DCB Financial Corp Announces First Quarter 2014 Results

LEWIS CENTER, Ohio, May 15, 2014 /PRNewswire/ -- DCB Financial Corp (the "Company"), (OTC Bulletin Board DCBF), parent holding company of The Delaware County Bank & Trust Company, Lewis Center, Ohio (the "Bank") announced net income of $117,000 or $0.02 per diluted share for the three months ended March 31, 2014, compared to net income of $142,000 or $0.02 per diluted share for the same period in 2013. Non-recurring gains and losses in the first quarter of 2014 aggregated $52,000 of net gains, compared to net non-recurring gains of $84,000 in the year-ago quarter. In addition, a negative loan loss provision of $650,000 was recorded in the year-ago quarter. There was no loan loss provision in the first quarter of 2014.

Ronald J. Seiffert, President and CEO for the Company said, "We are off to a strong start in 2014 in the execution of our strategy developed during last year's fourth quarter to dispose of certain problem assets, with nonaccrual loans down 47.8% and nonperforming assets (excluding troubled debt restructurings) down 42.8% in the first quarter. This progress was achieved through principal pay-downs, asset sales and charge-downs, and, importantly, did not require the recognition of any loan loss provisions during the quarter."

Seiffert continued, "The first quarter of 2014 also marked the return to core profitability for our Company. While we continue to work to improve our asset quality, we are also diligently working to increase our profitability through higher revenues and expense reductions. Net interest income was up $372,000 and our net interest margin increased 30 basis points from the first quarter of 2013 as our loan portfolio grew to 77% of our earning assets in the first quarter, compared to 69% of average assets in the year-ago quarter. The improvement in our asset quality metrics also had a favorable impact on non-interest expense, which was down $393,000 in the first quarter compared to last year's first quarter, largely due to lower workout and collection expenses and a decrease in FDIC insurance premiums. While we are very pleased with our progress in the first quarter, we recognize that we have much more work to do to continue to improve the operating performance of our Company for the benefit of our shareholders, our employees and our community."

Balance Sheet Highlights 

Total assets were $494.1 million at March 31, 2014, which was a decrease of $8.3 million from $502.4 million at December 31, 2013.  Assets transferred in connection with the sale of the Company's Marysville branch in the first quarter totaled $18.8 million and included cash of $12.7 million, loans held-for-sale of $4.7 million and fixed assets held-for-sale of $1.4 million.  Deposits attributable to the branch totaling $19.4 million were assumed by the buyer. 

Total loans, including loans held for sale, declined $9.4 million in the first quarter and were $354.5 million at March 31, 2014, compared with $363.9 million at the end of 2013.  Two large performing commercial loans totaling $5.7 million pre-paid in full during the first quarter, which, together with the sale of $4.7 million of loans in connection with the sale of our Marysville branch, offset originations of new loans in the quarter.   

Deposits totaled $439.8 million at March 31, 2014, while deposits, including deposits held-for-sale, were $449.4 million at the end of 2013.  The sale of $19.4 million of deposits in connection with the sale of the Marysville branch, was partially offset by an increase in public funds deposits of $7.6 million.  Low-cost transaction accounts comprised 42.0% of total deposits at the end of the quarter, compared with 42.5% at December 31, 2013 and 40.0% at September 30, 2013.  The Bank's liability mix continues to remain favorably weighted toward transaction accounts as retail and municipal depositors continue to prefer transaction and money market accounts over time accounts in the low interest rate environment, and also because of the build-up of cash on commercial customers' balance sheets.

Stockholders' equity was $46.4 million at March 31, 2014, compared with $45.3 million at December 31, 2013. The increase is primarily the result of the difference between the unrealized loss on collateralized debt obligations of $940,000 at December 31, 2013, and the actual loss recognized upon the sale of the security in the first quarter of $140,000. Sharply higher demand for these types of securities in the first quarter of 2014 contributed to the increase in the value of our security during the quarter.

The Bank's Tier 1 leverage ratio was 8.83% and its total risk-based capital ratio was 14.03% at the end of the first quarter, both of which comfortably exceeded the regulatory thresholds required to be classified as a "well-capitalized" institution, which are 5.0% and 10.0%, respectively.

Asset Quality and the Provision for Loan Losses

Delinquent loans (including non-performing) dropped 43.8% in the first quarter, and totaled $4.6 million at March 31, 2014, compared with $8.1 million at December 31, 2013. The largest decline occurred in non-accrual loans, which decreased $3.3 million or 47.8% in the first quarter to a balance of $3.6 million or 1.02% of total loans at March 31, 2014, compared to $6.9 million or 1.90% of total loans at December 31, 2013.  

Non-performing assets were $17.7 million or 3.59% of total assets at March 31, 2014, compared with $21.9 million or 4.36% of total assets at December 31, 2013.  Troubled debt restructurings ("TDR's") which are performing in accordance with the restructured terms and accruing interest, but are included in non-performing assets, were $12.6 million at March 31, 2014 and $12.8 million at December 31, 2013.

Much of the improvement in asset quality in the first quarter has resulted from the execution of previously disclosed strategies developed in the fourth quarter of 2013 to accelerate the disposition of certain troubled assets, in particular two commercial relationships which totaled $5.7 million at the end of 2013.  As of March 31, 2014, a total of $4.2 million of cash has been collected on these relationships. One of the relationships, with a carrying amount of $2.7 million at the end of 2013, was paid off in the first quarter.  A second relationship with an outstanding balance of $3.0 million and an allowance allocation of $1.5 million at the end of 2013 has been paid down by $1.5 million in the first quarter of 2014.  The Company recorded a partial write-down on this second relationship of $750,000 in the first quarter, using the specific loan loss allocation established for this relationship in the fourth quarter of 2013, resulting in a carrying value of $750,000 at March 31, 2014. A specific allowance allocation of $750,000 remains assigned to this relationship at the end of the first quarter.  The Company continues to actively pursue collection of the entire amount of the contractual principal amount, however no assurance can be given as to the amount, if any, of additional principal which will be collected.  

Also, as part of management's continued strategy to dispose of certain troubled assets, during the first quarter of 2014, certain loans held for sale were written down by $245,000 with a charge to earnings to reflect indications of fair value.     

Net charge-offs (annualized) were $1.3 million or 1.43% of average loans in the first quarter, compared to net recoveries of $526,000 in the year-ago quarter. Two relationships comprised nearly all of the charge-offs in the first quarter, which were charged against allowance allocations established in the fourth quarter of 2013.

There was no provision for loan losses recorded in the first quarter of 2014, as the $3.3 million loan loss provision recorded in the fourth quarter of 2013 included specific allocations or the two large relationships charged-off in the first quarter. A negative provision for loan losses of $650,000 was recorded in the first quarter of 2013 as the result of the net recoveries in that quarter and other credit quality indicators at that time. The provision for loan losses as a percentage of net charge-offs was not meaningful for first quarters of 2014 and 2013.   

The allowance for loan losses was $5.3 million at March 31, 2014, compared with $6.8 million at December 31, 2013.  The ratio of the allowance for loan losses to total loans was 1.51% at March 31, 2014, compared with 1.85% at December 31, 2013.  The ratio of the allowance for loan losses to non-performing loans (including TDR's) was 33.0% at March 31, 2014, compared with 34.3% at December 31, 2013. The ratio of the allowance for loan losses to non-accrual loans was 148.2% at March 31, 2014, compared with 97.4% at December 31, 2013.

Net Interest Income

Net interest income totaled $4.0 million in the three months ended March 31, 2014, compared with $3.6 million in the year-ago quarter and $4.0 million in the fourth quarter of 2013.  The net interest margin increased 30 basis points from the year-ago quarter and was 13 basis points higher than the fourth quarter of 2013.  Average interest-earning assets increased $7.5 million in the first quarter compared to the year-ago quarter, but were $4.4 million lower than the fourth quarter of 2013. The average balance in time deposits declined $48.1 million from the year-ago quarter, while average balances in lower-costing interest-bearing DDAs, savings and money market accounts increased $35.0 million, and non-interest-bearing DDAs increased $17.0 million over that same period.

The net interest margin was 3.50% in the first quarter of 2014, compared with 3.20% in the year-ago quarter and 3.37% in the fourth quarter of 2013.  The earning assets yield increased 7 basis points in the first quarter of 2014 compared with the year-ago quarter, due largely to growth in our loan portfolio which was funded largely from cash on deposit with the Federal Reserve and cash flows from our securities portfolio.  The cost of interest-bearing liabilities decreased 28 basis points over the same period as a result of maturing time accounts which either were renewed at lower rates or were transferred into our interest-bearing demand and money market accounts, which earn interest at lower rates than time accounts.  Also, we restructured advances from the Federal Home Loan Bank in November, 2013 which contributed to a 275 basis point decrease in the cost of borrowings in the first quarter compared to the year-ago quarter.   

Average interest-earning assets were $466.4 million in the first quarter, compared with $458.9 million in the year-ago quarter and $470.7 million in the fourth quarter of 2013.  The average balance of loans increased by $40.9 million, while average balance of interest earning cash and cash equivalents decreased $26.4 million and average investments decreased $7.1 million when compared with the year-ago quarter, as we used our excess liquidity position to fund loan growth. Total average loans and leases were 77.1% of total average interest-earning assets in the first quarter of 2014, compared with 69.4% in the year-ago quarter and 76.7% in the fourth quarter of 2013.      

Non-Interest Income and Non-Interest Expenses

Noninterest income was $1.2 million in the first quarter of 2014, which was a decrease of $116,000 or 8.9% from the year-ago quarter.  Nonrecurring gains, net of nonrecurring losses were $53,000 in the first quarter of 2014, compared to $84,000 in the first quarter of 2013.  There was a decline in service charges due to lower fee-based transaction volume related to changes in customer deposit account utilization.  The decrease in wealth management revenue is due largely to one less investment advisor being on staff in the first quarter of 2014 compared to the year-ago quarter.

Non-interest income accounted for 22.2% of total revenue in the first quarter of 2014, compared with 25.3% in the year-ago quarter.  Non-interest income accounted for 21.9% of total revenue in the prior quarter.

Non-interest expenses were $5.1 million for the first quarter of 2014, compared with $5.5 million in the year-ago quarter and $4.9 million for the prior quarter.  The decrease from the year-ago quarter is attributable to a $193,000 decrease in salaries and benefits, an $88,000 decrease in state franchise taxes, a $42,000 decrease in the FDIC insurance premium, and a $35,000 decrease in professional services.  The decrease in salaries and benefits is attributable to a decline in incentive compensation expense as loan originations during the quarter are down from the year-ago quarter.  The decrease in state franchise taxes is the result of a change in the tax law which changed how the tax is calculated in the first quarter of 2014.  The decrease in the FDIC insurance premium is a result of an upgrade in the Bank's risk classification for insurance assessment purposes.  The decrease in professional services is due primarily to the substantial improvement in our asset quality which has reduced the need for outside professional services related to the workout of classified assets.

The increase in noninterest expenses in the first quarter of 2014 compared to the fourth quarter of 2013 is primarily attributable to a $252,000 increase in salaries and benefits, which was the result of the reversal in the fourth quarter of 2014 of accruals recorded in the first three quarters of 2013 for senior management bonuses and deferred compensation.

The Company's efficiency ratio was 98.5% in the first quarter of 2014, compared with 112.4% in the year-ago quarter.

Income Taxes

The Company had net deferred tax assets totaling $11.3 million and $11.6 million with valuation allowances of $11.4 million and $11.2 million, respectively, at March 31, 2014 and December 31, 2013.  Included in net deferred tax assets are gross deferred tax assets of $12.0 million and $11.7 million at March 31, 2014 and December 31, 2013, respectively.  Deferred tax liabilities at March 31, 2014 were comprised entirely of the tax liability generated by the unrealized gain position of the available for sale securities portfolio.

About DCB Financial Corp    

DCB Financial Corp is a financial holding company formed under the laws of the State of Ohio. The Company is the parent of The Delaware County Bank & Trust Company, a state-chartered commercial bank. The Bank conducts business from its main offices at 110 Riverbend Avenue in Lewis Center, Ohio, and through its 13 branch offices located in Delaware County, Ohio and surrounding communities. The Bank provides customary retail and commercial banking and cash management services to its customers, including checking and savings accounts, time deposits, IRAs, safe deposit facilities, personal loans, commercial loans, commercial leases, real estate mortgage loans, night depository facilities and trust and personalized wealth management services.

Forward-Looking Statements

This press release contains certain forward-looking statements with respect to the financial condition, results of operations and business of DCB Financial Corp.  These forward-looking statements involve certain risks and uncertainties.  Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: an increase in competitive pressure in the banking industry; changes in the interest rate environment which may affect the net interest margin; changes in the regulatory environment; general economic conditions, either nationally or regionally, resulting, among other things, in a deterioration in credit quality; changes in business conditions and inflation; changes in the securities markets; changes in technology used in the banking business; our ability to maintain and increase market share and control expenses; increases in FDIC insurance premiums may cause earnings to decrease; and other risks set forth under the caption "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and in subsequent filings with the Securities and Exchange Commission.

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

SOURCE DCB Financial Corp