DCB Financial Corp Announces Third Quarter 2016 Results

LEWIS CENTER, Ohio, Nov. 10, 2016 /PRNewswire/ -- DCB Financial Corp (the "Company"), (OTCPink:DCBF), parent holding company of The Delaware County Bank & Trust Company, Lewis Center, Ohio (the "Bank") announced a net loss of $426,000 or $0.06 per diluted share for the three months ended September 30, 2016, compared to net income of $11.1 million or $1.52 per diluted share for the same period in 2015.

Third quarter results for 2016 included after-tax costs associated with the recently announced acquisition of the Company by First Commonwealth Financial Corporation ("First Commonwealth") of $651,000 or $0.09 per share. In the third quarter of 2015, the Company reversed a valuation allowance that had previously been recorded against its net deferred tax assets, resulting in a one-time tax benefit in the third quarter of 2015 of $10.7 million or $1.46 per diluted share. Pre-tax income was $400,000 for the third quarter of 2015.      

Net income was $21,000 or $0.00 per diluted share for the nine months ended September 30, 2016, compared to net income of $11.5 million or $1.58 per diluted share for the same period in 2015. Pre-tax income was $783,000 or $0.11 per diluted share for the nine months ended September 30, 2015.

On October 3, 2016, First Commonwealth and the Company announced that they had entered into a definitive merger agreement which provides for the merger of the Company with and into First Commonwealth following the satisfaction of certain closing conditions, including approval by the Company's shareholders and approval by appropriate bank regulatory authorities (the "Merger"). Under the terms of the definitive merger agreement, which has been unanimously approved by the board of directors of both companies, the Company's shareholders will be entitled to receive either 1.427 shares of First Commonwealth common stock or $14.50 in cash for each common share of the Company, subject to proration provisions set forth in the definitive merger agreement. Aggregate cash consideration to Company shareholders is fixed at $21,283,773, which is approximately 20% of the Merger consideration, and the remaining Merger consideration will be in the form of stock consideration. The Merger is expected to be completed in the second quarter of 2017.

Balance Sheet Highlights 

Total assets were $565.4 million at September 30, 2016, compared with $556.1 million at June 30, 2016 and $541.3 million at December 31, 2015. Much of the increase in assets in the first nine months of 2016 was in the Company's loan portfolio (including held for sale), which increased $13.0 million or 3.4%, to $391.5 million at September 30, 2016.

Deposits totaled $489.5 million at September 30, 2016, compared with $467.6 million at June 30, 2016 and $474.5 million at December 31, 2015. Most of the increase during the third quarter was the result of an increase in municipal deposit balances of $19.5 million during the quarter.

Shareholders' equity was $59.4 million at September 30, 2016, compared with $59.9 million at June 30, 2016 and $58.8 million at December 31, 2015. The decrease in shareholders' equity in the third quarter was attributable primarily to the net loss for the quarter.  The Company's tangible common equity to tangible assets ratio was 10.5% at September 30, 2016.

The Bank's common equity tier 1 capital ratio was 12.26% and its total risk-based capital ratio was 13.44% at September 30, 2016, both of which were well above the regulatory thresholds required to be classified as a "well-capitalized" institution, which are 6.5% and 10.0%, respectively.  

Asset Quality and the Provision for Loan Losses

Delinquent loans (including non-accrual loans) totaled $3.7 million or 0.94% of total loans at September 30, 2016, compared to $1.6 million or 0.41% of total loans at June 30, 2016 and $1.5 million or 0.41% of total loans at December 31, 2015.  Non-accrual loans totaled $3.4 million or 0.86% of total loans at September 30, 2016, compared to $1.4 million or 0.36% of total loans at June 30, 2016 and $1.2 million or 0.32% of total loans at December 31, 2015. The increase in non-accrual loans resulted from a commercial real estate mortgage with a balance of $2.1 million that was moved to non-accrual status in the third quarter.

Non-performing assets were $9.9 million or 1.77% of total assets at September 30, 2016, compared to $8.0 million or 1.43% of total assets at June 30, 2016 and $7.3 million or 1.35% of total assets at December 31, 2015.  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 $6.4 million at September 30, 2016, compared to $6.5 million at June 30, 2016 and $6.0 million at December 31, 2015.

Net recoveries of $2,000 were recorded in the third quarter of 2016, compared to net recoveries of $255,000 in the second quarter of 2016 and net recoveries of $192,000 in the year ago quarter. There was no provision for loan losses recorded in the three months and nine months ended September 30, 2016.  The Company recorded a negative provision for loan losses of $150,000 in the third quarter of 2015, due primarily to the net recoveries recorded in that quarter and to the favorable impact on the allowance for loan losses of the reduction in non-performing loans during that quarter. The negative provision for loan losses recorded in the third quarter of 2015 had the effect of offsetting the provision for loan losses of $150,000 that was recorded in the first quarter of 2015, resulting in no provision for loan losses for the nine months ended September 30, 2015. The allowance for loan losses was $4.6 million at both September 30, 2016 and at June 30, 2016, and was $4.3 million at December 31, 2015.  The ratio of the allowance for loan losses to total loans was 1.18% at September 30, 2016, compared to 1.17% at June 30, 2016 and 1.14% at December 31, 2015. 

The ratio of the allowance for loan losses to non-performing loans (including TDR's) was 46.9% at September 30, 2016, compared to 58.0% at June 30, 2016 and 59.7% at December 31, 2015. The ratio of the allowance for loan losses to non-accrual loans was 136% at September 30, 2016, compared to 323% at June 30, 2016 and 355% at December 31, 2015.

Net Interest Income

Net interest income totaled $4.3 million in the quarter ended September 30, 2016, compared to $4.2 million in the third quarter of 2015 and $4.2 million in the second quarter of 2016. The net interest margin was 3.31% in the third quarter of 2016, compared to 3.35% in the year-ago quarter and 3.41% in the second quarter of 2016. The decline in the net interest margin compared to the second quarter of 2016 was attributable to growth in interest-earning balances in the third quarter being concentrated in lower yielding securities and cash balances.

Average interest-earning assets were $509.6 million in the third quarter of 2016, compared to $496.5 million in the year-ago quarter and $499.1 million in the second quarter of 2016. Average loans outstanding in the third quarter of 2016 were $394.4 million or 77.4% of average interest-earning assets, compared with $383.3 million or 77.2% of average interest-earning assets in the year-ago quarter and $395.7 million or 79.3% of total average interest-earning assets in the second quarter of 2016. 

Average interest-bearing deposit balances were $356.8 million in the third quarter of 2016, compared to $350.4 million in the year-ago quarter and $342.6 million in the second quarter of 2016. The average balances of interest-bearing demand, savings and money market accounts (transaction accounts) were $301.4 million in the third quarter of 2016 compared to $277.2 million in the year-ago quarter and $290.2 million in the second quarter of 2016. Transaction accounts comprised 84.5% of total interest-bearing deposits in the third quarter of 2016, compared to 79.1% in the year-ago quarter and 84.7% in the second quarter of 2016.

Net interest income totaled $12.6 million in the nine months ended September 30, 2016, compared to $12.5 million in the year-ago period.  The net interest margin was 3.33% for the nine months ended September 30, 2016, compared to 3.41% in the year-ago period. 

Average interest-earning assets were $501.5 million in the nine months ended September 30, 2016, compared to $491.7 million in the year-ago period. Average loans outstanding in the nine months ended September 30, 2016 increased $9.8 million compared to the year-ago period, and totaled 77.9% of total interest-earning assets in the nine months ended September 30, 2016, compared with 77.4% in the year-ago period.

The average balance in time deposits decreased $18.5 million in the nine months ended September 30, 2016 compared with the year-ago period, while the average balances in lower-costing transaction accounts increased $13.4 million. Transaction accounts comprised 83.8% of total interest-bearing deposits in the first nine months of 2016, compared to 78.9% in the year-ago. The changes in the composition of average deposit balances in the three and nine months ended September 30, 2016 was primarily the result of the movement of large municipal time deposit maturities into money market accounts and overnight sweep accounts.

Non-Interest Income and Non-Interest Expenses

Non-interest income was $1.7 million in the third quarter of 2016, compared to $1.2 million in the year-ago quarter and $1.8 million in the second quarter of 2016. Gains on sales of loans totaled $351,000 in the third quarter of 2016, and $829,000 for the first nine months of 2016, reflecting the launch in the second quarter of secondary market sales of SBA and residential mortgage loans. Total loan sales in the third quarter were $9.6 million, of which $2.1 million were the 75% guaranteed portion of SBA loans and $7.5 million were residential mortgages. Gains on sales of SBA loans and residential mortgages in the third quarter totaled $191,000 and $160,000, respectively, compared to $414,000 and $64,000 in the second quarter of 2016. The Company did not sell any loans in 2015 or in the first quarter of 2016. Service charges, wealth management fees and treasury management fees increased an aggregate $115,000 or 11.0% in the third quarter of 2016 compared with the year-ago quarter, primarily from the impact of changes to certain of the Bank's fees and service charges and from business development activities.

Non-interest income was $4.8 million in the first nine months of 2016, compared to $3.6 million in the year ago period. Gains on sales of loans accounted for approximately 65% of the increase in non-interest income, with the balance of the increase being driven by changes to certain of the Bank's fees and service charges and from business development activities.

Non-interest income accounted for 28.8% of total revenue in the third quarter of 2016, compared to 22.0% in the year-ago quarter and 29.8% in the second quarter of 2016.  Non-interest income accounted for 27.8% of total revenue in the first nine months of 2016, compared with 22.1% in the year-ago period.

Non-interest expenses were $6.6 million for the third quarter of 2016, compared with $5.2 million in the year-ago quarter and $5.7 million for the second quarter of 2016. Merger related expenses accounted for approximately 69% of the increase in non-interest expenses compared to the year-ago quarter. Salaries and benefits increased $415,000 in the third quarter of 2016 compared to the year-ago quarter due primarily to the previously-announced hiring of the small business lending team and residential mortgage originators in the fourth quarter of 2015. The Company's efficiency ratio was 110.3% in the third quarter of 2016, compared with 95.0% in the year-ago quarter and 93.7% in the second quarter of 2016. 

Non-interest expenses were $17.6 million in the first nine months of 2016, compared to $15.3 million in the first nine months of 2015. Merger related expenses accounted for $987,000, or 43% of the increase in non-interest expenses. Salaries and benefits increased $1.1 million due primarily to the hiring of the small business lending team and residential mortgage originators. The Company's efficiency ratio was 101.2% for the first nine months of 2016, compared to 95.0% in the year-ago period.

Income Taxes

An income tax benefit of $190,000 and $233,000, respectively, was recorded in the three months and nine months ended September 30, 2016. The amount of income tax expense or benefit recognized in 2016 was impacted by the overall amount of pre-tax income and the amount of pre-tax income that is not subject to federal income taxes, which is comprised primarily of income from bank-owned life insurance that was partially offset by non-deductible merger related expenses.     

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 nine full-service and four limited-service branch offices located in Central Ohio. 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, SBA loans, 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, including certain plans, expectations, goals, projections, and statements.  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: ability to obtain regulatory approvals for the Merger in a timely manner and without significant expense or other burdens; ability to meet other closing conditions to the Merger, including approval by the Company's shareholders; delay in closing the Merger; difficulties and delays in integrating the businesses of the Company and First Commonwealth or fully realizing cost savings and other benefits; business disruption following the Merger; 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 in, among other things, 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, 2015, 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