10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: MARCH 31, 2013

OR

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

Commission file number: 0-22387

DCB Financial Corp

(Exact name of registrant as specified in its charter)

Ohio	31-1469837
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

110 Riverbend Avenue, Lewis Center, Ohio 43035

(Address of principal executive offices)

(740) 657-7000

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

Large accelerated filers	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

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

As of May 1, 2013, the latest practicable date, 7,192,350 shares of the registrant’s no par value common stock were issued and outstanding.

DCB FINANCIAL CORP

FORM 10-Q

For the Three Month Periods Ended March 31, 2013 and 2012

Table of Contents

	Page
PART I – FINANCIAL INFORMATION
ITEM 1 – Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012		3
Condensed Consolidated Statements of Operations (unaudited) for the three month period ended March  31, 2013 and 2012		4
Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three month period ended March 31, 2013 and 2012		5
Condensed Consolidated Statements of Cash Flows (unaudited) for the three month period ended March  31, 2013 and 2012		6
Notes to the Condensed Consolidated Financial Statements		7
ITEM  2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
ITEM 3 – Quantitative and Qualitative Disclosures about Market Risk		32
ITEM 4 – Controls and Procedures		33
PART II – OTHER INFORMATION		34
ITEM 1 – Legal Proceedings		34
ITEM 1A – Risk Factors		34
ITEM 2 – Unregistered Sales of Equity Securities and use of Proceeds		34
ITEM 3 – Defaults upon Senior Securities		34
ITEM 4 – Mine Safety Disclosures		34
ITEM 5 – Other Information		34
ITEM 6 – Exhibits		34
SIGNATURES		35

2

Item 1. Financial Statements

DCB FINANCIAL CORP

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, except per share data)

	March 31,			December 31,
	2013			2012
	(Unaudited)
ASSETS
Cash and due from financial institutions	$	7,877		$	9,663
Interest-bearing deposits		46,406			53,644
Total cash and cash equivalents		54,283			63,307
Securities available-for-sale		84,221			87,197
Securities held-to-maturity		1,184			1,149
Total securities		85,405			88,346
Loans		328,815			317,504
Less allowance for loan losses		(6,758	)		(6,881	)
Net Loans		322,057			310,623
Real estate owned		2,362			3,671
Investment in FHLB Stock		3,799			3,799
Premises and equipment, net		12,071			12,036
Bank owned life insurance		18,804			18,564
Accrued interest receivable and other assets		5,882			6,146
Total assets	$	504,663		$	506,492
LIABILITIES
Noninterest bearing deposits	$	90,553		$	95,847
Interest bearing deposits		356,736			352,443
Total deposits		447,289			448,290
Federal Home Loan Bank advances		6,384			7,498
Accrued interest payable and other liabilities		2,414			2,315
Total liabilities		456,087			458,103
STOCKHOLDERS’ EQUITY
Common stock, no par value, 7,500,000 shares authorized and issued at March 31, 2013 and December 31, 2012. 7,192,350 shares outstanding at March 31, 2013 and December 31, 2012.		15,771			15,771
Retained earnings		40,755			40,614
Treasury stock, at cost, 307,650 shares at March 31, 2013 and December 31, 2012		(7,416	)		(7,416	)
Accumulated other comprehensive loss		(534	)		(580	)
Total stockholders’ equity		48,576			48,389
Total liabilities and stockholders’ equity	$	504,663		$	506,492

See Notes to the consolidated financial statements.

3

DCB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF OPERATIONS

For the three months ended March 31,

(Unaudited)

(Dollars in thousands, except per share data)

	2013			2012
Interest and dividend income
Loans	$	3,551		$	4,366
Taxable securities		520			591
Tax-exempt securities		46			61
Federal funds sold and other		29			21
Total interest income		4,146			5,039
Interest expense
Deposits		451			665
Borrowings		79			368
Total interest expense		530			1,033
Net interest income		3,616			4,006
Provision for loan losses		(650	)		475
Net interest income after provision for loan losses		4,266			3,531
Non-interest income
Service charges on deposit accounts		675			598
Trust department income		188			226
Gain on sales of securities		—			512
Net gain (loss) on sale of REO		84			(156	)
Treasury management fees		62			67
Earnings on bank owned life insurance		240			244
Other		59			197
Total noninterest income		1,308			1,688
Noninterest expense
Salaries and other employee benefits		2,972			2,255
Occupancy and equipment		859			843
Professional services		456			391
Advertising		107			84
Postage, freight and courier		53			51
Supplies		70			38
State franchise taxes		212			104
Federal deposit insurance premiums		207			291
Other		520			814
Total noninterest expense		5,456			4,871
Net income (loss) before income taxes		118			348
Income tax expense (benefit)		(24	)		189
Net income	$	142		$	159
Basic and diluted earnings per common share	$	0.02		$	0.04
Dividends per share	$	—		$	—

See Notes to consolidated financial statements.

4

DCB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Dollars in thousands)

	For the three months ended
	March 31,
	2013		2012
Net income	$	142	$	159
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale, net of related taxes of $12 and $(201) in 2013 and 2012, respectively		23		(391	)
Amortization of unrealized losses on held-to-maturity securities, net of taxes of $12 and $12 in 2013 and 2012 respectively		23		23
Total other comprehensive income (loss)		46		(368	)
Comprehensive income (loss)	$	188	$	(209	)

See Notes to consolidated financial statements.

5

DCB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

For the three months ended March 31,

	2013			2012
Cash flows provided by (used in) operating activites		743		$	156
Cash flows provided by (used in) investing activities
Securities
Purchases		(6,730	)		(23,679	)
Proceeds from maturities, principal payments and calls		9,299			22,587
Net change in loans		(11,184	)		22,816
Proceeds from sale of real estate owned		1,314			1,614
Premises and equipment expenditures		(351	)		(168	)
Net cash flows provided by (used in) investing activities		(7,652	)		23,170
Cash flows used in financing activities
Net change in deposits		(1,001	)		(19,648	)
Net change in federal funds purchased and other short-term borrowings		—			(1,265	)
Repayment of Federal Home Loan Bank advances		(1,114	)		(18,466	)
Net cash used in financing activities		(2,115	)		(39,379	)
Net change in cash and cash equivalents		(9,024	)		(16,053	)
Cash and cash equivalents at beginning of period		63,307			33,521
Cash and cash equivalents at end of period	$	54,283		$	17,468
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings	$	537		$	990
Supplemental disclosures of non-cash investing and financing activites
Transfers from loans to real estate owned	$	—		$	1,675

See Notes to consolidated financial statements.

6

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

Earnings per share

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

	Three Months Ended March 31,
	2013		2012
Weighted-average common shares outstanding (basic)		7,192,350		3,717,385
Dilutive effect of assumed exercise of stock options		30,794		6,808
Weighted-average common shares outstanding (diluted)		7,223,144		3,724,193

Options to purchase 122,437 shares of common stock with a weighted-average exercise price of $16.46 were outstanding at March 31, 2013. There were 144,344 shares included in the computation of common share equivalents for the three-month period then ended because the average fair value of the shares was greater than the exercise price.

Options to purchase 201,999 shares of common stock with a weighted-average exercise price of $12.43 were outstanding at March 31, 2012. There were 17,707 shares included in the computation of common share equivalents for the three-month period then ended because the average fair value of the shares was greater than the exercise price.

7

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock-Based Compensation

The Corporation has a stock option plan for employees and directors as described in Note 6 (Stock-Based Compensation). In addition to equity settlement, the stock option plan also allows for cash settlement of options at the recipient’s discretion; therefore, liability accounting applies to this plan. Compensation expense is recognized based on the fair value of these awards at the reporting date. A Black Scholes model is utilized to estimate the fair value of stock options at the date of grant and subsequent remeasurement dates. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards. The Corporation’s stock option awards contain terms that provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period. Changes in fair value of the options between the vesting date and option expiration date are also recognized in the Consolidated Statement of Operations.

Application of Critical Accounting Policies

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

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

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.

8

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

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.

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.

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, 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. 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 borrower and guarantor; the type and value of the collateral, and the ease of liquidating collateral; and whether or not collateral is brought onto the bank’s balance sheet via repossession.

In the case of commercial and commercial real estate loans, charge-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. 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.

An individual loan is placed on a non-accruing status if, in the judgmant 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. 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, such as deteriorating collateral, negative cash flow changes and inability to reduce debt to income ratios.

9

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 2 – SECURITIES

As of March 31, 2013:

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

	Amortized Costs		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government and agency obligations	$	14,877	$	112	$	13	$	14,976
Corporate bonds		6,731		89		12		6,808
States and municipal obligations		20,436		930		51		21,315
Mortgage-backed securities		40,153		1,026		57		41,122
Total	$	82,197	$	2,157	$	133	$	84,221

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

	Adjusted Amortized Cost		Gross Unrealized Gains		Estimated Fair Value
Collateralized debt obligations	$	1,184	$	1,286	$	2,470

10

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 2 – SECURITIES (continued)

As of December 31, 2012:

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

	Amortized Costs		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government and agency obligations	$	16,821	$	134	$	18	$	16,937
Corporate bonds		5,081		86		2		5,165
States and municipal obligations		19,874		918		31		20,761
Mortgage-backed securities		43,432		931		29		44,334
Total	$	85,208	$	2,069	$	80	$	87,197

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

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

There were no credit losses recognized on investments in the three months ended March 31, 2013 and 2012.

11

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 2 – SECURITIES (continued)

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

March 31, 2013

	(Less than 12 months)						(12 months or longer)						Total
Description of securities	Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses
U.S. Government and agency obligations		3	$	3,601	$	13		—	$	—	$	—		3	$	3,601	$	13
Corporate bonds		5		2,018		12		—		—		—		5		2,018		12
State and municipal obligations		4		1,704		35		3		927		16		7		2,631		51
Mortgage-backed securities and other		6		4,730		57		1		726		—		7		5,456		57
Total temporarily impaired securities		18	$	12,053	$	117		4	$	1,653	$	16		22	$	13,706	$	133

December 31, 2012

	(Less than 12 months)						(12 months or longer)						Total
Description of securities	Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses
U.S. Government and agency obligations		3	$	3,649	$	18		—	$	—	$	—		3	$	3,649	$	18
Corporate bonds		1		501		2		—		—		—		1		501		2
State and municipal obligations		5		1,630		31		—		—		—		5		1,630		31
Mortgage-backed securities and other		6		4,065		29		—		—		—		6		4,065		29
Total temporarily impaired securities		15	$	9,845	$	80		—	$	—	$	—		15	$	9,845	$	80

The unrealized losses on the Corporation’s investments in U.S. Government and agency obligations, state and political subdivision obligations, corporate bonds and mortgage-backed securities were caused primarily by changes in interest rates. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Corporation does not intend to sell the investments and it is not more likely than not the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at March 31, 2013 or December 31, 2012.

12

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 2 – SECURITIES (continued)

The Corporation’s unrealized loss on investments in collateralized debt obligations relates to an original investment of $8,000 in pooled trust securities. The Corporation evaluates those investments on a quarterly basis for OTTI and other unrealized losses due to temporary market factors. The unrealized losses were primarily attributed to: declines in the performance of the underlying collateral due to weakness in the economy, and a lower than investment grade rating by industry analysts.

Credit losses on these securities are 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 OTTI at March 31, 2013.

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

At March 31, 2013, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies and the pooled trust securities noted above, in an amount greater than 10% of shareholders’ equity.

The amortized cost and estimated fair value of all debt securities at March 31, 2013, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown separately since they are not due at a single maturity date.

	Available-for-sale				Held-to-maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	1,533	$	1,542	$	—	$	—
Due after one to five years		9,898		10,020		—		—
Due after five to ten years		20,220		20,794		—		—
Due after ten years		10,393		10,743		1,184		2,470
Mortgage-backed and related securities		40,153		41,122		—		—
Total	$	82,197	$	84,221	$	1,184	$	2,470

Securities with a fair value of $58,544 at March 31, 2013 were pledged to secure public deposits and other obligations.

13

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 3 – LOANS

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

	March 31, 2013		December 31, 2012
Commercial and industrial	$	121,652	$	112,300
Commercial real estate		109,625		111,417
Residential real estate and home equity		73,026		72,137
Consumer and credit card		24,452		21,620
Subtotal		328,755		317,474
Add: Net deferred loan origination fees		60		30
Total loans receivable	$	328,815	$	317,504

NOTE 4 – CREDIT QUALITY

Allowance for Credit Losses

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

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

14

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 4 – CREDIT QUALITY (continued)

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

Three Months Ended March 31, 2013

	Consumer and Credit Card			Commercial and Industrial			Commercial Real Estate			Residential Real Estate and Home Equity			Total
Beginning balance	$	365		$	1,621		$	4,692		$	204		$	6,882
Charge-offs		(39	)		(64	)		(102	)		(42	)		(247	)
Recoveries		60			688			10			15			773
Provision		(99	)		(659	)		124			(16	)		(650	)
Ending balance	$	287		$	1,586		$	4,724		$	161		$	6,758
Individually evaluated for impairment	$	—		$	737		$	2,983		$	—		$	3,720
Collectively evaluated for impairment		287			849			1,741			161			3,038
Ending balance	$	287		$	1,586		$	4,724		$	161		$	6,758
Loans
Individually evaluated for impairment	$	—		$	5,586		$	20,980		$	—		$	26,566
Collectively evaluated for impairment		24,452			116,066			88,645			73,026			302,189
Total	$	24,452		$	121,652		$	109,625		$	73,026		$	328,755

15

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 4 – CREDIT QUALITY (continued)

Three Months Ended March 31, 2012

	Consumer and Credit Card			Commercial and Industrial			Commercial Real Estate			Residential Real Estate and Home Equity			Total
Beginning balance	$	425		$	1,952		$	6,916		$	291		$	9,584
Charge-offs		(124	)		(116	)		(660	)		—			(900	)
Recoveries		64			108			7			5			184
Provision		28			271			260			(84	)		475
Ending balance	$	393		$	2,215		$	6,523		$	212		$	9,343
Individually evaluated for impairment	$	—		$	446		$	5,042		$	—		$	5,488
Collectively evaluated for impairment		393			1,769			1,481			212			3,855
Ending balance	$	393		$	2,215		$	6,523		$	212		$	9,343
Loans
Individually evaluated for impairment	$	—		$	11,731		$	27,964		$	—		$	39,695
Collectively evaluated for impairment		18,193			103,347			94,695			78,637			294,872
Total	$	18,193		$	115,078		$	122,659		$	78,637		$	334,567

16

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 4 – CREDIT QUALITY (continued)

Impaired Loans

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

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

At March 31, 2013

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Year-to-date Average Recorded Investment		Year-to-date Interest Income Recognized
With No Related Allowance Recorded
Consumer and Credit Card	$	—	$	—	$	—	$	—	$	—
Commercial and Industrial		3,231		3,308		—		3,831		33
Commercial Real Estate		11,271		13,430		—		8,691		167
Residential RE and Home Equity		—		—		—		—		—
With Allowance Recorded
Consumer and Credit Card		—		—		—		—		—
Commercial and Industrial		2,355		2,491		737		1,521		26
Commercial Real Estate		9,709		11,355		2,983		12,579		86
Residential RE and Home Equity		—		—		—		—		—
Total
Consumer and Credit Card	$	—	$	—	$	—	$	—	$	—
Commercial and Industrial		5,586		5,799		737		5,352		59
Commercial Real Estate		20,980		24,785		2,983		21,270		253
Residential RE and Home Equity		—		—		—		—		—
Total	$	26,566	$	30,584	$	3,720	$	26,622	$	312

17

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 4 – CREDIT QUALITY (continued)

At December 31, 2012

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Year-to-date Average Recorded Investment		Year-to-date Interest Income Recognized
With No Related Allowance Recorded
Consumer and Credit Card	$	—	$	—	$	—	$	—	$	—
Commercial and Industrial		4,288		4,437		—		3,557		268
Commercial Real Estate		5,507		5,998		—		10,067		241
Residential RE and Home Equity		—		—		—		—		—
With Allowance Recorded
Consumer and Credit Card		—		—		—		—		—
Commercial and Industrial		1,183		1,248		340		6,208		65
Commercial Real Estate		16,376		20,008		3,400		15,965		820
Residential RE and Home Equity		—		—		—		—		—
Total
Consumer and Credit Card	$	—	$	—	$	—	$	—	$	—
Commercial and Industrial		5,471		5,685		340		9,765		333
Commercial Real Estate		21,883		26,006		3,400		26,032		1,061
Residential RE and Home Equity		—		—		—		—		—
Total	$	27,354	$	31,691	$	3,740	$	35,797	$	1,394

18

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 4 – CREDIT QUALITY (continued)

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

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

	March 31,		December 31,
	2012		2012
Consumer and credit card	$	—	$	—
Commercial and industrial		1,119		2,815
Commercial real estate		3,929		2,195
Residential real estate and home equity		312		321
Total	$	5,440	$	5,331

Credit Quality Indicators

Corporate risk exposure by risk profile was as follows at March 31, 2013:

Category	Commercial and Industrial		Commercial Real Estate
Pass-1-4	$	101,068	$	77,068
Vulnerable-5		12,426		11,023
Substandard-6		8,158		21,534
Doubtful-7		—		—
Loss-8		—		—
Total	$	121,652	$	109,625

Corporate risk exposure by risk profile was as follows at December 31, 2012:

Category	Commercial and Industrial		Commercial Real Estate
Pass-1-4	$	90,516	$	76,708
Vulnerable-5		12,240		12,289
Substandard-6		9,544		22,420
Doubtful-7		—		—
Loss-8		—		—
Total	$	112,300	$	111,417

19

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 4 – CREDIT QUALITY (continued)

Risk Category Descriptions

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

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

Vulnerable (Special Mention) – 5

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

Substandard – 6

Loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. One or more of the following characteristics may be exhibited in loans classified Substandard:

• Loans, which possess a defined credit weakness and the likelihood that a loan will be paid from the primary source, is uncertain. Financial deterioration is underway and very close attention is warranted to ensure that the loan is collected without loss.

• Loans are inadequately protected by the current net worth and paying capacity of the obligor.

• The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment such as collateral liquidation or guarantees.

• Loans are characterized by the distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

• Unusual courses of action are needed to maintain a high probability of repayment.

• The borrower is not generating enough cash flow to repay loan principal; however, continues to make interest payments.

• The lender is forced into a subordinated or unsecured position due to flaws in documentation.

• Loans have been restructured so that payment schedules, terms and collateral represent concessions to the borrower when compared to the normal loan terms.

• The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

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

Doubtful – 7

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

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

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

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

Loss – 8

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

20

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 4 – CREDIT QUALITY (continued)

Consumer Risk

Consumer risk based on payment activity at March 31, 2013 is as follows.

Payment Category	Consumer and Credit Card		Residential Real Estate and Home Equity
Performing	$	24,452	$	72,705
Non-performing		0		321
Total	$	24,452	$	78,637

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

Payment Category	Consumer and Credit Card		Residential Real Estate and Home Equity
Performing	$	21,592	$	72,714
Non-Performing		28		312
Total	$	21,620	$	73,026

Age Analysis of Past Due Loans

The following table presents past due loans aged as of March 31, 2013.

Category	30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 days  and Accruing
Consumer and credit card	$	34	$	124	$	0	$	158	$	24,294	$	24,452	$	—
Commercial and industrial		204		18		0		222		121,430		121,652		—
Commercial real estate		378		225		2,325		2,928		106,697		109,625		—
Residential real estate and home equity		165		220		312		697		72,329		73,026		—
Total	$	781	$	587	$	2,637	$	4,005	$	324,750	$	328,755	$	—

21

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 4 – CREDIT QUALITY (continued)

The following table presents past due loans aged as of December 31, 2012.

Category	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 days  and Accruing
Consumer and Credit Card	$	37	$	101	$	28	$	166	$	21,454	$	21,620	$	28
Commercial and Industrial		20		—		26		46		112,254		112,300		—
Commercial Real Estate		538		114		2,195		2,847		108,570		111,417		—
Residential Real Estate and Home Equity		444		289		321		1,054		71,083		72,137		—
Total	$	1,039	$	504	$	2,570	$	4,113	$	313,361	$	317,474	$	28

Troubled Debt Restructurings

Information regarding Troubled Debt Restructuring (“TDR”) loans for the three month period ended March 31, 2013 is as follows:

	Three Months Ended				Three Months Ended
	March 31, 2013				March 31, 2012
	Number of Contracts		Recorded Investment (as of period end)		Number of Contracts		Recorded Investment (as of period end)
Consumer and Credit Card		—	$	—		2	$	2
Commercial and Industrial		3		2,230		—		—
Commercial Real Estate		—		—		—		—
Residential Real Estate and Home Equity		—		—		—		—
Total		3	$	2,230		2	$	2

The following presents by class loans modified in a TDR from April 1, 2012 through March 31, 2013 that subsequently defaulted (i.e. 60 days or more past due following a modification) during the three month period ended March 31, 2013.

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

	Three Months Ended				Three Months Ended
	March 31, 2013				March 31, 2012
	Number of Contracts		Recorded Investment as of period end (1)		Number of Contracts		Recorded Investment as of period end (1)
Consumer and Credit Card		—	$	—		1		10
Commercial and Industrial		—		—		1		113
Commercial Real Estate		—		—		—		—
Residential Real Estate and Home Equity		—		—		—		—
Total		—	$	—		2	$	123

(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.

22

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 4 – CREDIT QUALITY (continued)

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

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

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

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

23

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 5 – FAIR VALUE MEASUREMENTS

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

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

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

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

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

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

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

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

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

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

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

Held to Maturity Investment Securities: Estimated fair value for held-to-maturity securities is based on independent third-party evaluations including discounted cash flows and other market assumptions. The methods used to estimate the fair value of the securities do not necessarily represent an exit price and due to the significant judgment involved, these securities are classified within the Level 3 classification.

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

24

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 5 – FAIR VALUE MEASUREMENTS (continued)

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

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

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

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

Commitments to Extend Credit: For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. At March 31, 2013 and December 31, 2012, the fair value of loan commitments was not material.

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

At March 31, 2013:

	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	54,283	$	54,283	$	54,283
Securities available-for-sale		84,221		84,221				84,221
Securities held-to-maturity		1,184		2,470						2,470
Loans (net of allowance)		322,057		316,959						316,959
FHLB stock		3,799		3,799				3,799
Accrued interest receivable		1,475		1,475						1,475
Financial liabilities
Noninterest-bearing deposits	$	90,553	$	90,553			$	90,553
Interest-bearing deposits		356,736		352,759				352,759
FHLB advances		6,384		6,384				6,384
Accrued interest payable		201		201						201

At December 31, 2012:

	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	63,307	$	63,307	$	63,307
Securities available-for-sale		87,197		87,197				87,197
Securities held-to-maturity		1,149		2,090						2,090
Loans (net of allowance)		310,623		307,729						307,729
FHLB stock		3,799		3,799				3,799
Accrued interest receivable		1,287		1,287						1,287
Financial liabilities
Noninterest-bearing deposits	$	95,847	$	95,847			$	95,847
Interest-bearing deposits		352,443		352,759				352,759
FHLB advances		7,498		7,498				7,498
Accrued interest payable		208		208						208

25

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 5 – FAIR VALUE MEASUREMENTS (continued)

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

			Fair Value Measurements Using
March 31, 2013	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government and agency obligations	$	14,976	$	—	$	14,976	$	—
State and municipal obligations		21,315		—		21,315		—
Corporate bonds		6,808		—		6,808		—
Mortgage-backed securities and other		41,122		—		41,122		—
Total	$	84,221	$	—	$	84,221	$	—
			Fair Value Measurements Using
December 31, 2012	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government and agency obligations	$	16,937	$	—	$	16,937	$	—
State and municipal obligations		20,761		—		20,761		—
Corporate bonds		5,165		—		5,165		—
Mortgage-backed securities and other		44,334		—		44,334		—
Total	$	87,197	$	—	$	87,197	$	—

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

Securities

Certain collateralized debt obligations are classified as held to maturity. The Corporation calculates fair value based upon a Level 3 estimate of fair value, including a discounted cash flows calculation and a fair value estimate from an independent evaluation of the securities.

Impaired loans

At March 31, 2013 and December 31, 2012, impaired loans consisted primarily of loans secured by nonresidential and commercial real estate. Management has determined fair value measurements on impaired loans primarily through evaluations of appraisals performed.

26

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 5 – FAIR VALUE MEASUREMENTS (continued)

Real Estate Owned

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

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

			Fair Value Measurements Using
March 31, 2013	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateralized debt obligations	$	2,470	$	—	$	—	$	2,470
Impaired loans		9,503		—		—		9,503
Real estate owned		2,362		—		—		2,362

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

27

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS

(Dollars in thousands, except per share data)

NOTE 6 – STOCK BASED COMPENSATION

The Corporation’s shareholders approved the 2004 Long-Term Stock Incentive Plan in May 2004. This Plan enables the Corporation to grant equity awards to certain employees. The Plan is limited to 300,000 shares. The shares granted to employees under the Plan vest 20% per year over a five year period. The options expire after ten years. At March 31, 2013, options to purchase 123,513 shares were exercisable, and 29,973 shares remained available for grant under this plan.

The Corporation recognizes compensation cost for vested equity-based awards based on their March 31, 2013 fair value. The Corporation recorded $91 and $8 in compensation cost for equity-based awards that vested during the three months ended March 31, 2013 and 2012, respectively.

In determining the fair value of the stock options at March 31, 2013, the Corporation utilized a Black-Scholes valuation model with a risk-free interest rate that corresponds to the expected remaining life of each award, an expected dividend yield of 0%, an expected common stock price volatility of 30%, and an expected life of 8 years from the grant date.

A summary of the status of the Corporation’s equity compensation plan as of March 31, 2013, and changes during the period then ended are presented below:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding at beginning of year		261,098		$	10.38		6.9 years
Granted		13,889			5.40		9.9 years
Exercised		(2,250	)		3.50		—
Forfeited		(2,710	)		19.54		—
Outstanding at end of year		270,027		$	10.38		7.1 years	$	159
Options exercisable at period end		122,437		$	16.46		5.0 years	$	93
Weighted-average fair value of options granted during the three months ended ended March 31, 2013				$	1.73
Weighted-average fair value of options granted during the year ended December 31, 2012				$	1.97

At March 31, 2013, unrecognized compensation expense to be recognized over the remaining life of outstanding options is $280.

The following information applies to options outstanding at March 31, 2013:

Number Outstanding	Range Of Exercise Prices
79,689	$16.90–$30.70
38,730	$5.40–$9.00
151,608	$3.50–$4.50

28

DCB FINANCIAL CORP

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except per share data)

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

INTRODUCTION

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

FORWARD-LOOKING STATEMENTS

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

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

Overview of the First Quarter of 2013

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

The Corporation, through the Bank, grants residential real estate, commercial real estate, consumer and commercial loans to customers located primarily in Delaware, Franklin, Licking, Morrow, Marion and Union Counties, Ohio. General economic conditions in the Corporation’s market area have been under some pressures mainly attributable to an overall slowdown in economic activity and related increases in unemployment levels, loan foreclosure volume and a decline in real estate values. The Corporation’s current economic environment has driven down earnings due to higher unemployment, and lower real estate values. This has increased credit defaults at the Bank over the last few years. Currently, real estate values within the Bank’s market have stabilized; however, they have not rebounded to pre-recession values. The Bank has also been impacted by the low interest rate environment and its impact on net interest margin. Overall, the local economy has shown some signs of recovery, but it has been slow.

.

29

DCB FINANCIAL CORP

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except per share data)

ANALYSIS OF FINANCIAL CONDITION

The Corporation’s assets totaled $504,663 at March 31, 2013, compared to $506,492 at December 31, 2012, a decrease of $1,829, or 0.4%. Cash and cash equivalents decreased $9,024 from year end, totaling $54,283 at March 31, 2013 and available-for-sale securities decreased $2,976 to $84,221 over that same period. These decreases funded the increase in loans receivable of $11,311. Loans receivable were $328,815 at March 31, 2013, a 3.6% increase from December 31, 2012. The overall improvement in credit quality throughout 2012 has allowed management to focus on disciplined growth in the loan portfolio in the current year.

Total deposits were $447,289 at March 31, 2013, a slight decrease from $448,290 at December 31, 2012. Borrowings have decreased 14.9% from $7,498 at December 31, 2012 to $6,384 at March 31, 2013. Overall, liabilities have remained flat as the growth in the loan portfolio has been funded from decreases in cash and investments, not growth in the balance sheet.

COMPARISON OF RESULTS OF OPERATIONS

Net Income. The Corporation reported net income of $142 for the three months ended March 31, 2013, compared to net income of $159 for the same period in 2012. Results for the current year quarter reflect the continued improvement in the credit quality of the existing loan portfolio as well as recoveries of loans previously charged off resulting in a release of the allowance for loan losses of $650. This is partially offset by a decrease in net interest income of $390 from the prior year quarter. The decrease in net interest income is a result of approximately a $20,000 decline in higher yielding problem loans, coupled with the effect of the current low interest rate environment and its impact on new and refinanced loans.

Net Interest Income. Net interest income of $3,616 for the three months ended March 31, 2013 is a decrease from $4,006 for the same quarter in the prior year. This change is attributed to a year-over-year decline in earning assets and a decline in net interest margin. Net interest margin was 3.11% for the first quarter 2013, compared to 3.35% for the first quarter 2012. This change in the margin is primarily a result of a $20,000 decline in higher yielding problem loans, coupled with the effect of the current low interest rate environment on new and refinanced loans. Deposit levels have remained relatively flat for that same period.

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

For the three months ended March 31, 2013, $650 in income was recognized in the provision for loan losses, compared to expense of $475 for the same period in 2012. This release from the allowance is primarily attributable to gross recoveries during the quarter of $774, and continued improvement in the quality of the Bank’s loan portfolio.

Non-accrual loans at March 31, 2013 were $5,440, up slightly from $5,331 at December 31, 2012, but down from $7,068 at March 31, 2012. Over the last 12 months, problems loans have stabilized in response to workout activities. The majority of non-accrual balances are attributed to loans in the investment real estate sector that were not generating sufficient cash flow to service the debt. Delinquent loans over thirty days past due decreased to 1.22% of total loans at March 31, 2013 from 1.30% at December 31, 2012. Delinquent loans are mainly attributed to the real estate investment and commercial portfolios.

The allowance for loan losses was $6,758, or 2.06% of total loans at March 31, 2013, compared to $6,881, or 2.17% of total loans at December 31, 2012. Net recoveries for the first quarter were $527, which were mainly attributed to residential and commercial real estate loans. Management will continue to monitor the credit quality of the loan portfolio and may recognize additional provisions in the future if needed to maintain the allowance for loan losses at an appropriate level.

30

DCB FINANCIAL CORP

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except per share data)

Noninterest Income. Total noninterest income for the quarter was $1,308, a decrease of 22.5% from $1,688 recognized in the first quarter 2012. The decrease is primarily due to recognition of gains from sales of assets in the prior year and no such sales in the current year. In the prior year quarter, the Bank recognized gains from sales of loans and investments of $512, this was partially offset by losses and writedowns on sales of other real estate owned (“OREO”).

Noninterest Expense. The total noninterest expense of $5,456 for the first quarter represents an increase of $585, or 12.0%, from the first quarter 2012. The increase in operating expense is attributed to an increase in salary and benefits, offset by a decline in occupancy expense and a reduction in insurance costs including Federal Deposit Insurance Corporation (FDIC) deposit insurance premiums. The increase in salary and benefits is driven by an increase in headcount associated primarily with the addition of new business development officers and their related incentive compensation. The effect of these increases has already had an impact in growing the loan portfolio.

Income Taxes. The Corporation recorded a tax benefit of $24 for the three months ended March 31, 2013, compared to a tax provision of $189 in the first quarter of 2012. The change in taxes reflects to the change in fair value of the available-for-sale investment portfolio and the accretion of the other comprehensive loss on the held-to-maturity portfolio as the Corporation currently is fully reserved for deferred tax assets.

LIQUIDITY

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

Cash and cash equivalents totaled $54,283 at March 31, 2013, compared to $63,307 at December 31, 2012. Cash and equivalents represented 10.8% of total assets at March 31, 2013 and 12.5% of total assets at December 31, 2012. The Corporation has the ability to borrow funds from the Federal Home Loan Bank and the Federal Reserve Bank should the Corporation need to supplement its future liquidity. Management believes the Corporation’s liquidity position is adequate based on its current level of cash, cash equivalents, core deposits, the stability of its other funding sources, and the support provided by its capital base.

CAPITAL RESOURCES

Total shareholders’ equity increased $187 between December 31, 2012 and March 31, 2013. The increase was due to changes in accumulated other comprehensive loss and the period’s net income of $142.

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

The Corporation and its subsidiaries meet all published regulatory capital requirements. For the Corporation’s wholly-owned bank, the Tier 1 leverage ratio was 9.47% the ratio of Tier 1 risk-based capital ratio was 12.26% at March 31, 2013, and the total capital to risk-weighted assets was 13.48%. Regulatory minimums call for a total risk-based capital ratio of 8.0%, at least half of which must be Tier 1 capital. As previously reported, in October 2010, the Corporation’s wholly-owned bank subsidiary entered into a Consent Order with the FDIC and a Written Agreement with the Ohio Division of Financial Institutions, each of which requires that Tier-1 and Total Risk Based Capital percentages reach 9.0% and 13.0% respectively.

31

DCB FINANCIAL CORP

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except per share data)

The following table sets forth the Corporation’s obligations and commitments to make future payments under contract as of March 31, 2013.

Contractual Obligations	PAYMENT DUE BY YEAR
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
FHLB advances	$	6,384	$	386	$	4,175	$	1,218	$	605
Federal funds purchased and other short-term borrowings		—		—		—		—		—
Operating lease obligations		2,319		601		948		629		141
Loan and line of credit commitments		113,571		52,919		—		—		60,652
Total Contractual Obligations	$	122,274	$	53,906	$	5,123	$	1,847	$	61,398

Item 3. Quantitative and Qualitative Disclosure about Market Risk

ASSET AND LIABILITY MANAGEMENT AND MARKET RISK

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

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

The Corporation’s Annual Report for the year ended December 31, 2012 includes a table depicting the changes in the Corporation’s interest rate risk as of December 31, 2012, as measured by changes in NPV for instantaneous and sustained parallel shifts of -100 to +400 basis points in market interest rates. Management believes that no events have occurred since December 31, 2012 that would significantly change their ratio of rate sensitive assets to rate sensitive liabilities.

The Corporation’s NPV is more sensitive to rising rates than declining rates. From an overall perspective, such difference in sensitivity occurs principally because, as rates rise, borrowers do not prepay fixed-rate loans as quickly as they do when interest rates are declining. Thus, in a rising interest rate environment, because the Corporation has fixed-rate loans in its loan portfolio, the amount of interest the Corporation would receive on its loans would increase relatively slowly as loans are slowly prepaid and new loans at higher rates are made. Moreover, the interest the Corporation would pay on its deposits would increase rapidly because the Corporation’s deposits generally have shorter periods for repricing.

The Corporation can utilize various tools to reduce exposure to changes in interest rates including offering floating versus fixed-rate products, or utilizing interest rate swaps. Additional consideration should also be given to today’s current interest rate levels. Several deposit products are within 200 basis points of zero percent and other products within 300 basis points. Should rates decline, fewer liabilities could be repriced down to offset potentially lower yields on loans. Thus, decreases could also impact future earnings and the Corporation’s NPV.

32

DCB FINANCIAL CORP

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except per share data)

As with any method of measuring interest rate risk, certain shortcomings are inherent in the NPV approach. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and mortgage-backed securities and early withdrawal levels from certificates of deposit would likely deviate significantly from those assumed in making risk calculations.

The ability to generate earnings is impacted in part by competitive pricing on loans and deposits, and by changes in the rates on various U.S. Treasury, U. S. Government Agency and state and political subdivision issues which comprise a significant portion of the Bank’s investment portfolio. The Bank is competitive with interest rates and loan fees that it charges and in its pricing on the variety of accounts it offers to the depositor. The Corporation confirms its pricing strategies by measuring its rates, costs and fees against competing financial services companies. The dominant pricing mechanism on loans is the prime interest rate as published in the Wall Street Journal, on a fixed rate plus a spread over the index. The interest spread depends on the overall account relationship and the creditworthiness of the borrower. Deposit rates are reviewed weekly by management and are generally discussed by the Asset/Liability Committee on a monthly basis. The Bank’s primary objective in setting deposit rates is to remain competitive in the market area and develop funding opportunities while earning an adequate interest rate margin.

Item 4. Controls and Procedures

The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures (as defined in Rule 13Q-15(e) under the Securities Exchange Act of 1934) as of March 31, 2013, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of March 31, 2013.

There was no change in the Corporation’s internal control over financial reporting that occurred during the Corporation’s fiscal quarter ended March 31, 2013, that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

33

DCB FINANCIAL CORP

FORM 10-Q

Quarter ended March 31, 2013

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There has been no material change in the nature of the risk factors set forth in the Company’s Form 10-K for the year ended December 31, 2012.

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

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

Item 3. Defaults upon Senior Securities

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

Item 4. Mine Safety Disclosures

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

Item 5. Other Information

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

Item 6. Exhibits

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

Exhibit No.	Exhibit
3.1	Amended and Restated Articles of Incorporation of DCB Financial Corp, incorporated by reference to Exhibit 3.1 to the Company’s Report on Form 10-Q filed with the Commission on November 14, 2003 (File No. 000-22387).
3.2	Amended and Restated Code of Regulations of DCB Financial Corp, incorporated by reference to Exhibit 3.2 to the Company’s Report on Form 10-Q filed with the Commission on November 14, 2003. (File No. 000-22387)
31.1	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification pursuant to 18 U.S.C. 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification pursuant to 18 U.S.C. 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
101	The following information from DCB Financial Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013 formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012; (ii) the Condensed Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012 (unaudited); (iii) the Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012 (unaudited); (iv) the Condensed Consolidated Statements of Cash Flow for the three months ended March 31, 2013 and 2012 (unaudited); (v) the Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (unaudited); and (vi) the Notes to Condensed Consolidated Financial Statements (furnished herewith).
	Pursuant to Rule 406T of Regulation S-T, the interactive data files included as Exhibit 101 are furnished and not deemed files or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those Sections.

34

DCB FINANCIAL CORP

SIGNATURES

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

	DCB FINANCIAL CORP (Registrant)
Date: May 13, 2013	/s/ Ronald J. Seiffert
	Ronald J. Seiffert
	President and Chief Executive Officer
Date: May 13, 2013	/s/ Michael B. Shannon
	Michael B. Shannon
	Controller and Principal Financial Officer

35

EX-31.1

Exhibit 31.1

DCB FINANCIAL CORP

CERTIFICATIONS

I, Ronald J. Seiffert certify that:

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

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

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

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

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

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

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

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

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

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 13, 2013	/s/ Ronald J. Seiffert
	Ronald J. Seiffert
	Title: President and Chief Executive Officer

EX-31.2

Exhibit 31.2

DCB FINANCIAL CORP

CERTIFICATIONS

I, Michael B. Shannon, certify that:

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

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

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

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

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

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

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

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

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

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 13, 2013	/s/ Michael B. Shannon
	Michael B. Shannon
	Title: Controller and Principal Financial Officer

EX-32.1

Exhibit 32.1

DCB FINANCIAL CORP

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ENACTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of DCB Financial Corp (the “Corporation”) on Form 10-Q for the period ending March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ronald J. Seiffert, President and Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. § 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ Ronald J. Seiffert

Ronald J. Seiffert

President and Chief Executive Officer

May 13, 2013

EX-32.2

Exhibit 32.2

DCB FINANCIAL CORP

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ENACTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of DCB Financial Corp (the “Corporation”) on Form 10-Q for the period ending March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael B. Shannon, Controller and Principal Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. § 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ Michael B. Shannon

Michael B. Shannon

Controller and Principal Financial Officer

May 13, 2013

XML

Fair Value Measurements (Details 2) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Quoted Prices in Active Markets for Identical Assets, Level 1 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value
Significant Other Observable Inputs, Level 2 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value
Significant Unobservable Inputs, Level 3 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value	2,470	2,090
Collateralized debt obligations [Member] | Fair Value, Measurements, Nonrecurring [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value	2,470	2,090
Collateralized debt obligations [Member] | Fair Value, Measurements, Nonrecurring [Member] | Quoted Prices in Active Markets for Identical Assets, Level 1 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value
Collateralized debt obligations [Member] | Fair Value, Measurements, Nonrecurring [Member] | Significant Other Observable Inputs, Level 2 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value
Collateralized debt obligations [Member] | Fair Value, Measurements, Nonrecurring [Member] | Significant Unobservable Inputs, Level 3 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value	2,470	2,090
Impaired loans [Member] | Fair Value, Measurements, Nonrecurring [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value	9,503	23,370
Impaired loans [Member] | Fair Value, Measurements, Nonrecurring [Member] | Quoted Prices in Active Markets for Identical Assets, Level 1 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value
Impaired loans [Member] | Fair Value, Measurements, Nonrecurring [Member] | Significant Other Observable Inputs, Level 2 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value
Impaired loans [Member] | Fair Value, Measurements, Nonrecurring [Member] | Significant Unobservable Inputs, Level 3 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value	9,503	23,370
Real estate owned [Member] | Fair Value, Measurements, Nonrecurring [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value	2,362	3,671
Real estate owned [Member] | Fair Value, Measurements, Nonrecurring [Member] | Quoted Prices in Active Markets for Identical Assets, Level 1 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value
Real estate owned [Member] | Fair Value, Measurements, Nonrecurring [Member] | Significant Other Observable Inputs, Level 2 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value
Real estate owned [Member] | Fair Value, Measurements, Nonrecurring [Member] | Significant Unobservable Inputs, Level 3 [Member]
Fair value measurements of assets nonrecurring basis
Securities held-to-maturity, Fair Value	$ 2,362	$ 3,671

XML

Credit Quality (Details 4) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Consumer Risk
Consumer risk based on payment activity	$ 328,815	$ 317,504
Consumer and Credit Card [Member]
Consumer Risk
Consumer risk based on payment activity	24,452	21,620
Consumer and Credit Card [Member] | Performing [Member]
Consumer Risk
Consumer risk based on payment activity	24,452	21,592
Consumer and Credit Card [Member] | Non-Performing [Member]
Consumer Risk
Consumer risk based on payment activity	0	28
Residential Real Estate and Home Equity [Member]
Consumer Risk
Consumer risk based on payment activity	78,637	73,026
Residential Real Estate and Home Equity [Member] | Performing [Member]
Consumer Risk
Consumer risk based on payment activity	72,705	72,714
Residential Real Estate and Home Equity [Member] | Non-Performing [Member]
Consumer Risk
Consumer risk based on payment activity	$ 321	$ 312

XML

Securities (Details 2) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013 Investment	Dec. 31, 2012 Investment
Unrealized loss
Number of investments	22	15
Fair value Less than 12 months	$ 12,053	$ 9,845
Unrealized losses Less than 12 months	117	80
Fair value, 12 months or longer	1,653
Unrealized losses, 12 months or longer	16
Fair value	13,706	9,845
Unrealized losses	133	80
Less than 12 months [Member]
Unrealized loss
Number of investments	18	15
12 months or longer [Member]
Unrealized loss
Number of investments	4
U.S. Government and agency obligations [Member]
Unrealized loss
Number of investments	3	3
Fair value	3,601	3,649
Unrealized losses	13	18
U.S. Government and agency obligations [Member] | Less than 12 months [Member]
Unrealized loss
Number of investments	3	3
Fair value Less than 12 months	3,601	3,649
Unrealized losses Less than 12 months	13	18
U.S. Government and agency obligations [Member] | 12 months or longer [Member]
Unrealized loss
Number of investments
Fair value, 12 months or longer
Unrealized losses, 12 months or longer
Corporate bonds [Member]
Unrealized loss
Number of investments	5	5
Fair value	2,018	1,630
Unrealized losses	12	31
Corporate bonds [Member] | Less than 12 months [Member]
Unrealized loss
Number of investments	5	5
Fair value Less than 12 months	2,018	1,630
Unrealized losses Less than 12 months	12	31
Corporate bonds [Member] | 12 months or longer [Member]
Unrealized loss
Number of investments
Fair value, 12 months or longer
Unrealized losses, 12 months or longer
State and municipal obligations [Member]
Unrealized loss
Number of investments	7	1
Fair value	2,631	501
Unrealized losses	51	2
State and municipal obligations [Member] | Less than 12 months [Member]
Unrealized loss
Number of investments	4	1
Fair value Less than 12 months	1,704	501
Unrealized losses Less than 12 months	35	2
State and municipal obligations [Member] | 12 months or longer [Member]
Unrealized loss
Number of investments	3
Fair value, 12 months or longer	927
Unrealized losses, 12 months or longer	16
Mortgage-backed securities and other [Member]
Unrealized loss
Number of investments	7	6
Fair value	5,456	4,065
Unrealized losses	57	29
Mortgage-backed securities and other [Member] | Less than 12 months [Member]
Unrealized loss
Number of investments	6	6
Fair value Less than 12 months	4,730	4,065
Unrealized losses Less than 12 months	57	29
Mortgage-backed securities and other [Member] | 12 months or longer [Member]
Unrealized loss
Number of investments	1
Fair value, 12 months or longer	726
Unrealized losses, 12 months or longer

XML

Stock Based Compensation (Details Textual) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Stock Based Compensation (Textual) [Abstract]
Employee share option plan	300,000
Employee share option plan granted	20.00%
Vesting period of stock option plan	5 years
Expiry term of option	10 years
Options exercisable	122,437
Available for grant	29,973
Unvested equity-based awards based on their grant-date fair value	$ 91	$ 8
Expected dividend yield	0.00%
Expected common stock price volatility	30.00%
Expected life	8 years
Unrecognized compensation expense to be recognized over the remaining life of outstanding options	$ 280

XML

Fair Value Measurements (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012	Mar. 31, 2012	Dec. 31, 2011
Financial assets
Cash and cash equivalents, Carrying amount	$ 54,283	$ 63,307	$ 17,468	$ 33,521
Securities available-for-sale, Carrying amount	84,221	87,197
Securities available-for-sale, Fair value	84,221	87,197
Securities held-to-maturity , Carrying amount	1,184	1,149
Loans (net of allowance), Carrying amount	322,057	310,623
FHLB stock, Carrying amount	3,799	3,799
Accrued interest receivable, Fair value
Financial liabilities
Noninterest-bearing deposits, Carrying amount	90,553	95,847
Interest-bearing deposits, Carrying amount	356,736	352,443
FHLB advances, Carrying amount	6,384	7,498
Level 1 [Member]
Financial assets
Cash and cash equivalents, Fair value	54,283	63,307
Securities available-for-sale, Fair value
Securities held-to-maturity, Fair Value
Loans (net of allowance), Fair value
FHLB stock, Fair value
Accrued interest receivable, Fair value
Financial liabilities
Noninterest-bearing deposits, Fair value
Interest-bearing deposits, Fair value
FHLB advances, Fair value
Accrued interest payable, Fair value
Level 2 [Member]
Financial assets
Cash and cash equivalents, Fair value
Securities available-for-sale, Fair value	84,221	87,197
Securities held-to-maturity, Fair Value
Loans (net of allowance), Fair value
FHLB stock, Fair value	3,799	3,799
Accrued interest receivable, Fair value
Financial liabilities
Noninterest-bearing deposits, Fair value	90,553	95,847
Interest-bearing deposits, Fair value	352,759	352,759
FHLB advances, Fair value	6,384	7,498
Accrued interest payable, Fair value
Level 3 [Member]
Financial assets
Cash and cash equivalents, Fair value
Securities available-for-sale, Fair value
Securities held-to-maturity, Fair Value	2,470	2,090
Loans (net of allowance), Fair value	316,959	307,729
FHLB stock, Fair value
Accrued interest receivable, Fair value	1,475	1,287
Financial liabilities
Noninterest-bearing deposits, Fair value
Interest-bearing deposits, Fair value
FHLB advances, Fair value
Accrued interest payable, Fair value	201	208
Carrying amount [Member]
Financial assets
Cash and cash equivalents, Carrying amount	54,283	63,307
Securities available-for-sale, Carrying amount	84,221	87,197
Securities held-to-maturity , Carrying amount	1,184	1,149
Loans (net of allowance), Carrying amount	322,057	310,623
FHLB stock, Carrying amount	3,799	3,799
Accrued interest receivable, Carrying amount	1,475	1,287
Financial liabilities
Noninterest-bearing deposits, Carrying amount	90,553	95,847
Interest-bearing deposits, Carrying amount	356,736	352,443
FHLB advances, Carrying amount	6,384	7,498
Accrued interest payable, Carrying Amount	201	208
Fair value [Member]
Financial assets
Cash and cash equivalents, Fair value	54,283	63,307
Securities available-for-sale, Fair value	84,221	87,197
Securities held-to-maturity, Fair Value	2,470	2,090
Loans (net of allowance), Fair value	316,959	307,729
FHLB stock, Fair value	3,799	3,799
Accrued interest receivable, Fair value	1,475	1,287
Financial liabilities
Noninterest-bearing deposits, Fair value	90,553	95,847
Interest-bearing deposits, Fair value	352,759	352,759
FHLB advances, Fair value	6,384	7,498
Accrued interest payable, Fair value	$ 201	$ 208

XML

Securities

3 Months Ended

Mar. 31, 2013

Securities [Abstract]

SECURITIES

NOTE 2 – SECURITIES

As of March 31, 2013:

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

	Amortized Costs		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government and agency obligations	$	14,877	$	112	$	13	$	14,976
Corporate bonds		6,731		89		12		6,808
States and municipal obligations		20,436		930		51		21,315
Mortgage-backed securities		40,153		1,026		57		41,122
Total	$	82,197	$	2,157	$	133	$	84,221

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

	Adjusted Amortized Cost		Gross Unrealized Gains		Estimated Fair Value
Collateralized debt obligations	$	1,184	$	1,286	$	2,470

As of December 31, 2012:

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

	Amortized Costs		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government and agency obligations	$	16,821	$	134	$	18	$	16,937
Corporate bonds		5,081		86		2		5,165
States and municipal obligations		19,874		918		31		20,761
Mortgage-backed securities		43,432		931		29		44,334
Total	$	85,208	$	2,069	$	80	$	87,197

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

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

There were no credit losses recognized on investments in the three months ended March 31, 2013 and 2012.

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

March 31, 2013

	(Less than 12 months)						(12 months or longer)						Total
Description of securities	Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses
U.S. Government and agency obligations		3	$	3,601	$	13		—	$	—	$	—		3	$	3,601	$	13
Corporate bonds		5		2,018		12		—		—		—		5		2,018		12
State and municipal obligations		4		1,704		35		3		927		16		7		2,631		51
Mortgage-backed securities and other		6		4,730		57		1		726		—		7		5,456		57
Total temporarily impaired securities		18	$	12,053	$	117		4	$	1,653	$	16		22	$	13,706	$	133

December 31, 2012

	(Less than 12 months)						(12 months or longer)						Total
Description of securities	Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses
U.S. Government and agency obligations		3	$	3,649	$	18		—	$	—	$	—		3	$	3,649	$	18
Corporate bonds		1		501		2		—		—		—		1		501		2
State and municipal obligations		5		1,630		31		—		—		—		5		1,630		31
Mortgage-backed securities and other		6		4,065		29		—		—		—		6		4,065		29
Total temporarily impaired securities		15	$	9,845	$	80		—	$	—	$	—		15	$	9,845	$	80

The unrealized losses on the Corporation’s investments in U.S. Government and agency obligations, state and political subdivision obligations, corporate bonds and mortgage-backed securities were caused primarily by changes in interest rates. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Corporation does not intend to sell the investments and it is not more likely than not the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at March 31, 2013 or December 31, 2012.

The Corporation’s unrealized loss on investments in collateralized debt obligations relates to an original investment of $8,000 in pooled trust securities. The Corporation evaluates those investments on a quarterly basis for OTTI and other unrealized losses due to temporary market factors. The unrealized losses were primarily attributed to: declines in the performance of the underlying collateral due to weakness in the economy, and a lower than investment grade rating by industry analysts.

Credit losses on these securities are 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 OTTI at March 31, 2013.

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

At March 31, 2013, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies and the pooled trust securities noted above, in an amount greater than 10% of shareholders’ equity.

The amortized cost and estimated fair value of all debt securities at March 31, 2013, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown separately since they are not due at a single maturity date.

	Available-for-sale				Held-to-maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	1,533	$	1,542	$	—	$	—
Due after one to five years		9,898		10,020		—		—
Due after five to ten years		20,220		20,794		—		—
Due after ten years		10,393		10,743		1,184		2,470
Mortgage-backed and related securities		40,153		41,122		—		—
Total	$	82,197	$	84,221	$	1,184	$	2,470

Securities with a fair value of $58,544 at March 31, 2013 were pledged to secure public deposits and other obligations.

XML

Credit Quality (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Allowance for credit losses
Beginning balance	$ 6,881	$ 9,584
Charge-offs	(247)	(900)
Recoveries	773	184
Provision	(650)	475
Individually evaluated for impairment	3,720	5,488
Collectively evaluated for impairment	3,038	3,855
Ending balance	6,758	9,343
Loans
Individually evaluated for impairment	26,566	39,695
Collectively evaluated for impairment	302,189	294,872
Total	328,755	334,567
Consumer and Credit Card [Member]
Allowance for credit losses
Beginning balance	365	425
Charge-offs	(39)	(124)
Recoveries	60	64
Provision	(99)	28
Collectively evaluated for impairment	287	393
Ending balance	287	393
Loans
Collectively evaluated for impairment	24,452	18,193
Total	24,452	18,193
Commercial and Industrial [Member]
Allowance for credit losses
Beginning balance	1,621	1,952
Charge-offs	(64)	(116)
Recoveries	688	108
Provision	(659)	271
Individually evaluated for impairment	737	446
Collectively evaluated for impairment	849	1,769
Ending balance	1,586	2,215
Loans
Individually evaluated for impairment	5,586	11,731
Collectively evaluated for impairment	116,066	103,347
Total	121,652	115,078
Commercial Real Estate [Member]
Allowance for credit losses
Beginning balance	4,692	6,916
Charge-offs	(102)	(660)
Recoveries	10	7
Provision	124	260
Individually evaluated for impairment	2,983	5,042
Collectively evaluated for impairment	1,741	1,481
Ending balance	4,724	6,523
Loans
Individually evaluated for impairment	20,980	27,964
Collectively evaluated for impairment	88,645	94,695
Total	109,625	122,659
Residential Real Estate and Home Equity [Member]
Allowance for credit losses
Beginning balance	204	291
Charge-offs	(42)
Recoveries	15	5
Provision	(16)	(84)
Collectively evaluated for impairment	161	212
Ending balance	161	212
Loans
Collectively evaluated for impairment	73,026	78,637
Total	$ 73,026	$ 78,637

XML

Loans (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Loans
Commercial and industrial	$ 121,652	$ 112,300
Commercial real estate	109,625	111,417
Residential real estate and home equity	73,026	72,137
Consumer and credit card	24,452	21,620
Subtotal	328,755	317,474
Add: Net deferred loan origination fees	60	30
Total loans receivable	$ 328,815	$ 317,504

XML

Credit Quality (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended	12 Months Ended
	Mar. 31, 2013	Dec. 31, 2012
Impaired Loans
Recorded Investment	$ 26,566	$ 27,354
Unpaid Principal Balance	30,584	31,691
Related Allowance	3,720	3,740
Year-to-date Average Recorded Investment	26,622	35,797
Year-to-date Interest Income Recognized	312	1,394
Consumer and Credit Card [Member]
Impaired Loans
Recorded Investment
Unpaid Principal Balance
Related Allowance
Year-to-date Average Recorded Investment
Year-to-date Interest Income Recognized
Commercial and Industrial [Member]
Impaired Loans
Recorded Investment	5,586	5,471
Unpaid Principal Balance	5,799	5,685
Related Allowance	737	340
Year-to-date Average Recorded Investment	5,352	9,765
Year-to-date Interest Income Recognized	59	333
Commercial Real Estate [Member]
Impaired Loans
Recorded Investment	20,980	21,883
Unpaid Principal Balance	24,785	26,006
Related Allowance	2,983	3,400
Year-to-date Average Recorded Investment	21,270	26,032
Year-to-date Interest Income Recognized	253	1,061
Residential RE and Home Equity [Member]
Impaired Loans
Recorded Investment
Unpaid Principal Balance
Related Allowance
Year-to-date Average Recorded Investment
Year-to-date Interest Income Recognized
With No Related Allowance Recorded [Member] | Consumer and Credit Card [Member]
Impaired Loans
Recorded Investment
Unpaid Principal Balance
Related Allowance
Year-to-date Average Recorded Investment
Year-to-date Interest Income Recognized
With No Related Allowance Recorded [Member] | Commercial and Industrial [Member]
Impaired Loans
Recorded Investment	3,231	4,288
Unpaid Principal Balance	3,308	4,437
Year-to-date Average Recorded Investment	3,831	3,557
Year-to-date Interest Income Recognized	33	268
With No Related Allowance Recorded [Member] | Commercial Real Estate [Member]
Impaired Loans
Recorded Investment	11,271	5,507
Unpaid Principal Balance	13,430	5,998
Year-to-date Average Recorded Investment	8,691	10,067
Year-to-date Interest Income Recognized	167	241
With No Related Allowance Recorded [Member] | Residential RE and Home Equity [Member]
Impaired Loans
Recorded Investment
Unpaid Principal Balance
Related Allowance
Year-to-date Average Recorded Investment
Year-to-date Interest Income Recognized
With Allowance Recorded [Member] | Consumer and Credit Card [Member]
Impaired Loans
Recorded Investment
Unpaid Principal Balance
Related Allowance
Year-to-date Average Recorded Investment
Year-to-date Interest Income Recognized
With Allowance Recorded [Member] | Commercial and Industrial [Member]
Impaired Loans
Recorded Investment	2,355	1,183
Unpaid Principal Balance	2,491	1,248
Related Allowance	737	340
Year-to-date Average Recorded Investment	1,521	6,208
Year-to-date Interest Income Recognized	26	65
With Allowance Recorded [Member] | Commercial Real Estate [Member]
Impaired Loans
Recorded Investment	9,709	16,376
Unpaid Principal Balance	11,355	20,008
Related Allowance	2,983	3,400
Year-to-date Average Recorded Investment	12,579	15,965
Year-to-date Interest Income Recognized	86	820
With Allowance Recorded [Member] | Residential RE and Home Equity [Member]
Impaired Loans
Recorded Investment
Unpaid Principal Balance
Related Allowance
Year-to-date Average Recorded Investment
Year-to-date Interest Income Recognized

XML

Credit Quality (Details 2) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Financing receivables on nonaccrual status
Financing receivables on nonaccrual status	$ 5,440	$ 5,331
Consumer and credit card [Member]
Financing receivables on nonaccrual status
Financing receivables on nonaccrual status
Commercial and industrial [Member]
Financing receivables on nonaccrual status
Financing receivables on nonaccrual status	1,119	2,815
Commercial real estate [Member]
Financing receivables on nonaccrual status
Financing receivables on nonaccrual status	3,929	2,195
Residential Real Estate and Home Equity [Member]
Financing receivables on nonaccrual status
Financing receivables on nonaccrual status	$ 312	$ 321

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Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2013

Summary of Significant Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

Earnings per share

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

	Three Months Ended March 31,
	2013		2012
Weighted-average common shares outstanding (basic)		7,192,350		3,717,385
Dilutive effect of assumed exercise of stock options		30,794		6,808
Weighted-average common shares outstanding (diluted)		7,223,144		3,724,193

Options to purchase 122,437 shares of common stock with a weighted-average exercise price of $16.46 were outstanding at March 31, 2013. There were 144,344 shares included in the computation of common share equivalents for the three-month period then ended because the average fair value of the shares was greater than the exercise price.

Options to purchase 201,999 shares of common stock with a weighted-average exercise price of $12.43 were outstanding at March 31, 2012. There were 17,707 shares included in the computation of common share equivalents for the three-month period then ended because the average fair value of the shares was greater than the exercise price.

Stock-Based Compensation

The Corporation has a stock option plan for employees and directors as described in Note 6 (Stock-Based Compensation). In addition to equity settlement, the stock option plan also allows for cash settlement of options at the recipient’s discretion; therefore, liability accounting applies to this plan. Compensation expense is recognized based on the fair value of these awards at the reporting date. A Black Scholes model is utilized to estimate the fair value of stock options at the date of grant and subsequent remeasurement dates. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards. The Corporation’s stock option awards contain terms that provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period. Changes in fair value of the options between the vesting date and option expiration date are also recognized in the Consolidated Statement of Operations.

Application of Critical Accounting Policies

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

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

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.

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.

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, 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. 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 borrower and guarantor; the type and value of the collateral, and the ease of liquidating collateral; and whether or not collateral is brought onto the bank’s balance sheet via repossession.

In the case of commercial and commercial real estate loans, charge-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. 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.

An individual loan is placed on a non-accruing status if, in the judgmant 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. 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, such as deteriorating collateral, negative cash flow changes and inability to reduce debt to income ratios.

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Credit Quality (Details 3) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Credit Quality Indicators
Loans	$ 328,815	$ 317,504
Commercial and Industrial [Member]
Credit Quality Indicators
Loans	121,652	112,300
Commercial and Industrial [Member] | Pass-1-4 [Member]
Credit Quality Indicators
Loans	101,068	90,516
Commercial and Industrial [Member] | Vulnerable-5 [Member]
Credit Quality Indicators
Loans	12,426	12,240
Commercial and Industrial [Member] | Substandard-6 [Member]
Credit Quality Indicators
Loans	8,158	9,544
Commercial and Industrial [Member] | Doubtful-7 [Member]
Credit Quality Indicators
Loans
Commercial and Industrial [Member] | Loss-8 [Member]
Credit Quality Indicators
Loans
Commercial Real Estate [Member]
Credit Quality Indicators
Loans	109,625	111,417
Commercial Real Estate [Member] | Pass-1-4 [Member]
Credit Quality Indicators
Loans	77,068	76,708
Commercial Real Estate [Member] | Vulnerable-5 [Member]
Credit Quality Indicators
Loans	11,023	12,289
Commercial Real Estate [Member] | Substandard-6 [Member]
Credit Quality Indicators
Loans	21,534	22,420
Commercial Real Estate [Member] | Doubtful-7 [Member]
Credit Quality Indicators
Loans
Commercial Real Estate [Member] | Loss-8 [Member]
Credit Quality Indicators
Loans

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Stock Based Compensation (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended	12 Months Ended
	Mar. 31, 2013	Dec. 31, 2012	Mar. 31, 2012
Summary of stock option plan
Outstanding at beginning of year, Shares	261,098		201,999
Outstanding at beginning of year, Weighted Average Exercise Price	$ 10.38		$ 12.43
Outstanding at beginning of year, Weighted Average Remaining Contractual Life	6 years 10 months 24 days
Granted, shares	13,889
Granted, Weighted Average Exercise Price	$ 5.40
Granted, Weighted Average Remaining Contractual Life	9 years 10 months 24 days
Exercised, Shares	(2,250)
Exercised, Weighted Average Exercise Price	$ 3.50
Forfeited, Shares	(2,710)
Forfeited, Weighted Average Exercise Price	$ 19.54
Outstanding at end of year, Shares	270,027	261,098	201,999
Outstanding at end of year, Weighted Average Exercise Price	$ 10.38	$ 10.38	$ 12.43
Outstanding at end of year, Weighted Average Remaining Contractual Life	7 years 1 month 6 days
Outstanding at Ending of year, Aggregate Intrinsic Value	$ 159
Options exercisable at period end, Shares	122,437
Options exercisable at year end, Weighted Average Exercise Price	$ 16.46
Options exercisable at year end, Weighted Average Remaining Contractual Life	5 years
Option exercisable at year end, Aggregate Intrinsic value	$ 93
Weighted-average fair value of options granted	$ 1.73	$ 1.97

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
ASSETS
Cash and due from financial institutions	$ 7,877	$ 9,663
Interest-bearing deposits	46,406	53,644
Total cash and cash equivalents	54,283	63,307
Securities available-for-sale	84,221	87,197
Securities held-to-maturity	1,184	1,149
Total securities	85,405	88,346
Loans	328,815	317,504
Less allowance for loan losses	(6,758)	(6,881)
Net Loans	322,057	310,623
Real estate owned	2,362	3,671
Investment in FHLB Stock	3,799	3,799
Premises and equipment, net	12,071	12,036
Bank owned life insurance	18,804	18,564
Accrued interest receivable and other assets	5,882	6,146
Total assets	504,663	506,492
LIABILITIES
Noninterest bearing deposits	90,553	95,847
Interest bearing deposits	356,736	352,443
Total deposits	447,289	448,290
Federal Home Loan Bank advances	6,384	7,498
Accrued interest payable and other liabilities	2,414	2,315
Total liabilities	456,087	458,103
STOCKHOLDERS' EQUITY
Common stock, no par value, 7,500,000 shares authorized and issued at March 31, 2013 and December 31, 2012. 7,192,350 shares outstanding at March 31, 2013 and December 31, 2012.	15,771	15,771
Retained earnings	40,755	40,614
Treasury stock, at cost, 307,650 shares at March 31, 2013 and December 31, 2012	(7,416)	(7,416)
Accumulated other comprehensive loss	(534)	(580)
Total stockholders' equity	48,576	48,389
Total liabilities and stockholders' equity	$ 504,663	$ 506,492

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Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Consolidated Statements of Comprehensive Income (Loss) [Abstract]
Taxes related to unrealized gains on securities available-for-sale	$ 12	$ (201)
Taxes related to amortization of unrealized losses on held-to-maturity securities	$ 12	$ 12

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Credit Quality (Details 6) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013 Contract	Mar. 31, 2012 Contract
Troubled Debt Restructurings
Number of Contracts	3	2
Recorded Investment	$ 2,230	$ 2
Number of Contracts modified		2
Recorded Investment modified		123
Consumer and Credit Card [Member]
Troubled Debt Restructurings
Number of Contracts		2
Recorded Investment		2
Number of Contracts modified		1
Recorded Investment modified		10
Commercial and Industrial [Member]
Troubled Debt Restructurings
Number of Contracts	3
Recorded Investment	2,230
Number of Contracts modified		1
Recorded Investment modified		113
Commercial Real Estate [Member]
Troubled Debt Restructurings
Number of Contracts
Recorded Investment
Number of Contracts modified
Recorded Investment modified
Residential Real Estate and Home Equity [Member]
Troubled Debt Restructurings
Number of Contracts
Recorded Investment
Number of Contracts modified
Recorded Investment modified

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Summary of Significant Accounting Policies (Details Textual) (USD $)	3 Months Ended
	Mar. 31, 2013	Dec. 31, 2012	Mar. 31, 2012
Summary of Significant Accounting Policies (Textual) [Abstract]
Options to purchase of common stock	270,027	261,098	201,999
Common stock with a weighted-average exercise price	$ 10.38	$ 10.38	$ 12.43
Vested shares in computation of common share equivalents	144,344		17,707
Interest income on mortgage and commercial loans	90 days
Consumer loans charged off delinquency period	120 days
Mortgage loans charge off delinquency period	180 days

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Credit Quality (Details Textual)	3 Months Ended
	Mar. 31, 2013
Credit Quality (Textual) [Abstract]
Non-accrual eligibility accruing status	6 months
Troubled Debt Restructuring extension period, Minimum	1 year
Troubled Debt Restructuring extension period, Maximum	3 years

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Securities (Details 1) (Collateralized debt obligations [Member], USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Collateralized debt obligations [Member]
Fair values of securities held-to-maturity
Adjusted Amortized Cost	$ 1,184	$ 1,149
Gross Unrealized Gains	1,286	941
Estimated Fair Value	$ 2,470	$ 2,090

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Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Consolidated Statements of Cash Flows [Abstract]
Cash flows provided by (used in) operating activities	$ 743	$ 156
Securities
Purchases	(6,730)	(23,679)
Proceeds from maturities, principal payments and calls	9,299	22,587
Net change in loans	(11,184)	22,816
Proceeds from sale of real estate owned	1,314	1,614
Premises and equipment expenditures	(351)	(168)
Net cash flows provided by (used in) investing activities	(7,652)	23,170
Cash flows used in financing activities
Net change in deposits	(1,001)	(19,648)
Net change in federal funds purchased and other short-term borrowings		(1,265)
Repayment of Federal Home Loan Bank advances	(1,114)	(18,466)
Net cash used in financing activities	(2,115)	(39,379)
Net change in cash and cash equivalents	(9,024)	(16,053)
Cash and cash equivalents at beginning of period	63,307	33,521
Cash and cash equivalents at end of period	54,283	17,468
Cash paid during the period for:
Interest on deposits and borrowings	537	990
Supplemental disclosures of non-cash investing and financing activities
Transfers from loans to real estate owned		$ 1,675

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Consolidated Balance Sheets (Parenthetical) (USD $)	Mar. 31, 2013	Dec. 31, 2012
Consolidated Balance Sheets [Abstract]
Common stock, par value
Common stock, shares authorized	7,500,000	7,500,000
Common stock, shares issued	7,500,000	7,500,000
Common stock, shares outstanding	7,192,350	7,192,350
Treasury stock, shares	307,650	307,650

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Loans (Tables)

3 Months Ended

Mar. 31, 2013

Loans [Abstract]

Loans

	March 31, 2013		December 31, 2012
Commercial and industrial	$	121,652	$	112,300
Commercial real estate		109,625		111,417
Residential real estate and home equity		73,026		72,137
Consumer and credit card		24,452		21,620
Subtotal		328,755		317,474
Add: Net deferred loan origination fees		60		30
Total loans receivable	$	328,815	$	317,504

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Document and Entity Information	3 Months Ended
	Mar. 31, 2013	May 01, 2013
Document and Entity Information [Abstract]
Entity Registrant Name	DCB FINANCIAL CORP
Entity Central Index Key	0001025877
Document Type	10-Q
Document Period End Date	Mar. 31, 2013
Amendment Flag	false
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q1
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		7,192,350

XML

Credit Quality (Tables)

3 Months Ended

Mar. 31, 2013

Credit Quality [Abstract]

Allowance for Credit Losses

Three Months Ended March 31, 2013

	Consumer and Credit Card			Commercial and Industrial			Commercial Real Estate			Residential Real Estate and Home Equity			Total
Beginning balance	$	365		$	1,621		$	4,692		$	204		$	6,882
Charge-offs		(39	)		(64	)		(102	)		(42	)		(247	)
Recoveries		60			688			10			15			773
Provision		(99	)		(659	)		124			(16	)		(650	)
Ending balance	$	287		$	1,586		$	4,724		$	161		$	6,758
Individually evaluated for impairment	$	—		$	737		$	2,983		$	—		$	3,720
Collectively evaluated for impairment		287			849			1,741			161			3,038
Ending balance	$	287		$	1,586		$	4,724		$	161		$	6,758
Loans
Individually evaluated for impairment	$	—		$	5,586		$	20,980		$	—		$	26,566
Collectively evaluated for impairment		24,452			116,066			88,645			73,026			302,189
Total	$	24,452		$	121,652		$	109,625		$	73,026		$	328,755

Three Months Ended March 31, 2012

	Consumer and Credit Card			Commercial and Industrial			Commercial Real Estate			Residential Real Estate and Home Equity			Total
Beginning balance	$	425		$	1,952		$	6,916		$	291		$	9,584
Charge-offs		(124	)		(116	)		(660	)		—			(900	)
Recoveries		64			108			7			5			184
Provision		28			271			260			(84	)		475
Ending balance	$	393		$	2,215		$	6,523		$	212		$	9,343
Individually evaluated for impairment	$	—		$	446		$	5,042		$	—		$	5,488
Collectively evaluated for impairment		393			1,769			1,481			212			3,855
Ending balance	$	393		$	2,215		$	6,523		$	212		$	9,343
Loans
Individually evaluated for impairment	$	—		$	11,731		$	27,964		$	—		$	39,695
Collectively evaluated for impairment		18,193			103,347			94,695			78,637			294,872
Total	$	18,193		$	115,078		$	122,659		$	78,637		$	334,567

Recorded investment, unpaid balance and related allowance

At March 31, 2013

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Year-to-date Average Recorded Investment		Year-to-date Interest Income Recognized
With No Related Allowance Recorded
Consumer and Credit Card	$	—	$	—	$	—	$	—	$	—
Commercial and Industrial		3,231		3,308		—		3,831		33
Commercial Real Estate		11,271		13,430		—		8,691		167
Residential RE and Home Equity		—		—		—		—		—
With Allowance Recorded
Consumer and Credit Card		—		—		—		—		—
Commercial and Industrial		2,355		2,491		737		1,521		26
Commercial Real Estate		9,709		11,355		2,983		12,579		86
Residential RE and Home Equity		—		—		—		—		—
Total
Consumer and Credit Card	$	—	$	—	$	—	$	—	$	—
Commercial and Industrial		5,586		5,799		737		5,352		59
Commercial Real Estate		20,980		24,785		2,983		21,270		253
Residential RE and Home Equity		—		—		—		—		—
Total	$	26,566	$	30,584	$	3,720	$	26,622	$	312

At December 31, 2012

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Year-to-date Average Recorded Investment		Year-to-date Interest Income Recognized
With No Related Allowance Recorded
Consumer and Credit Card	$	—	$	—	$	—	$	—	$	—
Commercial and Industrial		4,288		4,437		—		3,557		268
Commercial Real Estate		5,507		5,998		—		10,067		241
Residential RE and Home Equity		—		—		—		—		—
With Allowance Recorded
Consumer and Credit Card		—		—		—		—		—
Commercial and Industrial		1,183		1,248		340		6,208		65
Commercial Real Estate		16,376		20,008		3,400		15,965		820
Residential RE and Home Equity		—		—		—		—		—
Total
Consumer and Credit Card	$	—	$	—	$	—	$	—	$	—
Commercial and Industrial		5,471		5,685		340		9,765		333
Commercial Real Estate		21,883		26,006		3,400		26,032		1,061
Residential RE and Home Equity		—		—		—		—		—
Total	$	27,354	$	31,691	$	3,740	$	35,797	$	1,394

Financing receivables on nonaccrual status

	March 31,		December 31,
	2012		2012
Consumer and credit card	$	—	$	—
Commercial and industrial		1,119		2,815
Commercial real estate		3,929		2,195
Residential real estate and home equity		312		321
Total	$	5,440	$	5,331

Credit Quality Indicators

Category	Commercial and Industrial		Commercial Real Estate
Pass-1-4	$	101,068	$	77,068
Vulnerable-5		12,426		11,023
Substandard-6		8,158		21,534
Doubtful-7		—		—
Loss-8		—		—
Total	$	121,652	$	109,625

Category	Commercial and Industrial		Commercial Real Estate
Pass-1-4	$	90,516	$	76,708
Vulnerable-5		12,240		12,289
Substandard-6		9,544		22,420
Doubtful-7		—		—
Loss-8		—		—
Total	$	112,300	$	111,417

Consumer risk

Payment Category	Consumer and Credit Card		Residential Real Estate and Home Equity
Performing	$	24,452	$	72,705
Non-performing		0		321
Total	$	24,452	$	78,637

Payment Category	Consumer and Credit Card		Residential Real Estate and Home Equity
Performing	$	21,592	$	72,714
Non-Performing		28		312
Total	$	21,620	$	73,026

Age Analysis of Past Due Loans

Category	30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 days  and Accruing
Consumer and credit card	$	34	$	124	$	0	$	158	$	24,294	$	24,452	$	—
Commercial and industrial		204		18		0		222		121,430		121,652		—
Commercial real estate		378		225		2,325		2,928		106,697		109,625		—
Residential real estate and home equity		165		220		312		697		72,329		73,026		—
Total	$	781	$	587	$	2,637	$	4,005	$	324,750	$	328,755	$	—

Category	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 days  and Accruing
Consumer and Credit Card	$	37	$	101	$	28	$	166	$	21,454	$	21,620	$	28
Commercial and Industrial		20		—		26		46		112,254		112,300		—
Commercial Real Estate		538		114		2,195		2,847		108,570		111,417		—
Residential Real Estate and Home Equity		444		289		321		1,054		71,083		72,137		—
Total	$	1,039	$	504	$	2,570	$	4,113	$	313,361	$	317,474	$	28

Troubled Debt Restructurings

	Three Months Ended				Three Months Ended
	March 31, 2013				March 31, 2012
	Number of Contracts		Recorded Investment (as of period end)		Number of Contracts		Recorded Investment (as of period end)
Consumer and Credit Card		—	$	—		2	$	2
Commercial and Industrial		3		2,230		—		—
Commercial Real Estate		—		—		—		—
Residential Real Estate and Home Equity		—		—		—		—
Total		3	$	2,230		2	$	2

	Three Months Ended				Three Months Ended
	March 31, 2013				March 31, 2012
	Number of Contracts		Recorded Investment as of period end (1)		Number of Contracts		Recorded Investment as of period end (1)
Consumer and Credit Card		—	$	—		1		10
Commercial and Industrial		—		—		1		113
Commercial Real Estate		—		—		—		—
Residential Real Estate and Home Equity		—		—		—		—
Total		—	$	—		2	$	123

(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.

XML

Consolidated Statements of Operations (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Interest and dividend income
Loans	$ 3,551	$ 4,366
Taxable securities	520	591
Tax-exempt securities	46	61
Federal funds sold and other	29	21
Total interest income	4,146	5,039
Interest expense
Deposits	451	665
Borrowings	79	368
Total interest expense	530	1,033
Net interest income	3,616	4,006
Provision for loan losses	(650)	475
Net interest income after provision for loan losses	4,266	3,531
Non-interest income
Service charges on deposit accounts	675	598
Trust department income	188	226
Gain on sales of securities		512
Net gain (loss) on sale of REO	84	(156)
Treasury management fees	62	67
Earnings on bank owned life insurance	240	244
Other	59	197
Total noninterest income	1,308	1,688
Noninterest expense
Salaries and other employee benefits	2,972	2,255
Occupancy and equipment	859	843
Professional services	456	391
Advertising	107	84
Postage, freight and courier	53	51
Supplies	70	38
State franchise taxes	212	104
Federal deposit insurance premiums	207	291
Other	520	814
Total noninterest expense	5,456	4,871
Net income (loss) before income taxes	118	348
Income tax expense (benefit)	(24)	189
Net income	$ 142	$ 159
Basic and diluted earnings per common share	$ 0.02	$ 0.04
Dividends per share

XML

Fair Value Measurements

3 Months Ended

Mar. 31, 2013

Fair Value Measurements [Abstract]

FAIR VALUE MEASUREMENTS

NOTE 5 – FAIR VALUE MEASUREMENTS

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

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

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

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

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

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

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

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

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

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

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

Held to Maturity Investment Securities: Estimated fair value for held-to-maturity securities is based on independent third-party evaluations including discounted cash flows and other market assumptions. The methods used to estimate the fair value of the securities do not necessarily represent an exit price and due to the significant judgment involved, these securities are classified within the Level 3 classification.

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

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

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

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

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

Commitments to Extend Credit: For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. At March 31, 2013 and December 31, 2012, the fair value of loan commitments was not material.

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

At March 31, 2013:

	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	54,283	$	54,283	$	54,283
Securities available-for-sale		84,221		84,221				84,221
Securities held-to-maturity		1,184		2,470						2,470
Loans (net of allowance)		322,057		316,959						316,959
FHLB stock		3,799		3,799				3,799
Accrued interest receivable		1,475		1,475						1,475
Financial liabilities
Noninterest-bearing deposits	$	90,553	$	90,553			$	90,553
Interest-bearing deposits		356,736		352,759				352,759
FHLB advances		6,384		6,384				6,384
Accrued interest payable		201		201						201

At December 31, 2012:

	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	63,307	$	63,307	$	63,307
Securities available-for-sale		87,197		87,197				87,197
Securities held-to-maturity		1,149		2,090						2,090
Loans (net of allowance)		310,623		307,729						307,729
FHLB stock		3,799		3,799				3,799
Accrued interest receivable		1,287		1,287						1,287
Financial liabilities
Noninterest-bearing deposits	$	95,847	$	95,847			$	95,847
Interest-bearing deposits		352,443		352,759				352,759
FHLB advances		7,498		7,498				7,498
Accrued interest payable		208		208						208

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

			Fair Value Measurements Using
March 31, 2013	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government and agency obligations	$	14,976	$	—	$	14,976	$	—
State and municipal obligations		21,315		—		21,315		—
Corporate bonds		6,808		—		6,808		—
Mortgage-backed securities and other		41,122		—		41,122		—
Total	$	84,221	$	—	$	84,221	$	—
			Fair Value Measurements Using
December 31, 2012	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government and agency obligations	$	16,937	$	—	$	16,937	$	—
State and municipal obligations		20,761		—		20,761		—
Corporate bonds		5,165		—		5,165		—
Mortgage-backed securities and other		44,334		—		44,334		—
Total	$	87,197	$	—	$	87,197	$	—

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

Securities

Certain collateralized debt obligations are classified as held to maturity. The Corporation calculates fair value based upon a Level 3 estimate of fair value, including a discounted cash flows calculation and a fair value estimate from an independent evaluation of the securities.

Impaired loans

At March 31, 2013 and December 31, 2012, impaired loans consisted primarily of loans secured by nonresidential and commercial real estate. Management has determined fair value measurements on impaired loans primarily through evaluations of appraisals performed.

Real Estate Owned

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

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

			Fair Value Measurements Using
March 31, 2013	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateralized debt obligations	$	2,470	$	—	$	—	$	2,470
Impaired loans		9,503		—		—		9,503
Real estate owned		2,362		—		—		2,362

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

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Credit Quality

3 Months Ended

Mar. 31, 2013

Credit Quality [Abstract]

CREDIT QUALITY

NOTE 4 – CREDIT QUALITY

Allowance for Credit Losses

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

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

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

Three Months Ended March 31, 2013

	Consumer and Credit Card			Commercial and Industrial			Commercial Real Estate			Residential Real Estate and Home Equity			Total
Beginning balance	$	365		$	1,621		$	4,692		$	204		$	6,882
Charge-offs		(39	)		(64	)		(102	)		(42	)		(247	)
Recoveries		60			688			10			15			773
Provision		(99	)		(659	)		124			(16	)		(650	)
Ending balance	$	287		$	1,586		$	4,724		$	161		$	6,758
Individually evaluated for impairment	$	—		$	737		$	2,983		$	—		$	3,720
Collectively evaluated for impairment		287			849			1,741			161			3,038
Ending balance	$	287		$	1,586		$	4,724		$	161		$	6,758
Loans
Individually evaluated for impairment	$	—		$	5,586		$	20,980		$	—		$	26,566
Collectively evaluated for impairment		24,452			116,066			88,645			73,026			302,189
Total	$	24,452		$	121,652		$	109,625		$	73,026		$	328,755

Three Months Ended March 31, 2012

	Consumer and Credit Card			Commercial and Industrial			Commercial Real Estate			Residential Real Estate and Home Equity			Total
Beginning balance	$	425		$	1,952		$	6,916		$	291		$	9,584
Charge-offs		(124	)		(116	)		(660	)		—			(900	)
Recoveries		64			108			7			5			184
Provision		28			271			260			(84	)		475
Ending balance	$	393		$	2,215		$	6,523		$	212		$	9,343
Individually evaluated for impairment	$	—		$	446		$	5,042		$	—		$	5,488
Collectively evaluated for impairment		393			1,769			1,481			212			3,855
Ending balance	$	393		$	2,215		$	6,523		$	212		$	9,343
Loans
Individually evaluated for impairment	$	—		$	11,731		$	27,964		$	—		$	39,695
Collectively evaluated for impairment		18,193			103,347			94,695			78,637			294,872
Total	$	18,193		$	115,078		$	122,659		$	78,637		$	334,567

Impaired Loans

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

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

At March 31, 2013

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Year-to-date Average Recorded Investment		Year-to-date Interest Income Recognized
With No Related Allowance Recorded
Consumer and Credit Card	$	—	$	—	$	—	$	—	$	—
Commercial and Industrial		3,231		3,308		—		3,831		33
Commercial Real Estate		11,271		13,430		—		8,691		167
Residential RE and Home Equity		—		—		—		—		—
With Allowance Recorded
Consumer and Credit Card		—		—		—		—		—
Commercial and Industrial		2,355		2,491		737		1,521		26
Commercial Real Estate		9,709		11,355		2,983		12,579		86
Residential RE and Home Equity		—		—		—		—		—
Total
Consumer and Credit Card	$	—	$	—	$	—	$	—	$	—
Commercial and Industrial		5,586		5,799		737		5,352		59
Commercial Real Estate		20,980		24,785		2,983		21,270		253
Residential RE and Home Equity		—		—		—		—		—
Total	$	26,566	$	30,584	$	3,720	$	26,622	$	312

At December 31, 2012

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Year-to-date Average Recorded Investment		Year-to-date Interest Income Recognized
With No Related Allowance Recorded
Consumer and Credit Card	$	—	$	—	$	—	$	—	$	—
Commercial and Industrial		4,288		4,437		—		3,557		268
Commercial Real Estate		5,507		5,998		—		10,067		241
Residential RE and Home Equity		—		—		—		—		—
With Allowance Recorded
Consumer and Credit Card		—		—		—		—		—
Commercial and Industrial		1,183		1,248		340		6,208		65
Commercial Real Estate		16,376		20,008		3,400		15,965		820
Residential RE and Home Equity		—		—		—		—		—
Total
Consumer and Credit Card	$	—	$	—	$	—	$	—	$	—
Commercial and Industrial		5,471		5,685		340		9,765		333
Commercial Real Estate		21,883		26,006		3,400		26,032		1,061
Residential RE and Home Equity		—		—		—		—		—
Total	$	27,354	$	31,691	$	3,740	$	35,797	$	1,394

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

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

	March 31,		December 31,
	2012		2012
Consumer and credit card	$	—	$	—
Commercial and industrial		1,119		2,815
Commercial real estate		3,929		2,195
Residential real estate and home equity		312		321
Total	$	5,440	$	5,331

Credit Quality Indicators

Corporate risk exposure by risk profile was as follows at March 31, 2013:

Category	Commercial and Industrial		Commercial Real Estate
Pass-1-4	$	101,068	$	77,068
Vulnerable-5		12,426		11,023
Substandard-6		8,158		21,534
Doubtful-7		—		—
Loss-8		—		—
Total	$	121,652	$	109,625

Corporate risk exposure by risk profile was as follows at December 31, 2012:

Category	Commercial and Industrial		Commercial Real Estate
Pass-1-4	$	90,516	$	76,708
Vulnerable-5		12,240		12,289
Substandard-6		9,544		22,420
Doubtful-7		—		—
Loss-8		—		—
Total	$	112,300	$	111,417

Risk Category Descriptions

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

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

Vulnerable (Special Mention) – 5

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

Substandard – 6

Loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. One or more of the following characteristics may be exhibited in loans classified Substandard:

• Loans, which possess a defined credit weakness and the likelihood that a loan will be paid from the primary source, is uncertain. Financial deterioration is underway and very close attention is warranted to ensure that the loan is collected without loss.

• Loans are inadequately protected by the current net worth and paying capacity of the obligor.

• The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment such as collateral liquidation or guarantees.

• Loans are characterized by the distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

• Unusual courses of action are needed to maintain a high probability of repayment.

• The borrower is not generating enough cash flow to repay loan principal; however, continues to make interest payments.

• The lender is forced into a subordinated or unsecured position due to flaws in documentation.

• Loans have been restructured so that payment schedules, terms and collateral represent concessions to the borrower when compared to the normal loan terms.

• The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

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

Doubtful – 7

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

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

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

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

Loss – 8

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

Consumer Risk

Consumer risk based on payment activity at March 31, 2013 is as follows.

Payment Category	Consumer and Credit Card		Residential Real Estate and Home Equity
Performing	$	24,452	$	72,705
Non-performing		0		321
Total	$	24,452	$	78,637

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

Payment Category	Consumer and Credit Card		Residential Real Estate and Home Equity
Performing	$	21,592	$	72,714
Non-Performing		28		312
Total	$	21,620	$	73,026

Age Analysis of Past Due Loans

The following table presents past due loans aged as of March 31, 2013.

Category	30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 days  and Accruing
Consumer and credit card	$	34	$	124	$	0	$	158	$	24,294	$	24,452	$	—
Commercial and industrial		204		18		0		222		121,430		121,652		—
Commercial real estate		378		225		2,325		2,928		106,697		109,625		—
Residential real estate and home equity		165		220		312		697		72,329		73,026		—
Total	$	781	$	587	$	2,637	$	4,005	$	324,750	$	328,755	$	—

The following table presents past due loans aged as of December 31, 2012.

Category	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 days  and Accruing
Consumer and Credit Card	$	37	$	101	$	28	$	166	$	21,454	$	21,620	$	28
Commercial and Industrial		20		—		26		46		112,254		112,300		—
Commercial Real Estate		538		114		2,195		2,847		108,570		111,417		—
Residential Real Estate and Home Equity		444		289		321		1,054		71,083		72,137		—
Total	$	1,039	$	504	$	2,570	$	4,113	$	313,361	$	317,474	$	28

Troubled Debt Restructurings

Information regarding Troubled Debt Restructuring (“TDR”) loans for the three month period ended March 31, 2013 is as follows:

	Three Months Ended				Three Months Ended
	March 31, 2013				March 31, 2012
	Number of Contracts		Recorded Investment (as of period end)		Number of Contracts		Recorded Investment (as of period end)
Consumer and Credit Card		—	$	—		2	$	2
Commercial and Industrial		3		2,230		—		—
Commercial Real Estate		—		—		—		—
Residential Real Estate and Home Equity		—		—		—		—
Total		3	$	2,230		2	$	2

The following presents by class loans modified in a TDR from April 1, 2012 through March 31, 2013 that subsequently defaulted (i.e. 60 days or more past due following a modification) during the three month period ended March 31, 2013.

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

	Three Months Ended				Three Months Ended
	March 31, 2013				March 31, 2012
	Number of Contracts		Recorded Investment as of period end (1)		Number of Contracts		Recorded Investment as of period end (1)
Consumer and Credit Card		—	$	—		1		10
Commercial and Industrial		—		—		1		113
Commercial Real Estate		—		—		—		—
Residential Real Estate and Home Equity		—		—		—		—
Total		—	$	—		2	$	123

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

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

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

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

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

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Securities (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Fair values of securities available-for-sale
Amortized Costs	$ 82,197	$ 85,208
Gross Unrealized Gains	2,157	2,069
Gross Unrealized Losses	133	80
Fair Value	84,221	87,197
U.S. Government and agency obligations [Member]
Fair values of securities available-for-sale
Amortized Costs	14,877	16,821
Gross Unrealized Gains	112	134
Gross Unrealized Losses	13	18
Fair Value	14,976	16,937
Corporate bonds [Member]
Fair values of securities available-for-sale
Amortized Costs	6,731	5,081
Gross Unrealized Gains	89	86
Gross Unrealized Losses	12	2
Fair Value	6,808	5,165
States and municipal obligations [Member]
Fair values of securities available-for-sale
Amortized Costs	20,436	19,874
Gross Unrealized Gains	930	918
Gross Unrealized Losses	51	31
Fair Value	21,315	20,761
Mortgage-backed securities [Member]
Fair values of securities available-for-sale
Amortized Costs	40,153	43,432
Gross Unrealized Gains	1,026	931
Gross Unrealized Losses	57	29
Fair Value	$ 41,122	$ 44,334

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Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2013

Fair Value Measurements [Abstract]

Carrying amount and estimated fair values of financial instruments

At March 31, 2013:

	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	54,283	$	54,283	$	54,283
Securities available-for-sale		84,221		84,221				84,221
Securities held-to-maturity		1,184		2,470						2,470
Loans (net of allowance)		322,057		316,959						316,959
FHLB stock		3,799		3,799				3,799
Accrued interest receivable		1,475		1,475						1,475
Financial liabilities
Noninterest-bearing deposits	$	90,553	$	90,553			$	90,553
Interest-bearing deposits		356,736		352,759				352,759
FHLB advances		6,384		6,384				6,384
Accrued interest payable		201		201						201

At December 31, 2012:

	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	63,307	$	63,307	$	63,307
Securities available-for-sale		87,197		87,197				87,197
Securities held-to-maturity		1,149		2,090						2,090
Loans (net of allowance)		310,623		307,729						307,729
FHLB stock		3,799		3,799				3,799
Accrued interest receivable		1,287		1,287						1,287
Financial liabilities
Noninterest-bearing deposits	$	95,847	$	95,847			$	95,847
Interest-bearing deposits		352,443		352,759				352,759
FHLB advances		7,498		7,498				7,498
Accrued interest payable		208		208						208

Fair value measurements of assets recurring basis

			Fair Value Measurements Using
March 31, 2013	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government and agency obligations	$	14,976	$	—	$	14,976	$	—
State and municipal obligations		21,315		—		21,315		—
Corporate bonds		6,808		—		6,808		—
Mortgage-backed securities and other		41,122		—		41,122		—
Total	$	84,221	$	—	$	84,221	$	—
			Fair Value Measurements Using
December 31, 2012	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government and agency obligations	$	16,937	$	—	$	16,937	$	—
State and municipal obligations		20,761		—		20,761		—
Corporate bonds		5,165		—		5,165		—
Mortgage-backed securities and other		44,334		—		44,334		—
Total	$	87,197	$	—	$	87,197	$	—

Fair value measurements of assets nonrecurring basis

			Fair Value Measurements Using
March 31, 2013	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateralized debt obligations	$	2,470	$	—	$	—	$	2,470
Impaired loans		9,503		—		—		9,503
Real estate owned		2,362		—		—		2,362

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

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Summary of Significant Accounting Policies (Tables)

3 Months Ended

Mar. 31, 2013

Summary of Significant Accounting Policies [Abstract]

Weighted-average shares for basic and diluted earnings per share

	Three Months Ended March 31,
	2013		2012
Weighted-average common shares outstanding (basic)		7,192,350		3,717,385
Dilutive effect of assumed exercise of stock options		30,794		6,808
Weighted-average common shares outstanding (diluted)		7,223,144		3,724,193

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Stock Based Compensation

3 Months Ended

Mar. 31, 2013

Stock-Based Compensation [Abstract]

STOCK-BASED COMPENSATION

NOTE 6 – STOCK BASED COMPENSATION

The Corporation’s shareholders approved the 2004 Long-Term Stock Incentive Plan in May 2004. This Plan enables the Corporation to grant equity awards to certain employees. The Plan is limited to 300,000 shares. The shares granted to employees under the Plan vest 20% per year over a five year period. The options expire after ten years. At March 31, 2013, options to purchase 123,513 shares were exercisable, and 29,973 shares remained available for grant under this plan.

The Corporation recognizes compensation cost for vested equity-based awards based on their March 31, 2013 fair value. The Corporation recorded $91 and $8 in compensation cost for equity-based awards that vested during the three months ended March 31, 2013 and 2012, respectively.

In determining the fair value of the stock options at March 31, 2013, the Corporation utilized a Black-Scholes valuation model with a risk-free interest rate that corresponds to the expected remaining life of each award, an expected dividend yield of 0%, an expected common stock price volatility of 30%, and an expected life of 8 years from the grant date.

A summary of the status of the Corporation’s equity compensation plan as of March 31, 2013, and changes during the period then ended are presented below:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding at beginning of year		261,098		$	10.38		6.9 years
Granted		13,889			5.40		9.9 years
Exercised		(2,250	)		3.50		—
Forfeited		(2,710	)		19.54		—
Outstanding at end of year		270,027		$	10.38		7.1 years	$	159
Options exercisable at period end		122,437		$	16.46		5.0 years	$	93
Weighted-average fair value of options granted during the three months ended ended March 31, 2013				$	1.73
Weighted-average fair value of options granted during the year ended December 31, 2012				$	1.97

At March 31, 2013, unrecognized compensation expense to be recognized over the remaining life of outstanding options is $280.

The following information applies to options outstanding at March 31, 2013:

Number Outstanding	Range Of Exercise Prices
79,689	$16.90–$30.70
38,730	$5.40–$9.00
151,608	$3.50–$4.50

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Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2013

Summary of Significant Accounting Policies [Abstract]

Earnings per share

Earnings per share

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

	Three Months Ended March 31,
	2013		2012
Weighted-average common shares outstanding (basic)		7,192,350		3,717,385
Dilutive effect of assumed exercise of stock options		30,794		6,808
Weighted-average common shares outstanding (diluted)		7,223,144		3,724,193

Options to purchase 122,437 shares of common stock with a weighted-average exercise price of $16.46 were outstanding at March 31, 2013. There were 144,344 shares included in the computation of common share equivalents for the three-month period then ended because the average fair value of the shares was greater than the exercise price.

Options to purchase 201,999 shares of common stock with a weighted-average exercise price of $12.43 were outstanding at March 31, 2012. There were 17,707 shares included in the computation of common share equivalents for the three-month period then ended because the average fair value of the shares was greater than the exercise price.

Stock-Based Compensation

Stock-Based Compensation

The Corporation has a stock option plan for employees and directors as described in Note 6 (Stock-Based Compensation). In addition to equity settlement, the stock option plan also allows for cash settlement of options at the recipient’s discretion; therefore, liability accounting applies to this plan. Compensation expense is recognized based on the fair value of these awards at the reporting date. A Black Scholes model is utilized to estimate the fair value of stock options at the date of grant and subsequent remeasurement dates. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards. The Corporation’s stock option awards contain terms that provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period. Changes in fair value of the options between the vesting date and option expiration date are also recognized in the Consolidated Statement of Operations.

Application of Critical Accounting Policies

Application of Critical Accounting Policies

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

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

Loans

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

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

Allowance for Loan Losses

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

The allowance consists of both specific and general components. The specific component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the collateral value, or value of expected discounted cash flows of the impaired loan, is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process. Management utilizes 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.

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.

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, 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. 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 borrower and guarantor; the type and value of the collateral, and the ease of liquidating collateral; and whether or not collateral is brought onto the bank’s balance sheet via repossession.

In the case of commercial and commercial real estate loans, charge-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. 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.

An individual loan is placed on a non-accruing status if, in the judgmant 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. 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, such as deteriorating collateral, negative cash flow changes and inability to reduce debt to income ratios.

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Securities (Tables)

3 Months Ended

Mar. 31, 2013

Securities [Abstract]

Fair values of securities available-for-sale

	Amortized Costs		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government and agency obligations	$	14,877	$	112	$	13	$	14,976
Corporate bonds		6,731		89		12		6,808
States and municipal obligations		20,436		930		51		21,315
Mortgage-backed securities		40,153		1,026		57		41,122
Total	$	82,197	$	2,157	$	133	$	84,221

	Amortized Costs		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government and agency obligations	$	16,821	$	134	$	18	$	16,937
Corporate bonds		5,081		86		2		5,165
States and municipal obligations		19,874		918		31		20,761
Mortgage-backed securities		43,432		931		29		44,334
Total	$	85,208	$	2,069	$	80	$	87,197

Fair values of securities held-to-maturity

	Adjusted Amortized Cost		Gross Unrealized Gains		Estimated Fair Value
Collateralized debt obligations	$	1,184	$	1,286	$	2,470

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

Unrealized loss

March 31, 2013

	(Less than 12 months)						(12 months or longer)						Total
Description of securities	Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses
U.S. Government and agency obligations		3	$	3,601	$	13		—	$	—	$	—		3	$	3,601	$	13
Corporate bonds		5		2,018		12		—		—		—		5		2,018		12
State and municipal obligations		4		1,704		35		3		927		16		7		2,631		51
Mortgage-backed securities and other		6		4,730		57		1		726		—		7		5,456		57
Total temporarily impaired securities		18	$	12,053	$	117		4	$	1,653	$	16		22	$	13,706	$	133

December 31, 2012

	(Less than 12 months)						(12 months or longer)						Total
Description of securities	Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses
U.S. Government and agency obligations		3	$	3,649	$	18		—	$	—	$	—		3	$	3,649	$	18
Corporate bonds		1		501		2		—		—		—		1		501		2
State and municipal obligations		5		1,630		31		—		—		—		5		1,630		31
Mortgage-backed securities and other		6		4,065		29		—		—		—		6		4,065		29
Total temporarily impaired securities		15	$	9,845	$	80		—	$	—	$	—		15	$	9,845	$	80

Amortized cost and estimated fair value of all debt securities

	Available-for-sale				Held-to-maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	1,533	$	1,542	$	—	$	—
Due after one to five years		9,898		10,020		—		—
Due after five to ten years		20,220		20,794		—		—
Due after ten years		10,393		10,743		1,184		2,470
Mortgage-backed and related securities		40,153		41,122		—		—
Total	$	82,197	$	84,221	$	1,184	$	2,470

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Credit Quality (Details 5) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Age analysis of past due loans
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	$ 781	$ 1,039
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	587	504
Financing Receivable, Recorded Investment, Greater than 90 Days Past Due	2,637	2,570
Financing Receivable, Recorded Investment, Past Due, Total	4,005	4,113
Current	324,750	313,361
Subtotal	328,755	317,474
Recorded Investment greater than 90 days and Accruing		28
Consumer and Credit Card [Member]
Age analysis of past due loans
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	34	37
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	124	101
Financing Receivable, Recorded Investment, Greater than 90 Days Past Due	0	28
Financing Receivable, Recorded Investment, Past Due, Total	158	166
Current	24,294	21,454
Subtotal	24,452	21,620
Recorded Investment greater than 90 days and Accruing		28
Commercial and Industrial [Member]
Age analysis of past due loans
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	204	20
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	18
Financing Receivable, Recorded Investment, Greater than 90 Days Past Due	0	26
Financing Receivable, Recorded Investment, Past Due, Total	222	46
Current	121,430	112,254
Subtotal	121,652	112,300
Recorded Investment greater than 90 days and Accruing
Commercial Real Estate [Member]
Age analysis of past due loans
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	378	538
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	225	114
Financing Receivable, Recorded Investment, Greater than 90 Days Past Due	2,325	2,195
Financing Receivable, Recorded Investment, Past Due, Total	2,928	2,847
Current	106,697	108,570
Subtotal	109,625	111,417
Recorded Investment greater than 90 days and Accruing
Residential Real Estate and Home Equity [Member]
Age analysis of past due loans
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	165	444
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	220	289
Financing Receivable, Recorded Investment, Greater than 90 Days Past Due	312	321
Financing Receivable, Recorded Investment, Past Due, Total	697	1,054
Current	72,329	71,083
Subtotal	73,026	72,137
Recorded Investment greater than 90 days and Accruing

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Summary of Significant Accounting Policies (Details)	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Weighted-average shares for basic and diluted earnings per share
Weighted-average common shares outstanding (basic)	7,192,350	3,717,385
Dilutive effect of assumed exercise of stock options	30,794	6,808
Weighted-average common shares outstanding (diluted)	7,223,144	3,724,193

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Securities (Details 3) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013
Amortized cost and estimated fair value of all debt securities
Available-for-sale, Amortized Cost, Due in one year or less	$ 1,533
Available-for-sale, Amortized Cost, Due after one to five years	9,898
Available-for-sale, Amortized Cost, Due after five to ten years	20,220
Available-for-sale, Amortized Cost, Due after ten years	10,393
Available-for-sale, Amortized Cost, Mortgage-backed and related securities	40,153
Available-for-sale, Amortized Cost, Total	82,197
Available-for-sale, Fair Value, Due in one year or less	1,542
Available-for-sale, Fair Value, Due after one to five years	10,020
Available-for-sale, Fair Value, Due after five to ten years	20,794
Available-for-sale, Fair Value, Fair value, Due after ten years	10,743
Available-for-sale, Fair Value, Mortgage-backed and related securities	41,122
Available-for-sale, Fair Value, Total	84,221
Held-to-maturity, Amortized Cost, Due in one year or less
Held-to-maturity, Amortized Cost, Due after one to five years
Held-to-maturity, Amortized Cost, Due after five to ten years
Held-to-maturity, Amortized Cost, Due after ten years	1,184
Held-to-maturity, Amortized Cost, Mortgage-backed and related securities
Held-to-maturity, Amortized Cost, Total	1,184
Held-to-maturity, Fair Value, Due in one year or less
Held-to-maturity, Fair Value, Due after one to five years
Held-to-maturity, Fair Value, Due after five to ten years
Held-to-maturity, Fair Value, Due after ten years	2,470
Held-to-maturity, Fair Value, Mortgage-backed and related securities
Held-to-maturity, Fair Value, Total	$ 2,470

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Stock Based Compensation (Details 1) (USD $)	3 Months Ended
	Mar. 31, 2013
Range One [Member]
Stock options outstanding
Number Outstanding	79,689
Exercise Prices, Lower Range	$ 16.90
Exercise Prices, Higher Range	$ 30.70
Range Two [Member]
Stock options outstanding
Number Outstanding	38,730
Exercise Prices, Lower Range	$ 5.40
Exercise Prices, Higher Range	$ 9.00
Range Three [Member]
Stock options outstanding
Number Outstanding	151,608
Exercise Prices, Lower Range	$ 3.50
Exercise Prices, Higher Range	$ 4.50

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Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Consolidated Statements of Comprehensive Income (Loss) [Abstract]
Net income	$ 142	$ 159
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale, net of related taxes of $12 and $(201) in 2013 and 2012, respectively	23	(391)
Amortization of unrealized losses on held-to-maturity securities, net of taxes of $12 and $12 in 2013 and 2012 respectively	23	23
Total other comprehensive income (loss)	46	(368)
Comprehensive income (loss)	$ 188	$ (209)

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Loans

3 Months Ended

Mar. 31, 2013

Loans [Abstract]

LOANS

NOTE 3 – LOANS

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

	March 31, 2013		December 31, 2012
Commercial and industrial	$	121,652	$	112,300
Commercial real estate		109,625		111,417
Residential real estate and home equity		73,026		72,137
Consumer and credit card		24,452		21,620
Subtotal		328,755		317,474
Add: Net deferred loan origination fees		60		30
Total loans receivable	$	328,815	$	317,504

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Securities (Details Textual) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Securities (Textual) [Abstract]
Credit losses recognized on investments	$ 0	$ 0
Unrealized loss on investments in collateralized debt obligations	8,000
Major securities holding	0
Holdings of securities, issuer other than shareholders equity	10.00%
Collateralized debt obligations [Member]
Schedule of Trading Securities and Other Trading Assets [Line Items]
Fair value securities, deposits and other obligation	$ 58,544

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Fair Value Measurements (Details 1) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Fair value measurements of assets recurring basis
Fair Value	$ 84,221	$ 87,197
State and municipal obligations [Member]
Fair value measurements of assets recurring basis
Fair Value	21,315	20,761
Corporate bonds [Member]
Fair value measurements of assets recurring basis
Fair Value	6,808	5,165
Mortgage-backed securities and other [Member]
Fair value measurements of assets recurring basis
Fair Value	41,122	44,334
Quoted Prices in Active Markets for Identical Assets, Level 1 [Member]
Fair value measurements of assets recurring basis
Fair Value
Significant Other Observable Inputs, Level 2 [Member]
Fair value measurements of assets recurring basis
Fair Value	84,221	87,197
Significant Unobservable Inputs, Level 3 [Member]
Fair value measurements of assets recurring basis
Fair Value
Fair Value, Measurements, Recurring [Member]
Fair value measurements of assets recurring basis
Fair Value	84,221	87,197
Fair Value, Measurements, Recurring [Member] | U.S. Government and agency obligations [Member]
Fair value measurements of assets recurring basis
Fair Value	14,976	16,937
Fair Value, Measurements, Recurring [Member] | State and municipal obligations [Member]
Fair value measurements of assets recurring basis
Fair Value	21,315	20,761
Fair Value, Measurements, Recurring [Member] | Corporate bonds [Member]
Fair value measurements of assets recurring basis
Fair Value	6,808	5,165
Fair Value, Measurements, Recurring [Member] | Mortgage-backed securities and other [Member]
Fair value measurements of assets recurring basis
Fair Value	41,122	44,334
Fair Value, Measurements, Recurring [Member] | Quoted Prices in Active Markets for Identical Assets, Level 1 [Member]
Fair value measurements of assets recurring basis
Fair Value
Fair Value, Measurements, Recurring [Member] | Quoted Prices in Active Markets for Identical Assets, Level 1 [Member] | U.S. Government and agency obligations [Member]
Fair value measurements of assets recurring basis
Fair Value
Fair Value, Measurements, Recurring [Member] | Quoted Prices in Active Markets for Identical Assets, Level 1 [Member] | State and municipal obligations [Member]
Fair value measurements of assets recurring basis
Fair Value
Fair Value, Measurements, Recurring [Member] | Quoted Prices in Active Markets for Identical Assets, Level 1 [Member] | Corporate bonds [Member]
Fair value measurements of assets recurring basis
Fair Value
Fair Value, Measurements, Recurring [Member] | Quoted Prices in Active Markets for Identical Assets, Level 1 [Member] | Mortgage-backed securities and other [Member]
Fair value measurements of assets recurring basis
Fair Value
Fair Value, Measurements, Recurring [Member] | Significant Other Observable Inputs, Level 2 [Member]
Fair value measurements of assets recurring basis
Fair Value	84,221	87,197
Fair Value, Measurements, Recurring [Member] | Significant Other Observable Inputs, Level 2 [Member] | U.S. Government and agency obligations [Member]
Fair value measurements of assets recurring basis
Fair Value	14,976	16,937
Fair Value, Measurements, Recurring [Member] | Significant Other Observable Inputs, Level 2 [Member] | State and municipal obligations [Member]
Fair value measurements of assets recurring basis
Fair Value	21,315	20,761
Fair Value, Measurements, Recurring [Member] | Significant Other Observable Inputs, Level 2 [Member] | Corporate bonds [Member]
Fair value measurements of assets recurring basis
Fair Value	6,808	5,165
Fair Value, Measurements, Recurring [Member] | Significant Other Observable Inputs, Level 2 [Member] | Mortgage-backed securities and other [Member]
Fair value measurements of assets recurring basis
Fair Value	41,122	44,334
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs, Level 3 [Member]
Fair value measurements of assets recurring basis
Fair Value
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs, Level 3 [Member] | U.S. Government and agency obligations [Member]
Fair value measurements of assets recurring basis
Fair Value
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs, Level 3 [Member] | State and municipal obligations [Member]
Fair value measurements of assets recurring basis
Fair Value
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs, Level 3 [Member] | Corporate bonds [Member]
Fair value measurements of assets recurring basis
Fair Value
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs, Level 3 [Member] | Mortgage-backed securities and other [Member]
Fair value measurements of assets recurring basis
Fair Value

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Stock Based Compensation (Tables)

3 Months Ended

Mar. 31, 2013

Stock-Based Compensation [Abstract]

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

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding at beginning of year		261,098		$	10.38		6.9 years
Granted		13,889			5.40		9.9 years
Exercised		(2,250	)		3.50		—
Forfeited		(2,710	)		19.54		—
Outstanding at end of year		270,027		$	10.38		7.1 years	$	159
Options exercisable at period end		122,437		$	16.46		5.0 years	$	93
Weighted-average fair value of options granted during the three months ended ended March 31, 2013				$	1.73
Weighted-average fair value of options granted during the year ended December 31, 2012				$	1.97

Stock options outstanding

Number Outstanding	Range Of Exercise Prices
79,689	$16.90–$30.70
38,730	$5.40–$9.00
151,608	$3.50–$4.50