the capital position of the Bank; the strategic plan and budget for fiscal years 2011 and 2012; staffing; and submitting a funding contingency plan for the Bank that identifies available sources of liquidity and includes a plan for dealing with potential adverse economic and market conditions.
The Consent Order and the Agreement contain substantially similar provisions. Among other things, they require the Bank to attain a minimum 9% tier-1 capital ratio within 90 days of the effective date, and total risk-based capital ratio of not less than 13% within that same time period; submission of plans related to the reduction of non-performing assets; and a review of accounting matters related to subsidiary companies.
Management and the board of directors have made significant progress towards addressing and resolving these issues which are based on the findings of the ODFI and FDIC during their examinations of the Bank in 2010. Since the completion of the examinations, a number of initiatives have been developed and implemented which address the referenced matters, including: strengthening the Banks liquidity position and developing improved liquidity analysis and reporting; improving its credit underwriting and monitoring processes; and utilizing significant resources to address its problem loan portfolio in order to reduce the total level of under-performing loans.
The Agreement and Consent Order also provide that the Bank may not declare or pay dividends to DCB without the prior approval of the FDIC and ODFI. DCB may not declare or pay cash dividends, repurchase any of its shares, incur or guarantee any debt without the prior approval of the Federal Reserve.
As previously noted, the Bank is required to achieve a tier-1 capital ratio of not less than 9% and a total risk-based capital ratio of not less than 13% within 90 days of the effective date of the Agreement and Consent Order, and, to maintain those capital levels during the remaining term of the Agreement and the Consent Order. It may do so by, among other alternatives, raising additional capital, generating sufficient earnings, reducing the banks assets, or a combination thereof. The Bank has not yet achieved the 9% tier-1 target or the 13% total risk-based capital target.
10
Additionally, the Bank is required to submit periodic progress reports to the ODFI and the FDIC regarding various aspects of the foregoing actions and requirements. The Bank board appointed a compliance committee to monitor and coordinate the Banks performance under the Agreement and Consent Order. The Agreement and Consent Order will remain in effect until modified or terminated by the ODFI and/or the FDIC. The Bank entered into the Agreement and the Consent Order without admitting or denying any unsafe or unsound banking practices, violations, rule or regulation.
Our business may be adversely affected by current conditions in the financial markets, the real estate market and economic conditions generally.
Beginning in the latter half of 2007 and continuing into 2011, negative developments in the capital markets resulted in uncertainty in the financial markets and an economic downturn. The housing market declined, resulting in decreasing home prices and increasing delinquencies and foreclosures. The credit performance of mortgage and construction loans resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. The declines in the performance and value of mortgage assets encompassed all mortgage and real estate asset types, leveraged bank loans and nearly all other asset classes, including equity securities. These write-downs have caused many financial institutions to seek additional capital or to merge with larger and stronger institutions. Some financial institutions have failed. Although some improvements have occurred, housing prices are still depressed and continue to decline in some markets and unemployment remains high compared to levels prior to the recession.
Concerns over the stability of the financial markets and the economy have resulted in decreased lending by some financial institutions to their customers and to each other. This tightening of credit has led to increased loan delinquencies, lack of customer confidence, increased market volatility and a widespread reduction in general business activity. Competition among depository institutions for deposits has increased significantly, and access to deposits or borrowed funds has decreased for many institutions. It has also become more difficult to assess the creditworthiness of customers and to estimate the losses inherent in our loan portfolio.
Business activity across a wide range of industries and regions is greatly reduced, and local governments and many companies are in serious difficulty due to the lack of consumer spending and the lack of liquidity in the credit markets. A worsening of current conditions would likely adversely affect our business and results of operations, as well as those of our customers. As a result, we may experience increased foreclosures, delinquencies and customer bankruptcies, as well as more restricted access to funds.
11
The enactment of new legislation and increased regulatory oversight may significantly affect our financial condition and results of operations.
The Federal Reserve Board, Congress, the Treasury, the FDIC and others have taken numerous actions to address the current liquidity and credit situation in the financial markets. These measures include actions to encourage loan restructuring and modification for homeowners; the establishment of significant liquidity and credit facilities for financial institutions and investment banks; the lowering of the federal funds rate; and coordinated efforts to address liquidity and other weaknesses in the banking sector. The long-term effect of actions already taken as well as new legislation is unknown. Continued or renewed instability in the financial markets could weaken public confidence in financial institutions and adversely affect our ability to attract and retain new customers.
Further, legislation has been proposed that would reduce the amount that our customers are required to pay under existing loan contracts or limit our ability to foreclose on collateral. There can be no assurance that future legislation will not significantly impact our ability to collect on our current loans or foreclose on collateral.
Adverse changes in the financial markets may adversely impact our results of operations.
The global financial markets have experienced increased volatility and an overall loss of investor confidence in recent years. While we generally invest in securities with limited credit risk, certain investment securities we hold possess higher credit risk since they represent beneficial interests in structured investments collateralized by residential mortgages, debt obligations and other similar asset-backed assets. Regardless of the level of credit risk, all investment securities are subject to changes in market value due to changing interest rates and implied credit spreads.
Over the last few years, structured investments, like our collateralized debt obligations, have been subject to significant market volatility due to the uncertainty of the credit ratings, deterioration in credit losses occurring within certain types of residential mortgages, changes in prepayments of the underlying collateral and the lack of transparency related to the investment structures and the collateral underlying the structured investment vehicles. These conditions have resulted in our recognizing impairment charges on certain investment securities. Given recent market conditions and changing economic factors, we may be required to recognize additional impairment changes on securities held in our investment portfolio in the future.
12
A default by another larger financial institution could adversely affect financial markets generally.
The commercial soundness of many financial institutions may be closely interrelated as a result of relationships between the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. This systemic risk may adversely affect our business.
Changes in national and local economic and political conditions could adversely affect our earnings, as our borrowers ability to repay loans and the value of the collateral securing our loans decline and as loans and deposits decline.
There are inherent risks associated with our lending activities, including credit risk, which is the risk that borrowers may not repay outstanding loans or the value of the collateral securing loans will decrease. Conditions such as inflation, recession, unemployment, changes in interest rates and money supply and other factors beyond our control may adversely affect the ability of our borrowers to repay their loans and the value of collateral securing the loans, which could adversely affect our earnings. Because we have a significant amount of real estate loans, a decline in the value of real estate could have a material adverse affect on us. As of December 31, 2011, 87% of our loan portfolio consisted of commercial and industrial, commercial real estate, real estate construction and installment loans, all of which are generally viewed as having more risk of default than residential real estate loans and all of which, with the exception of installment loans, are typically larger than residential real estate loans. Residential real estate loans held in the portfolio are typically originated using conservative underwriting standards that does not include sub-prime lending. We attempt to manage credit risk through a program of underwriting standards, the review of certain credit decisions and an on-going process of assessment of the quality of the credit already extended. Economic and political changes could also adversely affect our deposits and loan demand, which could adversely affect our earnings and financial condition. Since substantially all of our loans are to individuals and businesses in Ohio, any decline in the economy of this market area could have a materially adverse effect on our credit risk and on our deposit and loan levels.
Changes in interest rates could adversely affect our financial condition and results of operations.
Our results of operations depend substantially on our net interest income, which is the difference between (i) the interest earned on loans, securities and other interest-earning assets and (ii) the interest paid on deposits and borrowings. These rates are highly sensitive to many factors beyond our control, including general economic conditions, inflation, recession, unemployment, money supply and the policies of various governmental and regulatory authorities. If the interest we pay on deposits and other borrowings increases at a faster rate than the interest we receive on loans and other investments, our net interest income and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest we receive on loans and other investments falls more quickly than the interest we pay on deposits and borrowings. While we have taken measures intended to manage the risks of operating in a changing interest rate environment, there can be no assurance that these measures will be effective in avoiding undue interest rate risk.
Increases in interest rates also can affect the value of loans and other assets, including our ability to realize gains on the sale of assets. We originate loans for sale and for our portfolio. Increasing interest rates may reduce the origination of loans for sale and consequently the fee income we earn on such sales. Further, increasing interest rates may adversely affect the ability of borrowers to pay the principal or interest on loans and leases, resulting in an increase in non-performing assets and a reduction of income recognized.
13
Increases in FDIC insurance premiums may have a material adverse effect on our earnings.
During the last few years, there have been higher levels of bank failures, which dramatically increased resolution costs of the FDIC and depleted the deposit insurance fund. In order to maintain a strong funding position and restore reserve ratios of the deposit insurance fund, the FDIC increased assessment rates of insured institutions uniformly by 7 basis points (7 cents for every $100 of deposits) for 2009 and 2010. Additional changes were also made to require riskier institutions to pay a larger share of premiums by factoring in rate adjustments based on secured liabilities and unsecured debt levels.
The Emergency Economic Stabilization Act of 2008 (the EESA) instituted two temporary programs to further insure customer deposits at FDIC-member banks: deposit accounts became insured up to $250,000 per customer (up from $100,000) and noninterest bearing transactional accounts became fully insured (unlimited coverage). Since then, the Dodd-Frank Act made the increase in the standard maximum insurance amount permanent, and the unlimited coverage of non-interest bearing transactions accounts has been extended until December 31, 2012.
On May 22, 2009, the FDIC adopted a rule that imposed a special assessment for the second quarter of 2009 of 5 basis points on each insured depository institutions assets minus its Tier 1 capital as of June 30, 2009, which was collected on September 30, 2009.
On November 12, 2009, the FDIC adopted a rule requiring insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid assessments for these periods were collected on December 30, 2009, along with the regular quarterly risk-based deposit insurance assessment for the third quarter of 2009. For the fourth quarter of 2009 and for all of 2010, the prepaid assessment rate was based on each institutions total base assessment rate in effect on September 30, 2009, modified to assume that the assessment rate in effect for the institution on September 30, 2009, was in effect for the entire third quarter of 2009. On September 29, 2009, the FDIC increased annual assessment rates uniformly by 3 basis points beginning in 2011. As a result, an institutions total base assessment rate for purposes estimating an institutions assessment for 2011 and 2012 was increased by 3 basis points. Each institutions prepaid assessment base was calculated using its third quarter 2009 assessment base, adjusted quarterly for an estimated five percent annual growth rate in the assessment base through the end of 2012. The three-year prepayment was $3.1 million for us, of which $1.5 million has been expensed through 2011.
On February 7, 2011, the FDIC issued final regulations, effective April 1, 2011, as required by the Dodd-Frank Act to change the deposit insurance assessment base from total domestic deposits to average total assets minus average tangible equity, as well as changing the assessment for larger institutions and the assessment rate schedules. These changes have reduced the Banks FDIC premiums due to a lower assessment rate.
14
We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional financial institution failures, we may be required to pay even higher FDIC premiums than the recently increased levels. Increases in FDIC insurance premiums may materially adversely affect our results of operations and our ability to continue to pay dividends on our common shares at the current rate or at all.
Our allowance for loan losses may be insufficient.
We maintain an allowance for loan losses to provide for probable loan losses based on managements quarterly analysis of the loan portfolio. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make significant estimates that affect the financial statements. One of our most critical estimates is the level of the allowance for loan losses. Due to the inherent nature of these estimates, we cannot provide absolute assurance that we will not be required to charge earnings for significant unexpected loan losses. For more information on the sensitivity of these estimates, refer to the discussion of our critical accounting policies included in the section of our 2011 Annual Report captioned Critical Accounting Policies.
We maintain an allowance for loan losses that we believe is a reasonable estimate of known and inherent losses within the loan portfolio. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information provided to us by customers and counterparties, including financial statements and other financial information. We may also rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to a business, we may assume that the customers audited financial statements conform with GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. We may also rely on the audit report covering those financial statements. Our financial condition, results of operations and cash flows could be negatively impacted to the extent that we rely on financial statements that do not comply with GAAP or on financial statements and other financial information that are materially misleading.
Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio, the collateral supporting the loans and performance of customers relative to their financial obligations with us. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and these losses may exceed current estimates. We cannot fully predict the amount or timing of losses or whether the loss allowance will be adequate in the future. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions could have a material adverse impact on our financial condition and results of operations. In addition, federal and state regulators periodically review our allowance for loan losses as part of their examination process and may require management to increase the allowance or recognize further loan charge-offs based on judgments different than those of management. Any increase in the provision for loan losses would decrease our pretax and net income.
15
We operate in an extremely competitive market, and our business will suffer if we are unable to compete effectively.
In our market area, we encounter significant competition from other banks, savings and loan associations, credit unions, mortgage banking firms, securities brokerage firms, asset management firms and insurance companies. The increasingly competitive environment is a result primarily of changes in regulation and the accelerating pace of consolidation among financial service providers. DCB is smaller than many of our competitors. Many of our competitors have substantially greater resources and lending limits than we do and may offer services that we do not or cannot provide.
The preparation of financial statements requires management to make estimates about matters that are inherently uncertain.
Managements accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods in order to ensure that they comply with generally accepted accounting principles and reflect managements judgment as to the most appropriate manner in which to record and report our financial condition and results of operations. One of the most critical estimates is the level of the allowance of loan losses. Due to the inherent nature of these estimates, we cannot provide absolute assurance that we will not significantly increase the allowance for loan losses or sustain loan losses that are significantly higher than the provided allowance.
Material breaches in security of our systems may have a significant effect on our business.
We collect, process and store sensitive consumer data by utilizing computer systems and telecommunications networks operated by both us and third party service providers. We have security and backup and recovery systems in place, as well as a business continuity plan, to ensure the computer systems will not be inoperable, to the extent possible. We also have implemented security controls to prevent unauthorized access to the computer systems and requires its third party service providers to maintain similar controls. However, management cannot be certain that these measures will be successful. A security breach of the computer systems and loss of confidential information, such as customer account numbers and related information, could result in a loss of customers confidence and, thus, loss of business.
16
Trading in our common shares is very limited, which may adversely affect the time and the price at which you can sell your DCB common shares.
Trading in DCBs common shares is not active, and the spread between the bid and the asked price is often wide. As a result, you may not be able to sell your shares on short notice, and the sale of a large number of shares at one time could temporarily depress the market price. The price at which you may be able to sell your common shares may be significantly lower than the price at which you could buy DCB common shares at that time.
Future expansion may adversely affect our financial condition and results of operations.
We may acquire other financial institutions or parts of institutions in the future and may open new branches. We also may consider and enter into new lines of business or offer new products or services. Expansions of our business involve a number of expenses and risks, including:
| the time and costs associated with identifying and evaluating potential acquisitions; |
| the potential inaccuracy of estimates and judgments used to evaluate credit, operations, management and market risk with respect to the target institutions; |
| the time and costs of evaluating new markets, hiring local management and opening new offices, and the delay between commencing these activities and the generation of profits from the expansion; |
| our ability to finance an acquisition or other expansion and the possible dilution to our existing shareholders; |
| the diversion of managements attention to the negotiation of a transaction and the integration of the operations and personnel of the combining businesses; |
| entry into unfamiliar markets; |
| the introduction of new products and services into our existing business; |
| the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations; and |
| the risk of loss of key employees and customers. |
17
We may incur substantial costs to expand, and we can give no assurance that such expansion will result in the levels of profits we expect. Neither can we assure that integration efforts for any future acquisitions will be successful. We may issue equity securities in connection with acquisitions, which could dilute the economic and voting interests of our existing shareholders.
Our ability to pay cash dividends is limited.
As noted, the Bank has entered into a written agreement (the Agreement) with the Ohio Division of Financial Institutions (ODFI) and a Consent Order (the Consent Order) with the Federal Deposit Insurance Corporation (FDIC) effective October 28, 2010 which address matters pertaining to, among other things: management and operations of the Bank; credit risk management practices and credit administration policies and procedures; Bank actions with respect to problem assets; reserves for loan and lease losses; strengthening the capital position of the Bank; strategic plans and budgets; staffing; and submitting a funding contingency plan for the Bank that identifies available sources of liquidity and includes a plan for dealing with potential adverse economic and market conditions.
The Agreement and Consent Order also provide that the Bank may not declare or pay dividends to DCB without the prior approval of the FDIC and ODFI. DCB may not declare or pay cash dividends, repurchase any of its shares, incur or guarantee any debt without the prior approval of the Federal Reserve.
As previously noted, the Bank is required to achieve a tier-1 capital ratio, which is capital divided by total average assets, of not less than 9% and a total risk-based capital ratio of not less than 13% within 90 days of the effective date of the Agreement and Consent Order, and to maintain those capital levels during the remaining term of the Agreement and the Consent Order. It may do so by, among other alternatives, raising additional capital, generating sufficient earnings, reducing the banks assets, or a combination thereof.
As a result, any payment of dividends in the future by DCB Financial Corp will be dependent, in large part, on the Banks ability to satisfy these regulatory restrictions and the Banks earnings, capital requirements, financial condition and other factors. Although the Corporations financial earnings and condition have allowed it to declare and pay periodic cash dividends in certain historic quarters to its stockholders, there can be no assurance that the dividend policy will allow for dividend payments in future periods.
18
The percentage of the Banks deposits from public institutions present possible liquidity and earnings risks.
At December 31, 2011, approximately 11.49% of the Banks deposits were received from public institutions. The possibility of withdrawal of such deposits, which do not tend to be long-term deposits, poses liquidity and earnings risk to the Corporation.
Investment securities may decline in value and require the recognition of an impairment expense, affecting the Corporations earnings.
The Corporation invests in various investment securities. Investment securities are exposed to various risks, including interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such change could materially affect the amounts reported in the accompanying balance sheets. In addition, if an impairment in value is determined to be other than temporary, a reduction in earnings may result.
The Corporation undertakes no obligation and disclaims any intention to publish revised information or updates to forward-looking statements contained in the above risk factors or in any other statement made at any time by any director, officer, employee or other representative of the Corporation unless and until any such revisions or updates are required to be disclosed by applicable securities laws or regulations.
Item 1B Unresolved Staff Comments
The Corporation has no unresolved staff comments.
19
Item 2 Properties
The Bank owns and operates its main office at 110 Riverbend Avenue, Lewis Center, Ohio 43035. The Bank operates 14 branches and utilizes 10 other properties, including its corporate center, that are owned or leased as noted below:
1. | Corporate Office | 110 Riverbend Avenue, Lewis Center, Ohio 43035 (owned) | ||
2. | Downtown Delaware Branch | 41 N. Sandusky St., Delaware, Ohio 43015 (leased) | ||
3. | Delaware Center Branch | 199 S. Sandusky Street, Delaware, Ohio 43015 (owned) | ||
4. | Galena Branch | 10 Park Street, Galena, Ohio 43021 (owned) | ||
5. | Ashley Branch Office | 2 West High Street, Ashley, Ohio 43003 (owned) | ||
6. | Buehlers Central Office | 800 West Central Avenue, Delaware, Ohio 43015 (leased) | ||
7. | Sunbury Branch Office | 75 S. Miller Dr., Sunbury, Ohio 43074 (owned) | ||
8. | Highland Lakes Branch | 6156 Highland Lakes Avenue, Westerville, Ohio 43082 (leased) | ||
9. | Sawmill Parkway Branch | 10149 Brewster Lane, Powell, Ohio 43065 (leased) | ||
10. | Willowbrook Branch | 100 Willowbrook Way South, Delaware, Ohio 43015 (leased) | ||
11. | Olentangy Crossing Branch | 81 Gallopers Ridge East, Lewis Center, Ohio 43035 (leased) | ||
12. | Corporate Center Drive-Thru | Corner of Evergreen & US 23 S., Lewis Center, OH 43035 (owned) | ||
13. | Willowbrook, Delaware Run Branch | 100 Delaware Crossing West, Delaware, OH 43015 (leased) | ||
14. | Marysville City Gate Branch | 181 North Colemans Crossing, Marysville, Ohio 43040 (owned) | ||
15. | Liberty Branch | 7319 Sawmill Parkway, Powell, Ohio 43065 (leased) | ||
16. | ATM Express Bank | 556 W. Central Ave., Delaware, Ohio 43015 (leased) | ||
17. | ATM Express Bank | Ohio Wesleyan University, Delaware, Ohio 43015 (leased) | ||
18. | ATM Express Bank | 8208 Marysville Road West, Ostrander, Ohio 43061 (leased) | ||
19. | ATM Express Bank | 1123 Columbus Pike, Delaware, Ohio 43015 (leased) | ||
20. | ATM Express Bank | Dexters IGA, 153 West Water Street, Prospect, Ohio 43342 (leased) | ||
21. | ATM Express Bank | 240 North Liberty Street, Powell, Ohio 43065 (leased) | ||
22. | ATM Express Bank | 33 W. William St., Delaware, Ohio 43015 (leased) | ||
23. | ATM Express Bank | 10 West North Street, Ostrander, Ohio 43061 (owned) | ||
24. | ATM Express Bank | 1942 Polaris Parkway, Columbus, Ohio 43240 (leased) |
20
Management considers its physical properties to be in good operating condition and suitable for the purposes for which they are being used. All the properties owned by the Bank are unencumbered by any mortgage or security interest and are, in managements opinion, adequately insured. The lease agreements for branch properties that were closed during the year remained in effect at December 31, 2011. Management intends to sublease those properties where an economic or strategic advantage exists.
Item 3 Legal Proceedings
There is no pending litigation of a material nature, other than routine litigation incidental to the business of the Corporation and Bank, to which the Corporation or any of its affiliates is a party or of which any of their property is the subject. Further, there are no material legal proceedings in which any director, executive officer, principal shareholder or affiliate of the Corporation is a party or has a material interest which is adverse to the Corporation or Bank. There is no routine litigation in which the Corporation or Bank is involved which is expected to have a material adverse impact on the financial position or results of operations of the Corporation or Bank.
Item 4 Mine Safety Disclosures
Not applicable.
PART II
Item 5 Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
The information required by this item is set forth in the Companys Annual Report to Shareholders under the sections captioned Common Stock and Shareholder Matters, and the response to item 12 of this report. Such information is incorporated herein by reference.
As of December 31, 2011, Broadridge Corporate Issuers Solutions, Inc. acted as the transfer agent for the Corporations common stock.
The following table sets forth information regarding shares purchased by the Bank during the fourth quarter of 2011 as compensation to the Chief Executive Officer.
Purchases of Equity Securities | ||||||||||||||||
Period |
(a) Total number of shares purchased |
(b) Average price paid per share |
(c) Total number of Shares purchased as Part of publicly Announced plan or programs |
(d) Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs |
||||||||||||
October 1, 2011 through October 31, 2011 |
| | | |||||||||||||
November 1, 2011 through November 30, 2011 |
12,755 | $ | 2.74 | 12,755 | $ | 30,000 | ||||||||||
December 1, 2011 through December 31, 2011 |
| | | |||||||||||||
Total |
12,755 | (1) | $ | 2.74 | 12,755 | $ | 30,000 |
(1) | Pursuant to the employment agreement executed by the Corporation, the Bank and Ronald J. Seiffert when Mr. Seiffert became the President and Chief Executive Officer of the Corporation and the Bank in September 2011, the Bank purchased on the open market on November 14, 2011, 7,301 shares for Mr. Seifferts benefit as a signing bonus when he joined the Corporation. In addition, again pursuant to Mr. Seifferts employment agreement, the Bank purchased on November 29, 2011, on the open market 5,454 shares that were a match to purchases made by Mr. Seiffert. Under the terms of the employment agreement, Mr. Seiffert is entitled to $15,000 of such additional matching purchases in each of calendar year 2012 and calendar year 2013. The employment agreement was announced on September 30, 2011. |
21
Item 6 Selected Financial Data
Certain selected financial data is set forth in the Corporations Annual Report to Shareholders under the section captioned Selected Consolidated Financial Information and Other Data. Such information is incorporated herein by reference.
Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations
Additional information required by this item is set forth in the Corporations Annual Report to Shareholders under the section captioned Managements Discussion and Analysis of Financial Condition and Results of Operations. Such information is incorporated herein by reference.
I | Discussion of Assets, Liabilities and Shareholders Equity; Interest Rates and Interest Differential |
The information required by this item is set forth in the Corporations Annual Report to Shareholders. Such information is incorporated herein by reference.
II | Investment Portfolio |
The following table sets forth the carrying amount of securities at December 31, 2011, 2010 and 2009.
(In thousands) | 2011 | 2010 | 2009 | |||||||||
Available for sale |
||||||||||||
U.S. agency obligations |
$ | 35,808 | $ | 29,986 | $ | 27,455 | ||||||
States and municipal obligations |
15,995 | 12,262 | 25,952 | |||||||||
Corporate bonds |
1,837 | | 1,039 | |||||||||
Mortgage-backed securities |
34,473 | 27,349 | 39,591 | |||||||||
|
|
|
|
|
|
|||||||
Total debt securities |
88,113 | 69,597 | 94,037 | |||||||||
Other securities, non-debt |
| | 63 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 88,113 | $ | 69,597 | $ | 94,100 | ||||||
|
|
|
|
|
|
|||||||
Held to maturity |
||||||||||||
Collateralized debt obligations |
$ | 1,010 | $ | 1,313 | $ | 1,752 | ||||||
|
|
|
|
|
|
22
The following table sets forth information regarding scheduled maturities, fair value and weighted average yields of the Corporations debt securities only at December 31, 2011. The weighted average yield has been computed using the historical amortized cost for securities available for sale. The weighted average yield on tax-exempt obligations is computed on a taxable equivalent basis based on the statutory federal income tax rate of 34%.
After | After | |||||||||||||||||||
One | Five | |||||||||||||||||||
One | Through | Through | After | |||||||||||||||||
Year | Five | Ten | Ten | Fair Value | ||||||||||||||||
(In thousands) | or Less | Years | Years | Years | Total | |||||||||||||||
Available for sale |
||||||||||||||||||||
U.S. agency obligations |
$ | | $ | 17,114 | $ | 15,636 | $ | 3,058 | $ | 35,808 | ||||||||||
States and municipal obligations |
571 | 2,525 | 6,928 | 5,971 | 15,995 | |||||||||||||||
Corporate bonds |
| 1,018 | 544 | 275 | 1,837 | |||||||||||||||
Mortgage-backed securities (1) |
1 | 278 | 6,097 | 28,097 | 34,473 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 572 | $ | 20,935 | $ | 29,205 | $ | 37,401 | $ | 88,113 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Weighted average yield |
3.29 | % | 1.70 | % | 2.88 | % | 3.35 | % | 2.80 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Based on contractual terms to maturity. Mortgage-backed securities are subject to prepayment without penalty. |
After | After | |||||||||||||||||||
One | Five | |||||||||||||||||||
One | Through | Through | After | |||||||||||||||||
Year | Five | Ten | Ten | Fair Value | ||||||||||||||||
(In thousands) | or Less | Years | Years | Years | Total | |||||||||||||||
Held to maturity |
||||||||||||||||||||
Collateralized debt obligations |
$ | | $ | | $ | | $ | 1,360 | $ | 1,360 | ||||||||||
|
|
|
|
|
|
|
|
|
|
23
III | Loan Portfolio |
Types of Loans
The amounts of gross loans, excluding net deferred loan fees and costs outstanding at December 31, 2011, 2010, 2009, 2008 and 2007 are shown in the following table.
(In thousands) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Commercial and industrial |
$ | 126,225 | $ | 155,410 | $ | 176,799 | $ | 186,318 | $ | 187,807 | ||||||||||
Commercial real estate |
129,958 | 152,374 | 182,709 | 180,360 | 164,912 | |||||||||||||||
Residential real estate and home equity |
83,814 | 93,646 | 98,542 | 106,938 | 118,178 | |||||||||||||||
Lease financing |
| | | | 73 | |||||||||||||||
Consumer and credit card |
19,770 | 23,411 | 31,394 | 39,426 | 49,239 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 359,767 | $ | 424,841 | $ | 489,444 | $ | 513,042 | $ | 520,209 | ||||||||||
|
|
|
|
|
|
|
|
|
|
24
The following table summarizes maturity for commercial real estate and other commercial loans at December 31, 2011. Commercial real estate loans include construction and land development loans.
After one year | After five years | |||||||||||||||||||||||||||||||
Less than one year | through five years | through ten years | After ten years | |||||||||||||||||||||||||||||
Weighted | Weighted | Weighted | Weighted | |||||||||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||||||||||
(In thousands) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||
Commercial real estate |
$ | 16,426 | 4.43 | % | $ | 42,742 | 5.02 | % | $ | 24,196 | 4.67 | % | $ | 46,594 | 4.87 | % | ||||||||||||||||
Commercial and industrial |
$ | 25,025 | 5.49 | % | $ | 30,737 | 5.09 | % | $ | 19,256 | 4.80 | % | $ | 51,207 | 5.11 | % |
As of December 31, 2011, there were $56,565 fixed-rate and $158,167 variable-rate commercial loans maturing in more than one year.
Risk Elements
Nonaccrual, Past Due Loans, and Restructured Loans
The following table summarizes nonaccrual loans and accruing loans, including impaired loans, past due greater than 90 days or more at December 31, 2011, 2010, 2009, 2008, and 2007.
(In thousands) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Nonaccrual loans |
$ | 9,576 | $ | 16,567 | $ | 11,275 | $ | 4,698 | $ | 10,360 | ||||||||||
Accruing loans past due 90 days or more |
$ | 985 | $ | 1,858 | $ | 886 | $ | 1,146 | $ | 2,740 |
25
The policy for placing loans on nonaccrual status is to cease accruing interest on loans when management believes that collection of interest is doubtful, or when loans are past due as to principal and interest 90 days or more, except in certain circumstances when the loan is well secured and in the process of collection. In such cases, loans are individually evaluated in order determine whether to continue income recognition after 90 days beyond the due dates. When loans are placed on nonaccrual, any accrued interest is charged against interest income.
The additional amount of interest income that would have been recorded on nonaccrual loans, had they been current, totaled $198, $894, and $603 for the years ended December 31, 2011, 2010, and 2009 respectively.
Included in certain impaired loan categories are troubled debt restructurings that were classified as impaired. At December 31, 2011, the Bank had $1,621 of commercial, $20,540 of commercial real estate, and $58 of consumer that were modified in troubled debt restructurings and performing according to the modified terms. In addition to these amounts, the Bank had troubled debt restructurings that were impaired and no longer performing in accordance with their modified terms. At year-end 2011 there were $121 of commercial, and $6,312 of commercial real estate within that category.
Potential Problem Loans
A commercial loan is classified as impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller balance loans or loans of a similar nature such as residential mortgage, consumer and credit card loans, and on an individual basis for commercial and commercial real estate loans.
Loan Concentrations
At year-end 2011, there were no concentrations of loans greater than 10% of total loans that are not otherwise disclosed as a category of loans in Item III above.
Other Interest-Bearing Assets
At year-end 2011, there were no other interest-bearing assets required to be disclosed under Item III if such assets were loans.
26
IV | Summary of Loan Loss Experience |
Analysis of the Allowance for Loan Losses
The following table sets forth the activity in the Corporations allowance for loan and lease losses for the years ended December 31, 2011, 2010, 2009, 2008, and 2007.
(In thousands) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Balance at beginning of year |
$ | 12,247 | 10,479 | $ | 6,137 | $ | 8,298 | $ | 5,442 | |||||||||||
Loans charged off: |
||||||||||||||||||||
Commercial |
(2,034 | ) | (2,261 | ) | (1,831 | ) | (3,250 | ) | (549 | ) | ||||||||||
Commercial real estate |
(5,562 | ) | (6,175 | ) | (2,575 | ) | (6,177 | ) | (5,549 | ) | ||||||||||
Residential real estate and home equity |
(278 | ) | (498 | ) | (269 | ) | (203 | ) | (330 | ) | ||||||||||
Consumer and credit card |
(567 | ) | (824 | ) | (1,115 | ) | (1,024 | ) | (1,258 | ) | ||||||||||
Lease financing |
| | | | (5 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans charged off |
(8,441 | ) | (9,758 | ) | (5,790 | ) | (10,654 | ) | (7,691 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loan recoveries: |
||||||||||||||||||||
Commercial |
58 | 270 | 99 | 35 | 42 | |||||||||||||||
Commercial real estate |
27 | 4 | 261 | 5 | 1 | |||||||||||||||
Residential real estate and home equity |
10 | 12 | 10 | 7 | 7 | |||||||||||||||
Consumer and credit card |
247 | 200 | 364 | 269 | 338 | |||||||||||||||
Lease financing |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loan recoveries |
342 | 486 | 734 | 316 | 388 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net loans charged off |
(8,099 | ) | (9,272 | ) | (5,056 | ) | (10,338 | ) | (7,303 | ) | ||||||||||
Provision for loan losses |
5,436 | 11,040 | 9,398 | 8,177 | 10,159 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at end of year |
$ | 9,584 | $ | 12,247 | $ | 10,479 | $ | 6,137 | $ | 8,298 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ratio of net charge-offs to average loans outstanding |
2.05 | % | 2.00 | % | 1.00 | % | 2.00 | % | 1.36 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
27
Allocation of the Allowance for Loan Losses
The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and related ratios. While managements periodic analysis of the adequacy of allowance for loan losses may allocate portions of the allowance for specific problem-loan situations, the entire allowance is available for any loan charge-off that occurs.
Percentage of Loans in Each |
Percentage of Loan in Each |
|||||||||||||||
Allowance | Category to | Allowance | Category to | |||||||||||||
Amount | Total Loans | Amount | Total Loans | |||||||||||||
(In thousands) | December 31, 2011 | December 31, 2010 | ||||||||||||||
Commercial and industrial |
$ | 1,952 | 35.08 | % | $ | 4,174 | 36.58 | % | ||||||||
Commercial real estate |
6,916 | 36.12 | 6,786 | 35.86 | ||||||||||||
Residential real estate and home equity |
291 | 23.30 | 491 | 22.04 | ||||||||||||
Consumer and credit card |
425 | 5.50 | 796 | 5.52 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 9,584 | 100.00 | % | $ | 12,247 | 100.00 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2009 | December 31, 2008 | |||||||||||||||
Commercial and industrial |
$ | 2,476 | 36.12 | % | $ | 683 | 36.32 | % | ||||||||
Commercial real estate |
6,817 | 37.33 | 4,374 | 35.16 | ||||||||||||
Residential real estate and home equity |
312 | 20.13 | 410 | 20.84 | ||||||||||||
Consumer and credit card |
874 | 6.42 | 670 | 7.68 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 10,479 | 100.00 | % | $ | 6,137 | 100.00 | % | ||||||||
|
|
|
|
|
|
|
|
28
December 31, 2007 | ||||||||
Commercial and industrial |
$ | 1,328 | 36.10 | % | ||||
Commercial real estate |
6,092 | 31.70 | ||||||
Residential real estate and home equity |
129 | 22.72 | ||||||
Consumer and credit card |
746 | 9.47 | ||||||
Lease financing |
3 | 0.01 | ||||||
|
|
|
|
|||||
Total |
$ | 8,298 | 100.00 | % | ||||
|
|
|
|
V | Deposits |
Schedule of Average Deposit Amounts and Rates
The average balance of noninterest-bearing demand deposits totaled $67.6 million, $64.9 million, and $63.0 million for the years ended December 31, 2011, 2010 and 2009, respectively. Additional detail regarding the make-up of the Corporations average deposit balances and related interest expense can be found on the Corporations attached Annual Report to Shareholders.
29
Maturity Analysis of Time Deposits Greater than $100,000
The following is a schedule of maturities of time certificates of deposit in amounts of $100,000 or more as of December 31, 2011.
(In thousands) | ||||
Three months or less |
$ | 11,682 | ||
Over three through six months |
9,468 | |||
Over six through twelve months |
29,504 | |||
Over twelve months |
39,311 | |||
|
|
|||
Total |
$ | 89,965 | ||
|
|
VI | Return on Equity and Assets |
The information required by this item is set forth in the Companys Annual Report to Shareholders.
VII | Short-Term Borrowings |
Short term borrowings are defined as obligations with original maturity terms of less than one year. Average outstanding balances of short-term borrowings were $804 for 2011, $1,416 for 2010, and $3,764 for 2009. The maximum amounts of outstanding short term borrowings were $2,002, $2,000, and $3,250 for the years 2011, 2010 and 2009, respectively. Additional detail regarding the make-up of the Corporations borrowings can be found on the Corporations attached Annual Report to Shareholders.
Item 7a Quantitative and Qualitative Disclosures about Market Risk
The information required by this item is set forth in the Companys Annual Report to Shareholders under the section captioned Asset and Liability Management and Market Risk. Such information is incorporated herein by reference.
30
Item 8 Financial Statements and Supplementary Data
The information required by this item is set forth in the Companys Annual Report to Shareholders. Such information is incorporated herein by reference.
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.
There were no changes in internal control over financial reporting during the quarter ended December 31, 2011, that materially impacted, or are likely to materially impact, internal control over financial reporting in the future.
Managements Report on Internal Control over Financial Reporting
Management of DCB Financial Corp (the Corporation) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934. The Corporations management, including the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Corporations internal control over financial reporting as of December 31, 2011.
31
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Corporations management assessed the effectiveness of the Corporations internal control over financial reporting at December 31, 2011, as required by Section 404 of the Sarbanes Oxley Act of 2002. Managements assessment is based on criteria established in the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and was designed to provide reasonable assurance that the Corporation maintained effective internal control over financial reporting as of December 31, 2011. Based on this assessment, management determined that the Corporation maintained effective internal control over financial reporting as of December 31, 2011.
Item 9B Other Information
None
PART III
Item 10 Directors, Executive Officers and Corporate Governance
The information required by this item is set forth in the Companys Proxy Statement to Shareholders in connection with its 2012 Annual Meeting, under the sections captioned Proposal 1 Election of Directors and Information with Respect to Directors and Officers, Board of Directors and Selected Committees, Corporate Governance and Section 16(A) Beneficial Ownership Reporting Compliance. Such information is incorporated herein by reference.
The Companys Board of Directors has adopted a Code of Ethics and Business Conduct that applies to all of its directors, officers, and employees, including its principal executive, principal financial, and principal accounting officers. A copy of the code of ethics will be provided, at no cost, upon written request to the attention of Mr. Jay D. Wolf, Vice President Marketing and Customer Relations, at the Companys main office, 110 Riverbend Avenue Lewis Center, Ohio. In addition, a copy of the Code of Ethics and Business Conduct is posted on our website at http://www.dcbfinancialcorp.com. In the event we make any amendment to, or grant any waiver of, a provision of the Code of Ethics and Business Conduct that applies to the principal executive officer, a principal financial officer, principal accounting officer, or controller, or persons performing similar functions that require disclosure under applicable SEC rules, we intend to disclose such amendment or waiver, the reasons for it, and the nature of any waiver, the name of the person to whom it was granted, and the date, on our internet website.
32
Item 11 Executive Compensation
The information required by this item is set forth in the Companys Proxy Statement to Shareholders in connection with its 2012 Annual Meeting, under the section captioned Executive Compensation and Other Information and Board of Directors and Selected Committees. Such information is incorporated herein by reference.
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information about beneficial ownership of DCB common shares required by this item is set forth in the Companys Proxy Statement to Shareholders in connection with its 2012 annual meeting, under the section captioned Security Ownership of Certain Beneficial Owners and Management. Such information is incorporated herein by reference.
33
Equity Compensation Plan Information
Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted-average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||
(a) |
(b) |
(c) | ||||
Equity compensation plans approved by security holders |
216,179 | $12.44 | 83,821 | |||
Equity compensation plan not approved by security holders |
0 | 0.00 | 0 | |||
|
|
| ||||
Total |
216,179 | $12.44 | 83,821 |
On May 20, 2004 the Companys shareholders approved the DCB Financial Corp Long-Term Stock Incentive Plan. This plan authorizes the issuance of up to 300,000 DCB common shares upon exercise of stock options awarded under the plan and in the form of restricted stock and stock awards. Beginning in January 2006, the Company started to expense these options under the methodology set forth in ASC 718 Compensation Stock Compensation. Options are granted for a maximum of ten years. The options vest at an annual rate of 20% over five years, assuming credited service by the designated employee.
Item 13 Certain Relationships and Related Transactions and Director Independence
Information required by this item is set forth in the Companys Proxy Statement to Shareholders in connection with its 2012 Annual Meeting, under the sections captioned Certain Relationships and Related Transactions and Board of Directors and Selected Committees, Selection of Auditors and Principal Accounting Firm Fees. Such information is incorporated herein by reference.
Item 14 Principal Accountant Fees and Services
Information required by this item is set forth in the Companys Proxy Statement to Shareholders in connection with its 2012 Annual Meeting under the section captioned Information Concerning Independent Registered Public Accountants, and such information is incorporated herein by reference.
34
PART IV
Item 15 Exhibits, Financial Statement Schedules
(a) | Documents filed as part of Form 10-K |
1. | The following consolidated financial statements appear in the Corporations 2011 Annual Report, Exhibit 13 to Shareholders and are incorporated herein: |
Report of Independent Registered Public Accounting Firm |
||
Consolidated Balance Sheets |
||
Consolidated Statements of Operations |
||
Consolidated Statements of Comprehensive Loss |
||
Consolidated Statements of Changes in Shareholders Equity |
||
Consolidated Statements of Cash Flows |
||
Notes to Consolidated Financial Statements |
2. | Exhibits |
3.1 | Articles of Incorporation of DCB Financial Corp | |
3.2 | Code of Regulations of DCB Financial Corp | |
4.1 | Agreement to furnish instruments and agreements defining rights of holders of long-term debt. | |
10.1* | Employment agreement with Ronald J. Seiffert | |
10.2* | DCB Financial Corp 2004 Long-Term Stock Incentive Plan | |
10.3* | Special Incentive Agreement with Ronald J. Seiffert | |
10.4* | Plan for Payment of Fees in DCB Financial Corp Common Stock | |
10.5* | The Delaware County Bank & Trust Company Senior Manager Severance Policy | |
10.6* | Annual Incentive Compensation Program Description |
35
10.7* | The Delaware County Bank & Trust Company Executive Deferred Compensation Plan, with amendments | |
10.8 | Consent order by and between The Delaware County Bank and Trust Company, Lewis Center, Ohio and the Federal Deposit Insurance Corporation, dated effective October 28, 2010 (incorporated by reference to Registrants Form 8-K filed on October 29, 2010, Exhibit 10.1 (File no. 000-22387) | |
10.9 | Written Agreement by and among The Delaware County Bank and Trust Company, Lewis Center, OH and the State of Ohio, Division of Financial Institutions, Columbus, Ohio, dated effective October 28, 2010 (incorporated by reference to Registrants For 8-K on October 29, 2010, Exhibit 10.2 (File No. 000-22387) | |
13 | Annual Report to Shareholders | |
21 | Subsidiaries of DCB Financial Corp | |
23.1 | Consent of Plante & Moran PLLC | |
23.2 | Consent of Plante & Moran PLLC | |
31.1(a) | Rule 13a-14 (a) Certifications | |
31.1(b) | Rule 13a-14(a) Certifications | |
31.2(a) | Rule 13a-14 (a) Certifications | |
31.2(b) | Rule 13a-14(a) Certifications | |
32.1(a) | Section 1350 Certifications | |
32.1(b) | Section 1350 Certifications | |
32.2(a) | Section 1350 Certifications | |
32.2(b) | Section 1350 Certifications |
* | Compensatory agreement or arrangement. |
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: April 27, 2012 | DCB FINANCIAL CORP | |||||
By: | /s/ Ronald J. Seiffert | |||||
Ronald J. Seiffert, President & CEO |
37
INDEX TO EXHIBITS
Exhibit Number |
Description of Document | |
3.1 | Articles of Incorporation of DCB Financial Corp (incorporated by reference to Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, Exhibit 3.1 (File No.000-223887) | |
3.2 | Code of Regulations of DCB Financial Corp (incorporated by reference to Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, Exhibit 3.2 (File No. 000-22387) | |
4.1 | Agreement to furnish instruments and agreements defining rights of holders of long-term debt (included herewith) | |
10.1* | Employment agreement with Ronald J. Seiffert (included herewith) | |
10.2* | DCB Financial Corp 2004 Long-Term Stock Incentive Plan (incorporated by reference to Appendix D to the Registrants Proxy Statement, as filed with the SEC on Schedule 14A on April 14, 2004) | |
10.3* | Special Incentive Agreement with Ronald J. Seiffert (included herewith) | |
10.4* | Plan for Payment of Fees in DCB Financial Corp Common Stock (included herewith) | |
10.5* | The Delaware County Bank & Trust Company Senior Manager Severance Policy (included herewith) | |
10.6* | Annual Incentive Compensation Program Description (included herewith) |
38
10.7* | The Delaware County Bank and Trust Company Executive Deferred Compensation Plan, with amendments (included herewith) | |
10.8 | Consent order by and between The Delaware County Bank and Trust Company, Lewis Center, Ohio and the Federal Deposit Insurance Corporation, dated effective October 28, 2010 (incorporated by reference to Registrants Form 8-K filed on October 29, 2010, Exhibit 10.1 (File no. 000-22387) | |
10.9 | Written Agreement by and among The Delaware County Bank and Trust Company, Lewis Center, OH and the State of Ohio, Division of Financial Institutions, Columbus, Ohio, dated effective October 28, 2010 (incorporated by reference to Registrants For 8-K on October 29, 2010, Exhibit 10.2 (File No. 000-22387) | |
13 | Annual Report to Shareholders (included herewith) | |
21 | Subsidiaries of DCB Financial Corp (included herewith) | |
23.1 | Consent of Plante & Moran PLLC (included with original Form 10-K) | |
23.2 | Consent of Plante & Moran PLLC (included herewith) | |
31.1(a) | Rule 13a-14 (a) Certifications (included with original Form 10-K) | |
31.1(b) | Rule 13a-14(a) Certifications (included herewith) | |
31.2(a) | Rule 13a-14 (a) Certifications (included with original Form 10-K) | |
31.2(b) | Rule 13a-14(a) Certifications (included herewith) | |
32.1(a) | Section 1350 Certifications (included with original Form 10-K) | |
32.1(b) | Section 1350 Certifications (included herewith) | |
32.2(a) | Section 1350 Certifications (included with original Form 10-K) | |
32.2(b) | Section 1350 Certifications (included herewith) |
* | Compensatory agreement or arrangement. |
39
EXHIBIT 4.1
DCB Financial Corp
110 Riverbend Avenue
Lewis Center, Ohio 43035
March 30, 2012
Securities and Exchange Commission
100 F Street. N.E.
Washington, D.C. 20549
Gentlemen:
DCB Financial Corp, an Ohio corporation (DCB), is today filing an Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the Form 10-K).
Pursuant to the instructions relating to the Exhibits in Item 601(b)(4)(iii) of Regulation S-K, DCB hereby agrees to furnish the Commission, upon request, copies of instruments and agreements defining the rights of holders of its long-term debt and of the long-term debt of its consolidated subsidiaries, which are not being filed as exhibits to the Form 10-K. No such instrument represents long-term debt in excess of 10% of the total assets of DCB and its subsidiaries on a consolidated basis.
Very truly yours,
/s/ Ronald J. Seiffert |
Ronald J. Seiffert President and CEO |
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement (the Agreement) is made and entered into this 29th day of Sept., 2011, (the Agreement Date) by and between DCB Financial Corp, a registered bank holding company (DCBF), and its wholly-owned subsidiary The Delaware County Bank and Trust Company (DCB&T; collectively with DCBF, the Bank herein), an Ohio-chartered FDIC-insured nonmember bank, and Ronald J. Seiffert, an individual currently residing at 7570 Wills Run Lane, Blacklick, Ohio (Executive). The Bank and Executive will be referred to collectively herein sometimes as the Parties.
In consideration of the mutual promises contained herein, the sufficiency of which is hereby acknowledged, the Parties agree as follows:
1. | Employment |
a. Subject to receipt of any and all necessary regulatory approvals, DCBF and DCB&T agree to employ Executive, and Executive agrees to serve as, President and Chief Executive Officer of DCBF and as President and Chief Executive Officer of DCB&T, respectively, during the period and upon the conditions stated herein. In those capacities, Executive will devote his full professional time to rendering administrative and management services such as are customarily performed by persons situated in similar executive positions. Executive will perform such other duties as the Board of Directors of the Bank (the Board, which may with respect to any of its obligations hereunder designate a member or committee thereof to perform such obligation) may from time to time reasonably direct.
b. Executive agrees to serve as a Director of the Bank if elected by the shareholders, but agrees that he shall have no vote regarding matters pertaining to his employment as President and Chief Executive Officer, including but not limited to his duties, responsibilities, goals, job performance, and compensation, and further agrees that he may from time to time be excused by the Board from discussions regarding such matters and that the Board may in its sole discretion meet with other senior Bank managers out of Executives presence to discuss such matters. However, upon termination for any reason of Executives employment under this Agreement, Executive will immediately resign as a Director of the Bank and will sign all documents necessary to accomplish such resignation. In the event Executive refuses to sign documents necessary to so resign then this document will act as the resignation pursuant to this paragraph. Executive shall also be compensated for serving as a Director in accordance with the Banks standard policies and practices for compensating its Directors.
c. Executive will be furnished with a private office, necessary secretarial assistance, and with such other facilities, amenities, and services as are appropriate for Executives position and adequate for the performance of the duties hereunder.
d. Executive represents and warrants that Executive is not a party to any contract or agreement, written or unwritten, that would restrict Executives ability to be employed by the Bank in the manner specified herein. Executive also agrees not to disclose to the Bank any information Executive is contractually or otherwise legally bound to keep confidential.
2. | Term of Employment |
Unless otherwise terminated in accordance with the provisions of this Agreement, Executive is hereby employed for a term commencing on the Agreement Date and ending December 31, 2013 (the Initial Term). At the end of the Initial Term this Agreement may be extended upon agreement of the Parties for additional three-year terms (each an Extended Term) and Executive for each such Extended Term will for all purposes continue to be considered as employed under the terms of this Agreement unless either Party notifies the other in writing no later than June 1 of the last year of any such Extended Term of his or its intent to terminate, for any reason or no reason at all as specified in paragraph 5. of this Agreement, Executives employment hereunder. Upon termination of employment of Executive for any reason specified in this Agreement, except as otherwise expressly provided herein this Agreement shall be deemed terminated.
3. | Standards and Evaluation of Performance |
a. Executive agrees to devote Executives best efforts and full time to the business and affairs of the Bank and to discharge the duties reasonably assigned by the Board. Executive will not during Executives employment hereunder render any services as an employee, independent contractor, consultant, or otherwise, other than to the Bank, except for service on such corporate, civic, or charitable boards or committees as are approved by the Board.
b. Following input from Executive, the Board will, each contract year, provide Executive with performance goals (the Goals), Executives best efforts towards the attainment of which will constitute part of Executives duties. Executive will provide the Board with no less than quarterly reports on the status of attaining each of the Goals. The Board may in its discretion reasonably adjust the Goals from time to time in response to business conditions. Performance Goals for the period commencing January 1, 2012, through December 31, 2012 shall be provided to Executive no later than 90 days following the commencement of Executives employment under this Agreement. The Board may elect to pay to Executive a performance bonus in 2012 for Executives 2011 performance at its sole discretion.
c. The Board will conduct an annual performance evaluation of Executive, which process Executive will initiate no later than January 15 of each year.
4. | Compensation and Benefits |
a. Base Salary. The Bank agrees to pay Executive (in addition to any payments under paragraph 1.b. of this Agreement) an initial annual salary of $225,000.00 (the Base Salary), payable on the Banks regular payroll schedule for other executive employees and subject to the standard withholdings for taxes and other appropriate items.
b. Eligibility for Performance-Based Bonus. The Goals will include standards by which Executive may achieve a performance-based bonus on an annual basis of up to $200,000.00 (the Potential Bonus) as described below. Commencing in 2012, no later than the date 30 days after the completion of audited financial statements for the preceding year (the Bonus Date), the Board will in its sole discretion determine the total performance-based bonus for that year (the Bonus Amount) based on the standards included in the Goals.
2
One-half of the Bonus Amount will be paid as a lump sum cash payment (subject to applicable withholding and payroll taxes) to Executive within 30 days of the Bonus Date and, in all events, by March 15th of the year following the year for which the Bonus Amount is being paid.
With respect to the other one-half of the Bonus Amount, Executive will be granted the option to purchase common shares of the capital stock of the Bank (the Performance Bonus Stock Options) in accordance with the terms of the DCB Financial Corp Long-term Stock Incentive Plan (the Plan) at the opening public trading price on the Bonus Date (the Performance Bonus Exercise Price) in an amount of shares determined by dividing one-half of the Bonus Amount as the numerator by the Performance Bonus Exercise Price as the denominator and rounding down to the largest whole number of shares. The Performance Bonus Stock Options will vest as follows:
Fraction of Shares |
Vesting Date | |
20% |
1 year from the Bonus Date | |
20% |
2 years from the Bonus Date | |
20% |
3 years from the Bonus Date | |
20% |
4 years from the Bonus Date | |
20% |
5 years from the Bonus Date |
Vested Performance Bonus Stock Options will be exercisable for up to 10 years following the Bonus Date unless Executives employment hereunder is terminated under paragraph 5.a. below, in which case all Performance Bonus Stock Options not yet vested on the date of termination will be forfeited. The Performance Bonus Stock Options as granted by the board under the Plan shall be the only options for which Executive shall be eligible hereunder.
It is the Parties mutual expectation and desire that, in order to demonstrate and establish his commitment to the Banks shareholders, Executive will of his own accord purchase capital stock of the Bank in addition to what he may be granted and/or purchase under this paragraph 4.b.
c. Executive Employee Benefits. Executive will be eligible for all of the Banks employee benefit plans pursuant to the terms of those plans, as they may be amended from time to time in the Banks sole discretion.
d. Reimbursement for Business Expenses. The Bank will reimburse Executive for reasonable entertainment, travel, lodging and other miscellaneous expenses, whether local or out-of-city, incurred on its behalf and directly related to the performance of Executives duties hereunder. The Bank further agrees to furnish Executive with a corporate credit card for business use in connection with entertainment, travel, lodging and other miscellaneous expenses. The reimbursement will include the payment of reasonable expenses for attending meetings of trade associations, industry analysts meetings, and banking-related conferences and seminars. Executive will submit documentation of the expenses incurred in a form that is satisfactory to the Bank. The Bank may from time to time at its sole discretion conduct a review of Executives expenses through the Compensation Committee of the Board or an auditor appointed thereby. Bank will reimburse Executive for up to $600.00 per month (subject to applicable taxes and other appropriate withholding) for automobile lease payments.
3
e. Country Club Membership and Expenses. The Bank agrees to purchase a personal membership at the Wedgewood Country Club or another club agreeable to the Bank and the Executive for use by Executive and other senior managers of the Bank at Executives directions and to reimburse Executive for any reasonable business-related costs associated therewith, including monthly dues and assessments. Personal expenses will not be reimbursed. These expenses will be detailed and provided to the Bank in connection with Executives periodic submission of reasonable entertainment expenses.
f. Vacation and Leaves. Executive will be entitled, without loss of pay, to an annual vacation of not less than 4 weeks per year, to be scheduled in a reasonable manner by Executive.
g. Vacation time not used within the calendar year will be forfeited. Executive will not be entitled to receive any additional compensation from the Bank for unused vacation time, including upon the termination for any reason of Executives employment hereunder. Executive will be entitled to such other leaves as are provided for executive employees under Bank policies.
h. Signing Bonus. Upon execution of this Agreement and subject to receipt of any and all necessary and appropriate prior approvals, Executive shall be granted shares of common stock of DCBF under the terms of the Plan with an aggregate and gross (subject to taxes) value to Executive of $20,000.00 at the grant date to vest equally in 20% increments over a period of 5 years. Anything to the contrary herein notwithstanding, Executive shall be responsible for any and all income taxes due and owing with regard to shares of stock and options issued hereunder (subject to applicable withholding and payroll taxes required to be reported, withheld or paid by the Bank).
i. Matching Shares Purchase Benefit. Should Executive purchase additional shares of DCBF Common Stock independently outside of the Plan during the period of employment, Bank will match the purchase price of such shares up to $5,000.00, in Company shares to be issued under the terms of the Plan, during any calendar year. If Executive invests $100,000.00 or more in DCBF Common Stock during any calendar year in the Initial Term or any Extended Term, the Bank will match the purchase price of such shares up to $15,000.00 in Company shares to be issued under the terms of the Plan during any such calendar year. Anything to the contrary herein notwithstanding, Executive shall be responsible for any and all income taxes due and owing with regard to shares of stock and options issued hereunder.
5. | Termination of Employment and Severance Payment |
In addition to either Partys right to terminate Executives employment hereunder pursuant to paragraph 2. of this Agreement, the Bank may terminate the employment of Executive and this Agreement at any other time, with or without cause, and with or without notice. Upon the termination of Executives employment prior to the end of the term set forth in paragraph 2. above, the Bank will be obligated to provide Executive only with such compensation as expressly provided in this paragraph 5., but only if the Executive, before the payment date, has executed a valid mutual release and waiver in a form satisfactory to the Bank of all claims, including claims Executive may have against the Bank and related parties. Such payment to Executive under this paragraph 5. will occur either on or as soon as administratively practical after the 45th day of the effective date of the termination of Executives employment, provided that such termination of employment qualifies as a separation from service as such term is defined for purposes of Section 409A of the Internal Revenue Code (the Code). Further, if this period begins in one year and ends in a subsequent year, payment will be made in the subsequent year.
4
a. Just Cause. If the Bank terminates Executives employment hereunder because of Executives dishonesty, incompetence, misconduct, breach of fiduciary duty, unreasonable failure or refusal to perform the duties and responsibilities assigned under this Agreement (including but not limited to failure to meet the annual budget approved by the Board), willful violation of any law, rule or regulation (other than misdemeanor traffic violations or similar offenses), conviction of a felony or for fraud or embezzlement, or material breach of any provision of this Agreement (hereinafter collectively referred to termination for Just Cause), or if Executive resigns or retires for any reason other than provided in paragraph 5.c. below, Executive will have no right to receive any compensation for any period after such termination and any stock options provided for in paragraph 4.b. and not yet vested will be forfeited, except as set forth in paragraph 5.e. below.
b. Other than Just Cause. If the Bank terminates Executives employment hereunder for any reason other than Just Cause, and unless Executives employment is terminated or suspended pursuant to subsections c., d., e. or f. herein (which shall govern in the instances described therein), Executive will be entitled to a sum equal to an amount not greater than the average of the annual total Base Salary paid to Executive by the Bank for the last two calendar years in which he was employed by the Bank for the entire year, payable in 12 equal monthly payments subject to taxes and other appropriate withholding, provided, however, that (i) each monthly payment will be reduced by the amount of wages or other compensation for services rendered earned by Executive during the preceding month from sources other than the Bank and (ii) Executive must use reasonable efforts to obtain such employment or other work and, upon the Banks request, provide documentation of such efforts to the Banks satisfaction. Notwithstanding the foregoing, in the event that the Bank terminates Executives employment hereunder for any reason other than Just Cause before the end of the Initial Term, the Bank shall pay Executive an amount equal to Executives Base Salary in effect on the termination date in installments as aforesaid, subject to subsections (i) and (ii) above.
Notwithstanding anything in this Agreement to the contrary, if Executive is a specified employee, within the meaning of Section 409A of the Internal Revenue Code (the Code) and the regulations thereunder, and is subject to the provisions of Section 409A(a)(2)(B) of the Code (or any comparable successor provision) at the time Executives employment is terminated, the total amount of payments that may be made to Executive under this paragraph 5.b. (including any payments made under any nonqualified deferred compensation plan as defined in Section 409A of the Code) during the first six months following Executives termination of employment may not exceed the amount set forth in Treasury Regulation section 1.409A-1(b)(9)(iii)(A). Any amount Executive would otherwise have been entitled to under this paragraph 5.b. (or any such nonqualified deferred compensation plan) during such six-month period shall be paid to Executive on the first day of the seventh month following termination of Executives employment. Furthermore, no payment will be made under this paragraph 5.b. unless (and until) Executives termination of employment qualifies as a separation from service as such term is defined for purposes of Section 409A of the Code.
5
c. If the Bank while Executive is employed hereunder merges with (other than a merger that would result in the beneficial owners of the stock of the Bank outstanding immediately prior thereto continuing to beneficial own, directly or indirectly, at least fifty percent (50%) of the combined voting power of the stock of the Bank or such entity resulting from the merger), is acquired by, or sells substantially all of its assets to an entity not affiliated with the Bank or an entity created for the express purpose of facilitating such a transaction, Executive will receive a sum equal to one times the average of the annual total Base Salary paid to Executive by the Bank for the last two calendar years in which he was employed by the Bank for the entire year if Executive resigns employment within one year of the closing date of such merger, acquisition, or sale.
Notwithstanding anything in this Agreement to the contrary, if Executive is a specified employee, within the meaning of Section 409A of the Internal Revenue Code (the Code) and the regulations thereunder, and is subject to the provisions of Section 409A(a)(2)(B) of the Code (or any comparable successor provision) at the time Executive terminates his employment, Executive shall not be entitled to receive any payments under this paragraph 5.c. during the first six months following Executives termination of employment. Any amount Executive would otherwise have been entitled to under this paragraph 5.c. during such six-month period shall be paid to Executive on the first day of the seventh month following termination of Executives employment. Furthermore, no payment will be made under this paragraph 5.c. unless (and until) Executives termination of employment qualifies as a separation from service as such term is defined for purposes of Section 409A of the Code.
Notwithstanding any other provision hereof, if the aggregate of the payments provided for in this Agreement (and any other payments and benefits that the Executive has the right to receive from the Bank) would result in the Executive receiving an excess parachute payment (as such term is defined in Section 280G(b)(2) of the Code) in connection with any event described in this paragraph 5.c., the amount of the payments made, and benefits provided, to Executive pursuant to this Agreement shall be reduced to the greatest amount that Executive may receive that will not constitute an excess parachute payment. The determination of the amount of reduction required shall be made by the Bank and the choice of which payment or benefit shall be reduced shall be made by the Executive.
d. Death of Executive. Executives employment hereunder automatically terminates upon the death of Executive. In the event of such death, Executives estate will be entitled to receive the compensation due Executive through the last day of the calendar month in which Executives death occurred.
e. Resignation, retirement, or disability. Executives employment hereunder and this Agreement shall automatically terminate upon Executives resignation, retirement, or disability. In the event of Executives termination of employment due to resignation, retirement, or disability, executives right to receive any compensation or severance pay for any period thereafter shall terminate and any stock options not yet vested shall be forfeited. The Bank retains discretion, at its sole option, to provide Executive with a severance pay arrangement and vesting of unvested options.
6
f. Special Regulatory Events. Notwithstanding any other provision of this Agreement, the obligations of the Parties will be as follows in the event of any of the following circumstances:
i. | If Executive is suspended and/or temporarily prohibited from participating in the conduct of the Banks affairs by a notice served under Section 8 of the Federal Deposit Insurance Act, 12 U.S.C. § 1818, the Banks obligations under this Agreement will be suspended as of the date of service of such notice unless otherwise ordered by a tribunal of competent jurisdiction, but this provision will not affect any vested rights of the Executive. If the charges in the notice are dismissed, the Bank may, in its sole discretion, pay Executive all or part of the compensation withheld while the obligations of this Agreement were suspended and reinstate in whole or in part any of the obligations which were suspended. |
ii. | If Executive is removed from office and/or permanently prohibited from participating in the conduct of the Banks affairs by an order issued under Section 8 of the Federal Deposit Insurance Act, 12 U.S.C. §1818(e) or Ohio Revised Code §§1121.33 and 1121.34, all obligations of the Bank under this Agreement will terminate as of the effective date of the order, but this provision will not affect any vested rights of the Executive. |
iii. | If the Bank is in default, as defined in Section 3(x)(1) of the Federal Deposit Insurance Act, 12 U.S.C. §1813(x)(1), or declared insolvent by the Ohio Superintendent of Banks pursuant to Ohio Revised Code § 1125.09, all obligations under this Agreement will terminate as of the date of default or insolvency, but this provision will not affect any vested rights of the Executive. |
iv. | All obligations under this Agreement may be terminated by the FDIC at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the Federal Deposit Insurance Act, 12 U.S.C. §1823(c), but this provision will not affect any vested rights of the Executive. |
v. | The parties acknowledge and agree that, in the event either or both of DCBF and/or DCB&T are, or remain, subject to the restrictions on payment of golden parachute and related payments as provided by Part 359 of the FDIC regulations (12 CFR Part 359), prior to making any such payment DCBF and/or DCB&T will provide such notices and shall seek any and all such prior regulatory consents and approvals as may be necessary and appropriate in those circumstances. The parties also acknowledge that, in that event, the proposed payments may or may not be approved by regulatory authorities, in whole or in part. |
7
6. | Executives Covenants Protecting the Banks Business Resources |
a. Non-Disclosure of Trade Secrets and Other Confidential Information. Executive acknowledges that Executive has received, and the Bank agrees to continue to provide to Executive on an ongoing basis, certain of the Banks confidential business information. Except as appropriate in connection with Executives performance of his obligations under this Agreement, Executive will not divulge, disclose, reveal, or communicate to any business entity or other person such information or any trade secrets or other information that Executive may have obtained during the term of employment with the Bank concerning any matters affecting or relating to the business of the Bank, including without limitation any of its customers or borrowers (including lists thereof), sales prices (including price lists), costs, plans, technology, processes, policies, techniques, trade practices, finances, accounting methods, methods of operations, trade secrets, or other data considered by the Bank to be confidential information, for so long as such information is not publicly available other than in whole or in part through the efforts of Executive. Nothing contained in this subsection shall be construed as permitting Executive to copy and retain information or documentation, in any form whatsoever, which constitutes or includes confidential supervisory information concerning the Bank or any institution-affiliated parties.
b. Books and Records. Executive will, upon the termination of employment hereunder, surrender and deliver to the Bank all property of the Bank, including any and all customer or price lists, manuals, blueprints, operating plans, books, records, papers and similar items (including all copies thereof in his possession) that contain information regarding the business of the Bank. Executive may maintain for his own records, copies of any performance evaluations provided to him, and copies of any publicly-available records or certifications prepared or signed by Executive (Executives Copies). Executive agrees that he must maintain, at all times, all such Executives Copies as the Banks confidential business information and trade secrets, and Executive agrees that he cannot use or disclose any such information except as required by law or in connection with any litigation involving Executive and Bank. Nothing contained in this subsection shall be construed as permitting Executive to copy and retain information or documentation, in any form whatsoever, which constitutes or includes confidential supervisory information concerning the Bank or any institution-affiliated parties.
c. Covenant Not to Compete. Executive will not during employment under this Agreement or for a period of 1 year after termination, regardless of the reason for termination thereof, compete with the Bank without the Banks prior written consent. Executive will be deemed to be competing with the Bank if Executive is self-employed as, employed by, works for, becomes associated with (whether as partner, officer, director, 10% shareholder, consultant, Executive, agent, or otherwise), furnishes information to, or communicates with any of the Banks customers or borrowers on behalf of any business entity or other person that competes or that may reasonably be construed to compete with the Bank anywhere in Delaware County, Ohio, or within a 5 mile radius of any of the Banks branches, including but not limited to any business entity that (i) itself or through an affiliated entity produces, markets, or sells products, renders services, or engages in business activities that are the same as, similar to, or otherwise competitive with those of, or under development or research by the Bank and (ii) produces, markets, or sells such products, renders such services, or engages in such activities in the Banks market area at that time (as that market area may change from time to time).
8
Executive acknowledges that Executive is qualified for other comparable employment, including for entities that do not compete with the Bank. Accordingly, Executive represents and warrants that Executives experience and capabilities are such that this covenant will not prevent Executive from earning an adequate livelihood for Executive and Executives dependents if this covenant should be specifically enforced against Executive.
d. Other Bank Employees. Executive will not during employment under this Agreement or for a period of 2 years after termination (for any reason) thereof induce or solicit, or attempt to induce or solicit, any other Bank employee to leave employment with the Bank without the Banks prior written consent.
e. Remedies for Breach. Executive stipulates that the covenants contained herein are essential for the protection of the trade secrets, confidential business and technological information, customer relationships, and competitive position of the Bank; that a breach of any covenant contained herein would cause the Bank irreparable damage for which damages at law would not be an adequate remedy; and that, in addition to damages and other remedies to which the Bank would otherwise be entitled, it will be entitled to whatever injunctive relief is appropriate for any such breach. The Parties agree that whichever party prevails (by court judgment, court order or a private settlement) in any legal or equitable action to enforce any breach of this Agreement, the non-prevailing party shall reimburse the prevailing party, within thirty days of any such court judgment, court order or private settlement, for the total cost of the reasonable attorneys fees, costs and expenses incurred by the prevailing party in the action.
f. Tolling Period. The term(s) of any covenant(s) in this paragraph 6. will not run during any time in that Executive is in violation of said covenant(s).
g. Claims against the Bank Not a Defense. The existence of any claim(s) or cause(s) of action of Executive against the Bank will not constitute a defense to the enforcement by the Bank of any or all of the covenants contained in this paragraph 6.
h. Anything to the contrary herein notwithstanding, the Parties acknowledge and agree that in the event that the Bank or its successors become aware at any time that Executive has committed, or is substantially responsible for, or has violated, the respective acts or omissions, conditions,or offenses set forth in 12 CFR Part 359.4(a)(4), Bank or its successors shall have the right and option to terminate any severance benefits and to demand reimbursement for severance benefits paid to date.
i. Survival of Covenants. The covenants in this paragraph 6. and in paragraph 7. will survive the termination of this Agreement.
7. | Miscellaneous |
a. Successors and Assigns. This Agreement will be binding upon and inure to the benefit of (i) the Bank and its successors and assigns and (ii) Executive and Executives heirs and personal representatives.
b. Notices. All notices, requests, demands and other communications hereunder will be in writing and will be deemed to have been duly given if delivered via telecopy, overnight delivery, or prepaid certified or registered U.S. Mail, return receipt requested, to the following addresses or to such other address as either party may designate by like notice.
9
If to the Bank, to:
Ms. Vicki Lewis
Chairperson
c/o DCB Financial Corp.
110 Riverbend Avenue
Lewis Center, Ohio 43035
If to Executive, to:
Mr. Ronald J. Seiffert
7570 Wills Run Lane
Blacklick, Ohio 43004
and to such other additional person(s) or location(s) as either party will have designated to the other party in writing by like notices.
c. Entire Agreement; Modification. This Agreement contains the entire agreement of the Parties about the subjects in it, and it replaces all prior contemporaneous oral or written agreements, understandings, statements, representations and promises by either party. No supplement, modification, or amendment to this Agreement will be effective and binding unless the same is contained in a writing accepted and duly executed by the Parties.
d. Paragraph Headings. The paragraph headings used in this Agreement are included solely for convenience and will not affect, or be used in connection with, the interpretation of this Agreement.
e. Severability. The provisions of this Agreement will be deemed severable and the invalidity or unenforceability of any provision will not affect the validity or enforceability of the other provisions hereof.
f. Governing Law. This Agreement will, except to the extent that federal law will be deemed to apply, be governed by and construed and enforced in accordance with the law of Ohio.
10
g. Arbitration of Disputes. All disputes under this Agreement, except for claims for injunctive relief, will be settled conclusively and without right of appeal therefrom by arbitration in Delaware County, Ohio, before a single arbitrator pursuant to the Rules of Employment Arbitration and Mediation Procedures of the American Arbitration Association (AAA). The arbitrator will be selected by the joint agreement of the Parties, but if they do not so agree within 10 calendar days after notice from either party to the other that it is instituting arbitration, they will request from the AAA a panel of 7 arbitrators from which the Parties will alternately strike names until a single arbitrator has been selected. The initial strike will be determined by the flip of a coin. Each Party will pay its own expenses of arbitration and the expenses of the arbitrator will be equally shared provided that, if in the opinion of the arbitrator any claim, defense, or argument raised in the arbitration was unreasonable, the arbitrator may assess all or part of the expenses of the other Party (including attorney fees) and of the arbitrator as the arbitrator deems appropriate. To the extent the Parties resort to judicial action arising under this Agreement for injunctive relief, to enforce the judgment of an arbitrator, or because an arbitrator deems issues not arbitrable, the Parties hereby expressly consent to the jurisdiction of, and agree that such an action will be instituted only in, the state and federal courts sitting in or for Delaware County, Ohio, waive any objection to venue therein, and consent to service of process in any such action by certified mail.
h. Section 409A of the Code. It is intended that this Agreement shall comply with the provisions of Section 409A of the Internal Revenue Code of 1986 (the Code) and any guidance published thereunder, including exemptions from Section 409A of the Code. For purposes of the limitations on nonqualified deferred compensation and applicable exceptions under Section 409A of the Code, each payment of compensation under this Agreement shall be treated as a separate payment of compensation. In no event may Executive, directly or indirectly, designate the calendar year of any payment under this Agreement.
[The remainder of this page is intentionally left blank.]
11
IN WITNESS WHEREOF, the Parties have entered this Agreement on the day and year first hereinabove written.
FOR THE BANK: |
||
DCB Financial Corp |
||
/s/ Vicki J. Lewis |
||
By: Vicki J. Lewis |
||
Its: Chairperson |
||
/s/ Adam Stevenson |
||
By: Adam Stevenson |
||
Its: Director and Chair of the Compensation Committee |
||
The Delaware County Bank & Trust Company |
||
/s/ Vicki J. Lewis |
||
By: Vicki J. Lewis |
||
Its: Chairperson |
||
/s/ Adam Stevenson |
||
By: Adam Stevenson |
||
Its: Director and Chair of the Compensation Committee |
||
Executive: |
||
/s/ Ronald J. Seiffert |
||
Ronald J. Seiffert |
12
EXHIBIT 10.3
SPECIAL INCENTIVE AGREEMENT
This Special Incentive Agreement (the Agreement ) made and entered into as of the 29th day of Sept., 2011, by and among DCB Financial Corp, a registered bank holding company (DCBF), The Delaware County Bank & Trust Company (DCB&T, collectively with DCBF, the Bank herein), an Ohio-chartered FDIC-insured nonmember bank, and Ronald J. Seiffert, an individual currently residing at 7570 Wills Run Lane, Blacklick, Ohio (Executive). The Bank and the Executive will sometimes be referred to herein as the Parties.
Witnesseth:
WHEREAS, the Parties have entered into a certain Employment Agreement of even date herewith (the Employment Agreement) providing, among other things, for the employment of Executive by the Bank subject to the terms and conditions set forth therein; and
WHEREAS, the Bank and the Federal Deposit Insurance Corporation (FDIC) are parties to a certain agreement dated as of October 28, 2010 (the FDIC Agreement) which provides, among other things, for an increase in capital by the Bank; and
WHEREAS, the Bank and the Ohio Division of Financial Institutions (ODFI) are parties to a certain agreement dated as of October 28, 2010 (the ODFI Agreement) which provides, among other things, for an increase in capital by the Bank; and
WHEREAS, the Parties desire to enter into this Agreement to provide a special incentive bonus for Executive to work toward termination and release of the FDIC Agreement and the ODFI Agreement (collectively the Regulatory Agreements) as part of the employment of Executive by the Bank.
Now therefore, in consideration of the mutual promises contained herein, the sufficiency of which is hereby acknowledged, the Parties agree as follows:
1. | The foregoing recitals are incorporated herein by reference. |
2. | Executive agrees to use his best efforts to seek and obtain termination of, and release from, the Regulatory Agreements as soon as possible as part of his responsibilities and obligations to the Bank in his capacities as cited in the Employment Agreement. |
3. | In the event that the Regulatory Agreements are terminated and released during the term of Executives employment under the terms of the Employment Agreement, Executive shall be entitled to receive a special bonus, in addition to any other compensation and benefits owed Executive under the terms of the Employment Agreement, equal to the Base Salary as defined in the Employment Agreement but at the level of salary in effect at the time the Regulatory Agreements are terminated and released. The special bonus shall be payable in a lump sum as soon as practicable but in no event later than the 15th day of the 3rd month after the termination and release of the Regulatory Agreements. |
4. | Any sums payable to Executive hereunder shall be subject to applicable withholding for taxes and other appropriate items. |
5. | The terms and conditions of the Employment Agreement are incorporated herein by reference. Consequently, the Employment Agreements provisions concerning Remedies for Breach (¶6.e.), Governing Law (¶7.f.), and Arbitration of Disputes (¶7.g.) shall govern any legal or equitable action regarding any breach and enforcement of this Agreement. Capitalized terms contained herein shall have the same meaning as in the Employment Agreement except as otherwise expressly provided. |
6. | The obligations of the Bank under this Agreement shall be subject to compliance by Executive with the terms and conditions contained in the Employment Agreement, and shall terminate upon termination of the Employment Agreement, except any still unpaid special bonus owed to Executive under Paragraph 3. of this Agreement shall be paid to Executive pursuant to the terms of Paragraph 3. of this Agreement. |
7. | It is intended that this Agreement shall comply with the provisions of Section 409A of the Code and any guidance published thereunder, including exemptions from Section 409A of the Code. For purposes of the limitations on nonqualified deferred compensation and applicable exceptions under Section 409A of the Code, each payment of compensation under this Agreement shall be treated as a separate payment of compensation. In no event may Executive, directly or indirectly, designate the calendar year of any payment under this Agreement. |
IN WITNESS WHEREOF, the parties have set their hands as of the day and year first hereinabove written.
FOR THE BANK: |
||
DCB Financial Corp |
||
/s/ Vicki J. Lewis |
||
By: Vicki J. Lewis |
||
Its: Chairperson |
||
/s/ Adam Stevenson |
||
By: Adam Stevenson |
||
Its: Director and Chair of the Compensation Committee |
||
The Delaware County Bank & Trust Company |
||
/s/ Vicki J. Lewis |
||
By: Vicki J. Lewis |
||
Its: Chairperson |
||
/s/ Adam Stevenson |
||
By: Adam Stevenson |
||
Its: Director and Chair of the Compensation Committee |
||
Executive: |
||
/s/ Ronald J. Seiffert |
||
Ronald J. Seiffert |
EXHIBIT 10.4
DIRECTORS FEES
PLAN FOR PAYMENT OF FEES IN DCB FINANCIAL CORP COMMON STOCK
It is the desire of the Boards of both DCB Financial Corp (DCBF) and The Delaware County Bank and Trust Company to receive shares of DCBF common stock in payment of Director fees owed to the Directors. In order to accomplish this, the members of each Board desire to institute a plan that would have the same effect as a 10b5-1 trading plan by creating a safe harbor or affirmative defense for Directors who receive shares of DCBF stock in payment of Directors fees. The plan is not intended to be utilized for any other purchase or sale of shares by Directors, and is solely for the purpose of paying Directors fees in stock of DCBF.
PROCEDURE
Management of DCB&T will keep records of all meetings attended by Directors during a calendar quarter. On the first business day following the end of each quarter, Management shall determine the amount owed to each Director, and the Directors hereby instruct Management to deliver the necessary funds to Sweney Cartwright and Co., 17 South High St., Columbus, OH 43215, (or such other business address of the company), which shall be authorized to purchase whole shares of stock on the open market at market price on the first business day following the end of each calendar quarter. No Director or any member of Management shall attempt to exercise any subsequent authority, influence or control over any purchases of shares contemplated under this plan. The shares of stock shall be registered in the Directors name, and delivered to the Director. The value of any fractional shares shall be paid to the Directors in cash.
Prior to the initial purchase of the shares under this plan for each Director, the Director shall have the option to instruct Management in writing to register the shares in the name of the Director and/or other persons or entities for the purpose of estate planning, or to deliver the shares electronically to an account in the name of the Director. Management shall continue to register the shares as instructed until it receives a written notice from the Director to change the registration for future purchases of shares.
Each Director acknowledges and understands that this plan will remain in full force and effect for a period of one year, or until altered, amended, or discontinued by the Board, and that no such alteration, amendment, or discontinuance may be effected during the time that the Directors are subject to a blackout. The Board will review this plan each year beginning in June of 2012.
Management is authorized to begin the payment of Directors fees earned for the third quarter 2011, in shares of DCBF stock in accordance with this plan.
EXHIBIT 10.5
The Delaware County Bank & Trust Company
09/23/2011
Policy Name: Senior Manager Severance Policy
I. | Policy Statement |
In the event an involuntary termination results from a change in ownership of The Delaware County Bank & Trust Company (DCB&T) (as defined below), this severance policy has been established to provide a financial bridge while affected senior managers reporting directly to the President/CEO and all First Vice Presidents (eligible employees) seek other employment. DCB&T does not provide severance payments to terminated employees other than as expressly provided herein.
If DCB&T merges with, is acquired by, or sells substantially all of its assets to an entity not affiliated with the Bank or an entity created for the express purpose of facilitating such a transaction and the successor entity, during a period of one (1) year following the closing date of such merger, acquisition, or sale (the closing date), does any of the following: i) reduces an eligible employees base salary which was in effect on the closing date; ii) substantially reduces benefits to be provided to an eligible employee in effect on the closing date; or iii) assigns an eligible employee to a position that requires an eligible employee to move his/her home, the affected eligible employee may voluntarily terminate and, upon return of all Bank property and the execution of a release in a form acceptable to the Bank of all claims against the Bank and related parties, be eligible for the severance provided for herein.
This Severance Policy shall be binding upon DCB&T, its successors and assigns and is personal as to the employee. Severance benefits may not be assigned by the employee except that the personal representative of the employee, his/her heirs, or guardian, as the case may be, shall have the right to enforce the provisions of this policy relating to any compensation due to the employee.
II. Guidelines
The following are guidelines that govern severance benefits:
| Severance will be based on the eligible employees base monthly salary, not including bonuses or incentives, at the time of termination. |
| Each Senior Manager and First Vice President will receive one year of severance benefits. |
| Severance benefits will be paid out on a monthly basis at the end of each full month in which the affected employee is unemployed, for a period of up to one year. |
| Severance benefits will cease if the employee obtains other employment. However, if that employment is at a lower salary, then the difference will be paid for the rest of the one year term. |
Revised and Board Approved 09/23/2011
EXHIBIT 10.5
The Delaware County Bank & Trust Company
09/23/2011
| Upon termination, an eligible employee will be subject to the same benefit considerations given to all other terminated employees, per relevant policy (ies) or Summary Plan Description(s). Eligible employees will be eligible for medical insurance continuation as described under COBRA. The termination date for COBRA will be the last day of the month in which employment ceases. |
| The affected employee agrees to return all company-owned property upon termination. |
DCB&T has the right to make changes to or modify this policy at any time with or without notice, except in the case of a possible or actual merger, in which case this policy will be in effect for a minimum of one year after the merger date.
Senior Manager Severance Policy
Revised and Board Approved 09/23/2011
EXHIBIT 10.6
ANNUAL INCENTIVE COMPENSATION PROGRAM
The purpose of DCB Financial Corps (DCBs) annual incentive compensation program is to provide direct financial incentives in the form of an annual cash bonus and DCB shares to executives who achieve the DCBs annual goals. For 2011, the Compensation Committee recommended, and the Board of Directors selected, earnings per share, the efficiency ratio, credit quality, the net interest margin, and return on equity of DCB as the measurements of DCBs performance, with a threshold goal set for each performance measure for determining bonus opportunities for executive officers. DCB performance exceeding the threshold produces a ratable increase in the bonus amount based upon that particular performance measure. Individual goals are also established for each executive officer; however, each executive officers bonus opportunity is determined by weighting individual and company goals. The amount distributed to each participant is based on his or her base salary and is weighted to reflect each participants ability to affect the performance of DCB. Incentive compensation plans are analyzed to assure consistency with the Compensation Committees underlying compensation philosophy. The Board of Directors retains the right, after receipt of recommendations by the Compensation Committee, to adjust goals and to determine the amount of payments to be made at the end of the year.
EXHIBIT 10.7
THE DELAWARE COUNTY BANK AND TRUST
EXECUTIVE DEFERRED COMPENSATION PLAN
THIS EXECUTIVE DEFERRED COMPENSATION PLAN (the Plan) is adopted this 21st day of June, 2004, by THE DELAWARE COUNTY BANK AND TRUST, a state-chartered commercial bank located in Lewis Center, Ohio (the Company). The purpose of this Plan is to provide specified benefits to a select group of management or highly compensated employees who contribute materially to the continued growth, development and future business success of the Company. This Plan shall be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974 (ERISA), as amended from time to time.
This Plan replaces in its entirety The Delaware County Bank and Trust Company Supplemental Executive Retirement Plan dated January 1, 1998.
Article 1
Definitions
Whenever used in this Plan, the following words and phrases shall have the meanings specified:
1.1 | Beneficiary means each designated person, or the estate of a deceased Participant, entitled to benefits, if any, upon the death of a Participant. |
1.2 | Base Salary means the annual cash compensation relating to services performed during any calendar year, excluding distributions from nonqualified deferred compensation plans, bonuses, commissions, overtime, fringe benefits, stock options, relocation expenses, incentive payments, non-monetary awards, director fees and other fees, and automobile and other allowances paid to a Participant for employment services rendered (whether or not such allowances are included in the Participants gross income). Base Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to all qualified or nonqualified plans of the Company and shall be calculated to include amounts not otherwise included in the Participants gross income under Code Sections 125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by the Company; provided, however, that all such amounts will be included in compensation only to the extent that had there been no such plan, the amount would have been payable in cash to the Participant. |
1.3 | Board means the Board of Directors of the Company as from time to time constituted. |
1.4 | Beneficiary Designation Form means the form established from time to time by the Plan Administrator that a Participant completes, signs and returns to the Plan Administrator to designate one or more beneficiaries. |
1.5 | Change in Control means and shall be deemed to have occurred on (i) the date upon which the Company is provided a copy of a Schedule 13D, filed pursuant to Section 13(d) of the Securities Exchange Act of 1934 indicating that a group or person, as defined in Rule 13d-3 under said Act, has become the beneficial owner of 20% or more of the outstanding Voting Shares or the date upon which the Company first learns that a person or group has become the beneficial owner of 20% or more of the outstanding Voting Shares if a Schedule 13D is not filed; (ii) the date of a change in the composition of the Board such that individuals who were members of the Board on the date two years prior to such change (or who were subsequently elected to fill a vacancy in the Board, or were subsequently nominated for election by the Companys shareholders, by the affirmative vote of at least two-thirds of the directors then still in office who were directors at the beginning of such two year period) no longer constitute a majority of the Board; (iii) the date the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the Voting Shares of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Shares of the surviving entity) at least 80% of the total voting power represented by the Voting Shares of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) the date shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Companys assets. Voting Shares means any securities of the Company which vote generally in the election of directors of the Company. |
1.6 | Code means the Internal Revenue Code of 1986, as amended. |
1.7 | Company Deferrals means the contributions, if any, declared by the Board for the benefit of a Participant. |
1.8 | Deferral Account means the Companys accounting of a Participants accumulated Deferrals, plus accumulated Company Deferrals, plus accrued interest. |
1.9 | Deferrals means the amount of a Participants Base Salary or Other Compensation which the Participant elects to defer according to this Plan. |
1.10 | Disability means the Participants suffering a sickness, accident or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Participant, or by the Social Security Administration, to be a disability rendering the Participant totally and permanently disabled. The Participant must submit proof to the Plan Administrator of the carriers or Social Security Administrations determination upon the request of the Plan Administrator. |
1.11 | Disability Benefit means the benefit set forth in Section 6.3. |
1.12 | Effective Date means January 1, 2004. |
2
1.13 | Election Form means the form established from time to time by the Plan Administrator that a Participant completes, signs and returns to the Plan Administrator to make an election under the Plan. |
1.14 | Involuntary Early Termination means the Company, without the Participants written consent, does any of the following: |
(a) | Assigns to the Participant any material duties or responsibilities inconsistent with the Participants positions, or a change in the Participants reporting responsibilities, titles, or offices, or any removal of the Participant from or any failure to re-elect the Participant to any of such positions, except in connection with the termination of the Participants employment for Cause, Disability, retirement, or as a result of the Participants death; |
(b) | Reduces the Participants Base Salary; |
(c) | Takes any action which would adversely affect the Participants participation in or materially reduce the Participants benefits under any benefit plans, or the failure by the Company to provide the Participant with the number of paid vacation days to which the Participant is then entitled on the basis of years of service with the Company in accordance with the Companys normal vacation policy in effect on the date hereof; |
(d) | Fails to obtain the assumption of, or the agreement to perform, this Plan by any successor as contemplated in Section 13.7 hereof; or |
(e) | Requires the Participant to be based anywhere other than a location within thirty (30) miles of Delaware, Ohio except for required travel on Company business to an extent substantially consistent with the Participants present business travel obligations or, in the event the Participant consents to any relocation, the failure by the Company to pay (or reimburse the Participant) for all reasonable moving expenses incurred by the Participant relating to a change of the Participants principal residence in connection with such relocation and to indemnify the Participant against any loss realized on the sale of the Participants principal residence in connection with any such change of residence. |
1.15 | Involuntary Early Termination Benefit means the benefit set forth in Section 6.4. |
1.16 | Normal Retirement Age means the Participant attaining age sixty-two (62). |
1.17 | Normal Retirement Benefit means the benefit set forth in Section 6.1. |
1.18 | Normal Retirement Date means the date at which a Participant terminates employment after attaining Normal Retirement Age. |
1.19 | Other Compensation means the annual cash compensation relating to services performed during any calendar year, paid in the form of commissions or bonuses and not as Base Salary. |
1.20 | Participant shall mean any employee (i) who is selected to participate in the Plan, (ii) who elects to participate in the Plan, (iii) who signs a Participation Agreement, an Election Form and a Beneficiary Designation Form, (iv) whose signed Participation Agreement, Election Form and Beneficiary Designation Form are accepted by the Plan Administrator, (v) who commences participation in the Plan, and (vi) whose Participation Agreement has not terminated. |
3
1.21 | Participation Agreement shall mean a written agreement, as may be amended from time to time, which is entered into by and between the Company and a Participant. Each Participation Agreement executed by a Participant and the Company shall provide for the entire benefit to which such Participant is entitled under the Plan; should there be more than one Participation Agreement, the Participation Agreement bearing the latest date of acceptance by the Company shall supersede all previous Participation Agreements in their entirety and shall govern such entitlement. The terms of any Participation Agreement may be different for any Participant, and any Participation Agreement may provide additional benefits not set forth in the Plan or limit the benefits otherwise provided under the Plan; provided, however, that any such additional benefits or benefit limitations must be agreed to by both the Company and the Participant. |
1.22 | Plan Administrator means the plan administrator described in Article 10. |
1.23 | Plan Year means the calendar year. |
1.24 | Termination for Cause has that meaning set forth in Section 9.1. |
1.25 | Termination of Employment means that the Participant ceases to be employed by the Company for any reason, voluntary or involuntary, other than by reason of a leave of absence approved by the Company. |
1.26 | Voluntary Early Termination means that the Participant, prior to Normal Retirement Age, has terminated employment with the Company for reasons other than death, Termination for Cause, Disability, or Involuntary Early Termination within twelve (12) months following a Change in Control. |
1.27 | Voluntary Early Termination Benefit means the benefit set forth in Section 6.2. |
1.28 | Years of Service means the twelve consecutive month period beginning on a Participants date of hire and any twelve (12) month anniversary thereof, during the entirety of which time the Participant is an employee of the Company. Service with a subsidiary or other entity controlled by the Company before the time such entity became a subsidiary or under such control shall not be considered credited service unless the Plan Administrator specifically agrees to credit such service. In addition, the Plan Administrator in its discretion may also grant additional Years of Service in such circumstances where it deems such additional service appropriate. |
4
Article 2
Selection, Enrollment and Eligibility
2.1 | Selection by Plan Administrator. Participation in the Plan shall be limited to a select group of management and highly compensated employees of the Company, as determined by the Plan Administrator in its sole discretion. From that group, the Plan Administrator shall select, in its sole discretion, employees to participate in the Plan. |
2.2 | Enrollment Requirements. As a condition to participation, each selected employee shall (i) voluntarily contribute to the Companys 401(k) plan and (ii) complete, execute and return to the Plan Administrator a Participation Agreement, an Election Form and a Beneficiary Designation Form, all within thirty (30) days after the employee is notified by the Plan Administrator of his or her selection to participate in the Plan. In addition, the Plan Administrator shall establish from time to time such other enrollment requirements as it determines in its sole discretion are necessary. |
2.3 | Eligibility; Commencement of Participation. Provided an employee selected to participate in the Plan has met all enrollment requirements set forth in this Plan and required by the Plan Administrator, including returning all required documents to the Plan Administrator within the specified time period, that employee shall commence participation in the Plan on the first day of the month following the month in which the employee completes all enrollment requirements (the Participation Date). If an employee fails to meet all such requirements within the period required, in accordance with Section 2.2, that employee shall not be eligible to participate in the Plan until the first day of the Plan Year following the delivery to and acceptance by the Plan Administrator of the required documents. |
2.4 | Termination of Participation and/or Deferrals. If the Participant discontinues voluntary contributions to the Companys 401(k) plan or if the Plan Administrator determines in good faith that a Participant no longer qualifies as a member of a select group of management or highly compensated employees, as membership in such group is determined in accordance with Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, the Plan Administrator shall have the right, in its sole discretion, to (i) terminate any deferral election the Participant has made for the remainder of the Plan Year in which the Participants membership status changes, (ii) prevent the Participant from making future deferral elections and/or (iii) immediately distribute the Participants then vested Deferral Account and terminate the Participants participation in the Plan. |
Article 3
Company Contributions
The Board, in its sole discretion, may declare a Company Deferral typically equal a percentage of a Participants Base Salary for the Plan Year to which such declaration applies. The targeted Company Deferral is 0-10% of Base Salary, but may be more at the Boards discretion. Any such declaration shall be made within sixty (60) days after the end of each Plan Year, and shall automatically be credited to the Deferral Account effective as of December 31 immediately preceding such declaration.
5
Article 4
Participant Contributions
4.1 | Initial Election. A Participant shall make an initial deferral election under this Plan by delivering to the Plan Administrator a signed Participation Agreement, Election Form and Beneficiary Designation Form within thirty (30) days after being notified by the Plan Administrator of selection for participation in the Plan. The Election Form shall set forth the amount of Base Salary to be deferred, not to exceed eighty percent (80%), and the amount of Other Compensation to be deferred, not to exceed one hundred percent (100%), and shall be effective to defer only Base Salary and Other Compensation that would be based on services performed after the date the Election Form is received by the Plan Administrator. |
4.2 | Deferral Election Changes |
4.2.1 | Generally. The Participant may modify the amount of Base Salary or Other Compensation to be deferred annually by filing a new Election Form with the Plan Administrator within thirty (30) days prior to the first day of the Plan Year in which the services that lead to the Base Salary or Other Compensation are to be performed. The modified deferral election shall not be effective until the calendar year in which services are performed that follows the year in which the subsequent Election Form is received and approved by the Plan Administrator. For example, to defer 2005 Base Salary election change must be made prior to November 30, 2004. To defer Other Compensation that would be payable in January 2006, but based on service performed in 2005, the election change must be made prior to November 30, 2004. |
4.2.2 | Hardship. If an unforeseeable financial emergency, as defined and allowed by applicable Federal statutes and regulations, of the Participant occurs, the Participant, by written instructions to the Plan Administrator, may reduce future Deferrals under this Agreement. |
Article 5
Deferral Account
5.1 | Establishing and Crediting. The Company shall establish a Deferral Account on its books for the Participant and shall credit to the Deferral Account the following amounts: |
5.1.1 | Deferrals. The Base Salary or Other Compensation deferred by the Participant as of the time the Base Salary or Other Compensation would have otherwise been paid to the Participant. The Participant shall be one hundred percent (100%) vested in his/her Deferrals. |
5.1.2 | Company Deferrals. Any discretionary Company Deferrals declared under Article 3. |
6
5.1.2.1 | Vesting in Company Deferrals. The Participant shall vest in any Company Deferrals credited under Section 5.1.2 pursuant to the following schedule: |
Years of Service |
Vesting | |
5-10 |
25% | |
11-15 |
50% | |
16-20 |
75% | |
20+ |
100% |
Notwithstanding the schedule above, the Participant shall become 100% vested upon attaining age sixty-two (62) while employed by the Company.
5.1.3 | Interest. At the end of each Plan Year, immediately prior to the payment of any benefits, and during any applicable installment period, interest shall be credited on the Deferral Account at a rate equal to the rate in effect on January 1 of such Plan Year for the Companys one-year certificate of deposit, calculated as simple interest on an annual basis. |
5.2 | Statement of Accounts. The Plan Administrator shall provide to the Participant, within ninety (90) days after the end of each Plan Year, a statement setting forth the Deferral Account balance. |
5.3 | Accounting Device Only. The Deferral Account is solely a device for measuring amounts to be paid under this Plan. The Deferral Account is not a trust fund of any kind. The Participant is a general unsecured creditor of the Company for the payment of benefits. The benefits represent the mere Company promise to pay such benefits. The Participants rights are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by the Participants creditors. |
Article 6
Benefits During Lifetime
6.1 | Normal Retirement Benefit. Upon the Normal Retirement Date, the Company shall pay to the Participant the benefit described in this Section 6.1 in lieu of any other benefit under this Article. |
6.1.1 | Amount of Benefit. The Normal Retirement Benefit under this Section 6.1 is the Deferral Account balance at the Participants Normal Retirement Date. |
6.1.2 | Payment of Benefit. The Company shall pay the Normal Retirement Benefit to the Participant as elected by the Participant on the Election Form. |
7
6.2 | Voluntary Early Termination Benefit. Upon the Participants Voluntary Early Termination, the Company shall pay to the Participant the benefit described in this Section 6.2 in lieu of any other benefit under this Article. |
6.2.1 | Amount of Benefit. The Voluntary Early Termination Benefit under this Section 6.2 is the vested Deferral Account balance at the Participants Termination of Employment. |
6.2.2 | Payment of Benefit. The Company shall pay the Voluntary Early Termination Benefit to the Participant as elected by the Participant on the Election Form. |
6.3 | Disability Benefit. If the Participant terminates employment due to Disability prior to Normal Retirement Age, the Company shall pay to the Participant the benefit described in this Section 6.3 in lieu of any other benefit under this Article. |
6.3.1 | Amount of Benefit. The Disability Benefit under this Section 6.3 is the vested Deferral Account balance at the Participants Termination of Employment. |
6.3.2 | Payment of Benefit. The Company shall pay the Disability Benefit to the Participant as elected by the Participant on the Election Form, commencing at the earlier of (i) cessation of payments, if any, to the Participant under a Company-sponsored long-term disability plan, or (ii) the Participants Normal Retirement Age. |
6.4. | Involuntary Early Termination Benefit. Upon a Participants Involuntary Early Termination within twelve (12) months of a Change in Control, the Company shall pay to the Participant the benefit described in this Section 6.4 in lieu of any other benefit under this Article. |
6.4.1 | Amount of Benefit. The Change in Control Benefit under this Section 6.4 is one hundred percent (100%) of the Deferral Account balance on the Participants Termination of Employment, without regard to vesting in any Company Deferrals. |
6.4.2 | Payment of Benefit. The Company shall pay the Change in Control Benefit to the Participant as elected by the Participant on the Election Form. |
6.4.3 | Excess Parachute Payment. Notwithstanding any provision of this Plan to the contrary, to the extent any benefit would create an excise tax under the excess parachute rules of Section 280G of the Code, the Company shall reduce the benefit paid under this Plan to the extent it would not be an excess parachute payment. |
6.5 | Hardship Distribution. Upon the Plan Administrators determination (following petition by the Participant) that the Participant has suffered an unforeseeable financial emergency, as defined and allowed in applicable Federal statutes or regulations, the Company shall distribute to the Participant all or a portion of the vested Deferral Account balance as determined by the Plan Administrator, but in no event shall the distribution be greater than is permitted under applicable Federal statutes or regulations. |
8
Article 7
Death Benefits
7.1 | Death During Active Service. If the Participant dies while in the employment of the Company, the Company shall pay to the Beneficiary the vested Deferral Account balance as of the date of the Participants death, in a lump sum within thirty (30) days following the Participants death. |
7.2 | Death During Payment of a Benefit. If the Participant dies after any benefit payments have commenced under this Plan but before receiving all such payments, the Company shall pay the remaining benefits to the Beneficiary at the same time and in the same amounts they would have been paid to the Participant had the Participant survived. |
7.3 | Death After Termination of Employment But Before Benefit Payments Commence. If the Participant is entitled to benefit payments under this Plan, but dies prior to the commencement of said benefit payments, the Company shall pay the remaining benefits to the Beneficiary at the same time and in the same amounts they would have been paid to the Participant had the Participant survived except that the benefits shall commence within thirty (30) days following the Participants death or notice thereof. |
Article 8
Beneficiaries
8.1 | Beneficiary. Each Participant shall have the right, at any time, to designate a Beneficiary(ies) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of the Company in which the Participant participates. |
8.2 | Beneficiary Designation; Change. A Participant shall designate a Beneficiary by completing and signing the Beneficiary Designation Form, and delivering it to the Plan Administrator or its designated agent. The Participants beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Participant or if the Participant names a spouse as Beneficiary and the marriage is subsequently dissolved. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrators rules and procedures, as in effect from time to time. Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all beneficiary designations previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Plan Administrator prior to the Participants death. |
9
8.3 | Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Plan Administrator or its designated agent. |
8.4 | No Beneficiary Designation. If the Participant dies without a valid beneficiary designation, or if all designated Beneficiaries predecease the Participant, then the Participants spouse shall be the designated Beneficiary. If the Participant has no surviving spouse, the benefits shall be paid to the personal representative of the Participants estate. |
8.5 | Facility of Payment. If the Plan Administrator determines in its discretion that a benefit is to be paid to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of that persons property, the Plan Administrator may direct payment of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount. |
Article 9
General Limitations
9.1 | Termination for Cause. Notwithstanding any provision of this Plan to the contrary, the Company shall not pay any benefit under this Plan that is in excess of the Participants Deferrals (i.e., the Company Deferrals and the interest earned on the Deferral Account) if the Board terminates the Participants employment for: |
(a) | Neglect of duties to the Company; |
(b) | Commission of a felony or of a gross misdemeanor involving moral turpitude in connection with the Participants employment with the Company; |
(c) | Fraud, disloyalty, dishonesty or willful violation of any law or significant Company policy committed in connection with the Participants employment; or |
(d) | Pursuant to a final removal or prohibition order issued by an appropriate federal banking agency pursuant to Section 8(e) of the Federal Deposit Insurance Act (FDIA). |
Article 10
Administration Of Plan
10.1 | Plan Administrator Duties. This Plan shall be administered by a Plan Administrator which shall consist of the Board, or such committee or person(s) as the Board shall appoint. Members of the Plan Administrator may be Participants under this Plan. The Plan Administrator shall also have the discretion and authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administration of this Plan and (ii) decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan. |
10
10.2 | Agents. In the administration of this Plan, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit, (including acting through a duly appointed representative), and may from time to time consult with counsel who may be counsel to the Company. |
10.3 | Binding Effect of Decisions. The decision or action of the Plan Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan. |
10.4 | Indemnity of Plan Administrator. The Company shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Plan Administrator or any of its members. |
10.5 | Company Information. To enable the Plan Administrator to perform its functions, the Company shall supply full and timely information to the Plan Administrator on all matters relating to the Base Salary or Other Compensation of its Participants, the date and circumstances of the retirement, Disability, death or Termination of Employment of its Participants, and such other pertinent information as the Plan Administrator may reasonably require. |
Article 11
Claims and Review Procedures
11.1 | Claims Procedure. A Participant or Beneficiary (claimant) who has not received benefits under the Plan that he or she believes should be paid shall make a claim for such benefits as follows: |
11.1.1 | Initiation Written Claim. The claimant initiates a claim by submitting to the Plan Administrator a written claim for the benefits. |
11.1.2 | Timing of Plan Administrator Response. The Plan Administrator shall respond to such claimant within 90 days after receiving the claim. If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional 90 days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision. |
11
11.1.3 | Notice of Decision. If the Plan Administrator denies part or all of the claim, the Plan Administrator shall notify the claimant in writing of such denial. The Plan Administrator shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth: |
(a) | The specific reasons for the denial, |
(b) | A reference to the specific provisions of the Plan on which the denial is based, |
(c) | A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed, |
(d) | An explanation of the Plans review procedures and the time limits applicable to such procedures, and |
(e) | A statement of the claimants right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review. |
11.2 | Review Procedure. If the Plan Administrator denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Plan Administrator of the denial, as follows: |
11.2.1 | Initiation Written Request. To initiate the review, the claimant, within 60 days after receiving the Plan Administrators notice of denial, must file with the Plan Administrator a written request for review. |
11.2.2 | Additional Submissions Information Access. The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim. The Plan Administrator shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimants claim for benefits. |
11.2.3 | Considerations on Review. In considering the review, the Plan Administrator shall take into account all materials and information the claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. |
11.2.4 | Timing of Plan Administrator Response. The Plan Administrator shall respond in writing to such claimant within 60 days after receiving the request for review. If the Plan Administrator determines that special circumstances require additional time for processing the claim, the Plan Administrator can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Plan Administrator expects to render its decision. |
11.2.5 | Notice of Decision. The Plan Administrator shall notify the claimant in writing of its decision on review. The Plan Administrator shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth: |
(a) | The specific reasons for the denial, |
(b) | A reference to the specific provisions of the Plan on which the denial is based, |
(c) | A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimants claim for benefits, and |
(d) | A statement of the claimants right to bring a civil action under ERISA Section 502(a). |
12
Article 12
Amendments and Termination
12.1 | Termination. The Company reserves the right to terminate the Plan at any time with respect to any or all of its participating employees, by action of its Board. Upon the termination of the Plan, the Participation Agreements of the affected Participants shall terminate and their vested Deferral Account balances shall be determined (i) subject to Section 2.4, as if they qualified for the Involuntary Early Termination Benefit on the date of Plan termination; or (ii) if Plan termination occurs after a Participants Normal Retirement Age, then with respect to that Participant as if he or she had retired on the date of Plan termination. Notwithstanding any Participant election to the contrary, the remaining vested Deferral Account balance shall be paid to the affected Participants in a lump sum within thirty (30) days following such Plan termination. The termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination; provided however, that the Company shall have the right to accelerate applicable installment payments without a premium or prepayment penalty by paying the Deferral Account balance in a lump sum within thirty (30) days following such termination. |
12.2 | Amendment. The Company may, at any time, amend or modify the Plan in whole or in part by the action of its Board; provided, however, that: (i) no amendment or modification shall be effective to decrease the value of a Participants vested Deferral Account balance in existence at the time the amendment or modification is made, calculated as if the Participant qualified for the Voluntary Early Termination Benefit as of the effective date of the amendment or modification, or if the amendment or modification occurs after a Participants Normal Retirement Age, as if the Participant had retired as of the effective date of the amendment or modification, and (ii) no amendment or modification of this Section 12.2 of the Plan shall be effective. The amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification; provided, however, that the Company shall have the right to accelerate applicable installment payments by paying the Deferral Account balance in a lump sum within thirty (30) days following such amendment. |
12.3 | Participation Agreement. Despite the provisions of Sections 12.1 and 12.2 above, if a Participants Participation Agreement contains benefits or limitations that are not in this Plan document, the Company may only amend or terminate such provisions with the consent of the Participant. |
13
Article 13
Miscellaneous
13.1 | Binding Effect. This Plan shall bind the Participant and the Company and their beneficiaries, survivors, executors, administrators and transferees. |
13.2 | No Guarantee of Employment. This Plan is not a contract for employment. It does not give the Participant the right to remain an employee of the Company, nor does it interfere with the Companys right to discharge the Participant. It also does not require the Participant to remain an employee nor interfere with the Participants right to terminate employment at any time. |
13.3 | Non-Transferability. Benefits under this Plan cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner. |
13.4 | Tax Withholding. The Company shall withhold any taxes that, in its reasonable judgment, are required to be withheld from the benefits provided under this Agreement. The Companys sole liability regarding taxes is to forward any amounts withheld to the appropriate taxing authority(ies). |
13.5 | Applicable Law. The Plan and all rights hereunder shall be governed by the laws of Ohio, except to the extent preempted by the laws of the United States of America. |
13.6 | Unfunded Arrangement. The Participant and the Beneficiary are general unsecured creditors of the Company for the payment of benefits under this Plan. The benefits represent the mere promise by the Company to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Participants life is a general asset of the Company to which the Participant and the Beneficiary have no preferred or secured claim. |
13.7 | Reorganization. The Company shall not merge or consolidate into or with another company, or reorganize, or sell substantially all of its assets to another company, firm, or person unless such succeeding or continuing company, firm, or person agrees to assume and discharge the obligations of the Company under this Plan. Upon the occurrence of such event, the term Company as used in this Plan shall be deemed to refer to the successor or survivor company. |
13.8 | Entire Agreement. This Plan and the Participants Participation Agreement constitute the entire agreement between the Company and the Participant as to the subject matter hereof. No rights are granted to the Participant by virtue of (i) this Plan other than those specifically set forth herein; or (ii) the Participation Agreement other than those specifically set forth therein. |
14
13.9 | Interpretation. Wherever the fulfillment of the intent and purpose of this Plan requires, and the context will permit, the use of the masculine gender includes the feminine and use of the singular includes the plural. |
13.10 | Alternative Action. In the event it shall become impossible for the Company or the Plan Administrator to perform any act required by this Plan, the Company or Plan Administrator may in its discretion perform such alternative act as most nearly carries out the intent and purpose of this Plan and is in the best interests of the Company. |
13.11 | Headings. Article and section headings are for convenient reference only and shall not control or affect the meaning or construction of any of its provisions. |
13.12 | Validity. In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision has never been inserted herein. |
13.13 | Notice. Any notice or filing required or permitted to be given to the Plan Administrator under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below: |
Delaware County Bank & Trust Company |
Attn: Human Resources |
PO Box 1001 |
Lewis Center, Ohio 43035 |
Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or the receipt for registration or certification.
Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant.
IN WITNESS WHEREOF, the Company has signed this Plan document as of June 21, 2004.
Company: |
THE DELAWARE COUNTY BANK AND TRUST |
By: Jeffery T. Benton |
Title: President and CEO |
15
THE DELAWARE COUNTY BANK AND TRUST
Executive Deferred Compensation Plan
PARTICIPATION AGREEMENT
THIS PARTICIPATION AGREEMENT (this Agreement) is entered into as of 20 between THE DELAWARE COUNTY BANK AND TRUST, located in Lewis Center, Ohio (the Company), and (the Participant).
Recital
A. | The Participant is a key employee of the Company, and the Company desires to have the continued services of the Participant. |
B. | The Company has adopted, effective January 1, 2004, the Delaware County Bank and Trust Executive Deferred Compensation Plan (the Plan), as amended from time to time, and the Participant has been selected to participate in the Plan. |
C. | The Participant desires to participate in the Plan. |
Agreement
NOW THEREFORE, it is mutually agreed that:
1. | Definitions. Unless otherwise provided in this Agreement, the capitalized terms in this Agreement shall have the same meaning as under the Plans master plan document (the Plan Document). |
2. | Integrated Agreement: Parties Bound. The Plan Document, a copy of which has been made available to the Participant, is hereby incorporated into and made a part of this Agreement as though set forth in full in this Agreement. The parties to this Agreement agree to and shall be bound by, and have the benefit of, each and every provision of the Plan as set forth in the Plan Document. This Agreement and the Plan Document, collectively, shall be considered one complete contract between the parties. |
3. | Acknowledgment. The Participant hereby acknowledges that he or she has read and understands this Agreement and the Plan Document. |
4. | Conditions to Participation. As a condition to participation in the Plan, the Participant must complete, sign, date and return to the Plan Administrator an original copy of this Agreement, various Election Forms as required by the Plan Administrator, and a Beneficiary Designation Form. |
5. | Successors and Assigns. This Agreement shall inure to the benefit of, and be binding upon the Company, its successors and assigns, and the Participant. |
6. | Governing Law. This Agreement shall be governed by and construed under the laws of the State of Ohio, as in effect at the time of the execution of this Agreement. |
IN WITNESS WHEREOF, the Participant has signed and the Company has accepted this Participation Agreement as of the date first written above.
16
PARTICIPANT : | ||
|
| |
Date | Signature of Participant | |
| ||
Type or Print Name | ||
AGREED AND ACCEPTED BY THE COMPANY: |
||
PLAN ADMINISTRATOR: |
||
|
| |
Date |
Signature of Plan Administrator Member | |
| ||
Type or Print Name |
17
THE DELAWARE COUNTY BANK AND TRUST
Executive Deferred Compensation Plan
ELECTION FORM
I elect to defer Base Salary under the Plan as follows:
Amount of Deferral |
Duration of Deferrals | |
[Initial and Complete one] I elect to defer % of my Base Salary annually (not to exceed 80%).
I elect to defer $ of my Base Salary annually (not to exceed 80%).
I elect not to defer any of my Base Salary. |
[Initial One]
One Year only
For [Insert Number] Years
Until Termination of Employment
Until , (date) |
I elect to defer Other Compensation under the Plan as follows:
Amount of Deferral |
Duration of Deferrals | |
[Initial and Complete one] Ielect to defer % of my Other Compensation annually (not to exceed 100%).
I elect to defer $ of my Other Compensation annually (not to exceed 100%).
I elect not to defer any of my Other Compensation. |
[InitialOne] One Year only
For [Insert Number] Years
Until Termination of Employment
Until , (date) |
Initial:
I understand that I may change the amount and duration of my deferrals by filing a new Election Form with the Plan Administrator by December 1 of each Plan Year; provided, however, that any subsequent election will not be effective until the calendar year in which services are performed that follows the year in which the new election is received by the Plan Administrator.
18
Benefit |
Form of Benefit | |||
Lump Sum * (Initial) | Equal Monthly Installments for the number of months shown, not to exceed 120 months ** (Initial and indicate number of months) | |||
§ 6.1.2Normal Retirement Benefit |
||||
§ 6.2.2Voluntary Early Termination Benefit |
||||
§ 6.4.2Involuntary Early Termination Benefit |
* | Lump Sum shall be payable on the first of the month following Termination of Employment. |
** | Unless otherwise specified in the Plan, payments shall commence on the first of the month following Termination of Employment. The Company shall continue to credit interest pursuant to Section 5.1.3 of the Plan on the remaining Deferral Account balance during the installment period. |
| I understand that I may change the Form of Benefit election only if said election is made at least thirteen (13) months prior to the starting date for the distribution previously elected. Furthermore, I understand that I may NOT change from installments to a lump sum. |
Printed Name: |
| |
Signature: |
| |
Date: |
|
Received by the Plan Administrator this day of , 200 .
By: | ||
Title: |
19
I, , designate the following as beneficiary of benefits under the Plan payable following my death:
Primary: |
||
|
% | |
|
% | |
|
% | |
Contingent: |
||
|
% | |
|
% | |
|
% |
Notes:
| Please PRINT CLEARLY or TYPE the names of the beneficiaries. |
| To name a trust as beneficiary, please provide the name of the trustee(s) and the exact name and date of the trust agreement. |
| To name your estate as beneficiary, please write Estate of _[your name]_. |
| Be aware that none of the contingent beneficiaries will receive anything unless ALL of the primary beneficiaries predecease you. |
I understand that I may change these beneficiary designations by delivering a new written designation to the Plan Administrator, which shall be effective only upon receipt and acknowledgment by the Plan Administrator prior to my death. I further understand that the designations will be automatically revoked if the beneficiary predeceases me, or, if I have named my spouse as beneficiary and our marriage is subsequently dissolved.
Name: | ||||||
Signature: |
|
Date: |
|
Received by the Plan Administrator this ________ day of ___________________, 20___.
By: | ||
Title: |
|
20
FIRST AMENDMENT
TO
THE DELAWARE COUNTY BANK AND TRUST
EXECUTIVE DEFERRED COMPENSATION PLAN
DATED JUNE 21, 2004
THIS FIRST AMENDMENT is adopted this 20 day of December, 2007, effective as of January 1, 2005, by THE DELAWARE COUNTY BANK AND TRUST, a state-chartered commercial bank located in Lewis Center, Ohio (the Company).
The Company executed The Delaware County Bank and Trust Executive Deferred Compensation Plan on June 21, 2004, effective as of January 1, 2004 (the Plan).
The undersigned hereby amends the Plan for the purpose of bringing the Plan into compliance with Section 409A of the Internal Revenue Code. Therefore, the following changes shall be made:
Section 1.10 of the Agreement shall be deleted in its entirety and replaced by the following:
1.10 | Disability means the Executive: (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months; or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees or directors of the Company. Medical determination of Disability may be made by either the Social Security Administration or by the provider of an accident or health plan covering employees or directors of the Company provided that the definition of disability applied under such disability insurance program complies with the requirements of the preceding sentence. Upon the request of the Plan Administrator, the Executive must submit proof to the Plan Administrator of the Social Security Administrations or the providers determination. |
The following Section 1.23a shall be added to the Plan immediately following Section 1.23:
1.23a | Specified Employee means a key employee (as defined in Section 416(i) of the Code without regard to paragraph 5 thereof) of the Company if any stock of the Company is publicly traded on an established securities market or otherwise, as determined by the Plan Administrator based on the twelve (12) month period ending each December 31 (the identification period). If the Participant is determined to be a Specified Employee for an identification period, the Participant shall be treated as a Specified Employee for purposes of this Plan during the twelve (12) month period that begins on the first day of the fourth month following the close of the identification period. |
21
Section 1.25 of the Plan shall be deleted in its entirety and replaced by the following:
1.25 | Termination of Employment means the termination of the Participants employment with the Company for reasons other than death or Disability. Whether a Termination of Employment takes place is determined in accordance with the requirements of Code Section 409A and related Treasury guidance or Regulations based on the facts and circumstances surrounding the termination of the Participants employment and whether the Company and the Participant intended for the Participant to provide significant services for the Company following such termination. A Termination of Employment will not have occurred if: |
(a) | the Participant continues to provide services as an employee of the Company at an annual rate that is twenty percent (20%) or more of the services rendered, on average, during the immediately preceding three (3) full calendar years of employment (or, if employed less than three (3) years, such lesser period) and the annual remuneration for such services is twenty percent (20%) or more of the average annual remuneration earned during the final three (3) full calendar years of employment (or, if less, such lesser period), or |
(b) | the Participant continues to provide services to the Company in a capacity other than as an employee of the Company at an annual rate that is fifty percent (50%) or more of the services rendered, on average, during the immediately preceding three (3) full calendar years of employment (or if employed less than three (3) years, such lesser period) and the annual remuneration for such services is fifty percent (50%) or more of the average annual remuneration earned during the final three (3) full calendar years of employment (or if less, such lesser period). |
The following Section 1.25a shall be added to the Plan immediately following Section 1.25:
1.25a | Unforeseeable Emergency means a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participants spouse, or the Participants dependent (as defined in Section 152(a) of the Code), loss of the Participants property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. |
Section 1.28 of the Plan shall be deleted in its entirety and replaced by the following:
1.28 | Years of Service means the twelve (12) month period beginning on the Participants date of hire and any twelve (12) month anniversary thereof during the entirety of which time the Participant is an employee of the Company. Employment with a subsidiary or other entity controlled by the Company before the time such entity became a subsidiary or under such control shall not be considered credited service. |
Section 2.4 of the Plan shall be deleted in its entirety and replaced by the following:
22
2.4 | Termination of Participation and/or Deferrals. If the Plan Administrator determines in good faith that a Participant no longer qualifies as a member of a select group of management or highly compensated employees, as membership in such group is determined in accordance with Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, the Plan Administrator shall have the right, in its sole discretion, to prevent the Participant from making future deferral elections. |
Section 4.2.2 of the Plan shall be deleted in its entirety and replaced by the following:
4.2.2 | Hardship. If an Unforeseeable Emergency occurs, the Participant, by written instructions to the Company, may discontinue deferrals hereunder. Any subsequent Deferral Elections may be made only in accordance with Section 4.2 hereof. |
Sections 6.3 and 6.3.1 of the Plan shall be deleted in their entirety and replaced by the following:
6.3 | Disability Benefit. If the Participant experiences a Disability prior to Normal Retirement Age, the Company shall pay to the Participant the Benefit described in this Section 6.3 in lieu of any other benefit under this Article. |
6.3.1 | Amount of Benefit. The Disability Benefit under this Section 6.3 is the vested Deferral Account balance upon the occurrence of such Disability. |
Section 6.5 of the Plan shall be deleted in its entirety and replaced by the following:
6.5 | Hardship Distribution. If an Unforeseeable Emergency occurs, the Participant may petition the Board to receive a distribution from the Plan. The Board in its sole discretion may grant such petition. If granted, the Participant shall receive, within sixty (60) days, a distribution from the Plan (i) only to the extent deemed necessary by the Board to remedy the Unforeseeable Emergency, plus an amount necessary to pay taxes reasonably anticipated as a result of the distribution; and (ii) after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participants assets (to the extent the liquidation would not itself cause severe financial hardship). In any event, the maximum amount which may be paid out pursuant to this Section 6.5 is the Deferral Account balance as of the day that the Participant petitioned the Board to receive a Hardship Distribution under this Section. |
The following Sections 6.6, 6.7 and 6.8 shall be added to the Plan immediately following Section 6.5:
6.6 | Restriction on Timing of Distributions. Notwithstanding any provision of this Plan to the contrary, if the Participant is considered a Specified Employee at Termination of Employment, the provisions of this Section 6.6 shall govern all distributions hereunder. Benefit distributions that are made due to a Termination of Employment occurring while the Participant is a Specified Employee shall not be made during the first six (6) months following Termination of Employment, rather any distribution which would otherwise be paid to the Participant during such period shall be accumulated and paid to the Participant in a lump sum on the first day of the seventh month following the Termination of Employment. All subsequent distributions shall be paid in the manner specified. |
23
6.7 | Distributions Upon Income Inclusion Under Section 409A of the Code. If any amount is required to be included in income by the Participant prior to receipt due to a failure of this Plan to meet the requirements of Code Section 409A and related Treasury guidance or Regulations, the Participant may petition the Plan Administrator for a distribution of that portion of the Deferral Account balance that is required to be included in the Participants income. Upon the grant of such a petition, which grant shall not be unreasonably withheld, the Company shall distribute to the Participant immediately available funds in an amount equal to the portion of the Deferral Account balance required to be included in income as a result of the failure of this Plan to meet the requirements of Code Section 409A and related Treasury guidance or Regulations, which amount shall not exceed the Participants unpaid Deferral Account balance. If the petition is granted, such distribution shall be made within ninety (90) days of the date when the Participants petition is granted. Such a distribution shall affect and reduce the Participants benefits to be paid under this Plan. |
6.8 | Change in Form or Timing of Distributions. All changes in the form or timing of distributions hereunder must comply with the following requirements. The changes: |
(a) | may not accelerate the time or schedule of any distribution, except as provided in Section 409A of the Code and the regulations thereunder; |
(b) | must, for benefits distributable under Section 6.3.2(ii), be made at least twelve (12) months prior to the first scheduled distribution; |
(c) | must, for benefits distributable under Sections 6.1, 6.2 and 6.4, delay the commencement of distributions for a minimum of five (5) years from the date the first distribution was originally scheduled to be made; and |
(d) | must take effect not less than twelve (12) months after the election is made. |
Article 12 of the Plan shall be deleted in its entirety and replaced by the following:
Article 12
Amendments and Termination
12.1 | Amendments. The Company may, at any time, amend or modify the Plan in whole or in part by the action of its Board; provided, however, that (i) no amendment or modification shall be effective to decrease the value of a Participants vested Deferral Account balance in existence at the time the amendment or modification is made; calculated as if the Participant qualified for the Voluntary Early Termination Benefit as of the effective date of the amendment or modification, or if the amendment or modification occurs after a Participants Normal Retirement Age, as if the Participant had retired as of the effective date of the amendment or modification, and (ii) no amendment or modification of this Section 12.1 of the Plan shall be effective. The amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of amendment or modification. |
24
12.2 | Plan Termination Generally. The Company reserves the right to terminate the Plan at any time with respect to any or all of its participating employees, by action of its Board. Upon the termination of the Plan, the Participation Agreements of the affected Participants shall terminate and their vested Deferral Account balances shall be determined (i) subject to Section 2.4, as if they qualified for the Involuntary Early Termination Benefit on the date of Plan termination; or (ii) if Plan termination occurs after a Participants Normal Retirement Age, then with respect to that Participant as if he or she had retired on the date of Plan Termination. The termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination. Except as provided in Section 12.3, the termination of this Plan shall not cause a distribution of benefits under this Plan. Rather, after such termination benefit distributions will be made at the earliest distribution event permitted under Article 6 or Article 7. |
12.3 | Plan Terminations Under Section 409A. Notwithstanding anything to the contrary in Section 12.2, if this Plan terminates in the following circumstances: |
(a) | Within thirty (30) days before or twelve (12) months after a change in the ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company as described in Section 409A(a)(2)(A)(v) of the Code, provided that all distributions are made no later than twelve (12) months following such termination of the Plan and further provided that all the Companys arrangements which are substantially similar to the Plan are terminated so the Participant and all participants in the similar arrangements are required to receive all amounts of compensation deferred under the terminated arrangements within twelve (12) months of the termination of the arrangements; |
(b) | Upon the Companys dissolution or with the approval of a bankruptcy court provided that the amounts deferred under the Plan are included in the Participants gross income in the latest of (i) the calendar year in which the Plan terminates; (ii) the calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (iii) the first calendar year in which the distribution is administratively practical; or |
(c) | Upon the Companys termination of this and all other arrangements that would be aggregated with this Agreement pursuant to Treasury Regulations Section 1.409A-1(c) if the Participant participated in such arrangements (Similar Arrangements), provided that (i) the termination and liquidation does not occur proximate to a downturn in the financial health of the Company, (ii) all termination distributions are made no earlier than twelve (12) months and no later than twenty-four (24) months following such termination, and (iii) the Company does not adopt any new arrangement that would be a Similar Arrangement for a minimum of three (3) years following the date the Company takes all necessary action to irrevocably terminate and liquidate the Agreement; |
25
the Company may distribute the Deferral Account balance, determined as of the date of the termination of the Plan, to the Participant in a lump sum subject to the above terms.
12.4 | Participation Agreement. Notwithstanding the provisions of Sections 12.1, 12.2 and 12.3 above, if a Participants Participation Agreement contains benefits or limitations that are not in this Plan document, the Company may only amend or terminate such provisions with the consent of the Participant. |
Section 13.10 of the Plan shall be deleted in its entirety and replaced by the following:
13.10 | Alternative Action. In the event it shall become impossible for the Company or the Plan Administrator to perform any act required by this Plan due to regulatory or other constraints, the Company or Plan Administrator may in its discretion perform such alternative act as most nearly carries out the intent and purpose of this Plan and is in the best interests of the Company, provided that such alternative acts do not violate Section 409A of the Code. |
The following Section 13.14 shall be added to the Plan immediately following Section 13.13:
13.14 | Compliance with Code Section 409A. This Agreement shall be interpreted and administered consistent with Code Section 409A. |
Any Participant who has not previously completed an Election Form regarding the form and timing of benefit distributions under Article 6 shall complete and return the attached Election Form to the Company no later than December 31, 2007.
All future Participants shall select the form and timing of benefit distributions under Article 6 by completing and returning the attached Election Form to the Company at the time they become a Participant.
IN WITNESS OF THE ABOVE, the Company has signed this First Amendment document as of December 20, 2007.
The Delaware County Bank and Trust
By: Jeffery T. Benton |
Title: President and CEO |
26
THE DELAWARE COUNTY BANK AND TRUST
Executive Deferred Compensation Plan
BENEFICIARY DESIGNATION FORM
ELECTION FORM
Form and Timing of Distributions
Benefit |
Distribution of Benefit | |||
Lump Sum (Initial) | Equal Monthly Installments for months, not to exceed 120 months. (Indicate number of months here and initial below. All installment periods must be the same length.) | |||
§ 6.1.2Normal Retirement Benefit |
||||
§ 6.3.2Disability Benefit |
||||
§ 6.2.2Voluntary Early Termination Benefit and § 6.4.2Involuntary Early Termination Benefit |
Unless otherwise specified in the Plan, any (a) lump sum distribution shall be made on the first day of the month following Termination of Employment or, in the case of Disability, at the time specified in Section 6.3.2, and (b) installment payments shall commence on the first day of the month following Termination of Employment or, in the case of Disability, at the time specified in Section 6.3.2. The Company shall continue to credit interest pursuant to Section 5.1.3 of the Plan on the remaining Deferral Account balance during any installment period.
Printed Name: | ||
Signature: | ||
Date: |
Received by the Plan Administrator this day of , 20
By: | ||
Title: |
For changes made after 2007, any change in the form or timing of distributions is subject to the following requirements:
(i) | The change will not take effect until 12 months following the date it is received by the Plan Administrator; |
(ii) | Distributions (except distributions on death, disability and emergency) must be delayed at least 5 years from the date the distributions otherwise would have been made; and |
(iii) | Any election related to distribution at a specified time or pursuant to a fixed schedule must be made 12 months prior to the date the distribution is scheduled to be paid. |
27
SECOND AMENDMENT
TO
THE DELAWARE COUNTY BANK AND TRUST
EXECUTIVE DEFERRED COMPENSATION PLAN
DATED JUNE 21, 2004
AND AMENDED DECEMBER 20, 2007
THIS SECOND AMENDMENT is adopted this 17 day of December, 2008, by THE DELAWARE COUNTY BANK AND TRUST, a state-chartered commercial bank located in Lewis Center, Ohio (the Company).
The Company executed the Executive Deferred Compensation Plan on June 21, 2004, and executed a First Amendment on December 20, 2007 (the Agreement).
The undersigned hereby amends the Agreement for the purpose of changing the vesting schedule. Therefore, the following changes shall be made:
Section 5.1.2.1 of the Agreement shall be deleted in its entirety and replaced by the following:
5.1.2.1 | Vesting in Company Deferrals. The Participant shall vest in any Company Deferrals credited under Section 5.1.2 pursuant to the following schedule: |
Completed Years of Service |
Vesting | |
Less than 5 |
0% | |
5 |
75% | |
6 |
80% | |
7 |
85% | |
8 |
90% | |
9 |
95% | |
10 or more |
100% |
Notwithstanding the schedule above, the Participant shall become 100% vested upon attaining age sixty-two (62) while employed by the Company.
IN WITNESS OF THE ABOVE, the Company has signed this Second Amendment document as of December 17, 2008.
The Delaware County Bank and Trust
By: Brian Stanfill |
Title: Senior Vice President |
28
EXHIBIT 13
Business of DCB Financial Corp
DCB Financial Corp (DCB or the Corporation) was incorporated under the laws of the State of Ohio on March 14, 1997, upon approval by the shareholders of The Delaware County Bank and Trust Company (the Bank) for the purpose of becoming a financial holding company by acquiring all of the outstanding shares of the Bank. The Bank is a commercial bank, chartered under the laws of the State of Ohio, and was organized in 1950. The Bank is a wholly-owned subsidiary of DCB.
The Bank conducts business from its main office at 110 Riverbend Avenue in Lewis Center, Ohio and from its 14 branch offices located in Delaware, Ohio and surrounding communities. The Bank provides customary retail and commercial banking services to its customers, including checking and savings accounts, time deposits, IRAs, safe deposit facilities, personal loans, commercial loans, real estate mortgage loans, installment loans, night depository facilities and wealth management services. The Bank also provides treasury management, bond registrar and payment agent services. Through its subsidiary Datatasx, the Bank provided data processing and other bank operational services to other financial institutions; however those services were discontinued in September 2011, and were not a material part of financial results.
DCB, through the Bank, grants residential real estate, commercial real estate, consumer and commercial loans to customers located primarily in Delaware, Franklin, and Union Counties, Ohio. Unemployment statistics in these counties have historically been among the lowest in the State of Ohio. Real estate values have historically been stable, although real estate values have declined in DCBs market area over the last four years in connection with the overall decline in the economy. DCB also invests in U.S. Government and agency obligations, obligations of states and political subdivisions, corporate obligations, mortgage-backed securities and other investments permitted by applicable law. Funds for lending and other investment activities come primarily from customer deposits, borrowed funds, and to a lesser extent, from principal repayments on securities.
As a financial holding company, DCB is subject to regulation, supervision and examination by the Federal Reserve Board. As a commercial bank chartered under the laws of the State of Ohio, the Bank is subject to regulation, supervision and examination by the State of Ohio Division of Financial Institutions and the Federal Deposit Insurance Corporation (the FDIC). The FDIC insures deposits in the Bank up to applicable limits. The Bank is also a member of the Federal Home Loan Bank (the FHLB) of Cincinnati, Ohio.
Common Stock and Shareholder Matters
DCB had 3,717,385 common shares outstanding on March 29, 2012, held of record by approximately 1,465 shareholders. There is no established public trading market for DCBs common shares. DCBs common shares are traded on a limited basis on the OTC Bulletin Board. At times however, various brokerage firms maintain daily bid and ask prices for DCBs common stock. The range of high and low transactions as reported by the OTC Bulletin Board is reported below. These transactions are shown without retail mark-up, mark-down or commissions.
Quarter ended | ||||||||||||||||
March 31, | June 30, | September 30, | December 31, | |||||||||||||
2011 | 2011 | 2011 | 2011 | |||||||||||||
High |
$ | 3.75 | $ | 3.84 | $ | 3.60 | $ | 3.00 | ||||||||
Low |
3.05 | 3.10 | 2.50 | 2.20 | ||||||||||||
Dividends per share |
0.00 | 0.00 | 0.00 | 0.00 |
March 31, | June 30, | September 30, | December 31, | |||||||||||||
2010 | 2010 | 2010 | 2010 | |||||||||||||
High |
$ | 7.25 | $ | 7.25 | $ | 6.20 | $ | 4.17 | ||||||||
Low |
6.00 | 5.00 | 3.70 | 3.02 | ||||||||||||
Dividends per share |
0.00 | 0.00 | 0.00 | 0.00 |
Management does not have knowledge of the prices in all transactions and has not verified the accuracy of those prices that have been reported. Because of the lack of an established market for DCBs stock, these prices may not reflect the prices at which the stock would trade in a more active market. DCB sold no securities during 2011 or 2010 that were not registered under the Securities Acts.
Income of DCB primarily consists of dividends, which may be declared by the Board of Directors of the Bank (the Board) and paid on common shares of the Bank held by DCB. During 2009 management of DCB ceased the payment of regular cash dividends and, no assurances can be given that any dividends will be declared or, if declared in the future, what the amount of any such dividends will be. The Bank did not pay dividends to DCB Financial during 2011 or 2010. See Note 11 to the Consolidated Financial Statements for a description of dividend restrictions.
2
Selected Consolidated Financial Information and Other Data
The following tables set forth certain information concerning the consolidated financial condition, results of operations and other data regarding DCB at the dates and for the periods indicated.
Selected consolidated financial condition data: | At December 31, | |||||||||||||||||||
(Dollars in thousands) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Total assets |
$ | 522,881 | $ | 565,105 | $ | 675,022 | $ | 712,564 | $ | 680,786 | ||||||||||
Cash and cash equivalents |
39,314 | 33,521 | 41,453 | 34,658 | 32,068 | |||||||||||||||
Securities available for sale |
88,113 | 69,597 | 94,100 | 111,360 | 89,009 | |||||||||||||||
Securities held to maturity |
1,010 | 1,313 | 1,752 | 8,002 | | |||||||||||||||
Net loans |
350,183 | 412,617 | 479,003 | 507,076 | 512,195 | |||||||||||||||
Deposits |
445,428 | 465,076 | 557,455 | 565,153 | 510,874 | |||||||||||||||
Borrowed funds |
40,036 | 59,767 | 66,159 | 88,384 | 110,082 | |||||||||||||||
Shareholders equity |
34,699 | 37,414 | 49,343 | 56,059 | 57,068 |
3
Selected Operating Data | Year ended December 31, | |||||||||||||||||||
(In thousands, except per share data) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Interest income |
$ | 22,732 | $ | 28,118 | $ | 32,341 | $ | 38,405 | $ | 43,556 | ||||||||||
Interest expense |
5,113 | 6,925 | 10,558 | 16,743 | 22,154 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest income |
17,619 | 21,193 | 21,783 | 21,662 | 21,402 | |||||||||||||||
Provision for loan losses |
5,436 | 11,040 | 9,398 | 8,177 | 10,159 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest income after provision for loan losses |
12,183 | 10,153 | 12,385 | 13,485 | 11,243 | |||||||||||||||
Noninterest income |
6,358 | 6,115 | 3,219 | 5,487 | 5,928 | |||||||||||||||
Noninterest expense |
21,292 | 23,488 | 22,989 | 20,884 | 17,962 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loss before income tax |
(2,751 | ) | (7,220 | ) | (7,385 | ) | (1,912 | ) | (791 | ) | ||||||||||
Income tax expense (credit) |
(13 | ) | 5,110 | (3,185 | ) | (2,241 | ) | (930 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | (2,738 | ) | $ | (12,330 | ) | $ | (4,200 | ) | $ | 329 | $ | 139 | |||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Per Share Data: |
||||||||||||||||||||
Basic earnings (loss) per share |
$ | (0.74 | ) | $ | (3.32 | ) | $ | (1.13 | ) | $ | 0.09 | $ | 0.04 | |||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Diluted earnings (loss) per share |
$ | (0.74 | ) | $ | (3.32 | ) | $ | (1.13 | ) | $ | 0.09 | $ | 0.04 | |||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Dividends declared per share |
$ | 0.00 | $ | 0.00 | $ | 0.06 | $ | 0.56 | $ | 0.60 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
At or for the year ended December 31, | ||||||||||||||||||||
Selected Financial Ratios: | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Interest rate spread |
3.26 | % | 3.44 | % | 3.21 | % | 2.97 | % | 2.90 | % | ||||||||||
Net interest margin |
3.39 | 3.58 | 3.38 | 3.29 | 3.36 | |||||||||||||||
Return on average equity |
* | * | * | 0.55 | 0.23 | |||||||||||||||
Return on average assets |
* | * | * | 0.05 | 0.02 | |||||||||||||||
Average equity to average assets |
6.56 | 7.32 | 7.64 | 8.42 | 8.88 | |||||||||||||||
Allowance for loan losses as a percentage of nonaccrual loans |
100.08 | 73.82 | 92.94 | 130.64 | 80.10 |
* | Not meaningful |
4
Managements Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands, except per share amounts)
Introduction
In the following pages, management presents an analysis of DCBs consolidated financial condition and results of operations as of and for the year ended December 31, 2011, compared to prior years. This discussion is designed to provide shareholders with a more comprehensive review of the operating results and financial position than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the financial statements, the related footnotes and the selected financial data included elsewhere in this report.
Forward-Looking Statements
Certain statements in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements relating to the financial condition and prospects, lending risks, plans for future business development and marketing activities, capital spending and financing sources, capital structure, the effects of regulation and competition, and the prospective business of both the Corporation and its wholly-owned subsidiary The Delaware County Bank and Trust Company (the Bank). 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, managements 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.
5
Recent Accounting Standards
In April 2011, the FASB issued ASU 2011-02, A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring, which provides additional guidance to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this update are effective for the Corporation beginning in the quarter ended September 30, 2011 and are to be applied retrospectively to January 1, 2011. In addition, the modification disclosures described in ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which were subsequently deferred by ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings, are effective on a prospective basis beginning in the quarter ended September 30, 2011. The adoption of ASU 2011-02 did not have a material impact on the consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term fair value. The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the Codification in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The impact of adoption of this ASU is not expected to be material to the consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which provides entities with the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income, along with a total for other comprehensive income, and a total amount for comprehensive income. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. This update should be applied retrospectively effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. As the Corporation currently reports comprehensive income in two separate but consecutive statements with all of the components required by ASU 2011-05, the adoption of this guidance will not have an impact on the consolidated financial statements.
6
Critical Accounting Policies
DCBs consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the financial services industry. The application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; as this information changes, the financial statements could reflect different estimates, assumptions, and judgments.
The most significant accounting policies followed by the Corporation are presented in the notes to the Consolidated Financial Statements. These policies are fundamental to the understanding of results of operations and financial condition. The accounting policies considered to be critical by Management are as follows.
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 allowance is regularly reviewed by management to determine whether the amount is considered adequate to absorb probable losses. This evaluation includes specific loss estimates on certain individually reviewed loans, statistical loss estimates for loan pools that are based on historical loss experience, and general loss estimates that are based upon the size, quality, and concentration characteristics of the various loan portfolios, adverse situations that may affect a borrowers ability to repay, and current economic and industry conditions. Also considered as part of that judgment is a review of the Banks trends in delinquencies and loan losses, as well as trends in delinquencies and loan losses for the region and nationally, and economic factors.
The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan portfolio. Managements evaluation of the adequacy of the allowance is an estimate based on managements current judgment about the credit quality of the loan portfolio. While the Corporation strives to reflect all known risk factors in its evaluations, judgment errors may occur.
7
The valuation of other assets requires that management utilize a variety of estimates and analysis to determine whether an asset is impaired or other-than-temporarily impaired. After determining the appropriate methodology for fair value measurement, management then evaluates whether or not declines in fair value below book value are temporary or other-than-temporary impairments (OTTI). If it is determined that measured impairment is other-than-temporary the appropriate loss recognition is recorded within the period that OTTI is recognized. Generally, management utilizes third parties to provide appraisals, analysis or market pricing in support of OTTI analysis.
Overview of 2011
Through its locations in Delaware, Union and Franklin Counties, the Corporation provides customary retail and commercial banking services to its customers, including checking and savings accounts, time deposits, IRAs, safe deposit facilities, personal loans, commercial loans, real estate mortgage loans, installment loans, trust, and other wealth management services.
The Corporation currently operates in an economic environment that has caused and continues to cause lowered earnings due to higher credit defaults across the banking industry. These credit defaults are attributed to an increase in unemployment coupled with reduced economic growth that has affected consumers and commercial businesses. Additionally, real estate values within the Banks market have generally declined, creating higher loss levels when defaults do occur.
Management has attempted to mitigate the results of these economic issues through a change in infrastructure by increasing its resources related to credit and compliance and by creating strategies for the long term benefit of its shareholders. These strategies include, but are not limited to: reducing overall size of the balance sheet; reducing staff to control costs; ensuring credit standards are appropriate for the current economic environment; and, pricing loans and other products appropriately. This includes pricing its deposit products to remain competitive, but focusing on developing core deposits through customers in its geographic footprint.
In addition to addressing the issues presented in the regulatory orders the bank also reduced its salary and benefits expense through a staffing reduction and reduced other overhead through the closure of five branch locations. As the overall size of the Corporation receded, the strategic reduction in expenses was prudent. There were other efficiency initiatives introduced during the year that also focused reducing costs through vendor consolidation and creating efficiencies.
The Corporation has also made significant progress in addressing its credit issues related to problem loans. During 2011 it has devoted significant resources in terms of personnel, consultants and legal resources to addressing non-performing and troubled loans. The strategies that were developed include: getting problem credits refinanced outside of the bank; negotiating restructured notes; selling notes to third-parties; charging off uncollectable balances; and when necessary, liquidating collateral.
8
In September 2011 the Board of Directors announced the hiring of Ronald J. Seiffert as its new President and Chief Executive Officer. Mr. Seiffert was hired to bring new direction and strategies for the long-term benefit of the Corporation and its shareholders. Under his direction, DCB Financial Corp launched a number of initiatives to address the long-term success of its operations. These included the restructure of management, the identification of efficiency opportunities and development of plans to increase capital levels to those required by the written regulatory agreements under which the Corporation operates.
The following points address financial and other strategic highlights from 2011:
| The Corporations assets totaled $522,881 at December 31, 2011, compared to $565,105 at December 31, 2010, a decrease of $42,224, or 7.5%. The decrease in assets was mainly attributed to a decline in loans resulting from management initiatives, and a reduction in interest bearing deposits and long-term borrowings. |
| Net loss for 2011 totaled $2,738 as compared to the net loss of $12,330 for 2010, representing a decrease in operating losses of $9,800. The 2011 operating results were less affected by provision expense and operating expenses for consulting and legal associated with managing non-performing loan portfolios as compared to 2010. |
| The Corporations net interest income decreased in 2011 to $17,619 from $21,193 in 2010. This is mainly attributed to the lower level of earning assets from year to year. The decline in the balance sheet was the result of Managements actions related to reducing non-core time deposits and FHLB debt, which were funded through loan and investment portfolio run-off. |
| The provision for loan losses totaled $5,436 for the year ended December 31, 2011 compared to $11,040 in 2010. Losses in commercial and commercial real estate loans were the main driver of the provision expense. DCB maintains an allowance for loan losses at a level considered adequate to absorb managements estimate of probable inherent credit losses in its portfolios. |
| The total problem loan portfolio declined to $83,562 at year-end 2011 from $118,691 at year-end 2010. As previously mentioned, this change resulted from the additional resources and implementation of strategies focusing on improving the overall credit quality of the balance sheet. |
9
Analysis of Financial Condition for the Years Ended December 31, 2011 and December 31, 2010
The Corporations assets totaled $522,881 at December 31, 2011, compared to $565,105 at December 31, 2010, a decrease of $42,224, or 7.5%. The decline in assets is mainly attributed to reduced quality lending opportunities in the Banks market area, managements initiatives to reduce problem assets, and a decline in marketable securities which were reduced in order to fund reduced deposit balances. Cash and cash equivalents rose from $33,521 at December 31, 2010 to $39,314 at December 31, 2011. The Corporation has set target limits for cash balances that focused on maintaining liquidity, while limiting balances of low earning assets in order to preserve net interest margin.
Available-for-sale securities increased to $88,113 at December 31, 2011 from $69,597 a year earlier. The increase is the result of directing excess funds from loan run-off being invested in higher yielding securities instead of overnight deposits. In order to focus on core deposits Management reduced time deposits through its Certificate of Deposit Account Registry Service program (CDARS) for non-core customers. This process was essential to reducing the overall asset level in order to maintain key capital measurements.
Total loans, excluding loans held for sale, decreased by $65,097 from $424,864 at December 31, 2010 to $359,767 at December 31, 2011. As noted earlier, the current commercial and commercial real estate market within the Corporations footprint is not offering a significant number of quality lending opportunities. Management has not been aggressive in pursuing on-balance sheet growth in order to preserve liquidity and to support targeted capital ratios. As an example, residential loan originations have generally been sold on the secondary market at a gain and not retained on balance sheet.
Total deposits decreased by $19,648 from $465,076 at December 31, 2010 to $445,428 at December 31, 2011. This change is mainly attributed to the planned reduction in non-core CDARS deposits and having less reliance on large public fund depositors. The funding of this run-off mainly came from the reduction in the Corporations loan portfolios. The Corporation did experience a slight increase in non-interest bearing deposits as it focused on both customer retention coupled with aggressive marketing.
Comparison of Results of Operations for the Years Ended December 31, 2011 and December 31, 2010
Net Loss The net loss for 2011 totaled $2,738 compared to a net loss for 2010 of $12,330. The basic and diluted loss per share totaled $0.74 for 2011 versus the basic and diluted loss per share of $3.32 for 2010. The Corporations decreased net loss is mainly attributed to decreased provision expense for probable loan losses in 2011 compared to 2010. Additionally, expenses related to administer and manage loan workout situations continue at an elevated level.
10
Net Interest Income During 2011 the interest rate environment allowed management to re-price liabilities to effectively increase the Corporations margin. However, due to the planned contraction of the balance sheet overall levels of earning assets were lower in 2011 compared to 2010. The lower level of earning assets is the main reason that net interest income of $17,619 was lower than the $21,193 recognized in 2010.
Deposit pricing opportunities allowed the cost of deposits to remain adequate at 62 basis points at year-end 2011 compared to 61 basis points at year-end 2010. The Bank has improved its deposit mix as balances in low cost or no cost deposits increased slightly, while time deposits, which typically carry the highest costs, declined significantly. Loan yields also declined, but at a lower percentage change than overall deposit costs.
As a result of these shifts in the components of interest-earning assets and interest-bearing liabilities, as well as movements in market interest rates, DCBs net interest margin, which is calculated by dividing net interest income by average interest-earning assets, decreased to 3.39% in 2011 from 3.58% in 2010. Management continues to offer deposit specials on certain products in order to ensure an adequate level of liquidity. These special rates normally have a negative impact on the overall net interest margin. If special deposit rates above the Corporations normal rates continue to be offered, it is likely that net interest margin and effectively net interest income could be negatively affected.
Noninterest Income Total noninterest income increased to $6,358 in 2011 from $6,115 in 2010. The increase is mainly attributed to reduced losses on held to maturity securities and increased gains on the sale of other securities. Other components of noninterest income were generally stable. During 2011 the Corporation sold securities and recognized $957 of gains related to these transactions as compared to $301 in gains for 2010. Additionally in 2011, the Corporation recognized $515 of losses related to the write downs of OREO property associated with quarterly re-evaluations, resulting in an overall loss of $363 for the year on the sale of OREO and other assets, compared to $813 gain recorded in 2010. Gain on sale of loans went from $401 in 2010 to $77 in 2011.
Other noninterest revenue transactions were stable during 2011. However, due to changing regulations, noninterest revenue could be impacted in future periods by legislation contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted into law on July 21, 2010, which would likely limit the amount of revenue generated on electronic banking and non-sufficient check transactions processed by the Bank.
Noninterest Expense Total noninterest expense decreased to $21,292 for the year ended December 31, 2011 compared to $23,488 in 2010. As previously noted, the decrease is mainly attributed to the decrease in consulting, legal and other expenses associated with the workout loan processes. This includes costs associated with holding repossessed property including management fees, utilities and real estate taxes. Additionally, the Corporation recognized $242 of current year expense related to a voluntary early retirement program offered to select employees. Though this increased expenses in 2011, it is expected the overall salary and benefit cost run-rates will be lower in 2012.
11
Provision Expense Provision expense for 2011 was $5,436 compared to $11,040 in 2010. The decrease in provision was mainly attributed to decreased probable losses expected to be incurred on its commercial and commercial real estate portfolios. Net charge-offs for 2011 were $8,099, compared to $9,272 of charge-offs during 2010, a decrease of 12.6%. The allowance for loan losses decreased to 2.66% of total loans at year-end 2011, compared to 2.88% at year-end 2010.
Delinquencies greater than 30 days compared to total loans at year-end 2011 were 2.24% compared to 4.01% at year-end 2010. Nonaccrual loans decreased to $9,576 at year-end 2011 from $16,567 at year-end 2010. The decrease in nonaccruals is mainly attributed to aggressive workout strategies employed by the Corporation.
The provision for loan losses represents the charge to income necessary to adjust the allowance for loan losses to an amount that represents managements assessment of the losses known and inherent in the Banks 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. To assist in identifying potential loan losses, the Bank maintains a credit administration function that regularly evaluates lending relationships as well as overall loan portfolio conditions. One of the primary objectives of this credit administration function is to make recommendations to management as to both specific and overall portfolio loss allowances. Management further evaluates these allowance levels through an ongoing rigorous credit quality process, which in addition to evaluating the current credit quality of the lending portfolios, examines other economic indicators and trends, which could affect the overall loss rates associated with the loan portfolios.
Management will continue to monitor the credit quality of the loan portfolio and may recognize additional provision expense in the future if needed to maintain the allowance for loan losses at an appropriate level. Management will continue to focus on activities related to monitoring, collection and workout of delinquent loans. In addition, management will continue to monitor exposure related to industry segments, in order to adequately diversify the loan portfolio.
Comparison of Results of Operations for the Years Ended December 31, 2010 and December 31, 2009
Net Loss The net loss for 2010 totaled $12,330 compared to a net loss for 2009 of $4,200. The basic and diluted loss per share totaled $3.32 for 2010 versus the basic and diluted loss per share of $1.13 for 2009. The Corporations increased net loss is mainly attributed to increased provision expense in 2010 compared to 2009 for probable loan losses, and the recognition of a full allowance of $8.08 million on its deferred tax position. Additionally, there continued to be higher than normal expenses due to the increased resources need to administer and manage loan workout situations. The Bank also recognized impairment on two trust preferred securities, which were written down by $1,302 in 2010.
Net Interest Income During 2010 the interest rate environment allowed management to re-price liabilities to effectively increase the Corporations margin. However, due to the planned contraction of the balance sheet overall levels of earning assets were lower in 2010 compared to 2009. The lower level of earning assets is the main reason that net interest income of $21,193 was lower than the $21,783 recognized in 2009.
12
Deposit pricing opportunities allowed the cost of deposits to decline to approximately 61 basis points at year-end 2010 compared to 93 basis points at year-end 2009. The Bank has improved its deposit mix as balances in low cost or no cost deposits increased slightly, while time deposits, which typically carry the highest costs, declined significantly. Loan yields also declined, but at a lower percentage change than overall deposit costs.
As a result of these shifts in the components of interest-earning assets and interest-bearing liabilities, as well as movements in market interest rates, DCBs net interest margin, which is calculated by dividing net interest income by average interest-earning assets, increased to 3.58% in 2010 from 3.38% in 2009. Despite the improvements in margin, Management continues to offer deposit specials on certain products in order to ensure an adequate level of liquidity. These special rates normally have a negative impact on the overall net interest margin. If special deposit rates above the Corporations normal rates continue to be offered, it is likely that net interest margin and effectively net interest income could be negatively affected.
Noninterest Income Total noninterest income increased to $6,115 in 2010 from $3,219 in 2009. The increase is mainly attributed to reduced losses on held to maturity securities and increased gains on the sale of other securities. Additionally, there were pre-payment penalties incurred on the early retirement of FHLB debt in 2009 that did not occur in 2010. Other components of noninterest income were generally stable. Other noninterest revenue transactions were stable during 2010. However, due to changing regulations, noninterest revenue could be impacted in future periods by legislation contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted into law on July 21, 2010, which would likely limit the amount of revenue generated on electronic banking and non-sufficient check transactions processed by the Bank.
Noninterest Expense Total noninterest expense increased to $23,488 for the year ended December 31, 2010 compared to $22,989 in 2009. As previously noted, the increase is mainly attributed to the increase in consulting, legal and other expenses associated with the workout loan processes. This includes additional costs associated with holding repossessed property including management fees, utilities and real estate taxes. Additionally, the Corporation recognized $154 of current year expense related to a voluntary early retirement program offered to select employees. Though this increased expenses in 2010, it is expected the overall salary and benefit cost run-rates will be lower in 2011.
Provision Expense Provision expense for 2010 was $11,040 compared to $9,398 in 2009. The slight increase in provision was mainly attributed to increased probable losses expected to be incurred on its commercial and commercial real estate portfolios. The increased provision along with $9,758 of charge-offs during 2010 created an increase in the allowance for loan losses to increase to 2.88% at year-end 2010 compared to 2.14% at year-end 2009.
Delinquencies greater than 30 days compared to total loans at year-end 2010 were 4.01% compared to 3.01% at year-end 2009, but showed an improvement compared to the end of the third-quarter 2010 when delinquencies were 4.14%. Nonaccrual loans increased to $16.6 million at year-end 2010 from $11.3 million from year-end 2009. The increase in nonaccruals is mainly attributed to the decline in performance of the commercial and commercial real estate portfolios.
The provision for loan losses represents the charge to income necessary to adjust the allowance for loan losses to an amount that represents managements assessment of the losses known and inherent in the Banks 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. To assist in identifying potential loan losses, the Bank maintains a credit administration function that regularly evaluates lending relationships as well as overall loan portfolio conditions. One of the primary objectives of this credit administration function is to make recommendations to management as to both specific and overall portfolio loss allowances. Management further evaluates these allowance levels through an ongoing rigorous credit quality process, which in addition to evaluating the current credit quality of the lending portfolios, examines other economic indicators and trends, which could affect the overall loss rates associated with the loan portfolios.
13
Margin Analysis The following table presents certain information from the Corporations average balance sheet and reflects the average yield on interest-earning assets and the average cost of interest-bearing liabilities for the years ended December 31, 2011, 2010 and 2009. Such yields and costs are derived by dividing annual income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the years presented. Average balances are derived from daily balances, net of the allowance for loan losses. Interest on tax-exempt securities is reported on a historical basis without tax-equivalent adjustment. Interest on tax-exempt securities on a tax-equivalent basis was $485 in 2011, $977 in 2010, and $1,495 in 2009. Average loan balances include nonaccruing loans. Loan income includes cash received on nonaccruing loans.
Year ended December 31, | ||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | ||||||||||||||||||||||||||||||||||
Average | Interest | Average | Interest | Average | Interest | |||||||||||||||||||||||||||||||
outstanding | earned/ | Yield/ | outstanding | earned/ | Yield/ | outstanding | earned/ | Yield/ | ||||||||||||||||||||||||||||
balance | paid | rate | balance | paid | rate | balance | paid | rate | ||||||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||||||||||||||
Federal funds sold and other short term |
$ | 44,298 | $ | 108 | 0.24 | % | $ | 33,426 | $ | 133 | 0.40 | % | $ | 43,057 | $ | 167 | 0.39 | % | ||||||||||||||||||
Taxable securities |
72,031 | 2,208 | 3.07 | 75,836 | 2,697 | 3.56 | 75,050 | 3,299 | 4.40 | |||||||||||||||||||||||||||
Tax-exempt securities |
7,940 | 320 | 4.03 | 16,608 | 645 | 3.88 | 22,452 | 987 | 4.40 | |||||||||||||||||||||||||||
Loans (includes nonaccrual loans) |
394,765 | 20,096 | 5.09 | 465,983 | 24,643 | 5.29 | 504,844 | 27,888 | 5.52 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total interest-earning assets |
519,034 | 22,732 | 4.38 | 591,853 | 28,118 | 4.75 | 645,403 | 32,341 | 5.01 | |||||||||||||||||||||||||||
Noninterest-earning assets |
43,848 | 47,403 | 62,481 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Total assets |
$ | 562,882 | $ | 639,256 | $ | 707,884 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Interest-bearing demand and money market deposits |
$ | 176,667 | $ | 405 | 0.23 | % | $ | 199,457 | $ | 471 | 0.24 | % | $ | 198,012 | $ | 651 | 0.33 | % | ||||||||||||||||||
Savings deposits |
33,100 | 49 | 0.15 | 33,607 | 49 | 0.15 | 32,828 | 54 | 0.16 | |||||||||||||||||||||||||||
Certificates of deposit |
190,217 | 2,355 | 1.24 | 232,474 | 3,662 | 1.58 | 292,095 | 6,624 | 2.27 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total deposits |
399,984 | 2,809 | 465,538 | 4,182 | 522,935 | 7,329 | ||||||||||||||||||||||||||||||
Borrowed funds |
53,825 | 2,304 | 4.28 | 64,647 | 2,743 | 4.24 | 64,246 | 3,229 | 5.03 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total interest-bearing liabilities |
453,809 | 5,113 | 1.13 | 530,185 | 6,925 | 1.31 | 587,181 | 10,558 | 1.80 | |||||||||||||||||||||||||||
Noninterest-bearing liabilities |
72,129 | 62,251 | 66,612 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Total liabilities |
525,938 | 592,436 | 653,793 | |||||||||||||||||||||||||||||||||
Shareholders equity |
36,944 | 46,820 | 54,091 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Total liabilities and shareholdersequity |
$ | 562,882 | $ | 639,256 | $ | 707,884 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Net interest income; interest rate spread |
$ | 17,619 | 3.25 | % | $ | 21,193 | 3.44 | % | $ | 21,783 | 3.21 | % | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Net interest margin (net interest income as a percent of average interest-earning assets) |
3.39 | % | 3.58 | % | 3.38 | % | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities |
114.37 | % | 111.63 | % | 109.92 | % | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
14
The table below describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected DCBs interest income and expense during the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume; (2) changes in rate; and, (3) total changes in rate and volume. The combined effects of changes in both volume and rate, that are not separately identified, have been allocated proportionately to the change due to volume and change due to rate:
Year ended December 31, | ||||||||||||||||||||||||
2011 vs. 2010 | 2010 vs. 2009 | |||||||||||||||||||||||
Increase | Increase | |||||||||||||||||||||||
(decrease) | (decrease) | |||||||||||||||||||||||
due to | due to | |||||||||||||||||||||||
Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||
Interest income attributable to: |
||||||||||||||||||||||||
Federal funds sold and other short term |
$ | 45 | $ | (70 | ) | $ | (25 | ) | $ | (41 | ) | $ | (46 | ) | $ | (87 | ) | |||||||
Taxable securities |
(136 | ) | (353 | ) | (489 | ) | 35 | (585 | ) | (550 | ) | |||||||||||||
Tax-exempt securities |
(337 | ) | 12 | (325 | ) | (257 | ) | (84 | ) | (341 | ) | |||||||||||||
Loans |
(3,766 | ) | (780 | ) | (4,546 | ) | (2,146 | ) | (1,099 | ) | (3,245 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total interest income |
(4,194 | ) | (1,191 | ) | (5,385 | ) | (2,409 | ) | (1,814 | ) | (4,223 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Interest expense attributable to: |
||||||||||||||||||||||||
Interest bearing demand and money market deposits |
(54 | ) | (12 | ) | (66 | ) | 5 | (185 | ) | (180 | ) | |||||||||||||
Savings deposits |
(1 | ) | 1 | | 1 | (6 | ) | (5 | ) | |||||||||||||||
Certificates of deposit |
(666 | ) | (641 | ) | (1,307 | ) | (1,352 | ) | (1,610 | ) | (2,962 | ) | ||||||||||||
Borrowed funds |
(456 | ) | 18 | (438 | ) | (3,228 | ) | 2,742 | (486 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total interest expense |
(1,177 | ) | (634 | ) | (1,811 | ) | (4,574 | ) | 941 | (3,633 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Increase (decrease) in net interest income |
$ | (3,017 | ) | $ | (557 | ) | $ | (3,574 | ) | $ | 2,165 | $ | (2,755 | ) | $ | (590 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
15
Asset and Liability Management and Market Risk
The Asset/Liability Committee (ALCO) of DCB Financial Corp utilizes a variety of tools to measure and monitor interest rate risk. This is defined as the risk that DCBs financial condition will be adversely affected due to movements in interest rates. To a lesser extent, DCB is also exposed to liquidity risk, or the risk that changes in cash flows could adversely affect its ability to honor its financial obligations. The ALCO committee monitors changes in the interest rate environment, and how these changes affect its lending and deposit rates, liquidity and profitability.
In order to reduce the adverse effect of changing interest rates, the Corporation developed a matched funding program through the FHLB to match longer term commercial and real estate loans with liabilities of similar term and rate structures. Also, the Corporation offered special deposit programs correlated to prevailing asset maturities.
Since income of the Bank is primarily derived from the excess of interest earned on interest-earning assets over the interest paid on interest-bearing liabilities, the ALCO committee places great importance on monitoring and controlling interest rate risk. The measurement and analysis of the exposure of DCBs primary operating subsidiary, the Bank, to changes in the interest rate environment are referred to as asset/liability modeling. One method used to analyze DCBs 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 DCB currently employs attempts to measure the change in NPV for a variety of interest rate scenarios, typically for parallel and sustained shifts of +400/-300 basis points in market rates. Presented below is an analysis depicting the changes in DCBs interest rate risk as of December 31, 2011 and December 31, 2010, 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 presented in the computation of estimated NPV.
16
As illustrated in the tables, the Banks balance sheet reacts nominally with respect to changes in overall interest rates. From an overall perspective, the sensitivity in the Banks balance sheet is somewhat attributed to the relatively short term structure of the liability side of the balance sheet compared to the longer structure of its assets. Though the institution does employ variable loan structures, these structures generally adjust based on annual time frames compared to shorter time frames for liabilities. These risks are offset somewhat by managements use of matched funding principles for longer term loans, where longer term liability structures are used to provide similar cash flow structures. Additionally, as rates rise borrowers are less likely to refinance or payoff loans prior to contractual maturity, which potentially increases the risk that the Bank may hold below market rate loans in a rising rate environment.
The following table depicts the ALCOs most likely interest rate scenarios and their affect on NPV. As depicted below, in a rising rate environment a liability sensitive balance sheet results in a moderate change in NPV. The Corporation operates within the ALCOs interest rate risk limits.
Change in | December 31, 2011 | December 31, 2010 | ||||||||||||||||||||||
Interest Rate | $ Change | % Change | NPV | $ Change | % Change | NPV | ||||||||||||||||||
(Basis Points) |
in NPV | in NPV | Ratio | in NPV | in NPV | Ratio | ||||||||||||||||||
+400 |
$ | 1,970 | 4.78 | % | 8.80 | % | $ | (11,714 | ) | (21.61 | )% | 8.06 | % | |||||||||||
+300 |
2,556 | 6.21 | 8.75 | (8,447 | ) | (15.58 | ) | 8.50 | ||||||||||||||||
+200 |
2,472 | 6.00 | 8.58 | (4,880 | ) | (9.00 | ) | 8.96 | ||||||||||||||||
+100 |
1,811 | 4.40 | 8.29 | (1,582 | ) | (2.92 | ) | 9.35 | ||||||||||||||||
Base |
| | | | | | ||||||||||||||||||
-100 |
(9,463 | ) | (22.98 | ) | 5.96 | (4,342 | ) | (8.01 | ) | 8.57 |
In a rising interest rate environment, DCBs net interest income can be negatively affected. Moreover, rising interest rates could negatively affect DCBs earnings due to diminished loan demand. The balance sheet has shown improved sensitivity to rising interest rates due to an increased percentage of variable rate assets and an increase in non-interest bearing liabilities compared to December 31, 2010.
As part of its interest rate risk strategy, DCB has attempted to utilize adjustable-rate and short-term-duration loans and investments. DCB intends to limit the addition of unhedged fixed-rate long-duration loans and securities to its portfolio. Certain assets such as adjustable-rate loans have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In addition, the portion of adjustable-rate loans in the Corporations portfolio could decrease in future periods if market interest rates remain at or decrease below current levels due to refinancing activity. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate from those assumed in the table. Finally, the ability of many borrowers to repay their adjustable-rate debt may decrease in the case of an increase in interest rates.
17
Liquidity
Liquidity is the ability of DCB to fund customers needs for borrowing and deposit withdrawals. The purpose of liquidity management is to assure sufficient cash flow exists to meet all financial commitments and to capitalize on business expansion opportunities. This ability depends on the institutions financial strength, asset quality and types of deposit and investment instruments offered by the Bank to its customers. DCBs principal sources of funds are deposits, loan and securities repayments, maturities of securities, sales of securities available for sale and other funds provided by operations. The Bank also has the ability to obtain funding from other sources including the FHLB, Federal Reserve, and through its other correspondent relationships. 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. DCB maintains investments in liquid assets based upon managements assessment of (1) need for funds, (2) expected deposit flows, (3) yields available on short-term liquid assets and (4) objectives of the asset/liability management program.
Cash and cash equivalents increased $5,793, or 17.3%, to $39,314 at year-end 2011 from $33,521 at year-end 2010. Cash and cash equivalents represented 7.5% of total assets at December 31, 2011 compared to 5.9% on December 31, 2010. The Bank has the ability to borrow funds from the Federal Home Loan Bank and has lines with the Federal Reserve Bank of Cleveland in the form of discount window availability and through the Borrower-In-Custody program, should it need to supplement its future liquidity needs in order to meet loan demand or to fund investment opportunities.
In addition to funding maturing deposits and other deposit liabilities, DCB also has off-balance sheet commitments in the form of lines of credit and letters of credit utilized by customers in the normal course of business. Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. These off-balance sheet commitments are not considered to have a major effect on the liquidity position of the Corporation. Further, management believes DCBs liquidity position is adequate based on its stable level of cash equivalents and the stability of its core other funding sources.
18
Capital Resources
As previously noted, the Corporations total shareholders equity decreased $2,715, or 7.3%, between December 31, 2011 and December 31, 2010. The decrease was primarily due to net loss of $2,738 for the year.
Tier 1 capital is shareholders equity excluding the net unrealized gains or losses included in other comprehensive income and a percentage of mortgage-servicing rights. Total capital includes Tier 1 capital plus the allowance for loan losses, not to exceed 1.25% of risk weighted assets. Risk weighted assets are DCBs total assets after such assets are assessed for risk and assigned a weighting factor based on their inherent risk.
DCBs consolidated ratio of total capital to risk-weighted assets was 10.1% at year-end 2011, while the Tier 1 risk-based consolidated capital ratio was 8.8%. Regulatory minimums call for a total risk-based capital ratio of 8.0%, at least half of which must be Tier 1 capital. DCBs consolidated leverage ratio, defined as Tier 1 capital divided by average assets, was 6.6% at year-end 2011 and exceeded the regulatory minimum for capital adequacy purposes of 4.0%. The Corporations wholly-owned bank reported a Tier 1 leverage ratio of 6.5% at December 31, 2011.
As previously reported via Form 8-K, the Corporations wholly-owned 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. At year-end 2011, the Banks capital ratios, as previously noted, were not at these levels.
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
DCB Financial Corp
Lewis Center, Ohio
We have audited the accompanying consolidated balance sheets of DCB Financial Corp as of December 31, 2011 and 2010, the related consolidated statements of operations, changes in shareholders equity and cash flows for the years then ended. These financial statements are the responsibility of the Corporations management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporations internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DCB Financial Corp as of December 31, 2011 and 2010 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 11, the Corporations bank subsidiary is not in compliance with revised minimum regulatory capital requirements under a formal regulatory agreement with the banking regulators. Failure to comply with the regulatory agreement may result in additional regulatory enforcement actions.
/s/ Plante & Moran PLLC
Columbus, Ohio
March 29, 2012
20
DCB FINANCIAL CORP
CONSOLIDATED BALANCE SHEETS
December 31, 2011 and 2010
(Dollars in thousands, except share amounts)
2011 | 2010 | |||||||
ASSETS |
||||||||
Cash and due from financial institutions |
$ | 11,067 | $ | 10,024 | ||||
Interest-bearing deposits |
28,247 | 23,497 | ||||||
|
|
|
|
|||||
Total cash and cash equivalents |
39,314 | 33,521 | ||||||
Securities available for sale |
88,113 | 69,597 | ||||||
Securities held to maturity |
1,010 | 1,313 | ||||||
|
|
|
|
|||||
Total securities |
89,123 | 70,910 | ||||||
Loans held for sale, at lower of cost or fair value |
| 753 | ||||||
Loans |
359,767 | 424,864 | ||||||
Less allowance for loan losses |
(9,584 | ) | (12,247 | ) | ||||
|
|
|
|
|||||
Net loans |
350,183 | 412,617 | ||||||
Real estate owned |
4,605 | 5,284 | ||||||
Investment in FHLB stock |
3,799 | 3,799 | ||||||
Premises and equipment, net |
12,107 | 13,175 | ||||||
Bank-owned life insurance |
17,822 | 17,073 | ||||||
Accrued interest receivable and other assets |
5,928 | 7,973 | ||||||
|
|
|
|
|||||
Total assets |
$ | 522,881 | $ | 565,105 | ||||
|
|
|
|
|||||
LIABILITIES |
||||||||
Deposits |
||||||||
Noninterest-bearing |
$ | 69,674 | $ | 63,695 | ||||
Interest-bearing |
375,754 | 401,381 | ||||||
|
|
|
|
|||||
Total deposits |
445,428 | 465,076 | ||||||
Federal funds purchased and other short-term borrowings |
| 1,265 | ||||||
Federal Home Loan Bank advances |
40,036 | 58,502 | ||||||
Accrued interest payable and other liabilities |
2,718 | 2,848 | ||||||
|
|
|
|
|||||
Total liabilities |
488,182 | 527,691 | ||||||
SHAREHOLDERS EQUITY |
||||||||
Common stock, no par value, 7,500,000 shares authorized, 4,273,908 shares issued |
3,785 | 3,785 | ||||||
Retained earnings |
45,145 | 47,883 | ||||||
Treasury stock, at cost, 556,523 shares |
(13,494 | ) | (13,494 | ) | ||||
Accumulated other comprehensive loss |
(737 | ) | (760 | ) | ||||
|
|
|
|
|||||
Total shareholders equity |
34,699 | 37,414 | ||||||
|
|
|
|
|||||
Total liabilities and shareholders equity |
$ | 522,881 | $ | 565,105 | ||||
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements
21
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, 2011 and 2010
(Dollars in thousands, except per share amounts)
2011 | 2010 | |||||||
Interest and dividend income |
||||||||
Loans |
$ | 20,096 | $ | 24,643 | ||||
Taxable securities |
2,208 | 2,697 | ||||||
Tax-exempt securities |
320 | 645 | ||||||
Federal funds sold and other |
108 | 133 | ||||||
|
|
|
|
|||||
Total interest income |
22,732 | 28,118 | ||||||
Interest expense |
||||||||
Deposits |
2,809 | 4,182 | ||||||
Borrowings |
2,304 | 2,743 | ||||||
|
|
|
|
|||||
Total interest expense |
5,113 | 6,925 | ||||||
|
|
|
|
|||||
Net interest income |
17,619 | 21,193 | ||||||
Provision for loan losses |
5,436 | 11,040 | ||||||
|
|
|
|
|||||
Net interest income after provision for loan losses |
12,183 | 10,153 | ||||||
Noninterest income |
||||||||
Service charges on deposit accounts |
2,724 | 2,726 | ||||||
Trust department income |
855 | 960 | ||||||
Gain on sale of securities |
957 | 301 | ||||||
Gain (loss) on sale of assets |
(363 | ) | 813 | |||||
Gain on sale of loans |
77 | 401 | ||||||
Treasury management fees |
345 | 417 | ||||||
Data processing servicing fees |
506 | 606 | ||||||
Earnings on bank owned life insurance |
749 | 747 | ||||||
Total other-than-temporary impairment losses |
(75 | ) | (487 | ) | ||||
Portion of loss recognized in other comprehensive income (before taxes) |
(17 | ) | (815 | ) | ||||
|
|
|
|
|||||
Net impairment losses recognized in income |
(92 | ) | (1,302 | ) | ||||
Other |
600 | 446 | ||||||
|
|
|
|
|||||
Total noninterest income |
6,358 | 6,115 | ||||||
Noninterest expense |
||||||||
Salaries and employee benefits |
9,710 | 10,285 | ||||||
Occupancy and equipment |
3,837 | 4,037 | ||||||
Professional services |
1,517 | 1,908 | ||||||
Advertising |
348 | 412 | ||||||
Postage, freight and courier |
282 | 356 | ||||||
Supplies |
185 | 261 | ||||||
State franchise taxes |
463 | 615 | ||||||
Federal deposit insurance premiums |
1,424 | 1,460 | ||||||
Other |
3,526 | 4,154 | ||||||
|
|
|
|
|||||
Total noninterest expense |
21,292 | 23,488 | ||||||
|
|
|
|
|||||
Loss before income tax |
(2,751 | ) | (7,220 | ) | ||||
Income tax expense (benefit) |
(13 | ) | 5,110 | |||||
|
|
|
|
|||||
Net loss |
$ | (2,738 | ) | $ | (12,330 | ) | ||
|
|
|
|
|||||
Basic loss per common share |
$ | (0.74 | ) | $ | (3.32 | ) | ||
|
|
|
|
|||||
Diluted loss per common share |
$ | (0.74 | ) | $ | (3.32 | ) | ||
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements
22
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
2011 | 2010 | |||||||
Net loss |
$ | (2,738 | ) | $ | (12,330 | ) | ||
Unrealized gains on securities available-for-sale, net of related taxes of $410 and $15 in 2011 and 2010, respectively |
794 | 30 | ||||||
Net unrealized gains (losses) on securities held-to-maturity for which a portion of an other-than-temporary impairment has been recognized in income, net of taxes of $118 and $277 in 2011 and 2010, respectively |
(229 | ) | 538 | |||||
Amortization of unrealized losses on held-to-maturity securities, net of taxes of $46 and $16 in 2011 and 2010, respectively |
90 | 32 | ||||||
Reclassification adjustment for realized gains included in net income, net of taxes of $325 and $102 in 2011 and 2010, respectively |
(632 | ) | (199 | ) | ||||
|
|
|
|
|||||
Comprehensive loss |
$ | (2,715 | ) | $ | (11,929 | ) | ||
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements
23
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Year ended December 31, 2011 and 2010
(Dollars in thousands, except per share amounts)
Accumulated | ||||||||||||||||||||
Other | Total | |||||||||||||||||||
Common | Retained | Treasury | Comprehensive | Shareholders | ||||||||||||||||
Stock | Earnings | Stock | Income (Loss) | Equity | ||||||||||||||||
Balance at December 31, 2009 |
3,785 | 60,213 | (13,494 | ) | (1,161 | ) | 49,343 | |||||||||||||
Net loss |
| (12,330 | ) | | | (12,330 | ) | |||||||||||||
Unrealized losses on securities designated as available-for-sale, net of realized gains and tax effects |
| | | (169 | ) | (169 | ) | |||||||||||||
Increase in noncredit related losses on securities designated as held-to-maturity, net |
| | | 570 | 570 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at December 31, 2010 |
$ | 3,785 | $ | 47,883 | $ | (13,494 | ) | $ | (760 | ) | $ | 37,414 | ||||||||
Net loss |
| (2,738 | ) | | | (2,738 | ) | |||||||||||||
Unrealized gains on securities designated as available-for-sale, net of realized gains and tax effects |
| | | 162 | 162 | |||||||||||||||
Reduction of noncredit related losses on securities designated as held-to-maturity, net |
| | | (139 | ) | (139 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at December 31, 2011 |
$ | 3,785 | $ | 45,145 | $ | (13,494 | ) | $ | (737 | ) | $ | 34,699 | ||||||||
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements
24
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
2011 | 2010 | |||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | (2,738 | ) | $ | (12,330 | ) | ||
Adjustments to reconcile loss to net cash provided by operating activities |
||||||||
Depreciation |
1,236 | 1,571 | ||||||
Provision for loan losses |
5,436 | 11,040 | ||||||
Deferred income taxes |
(13 | ) | 5,110 | |||||
Gain on sale of securities |
(957 | ) | (301 | ) | ||||
Gain on sale of loans |
(77 | ) | (401 | ) | ||||
(Gain) loss on sale of assets |
363 | (813 | ) | |||||
Stock option plan expense |
90 | 33 | ||||||
Premium amortization on securities, net |
501 | 676 | ||||||
Other-than-temporary impairment loss |
92 | 1,302 | ||||||
Loans originated for sale in the secondary market |
(4,509 | ) | (23,752 | ) | ||||
Proceeds from sale of loans |
5,339 | 25,842 | ||||||
Earnings on bank owned life insurance |
(749 | ) | (747 | ) | ||||
Net changes in other assets and other liabilities |
1,785 | 2,800 | ||||||
|
|
|
|
|||||
Net cash provided by operating activities |
5,799 | 10,030 | ||||||
Cash flows from investing activities |
||||||||
Securities |
||||||||
Purchases |
(61,537 | ) | (25,199 | ) | ||||
Sales, maturities, principal payments, and calls |
43,723 | 49,175 | ||||||
Net change in loans |
55,047 | 51,859 | ||||||
Proceeds from sale of real estate owned |
2,308 | 3,224 | ||||||
Investment in unconsolidated affiliates |
| 2,061 | ||||||
Premises and equipment expenditures |
(168 | ) | (311 | ) | ||||
|
|
|
|
|||||
Net cash provided by investing activities |
39,373 | 80,809 | ||||||
Cash flows from financing activities |
||||||||
Net change in deposits |
(19,648 | ) | (92,379 | ) | ||||
Net change in federal funds purchased and other short-term borrowings |
(1,265 | ) | (1,746 | ) | ||||
Repayment of Federal Home Loan Bank advances |
(18,466 | ) | (4,646 | ) | ||||
Net cash used in financing activities |
(39,379 | ) | (98,771 | ) | ||||
|
|
|
|
|||||
Net change in cash and cash equivalents |
5,793 | (7,932 | ) | |||||
Cash and cash equivalents at beginning of year |
33,521 | 41,453 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of year |
$ | 39,314 | $ | 33,521 | ||||
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements
25
DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
2011 | 2010 | |||||||
Supplemental disclosure of cash flow information |
||||||||
Cash paid during the year for: |
||||||||
Interest on deposits and borrowings |
$ | 5,116 | $ | 7,221 | ||||
Income taxes |
$ | | $ | | ||||
Supplemental disclosure of non cash investing and financing activities: |
||||||||
Transfers from loans to real estate owned |
$ | 1,951 | $ | 3,487 |
See Accompanying Notes to Consolidated Financial Statement
26
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the accounts of DCB Financial Corp (DCB) 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 (collectively referred to hereinafter as the Corporation). All intercompany transactions and balances have been eliminated in the consolidated financial statements.
Nature of Operations: The Corporation provides financial services through its 14 banking locations in Delaware, Franklin and Union Counties, Ohio. Its primary deposit products are checking, savings, and term certificate accounts and its primary lending products are residential mortgage, commercial and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Real estate loans are secured by both residential and commercial real estate. The Bank also operates a trust department and engages in other personal wealth management activities.
Business Segments: While DCBs management monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Corporation-wide basis. Accordingly, all of DCBs operations are considered by management to be aggregated in one operating segment.
Use of Estimates: To prepare consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect amounts reported in the financial statements and disclosures provided, and future results could differ. The allowance for loan losses, fair value of financial instruments, determination of other-than-temporary impairment, status of contingencies and deferred tax asset valuation are particularly subject to change.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, federal funds sold and deposits with other financial institutions with original maturities of less than ninety days. Net cash flows are reported for customer loan and deposit transactions, federal funds purchased and other short-term borrowings.
Securities: Securities classified as held-to-maturity are carried at adjusted amortized cost when management has the positive intent and ability to hold them to maturity. Securities classified as available-for-sale might be sold before maturity. Securities classified as available-for-sale are carried at fair value, with unrealized holding gains and losses excluded from earnings and reported as a component of other comprehensive income. Realized gains and losses on sale of securities are recognized using the specific identification method. The Corporation does not engage in securities trading activities.
Interest income includes premium amortization and accretion of discounts on securities. Effective April 1, 2009, the Corporation adopted new accounting guidance related to recognition and presentation of other-than-temporary impairment (ASC 320-10). When the Corporation does not intend to sell a debt security, and it is more likely than not, the Corporation will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.
27
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
As a result of this guidance, the Corporations consolidated statement of operations beginning on December 31, 2009, reflects the impairment (that is, the difference between the securitys amortized cost basis and fair value) on debt securities that the Corporation intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis. For available-for-sale and held-to-maturity debt securities that management has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the noncredit loss is recognized in accumulated other comprehensive income. The credit loss component recognized in earnings is
identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections.
Management considers, in determining whether other-than-temporary impairment exists, (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan.
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.
28
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 Banks internal risk rating process. Management utilizes historical loss rates in the calculation by applying weights, so that the most recent data bears a larger impact on future loss rate calculations. Management has the ability to adjust these loss rates by utilizing risk ratings based on current period trends. If current period trends differ either positively or negatively from the given weighted historical loss rates, adjustments can be made. The risk ratings either increase the expected loss rates, or decrease the expected loss rates, depending on the variance on actual versus historical trends. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risking rating data.
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.
Management utilizes historical loss information and various economic data to enhance the process for determining the allowance for loan losses. Typically, three years of historical loss data is accumulated by portfolio type and weighted to the extent that the most recent loss results bear a larger impact on the future loss expectations. These historical loss calculations, can be adjusted on a quarterly basis if trends begin to emerge that indicate actual loss rates differ, either positively or negatively, from historical trends. Economic data plays a minor role in the loan loss calculation, but is considered. Typically, the primary economic data that Management considers is the unemployment rate; however, inflationary pressures, and real estate activity and pricing trends are also taken into consideration.
29
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
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 Corporations market area. Though not specific to individual loans, these economic trends can have an impact on portfolio performance as a whole.
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. Uncollectability is usually determined based on a pre-determined number of days in the case of consumer loans, or, in the case of commercial loans, is based on delinquency, collateral and other legal considerations. Consumer loans are charged-off prior to 120 days of delinquency, but could be charged off earlier, depending on the individual circumstances. Mortgage loans are charged down prior to 180 days of delinquency, but could be charged off sooner, 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. Both consumer and commercial loans can be partially charged down depending on a number of factors including: the remaining strength of the borrow and guarantor; the type and value of the collateral, and the ease of liquidating collateral; and whether or not collateral is brought onto the banks balance sheet via repossession. In the case of commercial and commercial real estate loan charge-off, partial or whole, takes place when Management determines that full collectability of principal balance is unlikely to occur. Subsequent recoveries, if any, are credited to the allowance. Managements policies for determining impairment, reserves and charge-offs are reviewed and approved by the Board of Directors on an annual basis, and were not materially changed in 2011. 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.
30
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentrations of Credit Risk: The Bank grants commercial, real estate and consumer loans primarily in Delaware County, and the surrounding counties. Loans for commercial real estate, agricultural, construction and land development purposes comprise 36.2% of total loans at December 31, 2011. Loans for commercial purposes comprise 35.1% of loans, and include loans secured by business assets and agricultural loans. Loans for residential real estate purposes, including home equity loans, aggregate to 23.3% of loans. Loans for consumer purposes are primarily secured by consumer assets and represent 5.4% of total loans.
At December 31, 2010 loans for commercial real estate, agricultural, construction and land development purposes comprise 35.9% of total loans at December 31, 2010. Loans for commercial purposes comprise 36.6% of loans, and include loans secured by business assets and agricultural loans. Loans for residential real estate purposes, including home equity loans, aggregate to 22.0% of loans. Loans for consumer purposes are primarily secured by consumer assets and represent 5.5% of total loans.
Investment in Federal Home Loan Bank Stock: The Corporation is required as a condition of membership in the Federal Home Loan Bank of Cincinnati (FHLB) to maintain an investment in FHLB common stock. The stock is redeemable at par and, therefore, its cost is equivalent to its redemption value. The Corporations ability to redeem FHLB shares is dependent on the redemption practices of the FHLB. At December 31, 2011, the FHLB placed no restrictions on redemption of shares in excess of a members required investment in the stock. The stock is carried at cost and evaluated for impairment.
Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the assets useful lives, estimated to be 7 to 39 years for buildings, improvements and leasehold improvements. The Corporation generally uses three to five years for the useful lives of furniture, fixtures, and equipment, using the straight line method, depending on the nature of the asset. Premises and equipment are reviewed for impairment when events indicate the carrying amount may not be recoverable. Maintenance and repairs are expensed and major improvements are capitalized.
Foreclosed Assets: Assets acquired through foreclosure are initially recorded at the lower of cost or fair value less selling costs when acquired. If fair value declines below the recorded amount, a valuation allowance is recorded through expense. The Corporation generally evaluates fair market values of foreclosed assets on a quarterly basis, and adjusts accordingly. Holding costs after acquisition are expensed as incurred; however, construction costs to improve a propertys value may be capitalized as part of the asset value.
Servicing Assets: Servicing assets represent the allocated value of retained servicing on loans sold. Servicing assets are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the assets, using groupings of the underlying loans as to interest rates, and then secondarily as to geographic and prepayment characteristics. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance. Loans serviced for others totaled $6,844 and $8,165 at December 31, 2011 and 2010, respectively. The Corporation had net servicing assets of $16 and $21 at December 31, 2011 and 2010, respectively.
Bank Owned Life Insurance: The Corporation has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at the lower of its cash surrender value or its net redemption value.
31
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investment in Unconsolidated Affiliates: At December 31, 2011 and 2010, the Corporation did not carry any investments in unconsolidated affiliates on its balance sheet. The Corporation sold investments in two unconsolidated affiliates during 2010.
Income Taxes: The Corporation accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Corporation determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred tax assets are reduced by a valuation allowance, if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to the managements judgment. The Corporation recognizes interest and penalties on income taxes, if applicable, as a component of income tax expense. The Corporation files consolidated income tax returns with its subsidiaries.
Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Earnings (Loss) Per Common Share: Basic earnings (loss) per common share is net income (loss) divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share are computed including the dilutive effect of additional potential common shares issuable under stock options. Diluted earnings (loss) per share are not computed for periods in which an operating loss is sustained.
32
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The computation of earnings (loss) per share is based upon the following weighted-average shares outstanding for the years ended December 31:
2011 | 2010 | |||||||
Weighted-average common shares outstanding (basic) |
3,717,385 | 3,717,385 | ||||||
Dilutive effect of assumed exercise of stock options |
| | ||||||
|
|
|
|
|||||
Weighted-average common shares outstanding (diluted) |
3,717,385 | 3,717,385 | ||||||
|
|
|
|
Stock Option Plan: The Corporations shareholders approved an employee share option Plan (the Plan) in May 2004. This Plan grants certain employees the right to purchase shares at a predetermined price. The Plan is limited to 300,000 shares. The shares granted to employees vest 20% per year over a five year period. The options expire after ten years. During the year ended December 31, 2011, options for 500 shares were granted to employees under the Plan, at a weighted average exercise price of $3.35; however, these options were subsequently forfeited during
the year and no expense was recognized. At December 31, 2011, 103,757 shares were exercisable and 83,821 shares were available for grant under this Plan.
The Corporation recognizes compensation cost for unvested equity-based awards based on their grant-date fair value. The fair value of each option was estimated on the date of grant using the modified Black-Scholes options pricing model with weighted-average assumptions used for grants: dividend yield, expected volatility, risk-free interest rates, and contractual lives of 10 years for each grant. At December 31, 2011, outstanding options had no intrinsic value as the current share price of the options was greater than the market price.
The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date.
33
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Corporation recorded $40 and $33 in compensation cost for equity-based awards that vested during the years ended December 31, 2011 and 2010, respectively. The Corporation has $79 of total unrecognized compensation cost related to non-vested equity-based awards granted under its stock option plan as of December 31, 2011, which is expected to be recognized over a period of 3.2 years. A summary of the status of the Corporations stock option plan as of December 31, 2011, and changes during the year is presented below:
Year Ended December 31, 2011 |
||||||||||||||||
Shares | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life |
Aggregate Intrinsic Value |
|||||||||||||
Outstanding at beginning of year |
285,806 | $ | 11.87 | 8.6 years | $ | | ||||||||||
Granted |
500 | 3.35 | | | ||||||||||||
Forfeited |
(70,127 | ) | 9.40 | | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Outstanding at end of year |
216,179 | $ | 12.44 | 7.1 years | $ | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Options exercisable at year end |
103,757 | $ | 18.22 | $ | | |||||||||||
|
|
|
|
|
|
|||||||||||
Weighted-average fair value of options granted during the year |
$ | 0.00 | $ | | ||||||||||||
|
|
|
|
The following table depicts nonvested shares at December 31, 2011.
Nonvested Shares |
||||
Nonvested at January 1, 2011 |
204,006 | |||
Granted |
500 | |||
Vested |
(49,535 | ) | ||
Forfeited or expired |
(42,549 | ) | ||
|
|
|||
Nonvested at December 31, 2011 |
112,422 | |||
|
|
The following information applies to options outstanding at December 31, 2011:
Number Outstanding |
Range Of Exercise Prices | |
59,345 |
$23.00 - $30.70 | |
32,986 |
$14.15 - $16.90 | |
29,686 |
$7.50 - $ 9.00 | |
94,162 |
$3.35 - $3.50 |
34
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Comprehensive Income (Loss): Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), net of applicable income tax effects. Other comprehensive income (loss) includes unrealized appreciation (depreciation) on available-for-sale securities, unrealized appreciation (depreciation) on available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in income and unrealized appreciation (depreciation) on held-to-maturity securities for which a portion of an other-than-temporary impairment has been recognized in income.
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank of $1,000 was required to meet regulatory clearing balance requirements at December 31, 2011 and 2010. The regulatory clearing balances maintained do not earn interest, but do provide an earnings credit used to offset transaction fees. Other deposits at the Federal Reserve Bank above the clearing balance requirements earn interest at an overnight right, and are not restricted. In addition, approximately $1,080 is held in another institution and is under the control of a third party due to a contractual agreement.
Dividend Restrictions: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to DCB or by DCB to shareholders. Due to limitations imposed by regulators for DCB Financial Corp and the Bank, both entities are required to receive regulatory approval prior to paying dividends.
Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or market conditions could significantly affect the estimates.
Advertising and Marketing: Advertising and other marketing costs are expensed as incurred.
Reclassification: Certain amounts in the prior year consolidated financial statements have been reclassified to conform to the 2011 and 2010 presentations. These reclassifications had no effect on net income for any period presented.
New Accounting Pronouncements: FASB ASU 2011-02, A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring. In April 2011, the FASB issued ASU 2011-02, which provides additional guidance to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this update are effective for the Corporation beginning in the quarter ended September 30, 2011 and are to be applied retrospectively to January 1, 2011. In addition, the modification disclosures described in ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which were subsequently deferred by ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings, are effective on a prospective basis beginning in the quarter ended
September 30, 2011. The adoption of ASU 2011-02 did not have a material impact on the consolidated financial statements.
35
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
FASB ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term fair value. The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the Codification in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The impact of adoption of this ASU is not expected to be material.
FASB ASU 2011-05, Presentation of Comprehensive Income. In June 2011, the FASB issued ASU 2011-05, which provides entities with the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income, along with a total for other comprehensive income, and a total amount for comprehensive income. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. This update should be applied retrospectively effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.
As the Corporation currently reports comprehensive income in two separate but consecutive statements with all of the components required by ASU 2011-05, the adoption of this guidance will not have an impact on the consolidated financial statements.
36
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 2 SECURITIES
The amortized cost and approximate fair value of available-for-sale securities, together with gross unrealized gains and losses, were as follows at December 31, 2011:
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Costs | Gains | Losses | Value | |||||||||||||
U.S. Government and agency obligations |
$ | 35,393 | $ | 439 | $ | (24 | ) | $ | 35,808 | |||||||
State and municipal obligations |
15,497 | 548 | (50 | ) | 15,995 | |||||||||||
Corporate bonds |
1,854 | | (17 | ) | 1,837 | |||||||||||
Mortgage-backed securities |
33,478 | 1,021 | (26 | ) | 34,473 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 86,222 | $ | 2,008 | $ | (117 | ) | $ | 88,113 | |||||||
|
|
|
|
|
|
|
|
The amortized cost and estimated fair values of securities held-to-maturity at December 31, 2011 were as follows:
Adjusted | Gross | Estimated | ||||||||||
Amortized | Unrealized | Fair | ||||||||||
Cost | Gains | Value | ||||||||||
Collateralized Debt Obligations |
$ | 1,010 | $ | 350 | $ | 1,360 | ||||||
|
|
|
|
|
|
The amortized cost and approximate fair value of available-for-sale securities, together with gross unrealized gains and losses, were as follows at December 31, 2010:
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
U.S. Government and agency obligations |
$ | 29,510 | $ | 599 | $ | (123 | ) | $ | 29,986 | |||||||
State and municipal obligations |
12,153 | 193 | (84 | ) | 12,262 | |||||||||||
Mortgage-backed securities |
26,290 | 1,059 | | 27,349 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 67,953 | $ | 1,851 | $ | (207 | ) | $ | 69,597 | |||||||
|
|
|
|
|
|
|
|
The amortized cost and estimated fair values of securities held-to-maturity at December 31, 2010 were as follows:
Adjusted | Gross | Estimated | ||||||||||
Amortized | Unrealized | Fair | ||||||||||
Cost | Gains | Value | ||||||||||
Collateralized debt obligations |
$ | 1,313 | $ | 367 | $ | 1,680 |
37
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 2 SECURITIES (continued)
Credit Losses Recognized on Investments
The following table provides information about debt securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income for the years ended December 31, 2011 and 2010.
Accumulated Credit Losses | ||||||||
2011 | 2010 | |||||||
Credit losses on debt securities held to maturity |
||||||||
Beginning of period |
$ | 3,923 | $ | 2,621 | ||||
Additions related to other-than-temporary losses not previously recognized |
92 | 1,302 | ||||||
Reductions due to sales |
| | ||||||
Reductions due to change in intent or likelihood of sale |
| | ||||||
Additions related to increases in previously recognized other-than-temporary losses |
| | ||||||
Reductions due to increases in expected cash flows |
| | ||||||
|
|
|
|
|||||
End of period |
$ | 4,015 | $ | 3,923 | ||||
|
|
|
|
The tables below indicate the length of time individual securities have been in a continuous unrealized loss position at December 31, 2011 and 2010:
2011
(Less than 12 months) | (12 months or longer) | Total | Total | |||||||||||||||||||||||||||||||||
Description of Securities |
Number of investments |
Fair value |
Unrealized losses |
Number of investments |
Fair value |
Unrealized losses |
Number of investments |
Fair value |
Unrealized losses |
|||||||||||||||||||||||||||
U.S. Government and agency obligations |
5 | $ | 5,498 | $ | (24 | ) | | $ | | $ | | 5 | $ | 5,498 | $ | (24 | ) | |||||||||||||||||||
State and municipal obligations |
11 | 4,516 | (50 | ) | | | | 11 | 4,516 | (50 | ) | |||||||||||||||||||||||||
Corporate bonds |
3 | 1,562 | (17 | ) | | | | 3 | 1,562 | (17 | ) | |||||||||||||||||||||||||
Mortgage-backed securities and other |
5 | 5,435 | (26 | ) | | | | 5 | 5,435 | (26 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total securities |
24 | $ | 17,011 | $ | (117 | ) | | $ | | $ | | 24 | $ | 17,011 | $ | (117 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
(Less than 12 months) | (12 months or longer) | Total | 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 |
10 | $ | 9,904 | $ | (123 | ) | | $ | | $ | | 10 | $ | 9,904 | $ | (123 | ) | |||||||||||||||||||
State and municipal obligations |
9 | 3,575 | (84 | ) | | | | 9 | 3,575 | (84 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total securities |
19 | $ | 13,479 | $ | (207 | ) | | $ | | $ | | 19 | $ | 13,479 | $ | (207 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 2 SECURITIES (continued)
Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. These declines primarily resulted from changes in market interest rates and failure of certain investments to maintain consistent credit quality ratings. Should the impairment of any of these securities become other-than-temporary, the unrealized losses will be recorded to operations in the period the determination of other-than-temporary impairment is made.
The unrealized losses on the Corporations investments in U.S. Government and agency obligations, corporate bonds, state and political subdivision obligations, and mortgage-backed securities were caused primarily by changes in interest rates. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Corporation does not intend to sell the investments and it is not more likely than not the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at December 31, 2011.
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).
The Corporations unrealized loss on investments in collateralized debt obligations relates to an original aggregate $8,000 investment in pooled trust securities. The unrealized loss was primarily caused by (a) decrease in performance and regulatory capital resulting from exposure to subprime mortgages and (b) sector downgrade by industry analysts. The Corporation currently expects the obligations to be settled at a price less than the amortized cost basis of the investments (that is, the Corporation expects to recover less than the entire amortized cost basis of the security). The Corporation has recognized a loss equal to the credit loss, establishing a new, and 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. Because the Corporation does not intend to sell the investment and it is not more likely than not the Corporation will be required to sell the investment before recovery of its new, lower amortized cost basis, which may be maturity, it does not consider the remainder of the investment in the securities to be other-than-temporarily impaired at December 31, 2011.
At December 31, 2011, the $8,000 original investment in pooled trust securities was being carried by the Corporation at $1,010. Based on the current carrying value, those pooled trust securities are 2.91% of total shareholders equity. There are no securities from the same issuer, besides agency investments, greater than 10% of total equity at December 31, 2011.
The amortized cost and estimated fair value of debt securities, including securities held-to-maturity, at December 31, 2011, 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.
39
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 2 SECURITIES (continued)
Amortized Cost |
Fair Value |
|||||||
Due in one year or less |
$ | 557 | $ | 571 | ||||
Due from one to five years |
20,546 | 20,656 | ||||||
Due from five to ten years |
22,586 | 23,108 | ||||||
Due after ten years |
9,055 | 9,305 | ||||||
Mortgage-backed securities |
33,478 | 34,473 | ||||||
|
|
|
|
|||||
Total debt securities |
86,222 | 88,113 | ||||||
Other securities |
1,010 | 1,360 | ||||||
|
|
|
|
|||||
Total |
$ | 87,732 | $ | 89,473 | ||||
|
|
|
|
Sales of investment securities during the years ended December 31, 2011 and 2010 were as follows:
2011 | 2010 | |||||||
Proceeds from investments sales |
$ | 12,359 | $ | 15,764 | ||||
Gross gains on investment sales |
$ | 957 | $ | 446 | ||||
Gross losses on investment sales |
$ | | $ | 145 |
Securities with a carrying amount of $80,771 and $67,952 at December 31, 2011 and 2010, respectively, were pledged to secure public deposits and other obligations.
40
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 3 LOANS
At December 31, 2011 and 2010, loans were comprised of the following:
2011 | 2010 | |||||||
Commercial and industrial |
$ | 126,225 | $ | 155,410 | ||||
Commercial real estate |
129,958 | 152,374 | ||||||
Residential real estate and home equity |
83,814 | 93,646 | ||||||
Consumer and credit card |
19,770 | 23,411 | ||||||
|
|
|
|
|||||
359,767 | 424,841 | |||||||
Add: Net deferred loan origination fees/costs |
| 23 | ||||||
|
|
|
|
|||||
Total loans receivable |
$ | 359,767 | $ | 424,864 | ||||
|
|
|
|
Loans to principal officers, directors, and their related affiliates during 2011 and 2010 in the normal course of business were as follows.
2011 | 2010 | |||||||
Balance at beginning of year |
$ | 716 | $ | 7,988 | ||||
New loans |
| 1 | ||||||
Repayments |
(78 | ) | (7,273 | ) | ||||
|
|
|
|
|||||
Balance at end of year |
$ | 638 | $ | 716 | ||||
|
|
|
|
41
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 4 CREDIT QUALITY
Allowance for Credit Losses
The Corporations 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 Corporations portfolio. The loss rates are based on three-year historical trends weighted so that recent years data has more impact on the calculation. This methodology recognizes trends in 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 probably future losses based on historical and market data for homogenous loan portfolios. As the Corporations troubled loan portfolios have been reduced through charge-off, the remaining loan portfolios possess better overall credit characteristics, and based on the Corporations 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.
at December 31, 2011 | ||||||||||||||||||||
Consumer and Credit Card |
Commercial and Industrial |
Commercial Real Estate |
Residential Real Estate and Home Equity |
Total | ||||||||||||||||
Beginning Balance |
$ | 796 | $ | 4,174 | $ | 6,786 | $ | 491 | $ | 12,247 | ||||||||||
Charge Offs |
(567 | ) | (2,034 | ) | (5,562 | ) | (278 | ) | (8,441 | ) | ||||||||||
Recoveries |
247 | 58 | 27 | 10 | 342 | |||||||||||||||
Provision |
(51 | ) | (246 | ) | 5,665 | 68 | 5,436 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending Balance |
$ | 425 | $ | 1,952 | $ | 6,916 | $ | 291 | $ | 9,584 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Individually evaluated for impairment |
$ | | $ | 345 | $ | 5,748 | $ | | $ | 6,093 | ||||||||||
Collectively evaluated for impairment |
425 | 1,607 | 1,168 | 291 | 3,491 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending Balance |
$ | 425 | $ | 1,952 | $ | 6,916 | $ | 291 | $ | 9,584 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Financing Receivables |
||||||||||||||||||||
Individually evaluated for impairment |
$ | | $ | 12,620 | $ | 31,416 | $ | | $ | 44,036 | ||||||||||
Collectively evaluated for impairment |
19,770 | 113,605 | 98,542 | 83,814 | 315,731 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 19,770 | $ | 126,225 | $ | 129,958 | $ | 83,814 | $ | 359,767 | ||||||||||
|
|
|
|
|
|
|
|
|
|
42
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 4 CREDIT QUALITY (continued)
at December 31, 2010 | ||||||||||||||||||||
Consumer and Credit Card |
Commercial and Industrial |
Commercial Real Estate |
Residential Real Estate and Home Equity |
Total | ||||||||||||||||
Beginning Balance |
$ | 874 | $ | 2,476 | $ | 6,817 | $ | 312 | $ | 10,479 | ||||||||||
Charge Offs |
(824 | ) | (2,261 | ) | (6,175 | ) | (498 | ) | (9,758 | ) | ||||||||||
Recoveries |
200 | 270 | 4 | 12 | 486 | |||||||||||||||
Provision |
546 | 3,689 | 6,140 | 665 | 11,040 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending Balance |
$ | 796 | $ | 4,174 | $ | 6,786 | $ | 491 | $ | 12,247 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Individually evaluated for impairment |
$ | | $ | 2,812 | $ | 5,158 | $ | | $ | 7,970 | ||||||||||
Collectively evaluated for impairment |
796 | 1,362 | 1,628 | 491 | 4,277 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending Balance |
$ | 796 | $ | 4,174 | $ | 6,786 | $ | 491 | $ | 12,247 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Financing Receivables |
||||||||||||||||||||
Individually evaluated for impairment |
$ | | $ | 18,967 | $ | 42,104 | $ | | $ | 61,071 | ||||||||||
Collectively evaluated for impairment |
23,411 | 136,144 | 110,270 | 93,646 | 363,770 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 23,411 | $ | 155,410 | $ | 152,374 | $ | 93,646 | $ | 424,841 | ||||||||||
|
|
|
|
|
|
|
|
|
|
43
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 4 CREDIT QUALITY (continued)
Impaired Loans
A loan is considered impaired when based on current information and events it is probable the Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Generally, commercial and commercial real estate loans with risk grades Substandard, Vulnerable, Doubtful, or Loss, with aggregate relationships greater than $250 are evaluated for impairment.
The following table indicates impaired loans with and without an allocated allowance at December 31, 2011.
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 |
4,400 | 5,303 | | 4,324 | 200 | |||||||||||||||
Commercial Real Estate |
16,061 | 21,116 | | 12,501 | 663 | |||||||||||||||
Residential RE and Home Equity |
| | | | | |||||||||||||||
With Allowance Recorded |
||||||||||||||||||||
Consumer and Credit Card |
| | | | | |||||||||||||||
Commercial and Industrial |
8,220 | 9,647 | 2,003 | 10,844 | 593 | |||||||||||||||
Commercial Real Estate |
15,355 | 18,740 | 4,090 | 26,399 | 778 | |||||||||||||||
Residential RE and Home Equity |
| | | | | |||||||||||||||
Total |
||||||||||||||||||||
Consumer and Credit Card |
| | | | | |||||||||||||||
Commercial and Industrial |
12,620 | 14,950 | 2,003 | 15,168 | 793 | |||||||||||||||
Commercial Real Estate |
31,416 | 39,856 | 4,090 | 38,900 | 1,441 | |||||||||||||||
Residential RE and Home Equity |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 44,036 | $ | 54,806 | $ | 6,093 | $ | 54,068 | $ | 2,234 | ||||||||||
|
|
|
|
|
|
|
|
|
|
44
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 4 CREDIT QUALITY (continued)
The following table indicates impaired loans with and without an allocated allowance at December 31, 2010.
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 |
5,615 | 5,757 | | 4,196 | 295 | |||||||||||||||
Commercial Real Estate |
17,529 | 20,855 | | 14,597 | 993 | |||||||||||||||
Residential RE and Home Equity |
| | | | | |||||||||||||||
With Allowance Recorded |
||||||||||||||||||||
Consumer and Credit Card |
| | | | | |||||||||||||||
Commercial and Industrial |
13,352 | 15,238 | 2,812 | 13,651 | 741 | |||||||||||||||
Commercial Real Estate |
24,575 | 28,823 | 5,158 | 25,209 | 821 | |||||||||||||||
Residential RE and Home Equity |
| | | | | |||||||||||||||
Total |
||||||||||||||||||||
Consumer and Credit Card |
| | | | | |||||||||||||||
Commercial and Industrial |
18,967 | 20,995 | 2,812 | 17,847 | 1,036 | |||||||||||||||
Commercial Real Estate |
42,104 | 49,678 | 5,158 | 39,806 | 1,814 | |||||||||||||||
Residential RE and Home Equity |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 61,071 | $ | 70,673 | $ | 7,970 | $ | 57,653 | $ | 2,850 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Included in certain impaired loan categories are troubled debt restructurings that were classified as impaired. At December 31, 2011, the Bank had $1,621 of commercial, $20,540 of commercial real estate, and $58 of consumer that were modified in troubled debt restructurings and performing according to the modified terms.
In addition to these amounts, the Bank had troubled debt restructurings that were impaired and no longer performing in accordance with their modified terms. At year-end 2011 there were $1,310 1-4 family residential, $121 of commercial, and $5,002 of commercial real estate within that category. The allowance for impaired loans is included in the Corporations overall allowance for loan losses. The provision necessary to increase this allowance is included in the Corporations overall provision for losses on loans.
During 2011, the Corporation modified $19.1 million of loans that were not troubled debt restructures. This consisted of $5.7 million of commercial loans, $11.8 million of commercial real estate loans and $1.6 million of other loans including consumer and residential loans. These non-troubled debt restructures generally consist of renewals of operating lines of credit, renewals of project development lines of credit and extensions of loans related to real estate.
45
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 4 CREDIT QUALITY (continued)
During 2010, the Corporation modified $23.2 million of loans that were not troubled debt restructures. This consisted of $5.7 million of commercial loans, $13.6 million of commercial real estate loans and $3.9 million of other loans including consumer and residential loans. These non-troubled debt restructures generally consist of renewals of operating lines of credit, renewals of project development lines of credit and extensions of loans related to real estate.
Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Interest income that would have been recognized had nonperforming loans performed in accordance with contractual terms totaled $198 and $894 for years ended December 31, 2011and 2010, respectively. At December 31, 2011 and 2010, management viewed all loans past due and still accruing interest as well-secured and in the process of collection.
Financing receivables on nonaccrual status for the year ending December 31, 2011and 2010 are as follows:
2011 | 2010 | |||||||
Consumer and credit card |
$ | 46 | $ | 33 | ||||
Commercial and industrial |
2,381 | 6,043 | ||||||
Commercial real estate |
6,698 | 10,102 | ||||||
Residential real estate and home equity |
451 | 389 | ||||||
|
|
|
|
|||||
Total |
$ | 9,576 | $ | 16,567 | ||||
|
|
|
|
Credit Quality Indicators
Corporate risk exposure by risk profile was as follows at year-end 2011.
Category |
Commercial and Industrial |
Commercial Real Estate |
||||||
Pass-1-4 |
$ | 88,948 | $ | 90,364 | ||||
Vulnerable-5 |
15,265 | 5,605 | ||||||
Substandard-6 |
22,012 | 33,989 | ||||||
Doubtful-7 |
| | ||||||
Loss-8 |
| | ||||||
|
|
|
|
|||||
Total |
$ | 126,225 | $ | 129,958 | ||||
|
|
|
|
46
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 4 CREDIT QUALITY (continued)
Corporate risk exposure by risk profile was as follows at year-end 2010.
Category |
Commercial and Industrial |
Commercial Real Estate |
||||||
Pass-1-4 |
$ | 108,295 | $ | 87,724 | ||||
Vulnerable-5 |
22,154 | 11,785 | ||||||
Substandard-6 |
24,959 | 52,865 | ||||||
Doubtful-7 |
2 | | ||||||
Loss-8 |
| | ||||||
|
|
|
|
|||||
$ | 155,410 | $ | 152,374 | |||||
|
|
|
|
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 borrowers ability to meet its future debt service obligations is the primary focus for this determination. Generally, a borrowers expected performance is based on the borrowers 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.
47
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 4 CREDIT QUALITY (continued)
Substandard 6
Loans that are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. 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 institutions 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.
48
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 4 CREDIT QUALITY (continued)
Consumer Risk
Consumer risk based on payment activity at December 31, 2011 is as follows.
Payment Category |
Consumer and Credit Card |
Residential Real Estate and Home Equity |
||||||
Performing |
$ | 19,525 | $ | 83,317 | ||||
Non-Performing |
245 | 497 | ||||||
|
|
|
|
|||||
Total |
$ | 19,770 | $ | 83,814 | ||||
|
|
|
|
Consumer risk based on payment activity at December 31, 2010 is as follows.
Payment Category |
Consumer and Credit Card |
Residential Real Estate and Home Equity |
||||||
Performing |
$ | 22,970 | $ | 92,832 | ||||
Non-Performing |
441 | 814 | ||||||
|
|
|
|
|||||
Total |
$ | 23,411 | $ | 93,646 | ||||
|
|
|
|
Age Analysis of Past Due Loans
The following table presents past due loans aged as of December 31, 2011.
Category |
30-59 Days Past Due |
60-89 Days Past Due |
Greater than 90 Days Past Due |
Total Past Due |
Current | Total Financing Receivables |
Recorded Investment > 90 days and Accruing |
|||||||||||||||||||||
Consumer and Credit Card |
$ | 250 | $ | 177 | $ | 245 | $ | 672 | $ | 19,098 | $ | 19,770 | $ | 199 | ||||||||||||||
Commercial and Industrial |
9 | 165 | 706 | 880 | 125,345 | 126,225 | 740 | |||||||||||||||||||||
Commercial Real Estate |
| | 5,803 | 5,803 | 124,155 | 129,958 | | |||||||||||||||||||||
Residential Real Estate and Home Equity |
135 | 67 | 497 | 699 | 83,115 | 83,814 | 46 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 394 | $ | 409 | $ | 7,251 | $ | 8,054 | $ | 351,397 | $ | 359,767 | $ | 985 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 4 CREDIT QUALITY (continued)
The following table presents past due loans aged as of December 31, 2010.
Category |
30-59 Days Past Due |
60-89 Days Past Due |
Greater than 90 Days Past Due |
Total Past Due |
Current | Total Financing Receivables |
Recorded Investment > 90 days and Accruing |
|||||||||||||||||||||
Consumer and Credit Card |
$ | 300 | $ | 104 | $ | 441 | $ | 845 | $ | 22,566 | $ | 23,411 | $ | 407 | ||||||||||||||
Commercial and Industrial |
359 | 3 | 1,373 | 1,735 | 153,675 | 155,410 | 991 | |||||||||||||||||||||
Commercial Real Estate |
885 | 2,050 | 10,118 | 13,053 | 139,321 | 152,374 | 35 | |||||||||||||||||||||
Residential Real Estate and Home Equity |
472 | 123 | 814 | 1,409 | 92,237 | 93,646 | 425 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 2,016 | $ | 2,280 | $ | 12,746 | $ | 17,042 | $ | 407,799 | $ | 424,841 | $ | 1,858 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings
Information regarding Troubled Debt Restructuring (TDR) loans for the year ended December 31, 2011 is as follows:
Twelve Months Ended December 31, 2011 |
||||||||
Number of Contracts |
Post-Modification Outstanding Recorded Investment |
|||||||
Consumer and Credit Card |
8 | $ | 45 | |||||
Commercial and Industrial |
2 | 1,400 | ||||||
Commercial Real Estate |
17 | 16,172 | ||||||
Residential Real Estate and Home Equity |
1 | 8 | ||||||
|
|
|
|
|||||
Total |
28 | $ | 17,625 | |||||
|
|
|
|
50
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 4 CREDIT QUALITY (continued)
The following presents by class loans modified in a TDR from January 1, 2011 through December 31, 2011 that subsequently defaulted (i.e. 60 days or more past due following a modification) during the twelve month periods ended December 31, 2011.
Loans modified as a TDR within
the previous twelve months that subsequently defaulted during the Twelve Months Ended December 31, 2011 |
||||||||
Number of Contracts |
Post-Modification Outstanding Recorded Investment (1) |
|||||||
Consumer and Credit Card |
1 | $ | 11 | |||||
Commercial and Industrial |
1 | 115 | ||||||
Commercial Real Estate |
3 | 2,290 | ||||||
Residential Real Estate and Home Equity |
| | ||||||
|
|
|
|
|||||
Total |
5 | $ | 2,416 | |||||
|
|
|
|
(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 loans effective interest rate. Management exercises significant judgment in developing these estimates.
51
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 4 CREDIT QUALITY (continued)
As mentioned above, an individual loan is placed on a non-accruing status if, in the judgment of Management, it is unlikely that all principal and interest will be received according to the terms of the note. Loans on non-accrual may be eligible to be returned to an accruing status after six months of compliance with the modified terms. However, there are number of factors that could prevent a loan from returning to accruing status, even after remaining in compliance with loan terms for the aforementioned six month period. For example: deteriorating collateral, negative cash flow changes and inability to reduce debt to income ratios.
NOTE 5 PREMISES AND EQUIPMENT
Year-end fixed assets were as follows:
2011 | 2010 | |||||||
Land |
$ | 1,899 | $ | 1,899 | ||||
Buildings |
13,916 | 13,916 | ||||||
Furniture and equipment |
11,880 | 11,919 | ||||||
|
|
|
|
|||||
Subtotal |
27,695 | 27,734 | ||||||
Accumulated depreciation |
(15,788 | ) | (14,839 | ) | ||||
|
|
|
|
|||||
Total premises and equipment |
11,907 | 12,895 | ||||||
Software, net of accumulated amortization |
200 | 280 | ||||||
|
|
|
|
|||||
Total Fixed Assets |
$ | 12,107 | $ | 13,175 | ||||
|
|
|
|
The Corporation has entered into operating lease agreements for branch offices and equipment, which expire at various dates through 2023, and provide options for renewals. Rental expense on lease commitments for 2011 and 2010 amounted to $754 and $832, respectively. The total future minimum lease commitments at December 31, 2011 under these leases are summarized as follows.
2012 |
$ | 626 | ||
2013 |
614 | |||
2014 |
496 | |||
2015 |
475 | |||
2016 |
455 | |||
Thereafter |
704 | |||
|
|
|||
Total |
$ | 3,370 | ||
|
|
52
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 6 INTEREST-BEARING DEPOSITS
Year-end interest-bearing deposits were as follows:
2011 | 2010 | |||||||
Interest-bearing demand |
$ | 66,651 | $ | 65,732 | ||||
Money market |
101,435 | 110,087 | ||||||
Savings deposits |
33,448 | 32,308 | ||||||
Time deposits |
||||||||
In denominations under $100,000 |
84,255 | 63,675 | ||||||
In denominations of $100,000 or more |
89,965 | 129,579 | ||||||
|
|
|
|
|||||
Total |
$ | 375,754 | $ | 401,381 | ||||
|
|
|
|
Scheduled maturities of time deposits were as follows:
2012 |
$ | 101,403 | ||
2013 |
62,676 | |||
2014 |
9,134 | |||
2015 |
763 | |||
2016 |
244 | |||
|
|
|||
Total |
$ | 174,220 | ||
|
|
At December 31, 2011 and 2010 deposits received from officers, directors and related affiliates were considered to be immaterial to the total amount of deposits held at the institution.
NOTE 7 BORROWED FUNDS
There were no short-term borrowings outstanding at December 31, 2011. As a member of the FHLB of Cincinnati, the Bank has the ability to obtain borrowings based on its investment in FHLB stock and other qualified collateral. FHLB advances are collateralized by a blanket pledge of the Banks qualifying 1-4 family and multi-family loan portfolios and all shares of FHLB stock. At December 31, 2011 total pledged loan collateral was $51,428 and investment in FHLB stock was $3,799. Those amounts at December 31, 2010 were $81,942 and $3,799 respectively.
53
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 7 BORROWED FUNDS (continued)
Advances from the Federal Home Loan Bank at year-end were as follows.
Interest rate range |
Maturing year ending December 31, |
2011 | 2010 | |||||||||
4.44% - 5.50% |
2011 | $ | | $ | 15,000 | |||||||
3.36% - 4.68% |
2012 | 29,500 | 29,500 | |||||||||
2.59% - 3.67% |
2013 | 1,298 | 2,240 | |||||||||
2.87% - 4.36% |
2014 | 1,415 | 2,027 | |||||||||
4.03% - 5.72% |
2015 | 5,206 | 6,499 | |||||||||
2016 | | | ||||||||||
3.47% - 5.44% |
Thereafter | 2,617 | 3,236 | |||||||||
|
|
|
|
|||||||||
Total | $ | 40,036 | $ | 58,502 | ||||||||
|
|
|
|
|||||||||
Weighted-average interest rate |
|
4.29 | % | 4.38 | % |
NOTE 8 RETIREMENT PLANS
The Corporation provides a 401(k) savings plan (the Plan) for all eligible employees. To be eligible, an individual must complete six months of employment and be 20 or more years of age. Under provisions of the Plan, a participant can contribute a certain percentage of their compensation to the Plan up to the maximum allowed by the IRS. The Corporation also matches a certain percentage of those contributions up to a maximum match of up to 3% of the participants compensation. The Corporation may also provide additional discretionary contributions. Employee voluntary contributions are vested immediately and Corporation contributions are fully vested after three years. The 2011 and 2010 expenses related to the Plan were $138 and $151, respectively.
The Corporation maintains a deferred compensation plan for the benefit of certain officers. The plan is designed to provide post-retirement benefits to supplement other sources of retirement income such as social security and 401(k) benefits. The amount of each officers benefit will generally depend on their salary, and their length of employment. The Corporation accrues the cost of this deferred compensation plan during the working careers of the officers. Expense under this plan totaled $230 and $98 in 2011 and 2010, respectively. The total accrued liability under this plan was $719 and $593 at December 31, 2011 and 2010, respectively. In addition to recognizing expense associated with the plan, the Corporation also funds the plan via cash payments into separate accounts managed by the Corporations trust department. At December 31, 2011, $558 of the outstanding liability has been funded through this process.
The Corporation has purchased insurance contracts on the lives of the participants in the supplemental post-retirement benefit plan and has named the Corporation as the beneficiary. While no direct connection exists between the deferred compensation plan and the life insurance contracts, it is managements current intent that the earnings on the insurance contracts be used as a funding source for benefits payable under the plan.
54
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 9 FEDERAL INCOME TAXES
The Corporation files income tax returns in the U.S. federal jurisdiction and franchise tax returns in Ohio. Income tax expense (credits) for the years ended December 31, 2011 and 2010 included the following components.
2011 | 2010 | |||||||
Valuation Allowance |
$ | 1,622 | $ | 8,083 | ||||
Deferred |
(1,635 | ) | (2,973 | ) | ||||
|
|
|
|
|||||
Totals |
$ | (13 | ) | $ | 5,110 | |||
|
|
|
|
The difference between the financial statement tax provision and amounts computed by applying the statutory federal income tax rate to income before income taxes was as follows:
2011 | 2010 | |||||||
Income taxes (credits) computed at the statutory federal income tax rate |
$ | (935 | ) | $ | (2,455 | ) | ||
Tax exempt income |
(401 | ) | (512 | ) | ||||
Change in Valuation Allowance |
1,622 | 8,083 | ||||||
Other |
(299 | ) | (6 | ) | ||||
|
|
|
|
|||||
Totals |
$ | (13 | ) | $ | 5,110 | |||
|
|
|
|
Year-end deferred tax assets and liabilities were comprised of the following.
2011 | 2010 | |||||||
Deferred tax assets |
||||||||
Allowance for loan losses |
$ | 3,259 | $ | 4,164 | ||||
Depreciation |
227 | 202 | ||||||
Deferred compensation |
244 | 217 | ||||||
Alternative minimum tax carry forward |
145 | 145 | ||||||
Other-than-temporary impairment losses |
1,365 | 1,334 | ||||||
Other |
62 | 43 | ||||||
Expenses on foreclosed real estate |
132 | 24 | ||||||
Unrealized loss on other-than-temporary impairment on held-to-maturity securities |
1,021 | 950 | ||||||
NOL Carry forward |
4,354 | 2,026 | ||||||
|
|
|
|
|||||
10,809 | 9,105 | |||||||
Deferred tax liabilities |
||||||||
FHLB stock dividends |
(455 | ) | (455 | ) | ||||
Unrealized gain on securities available-for-sale |
(643 | ) | (559 | ) | ||||
Other |
(6 | ) | (8 | ) | ||||
|
|
|
|
|||||
(1,104 | ) | (1,022 | ) | |||||
|
|
|
|
|||||
Net deferred tax asset |
9,705 | 8,083 | ||||||
Less: Valuation Allowance |
(9,705 | ) | (8,083 | ) | ||||
|
|
|
|
|||||
Total |
$ | | $ | | ||||
|
|
|
|
At December 31, 2011, the Corporation has a $12.8 million net operating loss carry forward available to reduce future income taxes through 2030.
55
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 10 COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK
Some financial instruments such as loan commitments, credit lines, letters of credit and overdraft protection are issued to meet customer financing needs. These financing arrangements to provide credit typically have predetermined expiration dates, but can be withdrawn if certain conditions are not met. The commitments may expire without ever having been drawn on by the customer; therefore the total commitment amount does not necessarily represent future cash requirements. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used for loans, including obtaining various forms of collateral, such as real estate or securities at exercise of the commitment or letter of credit.
The Bank grants retail, commercial and commercial real estate loans in central Ohio. The Bank evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based upon managements credit evaluation of each customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income producing commercial properties.
The contractual amount of financing instruments with off-balance sheet risk was as follows at year-end.
2011 | 2010 | |||||||||||||||
Fixed Rate |
Variable Rate |
Fixed Rate |
Variable Rate |
|||||||||||||
Commitments to extend credit |
$ | 62 | $ | 195 | $ | 36 | $ | | ||||||||
Unused lines of credit and letters of credit |
$ | 1,313 | $ | 63,369 | $ | 2,108 | $ | 66,685 |
Commitments to make loans are generally made for periods of 30 days or less. The fixed-rate loan commitments have interest rates ranging from 2.35% to 8.25% for 2011. Maturities for loans subject to these fixed-rate commitments range from up to 1 to 30 years. In the opinion of management, outstanding loan commitments equaled or exceeded prevalent market interest rates at December 31, 2011, such commitments were underwritten in accordance with normal loan underwriting policies, and all disbursements will be funded via normal cash flows from operations and existing excess liquidity.
Legal Proceedings
There is no pending material litigation, other than routine litigation incidental to the business of the Corporation and Bank. Further, there are no material legal proceedings in which any director, executive officer, principal shareholder or affiliate of the Corporation is a party or has a material interest, which is adverse to the Corporation or Bank. Finally, there is no litigation in which the Corporation or Bank is involved which is expected to have a material adverse impact on the financial position or results of operations of the Corporation or Bank.
56
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 11 REGULATORY CAPITAL
The Corporation is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporations financial statements. Capital adequacy guidelines and, additionally for banks, prompt corrective-action regulations, involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet various capital requirements can initiate regulatory action.
The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The Bank met the well-capitalized requirements, as publicly defined, at December 31, 2011. The classification as well capitalized is made periodically by regulators and is subject to change over time. Because the Bank operates under a written order, it is considered by regulation to be adequately capitalized.
The Corporations wholly-owned subsidiary, The Delaware County Bank and Trust, entered into a written agreement with the Ohio Division of Financial Institutions (ODFI) and a Consent Order with the Federal Deposit Insurance Corporation (FDIC) effective October 28, 2010 which address matters pertaining to, among other things: management and operations of the Bank; credit risk management practices and credit administration policies and procedures; Bank actions with respect to problem assets; reserves for loan and lease losses; strengthening the capital position of the Bank; the strategic plan and budget for fiscal 2012; staffing; and submitting a funding contingency plan for the Bank that identifies available sources of liquidity and includes a plan for dealing with potential adverse economic and market conditions.
The Consent Order and the Agreement contain substantially similar provisions. Among other things they require the Bank to attain a minimum 9% tier-1 capital ratio within 90 days of the effective date, and total risk-based capital ratio of not less than 13% within that same time period; submission of plans related to the reduction of non-performing assets; and a review of accounting matters related to subsidiary companies. The Agreement and Consent Order also provide that the Bank may not declare or pay dividends to DCB without the prior approval of the FDIC and ODFI. And, as announced earlier this year by DCB, without the prior approval of the Federal Reserve, if applicable, DCB may not declare or pay cash dividends, repurchase any of its shares, make payments on trust preferred securities or incur or guarantee any debt.
As previously noted, the Bank is required to achieve a tier-1 capital ratio of not less than 9.0% and a total risk-based capital ratio of not less than 13.0% within 90 days of the effective date of the Agreement and Consent Order, and, to maintain those capital levels during the remaining term of the Agreement and the Consent Order. It may do so by, among other alternatives, raising additional capital, generating sufficient earnings, reducing the banks assets, or a combination thereof. The Bank has not yet achieved the 9% tier-1 target or the 13% total risk-based capital target.
Additionally, the Bank is required to submit periodic progress reports to the ODFI and the FDIC regarding various aspects of the foregoing actions and requirements, and the Bank board has appointed a compliance committee to monitor and coordinate the Banks performance under the Agreement and Consent Order. The Agreement and Consent Order will remain in effect until modified or terminated by the ODFI and/or the FDIC. The Bank entered into the Agreement and the Consent Order without admitting or denying any unsafe or unsound banking practices, violations, rule or regulation.
57
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 11 REGULATORY CAPITAL (continued)
Actual and required capital ratios are presented below at year-end.
Actual | For Capital Adequacy Purposes |
To Be Well Capitalized Under Prompt Corrective Action Provisions |
||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
2011 |
||||||||||||||||||||||||
Total capital to risk-weighted assets |
||||||||||||||||||||||||
Consolidated |
$ | 40,510 | 10.1 | % | $ | 32,124 | 8.0 | % | N/A | N/A | ||||||||||||||
Bank |
$ | 40,069 | 10.0 | % | $ | 32,124 | 8.0 | % | $ | 40,156 | 10.0 | % | ||||||||||||
Tier 1 (core) capital to risk-weighted assets |
||||||||||||||||||||||||
Consolidated |
$ | 35,434 | 8.8 | % | $ | 16,062 | 4.0 | % | N/A | N/A | ||||||||||||||
Bank |
$ | 34,993 | 8.7 | % | $ | 16,062 | 4.0 | % | $ | 24,093 | 6.0 | % | ||||||||||||
Tier 1 (core) capital to average assets |
||||||||||||||||||||||||
Consolidated |
$ | 35,634 | 6.6 | % | $ | 21,433 | 4.0 | % | N/A | N/A | ||||||||||||||
Bank |
$ | 34,993 | 6.5 | % | $ | 21,498 | 4.0 | % | $ | 26,872 | 5.0 | % | ||||||||||||
2010 |
||||||||||||||||||||||||
Total capital to risk-weighted assets |
||||||||||||||||||||||||
Consolidated |
$ | 43,554 | 10.3 | % | $ | 33,865 | 8.0 | % | N/A | N/A | ||||||||||||||
Bank |
$ | 43,422 | 10.3 | % | $ | 33,861 | 8.0 | % | $ | 42,327 | 10.0 | % | ||||||||||||
Tier 1 (core) capital to risk-weighted assets |
||||||||||||||||||||||||
Consolidated |
$ | 38,177 | 9.0 | % | $ | 16,933 | 4.0 | % | N/A | N/A | ||||||||||||||
Bank |
$ | 38,045 | 9.0 | % | $ | 16,931 | 4.0 | % | $ | 25,396 | 6.0 | % | ||||||||||||
Tier 1 (core) capital to average assets |
||||||||||||||||||||||||
Consolidated |
$ | 38,177 | 6.4 | % | $ | 23,802 | 4.0 | % | N/A | N/A | ||||||||||||||
Bank |
$ | 38,045 | 6.4 | % | $ | 23,750 | 4.0 | % | $ | 29,688 | 5.0 | % |
58
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 11 REGULATORY CAPITAL (continued)
Banking regulations limit capital distributions by the Bank. Generally, capital distributions are limited to undistributed net income for the current and prior two years. In addition, dividends may not reduce capital levels below the minimum regulatory requirements disclosed above. Based on assets held at December 31, 2011, the tier-1 capital necessary to reach those requirements would be $48,370. To reach the 13% total risk-based capital requirement the Corporation would need to reach $52,202, based on risk based assets of $401,555 as presented in the December 31, 2011 FDIC Call Report. At December 31, 2011 and 2010, the Bank was unable to make dividend distributions to the Corporation without prior regulatory approval.
NOTE 12 DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as follows at year-end.
2011 | 2010 | |||||||||||||||
Carrying Amount |
Fair Value | Carrying Amount |
Fair Value | |||||||||||||
Financial assets |
||||||||||||||||
Cash and cash equivalents |
$ | 39,314 | $ | 39,314 | $ | 33,521 | $ | 33,521 | ||||||||
Securities available for sale |
88,813 | 88,813 | 69,597 | 69,597 | ||||||||||||
Securities held to maturity |
1,010 | 1,360 | 1,313 | 1,680 | ||||||||||||
Loans held for sale |
| | 753 | 753 | ||||||||||||
Loans (net of allowance) |
350,183 | 345,774 | 412,617 | 401,967 | ||||||||||||
FHLB stock |
3,799 | 3,799 | 3,799 | 3,799 | ||||||||||||
Accrued interest receivable |
1,480 | 1,480 | 1,673 | 1,673 | ||||||||||||
Financial liabilities |
||||||||||||||||
Noninterest-bearing deposits |
$ | 69,674 | $ | 69,674 | $ | 63,695 | $ | 63,695 | ||||||||
Interest-bearing deposits |
375,754 | 376,841 | 401,381 | 402,131 | ||||||||||||
Federal funds purchased and other short-term borrowings |
| | 1,265 | 1,265 | ||||||||||||
FHLB advances |
40,036 | 40,616 | 58,502 | 60,581 | ||||||||||||
Accrued interest payable |
340 | 340 | 336 | 336 |
The estimated fair value of cash and cash equivalents, FHLB stock, accrued interest receivable, noninterest-bearing deposits, federal funds purchased and other short-term borrowings and accrued interest payable approximates the related carrying amounts. Estimated fair value for securities held-to-maturity is based on independent third-party evaluation including discounted cash flows and other market assumptions. For fixed rate loans or deposits and for variable rate loans or deposits 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. Fair value of loans held for sale is based on market quotes. Fair values of long-term FHLB advances are based on current rates for similar financing. Fair values of off-balance sheet items are based on the current fee or cost that would be charged to enter into or terminate such agreements, which are not material.
59
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 12 DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
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 |
60
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 12 DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Securities
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include equity and certain municipal securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Government and agency obligations, state and municipal obligations, corporate bonds and mortgage-backed securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
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 December 31, 2011 and 2010.
Fair Value Measurements Using | ||||||||||||||||
December 31, 2011 | 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. agency obligations |
$ | 35,808 | $ | | $ | 35,808 | $ | | ||||||||
State and municipal obligations |
15,995 | | 15,995 | | ||||||||||||
Corporate bonds |
1,837 | | 1,837 | | ||||||||||||
Mortgage-backed |
34,473 | | 34,373 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 88,113 | $ | | $ | 88,113 | $ | | ||||||||
|
|
|
|
|
|
|
|
Fair Value Measurements Using | ||||||||||||||||
December 31, 2010 | 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. agency obligations |
$ | 29,986 | $ | | $ | 29,986 | $ | | ||||||||
State and municipal obligations |
12,262 | | 12,262 | | ||||||||||||
Mortgage-backed |
27,349 | | 27,349 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 69,597 | $ | | $ | 69,597 | $ | | ||||||||
|
|
|
|
|
|
|
|
61
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 12 DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
Following is a description of the valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Securities
Collateralized debt obligations are classified as held to maturity. The Corporation recognized other-than-temporary impairment on the securities as of December 31, 2011 and 2010, 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 security.
Impaired loans
At December 31, 2011 and December 31, 2010, 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 December 31, 2011 and December 31, 2010.
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) |
|||||||||||||
December 31, 2011 |
||||||||||||||||
Collateralized debt obligations |
$ | 1,360 | $ | | $ | | $ | 1,360 | ||||||||
Impaired loans |
17,483 | | | 17,483 | ||||||||||||
Real estate owned |
1,590 | | | 1,590 | ||||||||||||
December 31, 2010 |
||||||||||||||||
Collateralized debt obligations |
$ | 1,313 | $ | | $ | | $ | 1,313 | ||||||||
Impaired loans |
24,187 | | | 24,187 | ||||||||||||
Real estate owned |
449 | | | 449 |
62
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 13 PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of DCB Financial Corp was as follows:
CONDENSED BALANCE SHEETS
December 31, 2011 and 2010
2011 | 2010 | |||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 413 | $ | 75 | ||||
Investment in subsidiaries |
34,311 | 37,442 | ||||||
Investment securities |
| | ||||||
Investment in affiliates |
| | ||||||
Other assets |
| | ||||||
|
|
|
|
|||||
Total assets |
$ | 34,724 | $ | 37,517 | ||||
|
|
|
|
|||||
Liabilities |
||||||||
Short term borrowings |
$ | | $ | 80 | ||||
Other liabilities |
3,760 | 3,758 | ||||||
Shareholders Equity |
30,964 | 33,679 | ||||||
|
|
|
|
|||||
Total liabilities and shareholders equity |
$ | 34,724 | $ | 37,517 | ||||
|
|
|
|
Note: At December 31, 2011and 2010, DCB Financial Corp. has a payable to the Bank in the amount of $3,735. The Bank evaluated the receivable for collectability and has written the receivable off based on its evaluation. The payable to the Bank represents the difference between consolidated shareholders equity and the shareholders equity of DCB Financial Corp.
CONDENSED STATEMENTS OF OPERATIONS
Years ended December 31, 2011 and 2010
2011 | 2010 | |||||||
Dividends from Bank subsidiary |
$ | 492 | $ | | ||||
Equity in undistributed loss of subsidiaries |
(3,154 | ) | (12,547 | ) | ||||
Other |
(2 | ) | (70 | ) | ||||
|
|
|
|
|||||
Total income (loss) |
(2,664 | ) | (12,617 | ) | ||||
Operating expenses |
74 | 127 | ||||||
Federal income tax expense (credit) |
| (414 | ) | |||||
|
|
|
|
|||||
Net loss |
$ | (2,738 | ) | $ | (12,330 | ) | ||
|
|
|
|
63
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 13 PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 2011 and 2010
2011 | 2010 | |||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | (2,738 | ) | $ | (12,330 | ) | ||
Adjustments to reconcile net loss to cash provided by operating activities: |
||||||||
Excess distributions from subsidiaries |
3,154 | 12,547 | ||||||
Net change in other assets and liabilities |
2 | 401 | ||||||
|
|
|
|
|||||
Net cash from operating activities |
418 | 618 | ||||||
Cash flows used in investing activities |
||||||||
Investments in unconsolidated affiliates |
| 426 | ||||||
|
|
|
|
|||||
Net cash from investing activities |
| 426 | ||||||
Cash flows from financing activities |
||||||||
Repayment of short-term borrowings |
(80 | ) | (2,290 | ) | ||||
Cash dividends paid |
| | ||||||
Proceeds from exercise of stock options |
| | ||||||
Purchase of treasury stock, net |
| | ||||||
|
|
|
|
|||||
Net cash from financing activities |
(80 | ) | (2,290 | ) | ||||
|
|
|
|
|||||
Net change in cash and cash equivalents |
338 | (1,246 | ) | |||||
Cash and cash equivalents at beginning of year |
75 | 1,321 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of year |
$ | 413 | $ | 75 | ||||
|
|
|
|
64
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 14 SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses are reflected in the footnote regarding loans. Current vulnerabilities due to certain concentrations of credit risk are discussed in the footnote on commitments and credit risk. Other significant estimates and concentrations not discussed in those footnotes include:
Deposit Concentration
At December 31, 2011, approximately 11.49% of the Banks deposits were received from public institutions. These concentrations pose possible liquidity and earnings risk to the Corporation. However, in the opinion of management, the potential risks associated with such deposit concentration is more than offset at December 31, 2011 by the Corporations available lending and borrowing capacity.
Investments
The Corporation invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such change could materially affect the amounts reported in the accompanying balance sheets.
Current Economic Conditions
The current protracted economic decline continues to present financial institutions with unprecedented circumstances and challenges, which in some cases have resulted in large and unanticipated declines in the fair values of investments and other assets, constraints on liquidity and capital and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans.
At December 31, 2011, the Corporation held $129,958 in commercial real estate included in the Banks geographic area. Due to national, state and local economic conditions, values for commercial and development real estate have declined significantly, and the market for these properties is depressed.
The accompanying financial statements have been prepared using values and information currently available to the Corporation.
Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses and, capital that could negatively impact the Corporations ability to meet regulatory capital requirements and maintain sufficient liquidity.
65
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 15 DETAILS OF OPERATING EXPENSES
The following table details the composition of occupancy and equipment expenses for the years ended December 31, 2011 and 2010.
2011 | 2010 | |||||||
Bank premises rent |
$ | 613 | $ | 633 | ||||
Bank premises maintenance |
447 | 437 | ||||||
Bank premises depreciation |
549 | 551 | ||||||
Equipment lease |
143 | 199 | ||||||
Depreciation |
687 | 1,019 | ||||||
Software maintenance |
774 | 718 | ||||||
Other |
624 | 480 | ||||||
|
|
|
|
|||||
Total |
$ | 3,837 | $ | 4,037 | ||||
|
|
|
|
The following table details the composition of other operating expenses for the years ended December 31, 2011 and 2010.
2011 | 2010 | |||||||
ATM and debit cards |
$ | 622 | $ | 647 | ||||
Telephone |
440 | 379 | ||||||
Loan |
942 | 914 | ||||||
Other operating |
1,522 | 2,214 | ||||||
|
|
|
|
|||||
Total |
$ | 3,526 | $ | 4,154 | ||||
|
|
|
|
66
DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2011 and 2010
(Dollars in thousands)
NOTE 16 QUARTERLY FINANCIAL DATA (Unaudited)
The following tables summarize the Corporations quarterly results for the years ended December 31, 2011 and 2010.
Three Months Ended | ||||||||||||||||
December 31, | September 30, | June 30, | March 31, | |||||||||||||
2011: |
||||||||||||||||
Total interest income |
$ | 5,413 | $ | 5,597 | $ | 5,770 | $ | 5,952 | ||||||||
Total interest expense |
1,223 | 1,269 | 1,282 | 1,339 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income |
4,190 | 4,328 | 4,488 | 4,613 | ||||||||||||
Provision for losses on loans |
1,600 | 625 | 2,536 | 675 | ||||||||||||
Noninterest income |
1,782 | 1,329 | 1,745 | 1,502 | ||||||||||||
Noninterest expense |
5,045 | 4,995 | 5,821 | 5,431 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income tax expense (benefit) |
(673 | ) | 37 | (2,124 | ) | 9 | ||||||||||
Federal income tax expense (benefit) |
518 | (239 | ) | (268 | ) | (24 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | (1,191 | ) | $ | 276 | $ | (1,856 | ) | $ | 33 | ||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) per share: |
||||||||||||||||
Basic |
$ | (0.32 | ) | $ | 0.07 | $ | (0.50 | ) | $ | 0.01 | ||||||
Diluted |
$ | (0.32 | ) | $ | 0.07 | $ | (0.50 | ) | $ | 0.01 | ||||||
Three Months Ended | ||||||||||||||||
December 31, | September 30, | June 30, | March 31, | |||||||||||||
2010: |
||||||||||||||||
Total interest income |
$ | 6,631 | $ | 6,896 | $ | 7,196 | $ | 7,395 | ||||||||
Total interest expense |
1,448 | 1,742 | 1,834 | 1,901 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income |
5,183 | 5,154 | 5,362 | 5,494 | ||||||||||||
Provision for losses on loans |
1,162 | 4,531 | 3,386 | 1,961 | ||||||||||||
Noninterest income |
2,175 | 1,711 | 1,793 | 436 | ||||||||||||
Noninterest expense |
6,021 | 6,242 | 5,737 | 5,488 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes (credits) |
175 | (3,908 | ) | (1,968 | ) | (1,519 | ) | |||||||||
Federal income tax expense (credit) |
530 | 5,151 | 60 | (631 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss |
$ | (355 | ) | $ | (9,059 | ) | $ | (2,028 | ) | $ | (888 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Loss per share: |
||||||||||||||||
Basic |
$ | (0.10 | ) | $ | (2.44 | ) | $ | (0.54 | ) | $ | (0.24 | ) | ||||
Diluted |
$ | (0.10 | ) | $ | (2.44 | ) | $ | (0.54 | ) | $ | (0.24 | ) |
67
EXHIBIT 21
SUBSIDIARIES OF DCB FINANCIAL CORP
1. | The Delaware County Bank and Trust Company |
Incorporated in Ohio
DCB Financial Corp owns 100%
2. | DCB Title Services, LLC |
Incorporated in Ohio
DCB Financial Corp owns 100%
3. | DCB Insurance Services, LLC |
Incorporated in Ohio
DCB Financial Corp owns 100%
4. | DataTasx LLC |
Incorporated in Ohio
DCB Financial Corp owns 100%
EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 29, 2012, accompanying the consolidated financial statements incorporated by reference in the Annual Report of DCB Financial Corp (the Company) on Form 10-K/A for the year ended December 31, 2011. We hereby consent to the incorporation by reference of said report in the Registration Statements of DCB Financial Corp on Form S-3, filed with the Securities and Exchange Commission (the Commission) on March 30, 1999, the Companys Form S-8, filed with the Commission on November 17, 1999, the Companys Form S-8, filed with the Commission on May 9, 2002, and the Companys Form S-8, filed with the Commission on June 18, 2004.
/s/ Plante & Moran PLLC
Columbus, Ohio
April 26, 2012
EXHIBIT 31.1(b)
CERTIFICATIONS
I, Ronald J. Seiffert, certify that:
1. | I have reviewed this annual report on Form 10-K/A 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 registrants other certifying officer(s) 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 registrants 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 registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants 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 registrants 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 registrants internal control over financial reporting. |
Date: April 27, 2012 |
/s/ Ronald J. Seiffert | |
Ronald J. Seiffert | ||
Title: President and Chief Executive Officer |
EXHIBIT 31.2(b)
CERTIFICATIONS
I, John A. Ustaszewski, certify that:
1. | I have reviewed this annual report on Form 10-K/A 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 registrants other certifying officer(s) 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 registrants 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 registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants 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 registrants 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 registrants internal control over financial reporting. |
Date: April 27, 2012 |
/s/ John A. Ustaszewski | |
John A. Ustaszewski | ||
Title: Senior Vice President and | ||
Chief Financial Officer |
EXHIBIT 32.1(b)
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 Annual Report of DCB Financial Corp (the Company) on Form 10-K/A for the period ending December 31, 2011 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 Company. |
/s/ Ronald J. Seiffert |
Ronald J. Seiffert President and Chief Executive Officer April 27, 2012 |
EXHIBIT 32.2(b)
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 Annual Report of DCB Financial Corp (the Company) on Form 10-K/A for the period ending December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, John A. Ustaszewski, Chief Financial Officer of the Company, 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 Company. |
/s/ John A. Ustaszewski |
John A. Ustaszewski Senior Vice-President and Chief Financial Officer April 27, 2012 |
Summary of Significant Accounting Policies
|
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2011
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Significant Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The consolidated financial statements include the accounts of DCB Financial Corp (“DCB”) 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 (collectively referred to hereinafter as the “Corporation”). All intercompany transactions and balances have been eliminated in the consolidated financial statements. Nature of Operations: The Corporation provides financial services through its 14 banking locations in Delaware, Franklin and Union Counties, Ohio. Its primary deposit products are checking, savings, and term certificate accounts and its primary lending products are residential mortgage, commercial and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Real estate loans are secured by both residential and commercial real estate. The Bank also operates a trust department and engages in other personal wealth management activities. Business Segments: While DCB’s management monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Corporation-wide basis. Accordingly, all of DCB’s operations are considered by management to be aggregated in one operating segment. Use of Estimates: To prepare consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect amounts reported in the financial statements and disclosures provided, and future results could differ. The allowance for loan losses, fair value of financial instruments, determination of other-than-temporary impairment, status of contingencies and deferred tax asset valuation are particularly subject to change. Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, federal funds sold and deposits with other financial institutions with original maturities of less than ninety days. Net cash flows are reported for customer loan and deposit transactions, federal funds purchased and other short-term borrowings. Securities: Securities classified as held-to-maturity are carried at adjusted amortized cost when management has the positive intent and ability to hold them to maturity. Securities classified as available-for-sale might be sold before maturity. Securities classified as available-for-sale are carried at fair value, with unrealized holding gains and losses excluded from earnings and reported as a component of other comprehensive income. Realized gains and losses on sale of securities are recognized using the specific identification method. The Corporation does not engage in securities trading activities. Interest income includes premium amortization and accretion of discounts on securities. Effective April 1, 2009, the Corporation adopted new accounting guidance related to recognition and presentation of other-than-temporary impairment (ASC 320-10). When the Corporation does not intend to sell a debt security, and it is more likely than not, the Corporation will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security. As a result of this guidance, the Corporation’s consolidated statement of operations beginning on December 31, 2009, reflects the impairment (that is, the difference between the security’s amortized cost basis and fair value) on debt securities that the Corporation intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis. For available-for-sale and held-to-maturity debt securities that management has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the noncredit loss is recognized in accumulated other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections. Management considers, in determining whether other-than-temporary impairment exists, (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan. 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 historical loss rates in the calculation by applying weights, so that the most recent data bears a larger impact on future loss rate calculations. Management has the ability to adjust these loss rates by utilizing risk ratings based on current period trends. If current period trends differ either positively or negatively from the given weighted historical loss rates, adjustments can be made. The risk ratings either increase the expected loss rates, or decrease the expected loss rates, depending on the variance on actual versus historical trends. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risking rating data. 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. Management utilizes historical loss information and various economic data to enhance the process for determining the allowance for loan losses. Typically, three years of historical loss data is accumulated by portfolio type and weighted to the extent that the most recent loss results bear a larger impact on the future loss expectations. These historical loss calculations, can be adjusted on a quarterly basis if trends begin to emerge that indicate actual loss rates differ, either positively or negatively, from historical trends. Economic data plays a minor role in the loan loss calculation, but is considered. Typically, the primary economic data that Management considers is the unemployment rate; however, inflationary pressures, and real estate activity and pricing trends are also taken into consideration.
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. 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. Uncollectability is usually determined based on a pre-determined number of days in the case of consumer loans, or, in the case of commercial loans, is based on delinquency, collateral and other legal considerations. Consumer loans are charged-off prior to 120 days of delinquency, but could be charged off earlier, depending on the individual circumstances. Mortgage loans are charged down prior to 180 days of delinquency, but could be charged off sooner, 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. Both consumer and commercial loans can be partially charged down depending on a number of factors including: the remaining strength of the borrow 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 loan charge-off, partial or whole, takes place when Management determines that full collectability of principal balance is unlikely to occur. Subsequent recoveries, if any, are credited to the allowance. Management’s policies for determining impairment, reserves and charge-offs are reviewed and approved by the Board of Directors on an annual basis, and were not materially changed in 2011. 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. Concentrations of Credit Risk: The Bank grants commercial, real estate and consumer loans primarily in Delaware County, and the surrounding counties. Loans for commercial real estate, agricultural, construction and land development purposes comprise 36.2% of total loans at December 31, 2011. Loans for commercial purposes comprise 35.1% of loans, and include loans secured by business assets and agricultural loans. Loans for residential real estate purposes, including home equity loans, aggregate to 23.3% of loans. Loans for consumer purposes are primarily secured by consumer assets and represent 5.4% of total loans. At December 31, 2010 loans for commercial real estate, agricultural, construction and land development purposes comprise 35.9% of total loans at December 31, 2010. Loans for commercial purposes comprise 36.6% of loans, and include loans secured by business assets and agricultural loans. Loans for residential real estate purposes, including home equity loans, aggregate to 22.0% of loans. Loans for consumer purposes are primarily secured by consumer assets and represent 5.5% of total loans. Investment in Federal Home Loan Bank Stock: The Corporation is required as a condition of membership in the Federal Home Loan Bank of Cincinnati (“FHLB”) to maintain an investment in FHLB common stock. The stock is redeemable at par and, therefore, its cost is equivalent to its redemption value. The Corporation’s ability to redeem FHLB shares is dependent on the redemption practices of the FHLB. At December 31, 2011, the FHLB placed no restrictions on redemption of shares in excess of a member’s required investment in the stock. The stock is carried at cost and evaluated for impairment. Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the assets’ useful lives, estimated to be 7 to 39 years for buildings, improvements and leasehold improvements. The Corporation generally uses three to five years for the useful lives of furniture, fixtures, and equipment, using the straight line method, depending on the nature of the asset. Premises and equipment are reviewed for impairment when events indicate the carrying amount may not be recoverable. Maintenance and repairs are expensed and major improvements are capitalized. Foreclosed Assets: Assets acquired through foreclosure are initially recorded at the lower of cost or fair value less selling costs when acquired. If fair value declines below the recorded amount, a valuation allowance is recorded through expense. The Corporation generally evaluates fair market values of foreclosed assets on a quarterly basis, and adjusts accordingly. Holding costs after acquisition are expensed as incurred; however, construction costs to improve a property’s value may be capitalized as part of the asset value. Servicing Assets: Servicing assets represent the allocated value of retained servicing on loans sold. Servicing assets are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the assets, using groupings of the underlying loans as to interest rates, and then secondarily as to geographic and prepayment characteristics. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance. Loans serviced for others totaled $6,844 and $8,165 at December 31, 2011 and 2010, respectively. The Corporation had net servicing assets of $16 and $21 at December 31, 2011 and 2010, respectively. Bank Owned Life Insurance: The Corporation has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at the lower of its cash surrender value or its net redemption value. Investment in Unconsolidated Affiliates: At December 31, 2011 and 2010, the Corporation did not carry any investments in unconsolidated affiliates on its balance sheet. The Corporation sold investments in two unconsolidated affiliates during 2010. Income Taxes: The Corporation accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Corporation determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred tax assets are reduced by a valuation allowance, if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to the management’s judgment. The Corporation recognizes interest and penalties on income taxes, if applicable, as a component of income tax expense. The Corporation files consolidated income tax returns with its subsidiaries. Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Earnings (Loss) Per Common Share: Basic earnings (loss) per common share is net income (loss) divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share are computed including the dilutive effect of additional potential common shares issuable under stock options. Diluted earnings (loss) per share are not computed for periods in which an operating loss is sustained.
The computation of earnings (loss) per share is based upon the following weighted-average shares outstanding for the years ended December 31:
Stock Option Plan: The Corporation’s shareholders approved an employee share option Plan (the “Plan”) in May 2004. This Plan grants certain employees the right to purchase shares at a predetermined price. The Plan is limited to 300,000 shares. The shares granted to employees vest 20% per year over a five year period. The options expire after ten years. During the year ended December 31, 2011, options for 500 shares were granted to employees under the Plan, at a weighted average exercise price of $3.35; however, these options were subsequently forfeited during the year and no expense was recognized. At December 31, 2011, 103,757 shares were exercisable and 83,821 shares were available for grant under this Plan. The Corporation recognizes compensation cost for unvested equity-based awards based on their grant-date fair value. The fair value of each option was estimated on the date of grant using the modified Black-Scholes options pricing model with weighted-average assumptions used for grants: dividend yield, expected volatility, risk-free interest rates, and contractual lives of 10 years for each grant. At December 31, 2011, outstanding options had no intrinsic value as the current share price of the options was greater than the market price. The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. The Corporation recorded $40 and $33 in compensation cost for equity-based awards that vested during the years ended December 31, 2011 and 2010, respectively. The Corporation has $79 of total unrecognized compensation cost related to non-vested equity-based awards granted under its stock option plan as of December 31, 2011, which is expected to be recognized over a period of 3.2 years. A summary of the status of the Corporation’s stock option plan as of December 31, 2011, and changes during the year is presented below:
The following table depicts nonvested shares at December 31, 2011.
The following information applies to options outstanding at December 31, 2011:
Comprehensive Income (Loss): Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), net of applicable income tax effects. Other comprehensive income (loss) includes unrealized appreciation (depreciation) on available-for-sale securities, unrealized appreciation (depreciation) on available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in income and unrealized appreciation (depreciation) on held-to-maturity securities for which a portion of an other-than-temporary impairment has been recognized in income. Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank of $1,000 was required to meet regulatory clearing balance requirements at December 31, 2011 and 2010. The regulatory clearing balances maintained do not earn interest, but do provide an earnings credit used to offset transaction fees. Other deposits at the Federal Reserve Bank above the clearing balance requirements earn interest at an overnight right, and are not restricted. In addition, approximately $1,080 is held in another institution and is under the control of a third party due to a contractual agreement. Dividend Restrictions: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to DCB or by DCB to shareholders. Due to limitations imposed by regulators for DCB Financial Corp and the Bank, both entities are required to receive regulatory approval prior to paying dividends. Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or market conditions could significantly affect the estimates. Advertising and Marketing: Advertising and other marketing costs are expensed as incurred. Reclassification: Certain amounts in the prior year consolidated financial statements have been reclassified to conform to the 2011 and 2010 presentations. These reclassifications had no effect on net income for any period presented. New Accounting Pronouncements: FASB ASU 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. In April 2011, the FASB issued ASU 2011-02, which provides additional guidance to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this update are effective for the Corporation beginning in the quarter ended September 30, 2011 and are to be applied retrospectively to January 1, 2011. In addition, the modification disclosures described in ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which were subsequently deferred by ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings, are effective on a prospective basis beginning in the quarter ended September 30, 2011. The adoption of ASU 2011-02 did not have a material impact on the consolidated financial statements. FASB ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the “Boards”) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the Codification in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The impact of adoption of this ASU is not expected to be material. FASB ASU 2011-05, Presentation of Comprehensive Income. In June 2011, the FASB issued ASU 2011-05, which provides entities with the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income, along with a total for other comprehensive income, and a total amount for comprehensive income. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. This update should be applied retrospectively effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. As the Corporation currently reports comprehensive income in two separate but consecutive statements with all of the components required by ASU 2011-05, the adoption of this guidance will not have an impact on the consolidated financial statements. |