DCB Financial Corp Announces Third Quarter 2014 Results

LEWIS CENTER, Ohio, Nov. 13, 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 $50,000 or $0.01 per diluted share for the three months ended September 30, 2014, compared to a net loss of $127,000 or $0.02 per diluted share for the same period in 2013. Non-recurring gains and losses in the third quarter of 2014 aggregated $17,000 of net losses, compared to net non-recurring losses of $51,000 in the year-ago quarter.

Net income was $206,000 or $0.03 per diluted share for the nine months ended September 30, 2014, compared to net income of $171,000 or $0.02 per diluted share for the same period in 2013. Non-recurring gains and losses in the nine months ended September 30, 2014 aggregated $80,000 of net losses, compared to net non-recurring gains, negative provision for loan losses and income tax benefit aggregating $1.4 million in the year-ago period. There was no loan loss provision or income tax benefit in the nine months ended September 30, 2014.

Ronald J. Seiffert, President and CEO for the Company said, "In the third quarter we undertook a number of initiatives relating to matters of corporate governance, capital management, corporate equity plans and the special meeting of shareholders held in October, each of which is expected to provide long-term benefits to the Company and its shareholders.  Our third quarter earnings were impacted by the non-routine expenses related to these initiatives of approximately $100,000."

Seiffert continued, "We continued to make good progress in the third quarter in shoring-up the Company's asset quality metrics, as evidenced by a $1.3 million decrease in non-performing assets during the quarter, bringing the total year-to-date reduction in non-performing assets to $7.8 million or 36%. Of the $14.1 million of non-performing assets at the end of the third quarter, $9.8 million or 70% of those are loans whose terms have been modified in a troubled debt restructuring, but which are paying in compliance with their modified terms and accruing interest."

Balance Sheet Highlights
Total assets were $500.3 million at September 30, 2014, compared with $500.5 million at June 30, 2014 and $502.4 million at December 31, 2013.  Assets sold in connection with the sale of the Company's Marysville branch in the first quarter totaled $18.7 million and included cash of $12.5 million, loans of $4.8 million and fixed assets 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, increased $11.9 million in the third quarter, and were $369.6 million at September 30, 2014, compared with $357.7 million at June 30, 2014.  Strength in the Company's retail lending operations continued to drive loan growth in the third quarter, with residential mortgages increasing $11.4 million and $26.9 million in the three and nine months ended September 30, 2014.

Deposits totaled $445.5 million at September 30, 2014, compared with $436.1 million at the end of the second quarter. Money market accounts increased $16.8 million in the third quarter, which was partially offset by a decrease in savings, and demand accounts aggregating $8.5 million. Consistent with the financial sector generally, the very low interest rate environment continues to influence the Company's deposit composition, as customer preference for non-maturity savings accounts outweighs that of time accounts.    

Stockholders' equity was $46.7 million at September 30, 2014, compared with $46.8 million at June 30, 2014, and $45.3 million at December 31, 2013. The increase since December was primarily the result of the difference between the unrealized loss of $940,000 on one collateralized debt obligation ("CDO") at December 31, 2013, and the actual loss recognized upon the sale of that 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 the CDO during that quarter.  The remaining increase in stockholder's equity was due primarily to an increase in unrealized gains on securities available-for-sale and to net income in the first nine months of 2014.

The Bank's Tier 1 leverage ratio was 8.96% and its total risk-based capital ratio was 13.57% at the end of the third quarter, both of which were well above 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-accrual) totaled $3.1 million or 0.84% of total loans at September 30, 2014, compared to $5.7 million or 1.58% of total loans at June 30, 2014 and $8.1 million or 2.24% at the end of 2013.  Nonaccrual loans totaled $3.0 million or 0.81% of total loans at September 30, 2014, compared to $4.6 million or 1.29% of total loans at June 30, 2014 and $6.9 million or 1.90% of total loans at December 31, 2013.

Non-performing assets were $14.1 million or 2.81% of total assets at September 30, 2014, compared with $15.3 million or 3.06% of total assets at June 30, 2014 and $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 $9.8 million at September 30, 2014, compared to $9.3 million at June 30, 2014 and $12.8 million at December 31, 2013.

Much of the $7.8 million reduction in non-performing assets in 2014 resulted from the execution of previously disclosed strategies developed in the fourth quarter of 2013 to accelerate the disposition of certain troubled assets. The Company's exposure to three troubled commercial relationships with aggregate balances at the end of 2013 of $7.0 million was reduced by $5.8 million in 2014 through a combination of collection actions, negotiated settlements, and asset sales, which resulted in charge-offs of $1.9 million and cash collections of $3.9 million.      

Net charge-offs were $392,000 or 0.43% (annualized) of average loans in the third quarter, compared to net charge-offs of $32,000 or 0.04% in the year-ago quarter. Net charge-offs were $2.5 million or 0.91% (annualized) of average loans in the first nine months of 2014, compared to net recoveries of $480,000 in the year-ago period. The three commercial relationships discussed above comprised approximately 71% of the gross charge-offs in the first nine months of 2014, which were charged against specific allowance allocations established in the fourth quarter of 2013 in connection with the non-performing asset reduction strategy developed in last year's fourth quarter.

There was no provision for loan losses recorded in the first nine months of 2014, as the $3.3 million loan loss provision recorded in the fourth quarter of 2013 included specific allocations for the three large relationships charged-off in the first nine months of 2014. Negative provisions for loan losses of $890,000 were recorded in the first half of 2013 as the result of the net recoveries and other credit quality indicators in that period. No loan loss provision was recorded in the third quarter of 2013. The provision for loan losses as a percentage of net charge-offs was not meaningful for first nine months of 2014 and 2013.  On a linked-quarters basis, the provision for loan losses as a percentage of net charge-offs was 93.4% for the five quarters ending September 30, 2014.    

The allowance for loan losses was $4.2 million at September 30, 2014, compared with $4.6 million at June 30, 2014 and $6.7 million at December 31, 2013.  The ratio of the allowance for loan losses to total loans was 1.13% at September 30, 2014, compared with 1.28% at June 30, 2014 and 1.85% at December 31, 2013.  The ratio of the allowance for loan losses to non-performing loans (including TDR's) was 32.5% at September 30, 2014, compared with 33.9% at June 30, 2014 and 34.1% at December 31, 2013. The ratio of the allowance for loan losses to non-accrual loans was 139% at September 30, 2014, compared with 109% at June 30, 2014 and 97% at December 31, 2013.

Net Interest Income
Net interest income totaled $4.0 million in the three months ended September 30, 2014, compared with $3.9 million in the year-ago quarter and $4.0 million in the second quarter of 2014.  The net interest margin increased 6 basis points in the third quarter compared with the year-ago quarter but was 11 basis points lower than the second quarter of 2014. 

The net interest margin was 3.40% in the third quarter of 2014, compared with 3.34% in the year-ago quarter and 3.51% in the second quarter of 2014.  The earning assets yield decreased 4 basis points and 9 basis points in the third quarter of 2014 compared with the year-ago quarter and second quarter of 2014, respectively, primarily due to the effect of the reinvestment of loan and securities amortization at current market rates, and to the effect of purchase premiums written off in the third quarter of 2014 on the prepayment of certain investment securities and purchased mortgages.  The cost of interest-bearing liabilities decreased 13 basis points in the third quarter compared to the year-ago quarter 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, the Company restructured advances from the Federal Home Loan Bank in November, 2013 which contributed to a 246 basis point decrease in the cost of borrowings in the third quarter compared to the year-ago quarter. The cost of interest-bearing liabilities was virtually unchanged in the third quarter of 2014 compared with the second quarter of 2014.  

Average interest-earning assets were $463.5 million in the third quarter, compared with $462.6 million in the year-ago quarter and $453.4 million in the second quarter of 2014.  The average balance of loans increased by $8.5 million, while average balance of interest earning cash and cash equivalents decreased $5.6 million and average investments decreased $2.1 million when compared with the year-ago quarter, as the Company used its excess liquidity position to fund organic loan growth. Total average loans were 78.2% of total average interest-earning assets in the third quarter of 2014, compared with 76.5% in the year-ago quarter and 78.7% in the second quarter of 2014.  The average balance of time deposits declined $31.2 million in the third quarter compared with the year-ago quarter, while average balances in lower-costing interest-bearing demand, savings and money market accounts increased $21.3 million, and the average balance of non-interest-bearing demand accounts increased $9.3 million over that same period.

Net interest income totaled $11.9 million in the first nine months of 2014, which was an increase of $666,000 or 5.9% compared with $11.3 million in the year-ago period.  The net interest margin was 3.45% for the nine months ended September 30, 2014, compared with 3.28% in the year-ago period.  The earning asset yield increased 1 basis point in the first nine months of 2014 compared with the year-ago period, and the cost of interest-bearing liabilities decreased 18 basis points over the same period.

Average interest-earning assets were $461.6 million in the first nine months of 2014, which was an increase of $2.7 million from the year-ago period. Total average loans were 77.9% of total interest-earning assets in the nine months ended September 30, 2014, compared with 73.2% in the year-ago period. The average balance in time deposits decreased $40.8 million in the first nine months of 2014 compared with the year-ago period, while the average balances in lower-costing interest-bearing demand, savings and money market accounts increased $25.8 million, and the average balance of non-interest-bearing demand accounts increased $13.3 million.

Non-Interest Income and Non-Interest Expenses
Non-interest income was $1.1 million in the third quarter of 2014, compared to $1.2 million in the year-ago quarter and $996,000 in the second quarter of 2014. Nonrecurring writedowns and losses, net of nonrecurring gains were $17,000 in the third quarter, compared to $51,000 in the year-ago quarter and $118,000 in the second quarter of 2014. The Company recognized $241,000 of gains on the sales of securities in the third quarter, which substantially offset writedowns and losses on loans held-for-sale of $189,000 and losses on the sale of real estate owned of $69,000. During the fourth quarter, the Company liquidated all remaining loans held-for-sale at no additional loss.

Non-interest income was $3.3 million in the first nine months of 2014, compared to $3.9 million in the year-ago period.  Non-recurring writedowns and losses, net were $80,000 in the first nine months of 2014, compared to net non-recurring gains of $170,000 in the year-ago period. In addition, service charges decreased $180,000 in the first nine months of 2014 compared to the year-ago period due to lower volumes of overdraft and debit card transactions.

Non-interest income (net of nonrecurring income, gains and losses and gains/losses on the sales of securities) accounted for 22.6% of total revenue in the third quarter of 2014, compared with 24.2% in the year-ago quarter and 21.8% in the second quarter of 2014.  Non-interest income accounted for 22.2% of total revenue in the first nine months of 2014, compared with 24.6% in the year-ago period.

Non-interest expenses were $5.1 million for the third quarter of 2014, compared with $5.2 million in the year-ago quarter and $4.9 million for the second quarter of 2014.  The decrease from the year-ago quarter was primarily attributable to a $103,000 decrease in salaries and benefits and a $53,000 decrease in state franchise taxes.  The decrease in salaries and benefits was attributable to a decline in incentive compensation expense as loan originations during the quarter were down from the year-ago quarter, and to the elimination of $47,000 of salaries expense attributable to the Company's former Marysville branch.  The decrease in state franchise taxes is the result of a change in the tax law which changed how the tax was calculated in the current year.  Professional services in the third quarter of 2014 included approximately $100,000 of non-routine legal expenses covering matters of corporate governance, capital management, corporate equity plans and the special meeting of shareholders held in October, among other things.

The Company's efficiency ratio was 98.7% in the third quarter of 2014, compared with 101.8% in the year-ago quarter, and 96.2% in the second quarter of 2014. 

Non-interest expenses were $15.0 million in the nine months of 2014, which was a decrease of $1.1 million or 6.7% compared to the year-ago period as salaries and benefits expense decreased $449,000 and franchise taxes decreased $175,000 for the same reasons discussed above. Professional services decreased $343,000 due to the substantial reduction in non-performing assets in 2014 which has resulted in a reduced need for outside professional services related to the workout of such assets.   

The Company's efficiency ratio was 98.1% for the first nine months of 2014, compared to 107.8% in the prior year.

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 14 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