DCB Financial (DCBF) 10-Q 2010 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: MARCH 31, 2010

OR

o 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. Yesþ Noo

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). Yeso Noo

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 filerso Accelerated filero Non-accelerated filero Smaller reporting companyþ

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yeso Noþ

As of May 7, 2010, the latest practicable date, 3,717,385 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, 2010 and 2009

Table of Contents

	Page
PART I — FINANCIAL INFORMATION
ITEM 1 — Financial Statements
Condensed Consolidated Balance Sheets		3
Condensed Consolidated Statements of Operations		4
Condensed Consolidated Statements of Comprehensive Income (Loss)		5
Condensed Consolidated Statements of Cash Flows		6
Notes to the Condensed Consolidated Financial Statements		7
ITEM 1A — Risk Factors		20
ITEM 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
ITEM 3 — Quantitative and Qualitative Disclosures About Market Risk		26
ITEM 4 — Controls and Procedures		27
PART II — OTHER INFORMATION		28
SIGNATURES		30
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

2

DCB FINANCIAL CORP

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

Item 1.Financial Statements

	March 31,			December 31,
	2010			2009
	(unaudited)
ASSETS
Cash and due from financial institutions	$	11,475		$	10,082
Interest bearing deposits		54,025			26,371
Federal funds sold and overnight investments		—			5,000
Total cash and cash equivalents		65,500			41,453
Securities available for sale		94,455			94,100
Securities held to maturity		1,672			1,752
Total securities		96,127			95,852
Loans held for sale, at lower of cost or fair value		2,313			2,442
Loans		480,727			489,482
Less allowance for loan losses		(11,314	)		(10,479	)
Net loans		469,413			479,003
Real estate owned		4,166			4,912
Investment in FHLB stock		3,754			3,773
Premises and equipment, net		14,052			14,435
Investment in unconsolidated affiliates		1,434			1,439
Bank-owned life insurance		16,493			16,326
Deferred federal income taxes		5,413			5,239
Accrued interest receivable and other assets		9,570			10,148
Total assets	$	688,235		$	675,022
LIABILITIES
Deposits
Noninterest-bearing	$	61,329		$	60,502
Interest-bearing		512,844			496,953
Total deposits		574,173			557,455
Federal funds purchased and other short-term borrowings		1,261			3,011
Federal Home Loan Bank advances		61,507			63,148
Accrued interest payable and other liabilities		2,068			2,065
Total liabilities		639,009			625,679
SHAREHOLDERS’ EQUITY
Common stock, no par value, 7,500,000 shares authorized, 4,273,908 issued		3,785			3,785
Retained earnings		59,325			60,213
Treasury stock, at cost, 556,523 shares		(13,494	)		(13,494	)
Accumulated other comprehensive loss		(390	)		(1,161	)
Total shareholders’ equity		49,226			49,343
Total liabilities and shareholders’ equity	$	688,235		$	675,022

See notes to the condensed consolidated financial statements.

3

DCB FINANCIAL CORP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended
	March 31,
	2010			2009
Interest and dividend income
Loans	$	6,456		$	7,104
Taxable securities		722			1,027
Tax-exempt securities		199			274
Federal funds sold and other		18			77
Total interest income		7,395			8,482
Interest expense
Deposits		1,210			2,295
Borrowings		691			910
Total interest expense		1,901			3,205
Net interest income		5,494			5,277
Provision for loan losses		1,961			3,435
Net interest income after provision for loan losses		3,533			1,842
Noninterest income
Service charges on deposit accounts		605			598
Trust department income		225			236
Net gain (loss) on sales of assets		98			(25	)
Gains on sale of loans		29			51
Treasury management fees		130			135
Data processing servicing fees		132			135
Earnings on bank owned life insurance		167			167
Total other-than-temporary impairment losses		(80	)		—
Portion of loss recognized in (reclassified from) other comprehensive loss (before taxes)		(950	)		—
Net impairment losses recognized in income		(1,030	)		—
Other		80			101
Total noninterest income		436			1,398
Noninterest expense
Salaries and other employee benefits		2,624			2,524
Occupancy and equipment		1,030			1,067
Professional services		307			163
Advertising		74			91
Postage, freight and courier		87			85
Supplies		30			77
State franchise taxes		152			169
Federal deposit insurance premiums		396			160
Other		788			739
Total noninterest expense		5,488			5,075
Loss before income tax credits		(1,519	)		(1,835	)
Income tax credits		(631	)		(764	)
Net loss	$	(888	)	$	(1,071	)
Basic and diluted loss per common share	$	(0.24	)	$	(0.29	)
Dividends per share	$	—		$	0.02

See notes to the condensed consolidated financial statements.

4

DCB FINANCIAL CORP

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Dollars in thousands)

	Three Months Ended
	March 31,
	2010			2009
Net loss	$	(888	)	$	(1,071	)
Reclassification adjustment for other-than-temporary impairment loss recognized in income, net of taxes of $323		627			—
Unrealized gains on securities available for sale, net of taxes of $74 and $100 for the respective periods		144			195
Comprehensive loss	$	(117	)	$	(876	)
Accumulated other comprehensive income (loss)	$	(390	)	$	1,030

See notes to the condensed consolidated financial statements.

5

DCB FINANCIAL CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Three Months Ended
	March 31,
	2010			2009
Cash flows provided by (used in) operating activities	$	2,716		$	(3,743	)
Cash flows provided by investing activities
Securities
Purchases		(9,861	)		(7,479	)
Maturities, principal payments and calls		9,481			12,411
Net change in loans		7,740			(3,447	)
Proceeds from sale of real estate owned		688			560
Investment in unconsolidated affiliate		5			(6	)
Premises and equipment expenditures		(49	)		(99	)
Net cash flows provided by investing activities		8,004			1,940
Cash flows provided by financing activities
Net change in deposits		16,718			21,269
Net change in federal funds purchased and other short-term borrowings		(1,750	)		(911	)
Repayment of Federal Home Loan Bank advances		(1,641	)		(2,905	)
Cash dividends paid		—			(568	)
Net cash provided by financing activities		13,327			16,885
Net change in cash and cash equivalents		24,047			15,082
Cash and cash equivalents at beginning of period		41,453			33,632
Cash and cash equivalents at end of period	$	65,500		$	48,714
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings	$	1,996		$	3,141
Supplemental disclosure of non-cash investing and financing activities:
Unrealized gains on securities designated as available for sale, net of tax benefits	$	144		$	195
Unrealized loss on securities designated as held-to-maturity, net of taxes	$	53		$	—
Transfers from loans to real estate owned	$	16		$	—
Cash dividends declared but unpaid	$	—		$	595

See notes to the condensed consolidated financial statements.

6

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands)

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, 2010, and its results of operations and cash flows for the three month periods ended March 31, 2010 and 2009. 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, 2009. 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, 2009. The Corporation has consistently followed these policies in preparing this Form 10-Q. The results of operations for the three months ended March 31, 2010, 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 and ORECO (collectively referred to herein after as the “Corporation”). 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, 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.

Income tax expense is based on the effective tax rate expected to be applicable for the entire year. 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 valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

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,
	2010		2009
Weighted-average common shares outstanding (basic)		3,717,385		3,717,385
Dilutive effect of assumed exercise of stock options		—		—
Weighted-average common shares outstanding (diluted)		3,717,385		3,717,385

7

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

Options to purchase 200,742 shares of common stock with a weighted-average exercise price of $19.59, were outstanding at March 31, 2010, but were excluded from the computation of common share equivalents for the three month period then ended because the exercise price was greater than the average fair value of the shares.

Options to purchase 159,284 shares of common stock with a weighted-average exercise price of $22.92, were outstanding at March 31, 2009, but were excluded from the computation of common share equivalents for the period then ended because the exercise price was greater than the average fair value of the shares during the period.

Stock option plan

The Corporation’s shareholders approved an employee share option plan (the “Plan”) in May 2004. This plan grants certain employees the right to purchase shares at a predetermined price. The plan is limited to 300,000 shares. The shares granted to employees vest 20% per year over a five year period. The options expire after ten years. No shares were granted for the period ending March 31, 2010. At March 31, 2010, 67,504 shares were exercisable and 98,674 shares were available for grant under this plan.

The Corporation recognizes compensation cost for unvested equity-based awards based on their grant-date fair value. The Corporation recorded $24 and $32 in compensation cost for equity-based awards that vested during the three months ended March 31, 2010 and 2009, respectively. The Corporation has $220 of total unrecognized compensation cost related to non-vested equity-based awards granted under its stock option plan as of March 31, 2010, which is expected to be recognized over a weighted-average period of 4.2 years.

8

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except share data)

A summary of the status of the Corporation’s stock option plan as of March 31, 2010 and December 31, 2009, and changes during the periods then ended are presented below:

				Three Months Ended
				March 31,
				2010
						WEIGHTED
				WEIGHTED		AVERAGE
				AVERAGE		REMAINING
				EXERCISE		CONTRACTUAL
	SHARES			PRICE		LIFE
Outstanding at beginning of period		204,883		$	19.59	8.6 years
Forfeited		(4,141	)		14.87
Outstanding at end of period		200,742		$	19.59	8.3 years
Options exercisable at period end		67,504		$	23.96

				Year Ended
				December 31,
				2009
						WEIGHTED
				WEIGHTED		AVERAGE
				AVERAGE		REMAINING
				EXERCISE		CONTRACTUAL
	SHARES			PRICE		LIFE
Outstanding at beginning of year		159,284		$	22.92	8.2 years
Granted		55,566			8.93	9.5 years
Forfeited		(9,967	)		21.30
Outstanding at end of year		204,883		$	19.59	8.6 years
Options exercisable at year end		63,005		$	24.77
Weighted-average fair value of options granted during the year				$	0.76

9

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except share data)

The following information applies to options outstanding at March 31, 2010:

NUMBER OUTSTANDING	RANGE OF EXERCISE PRICES
97,097	$23.00 – $30.70
50,942	$16.90
52,703	$7.50 – $9.00

Recent Accounting Standards: FASB ASC 860-10 relates to accounting for transfers of financial assets and changes the derecognition guidance for transferors of financial assets, including entities that sponsor securitizations. The standard also eliminates the exemption from consolidation for qualifying special-purpose entities (QSPEs). As a result, all existing QSPEs need to be evaluated to determine whether the QSPE should be consolidated.

FASB ASC 860-10 is effective as of the beginning of a reporting entity’s first annual reporting period beginning January 1, 2010 as to the Corporation, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The recognition and measurement provisions must be applied to transfers that occur on or after the effective date. Early application is prohibited. The standard also requires additional disclosures about transfers of financial assets that occur both before and after the effective date. The Corporation adopted the standard effective January 1, 2010, without significant effect on its consolidated financial statements.

FASB ASC 860-10 also improves how enterprises account for and disclose their involvement with variable interest entities (VIE’s), which are special-purpose entities, and other entities whose equity at risk is insufficient or lack certain characteristics. Among other things, FASB ASC 860-10 changes how an entity determines whether it is the primary beneficiary of a variable interest entity (VIE) and whether that VIE should be consolidated.

The standard requires an entity to provide significantly more disclosures about its involvement with VIEs. As a result, the Corporation must comprehensively review its involvements with VIEs and potential VIEs, including entities previous considered to be qualifying special purpose entities, to determine the effect on its consolidated financial statements and related disclosures.

FASB ASC 860-10 is effective as of the beginning of a reporting entity’s first annual reporting period that begins January 1, 2010 and for interim periods within the first annual reporting period. Earlier application is prohibited. The Corporation adopted the standard effective January 1, 2010, without significant effect on its consolidated financial statements.

Application of Critical Accounting Policies

DCB’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.

10

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share data)

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

The allowance is regularly reviewed by management to determine whether the amount is considered adequate to absorb probable losses. This evaluation includes specific loss estimates on certain individually reviewed loans, statistical loss estimates for loan pools that are based on historical loss experience, and general loss estimates that are based upon the size, quality, and concentration characteristics of the various loan portfolios, adverse situations that may affect a borrower’s ability to repay, and current economic and industry conditions. Also considered as part of that judgment is a review of the Bank’s trends in delinquencies and loan losses, as well as trends in delinquencies and losses for the region and nationally, and economic factors.

The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on management’s current judgment about the credit quality of the loan portfolio. While the Corporation strives to reflect all known risk factors in its evaluations, judgment errors may occur.

The valuation of other assets requires that management utilize a variety of estimates and analysis to determine whether an asset is impaired or other-than-temporarily impaired. After determining the appropriate methodology for fair value measurement, management then evaluates whether or not declines in fair value below book value are temporary or other-than-temporary impairments. If it is determined that measured impairment is other-than-temporary the appropriate loss recognition is recorded within the period that OTTI is recognized. Generally, management utilizes third parties to provide appraisals, analysis or market pricing in support of OTTI analysis.

11

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)

NOTE 2 — SECURITIES

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

			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	March 31, 2010
U.S. Government and agency obligations	$	28,356	$	324	$	(54	)	$	28,626
State and municipal obligations		25,127		647		(24	)		25,750
Corporate bonds		1,011		41		—			1,052
Mortgage-backed and related securities		37,765		1,212		(2	)		38,975
Total debt securities		92,259		2,224		(80	)		94,403
Other securities		57		7		(12	)		52
Total	$	92,316	$	2,231	$	(92	)	$	94,455

			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	December 31, 2009
U.S. Government and agency obligations	$	27,235	$	297	$	(77	)	$	27,455
State and municipal obligations		25,444		543		(35	)		25,952
Corporate bonds		1,012		27		—			1,039
Mortgage-backed and related securities		38,455		1,144		(8	)		39,591
Total debt securities		92,146		2,011		(120	)		94,037
Other securities		57		20		(14	)		63
Total	$	92,203	$	2,031	$	(134	)	$	94,100

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

	Adjusted		Gross			Estimated
	Amortized		Unrealized			Fair
	Cost		Losses			Value
	March 31, 2010
Collateralized debt obligations	$	4,380	$	(2,708	)	$	1,672

12

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)

	Adjusted		Gross			Estimated
	Amortized		Unrealized			Fair
	Cost		Losses			Value
	December 31, 2009
Collateralized debt obligations	$	5,410	$	(3,658	)	$	1,752

The Corporation’s investment in held to maturity securities was comprised of the following as of March 31, 2010:

Collateralized debt obligations determined to be other than temporarily impaired.

	March 31,			December 31,
	2010			2009
Carrying value before impairment	$	5,410		$	8,031
Other than temporary impairment due to credit quality issues		(1,030	)		(2,621	)
Adjusted carrying value		4,380			5,410
Other than temporary impairment not related to credit quality issues		(2,708	)		(3,658	)
Total fair value of securities held to maturity	$	1,672		$	1,752

Credit Losses Recognized on Investments

The following table provides information about debt securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income for the three month periods ended March 31, 2010 and 2009.

	Accumulated Credit Losses
	2010		2009
Credit losses on debt securities held
Beginning of period	$	2,621	$	—
Additions related to other-than-temporary losses not previously recognized		1,030		—
Reductions due to sales		—		—
Reductions due to change in intent or likelihood of sale		—		—
Additions related to increases in previously recognized other-than-temporary losses		—		—
Reductions due to increases in expected cash flows		—		—
End of period	$	3,651	$	—

13

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at March 31, 2010 and December 31, 2009:

March 31, 2010

	(Less than 12 months)							(12 months or longer)
			Estimated		Gross					Estimated		Gross					Estimated		Total
Description of	Number of		Fair		Unrealized			Number of		Fair		Unrealized			Number of		Fair		Unrealized
Securities	investments		value		losses			investments		value		losses			investments		value		losses
										(Restated)							(Restated)
U.S. Government and agency obligations		8	$	8,199	$	(54	)		—	$	—	$	—			8	$	8,199	$	(54	)
State and municipal obligations		6		2,450		(20	)		1		303		(4	)		7		2,754		(24	)
Mortgage-backed and other securities		6		629		(2	)		2		52		(12	)		8		681		(14	)
Collateralized debt obligations		—		—		—			2		1,672		(2,708	)		2		1,672		(2,708	)
Total temporarily impaired securities		20	$	11,278	$	(76	)		5	$	2,027	$	(2,724	)		25	$	13,306	$	(2,800	)

December 31, 2009

	(Less than 12 months)							(12 months or longer)											Total
Description of	Number of		Fair		Unrealized			Number of		Fair		Unrealized			Number of		Fair		Unrealized
Securities	investments		value		losses			investments		value		losses			investments		value		losses
U.S. Government and agency obligations		5	$	5,087	$	(77	)		—	$	—	$	—			5	$	5,087	$	(77	)
State and municipal obligations		9		3,504		(35	)		—		—		—			9		3,504		(35	)
Collateralized debt obligations		—		—		—			2		1,752		(3,658	)		2		1,752		(3,658	)
Mortgage-backed securities and other		5		1,048		(1	)		6		931		(21	)		11		1,979		(22	)
Total temporarily impaired securities		19	$	9,639	$	(113	)		8	$	2,683	$	(3,680	)		27	$	12,322	$	(3,792	)

The unrealized losses on the Corporation’s investments in U.S. Government and agency obligations, state and political subdivision obligations and mortgage-backed securities were caused primarily by changes in interest rates. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost 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, 2010.

14

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)

The Corporation’s unrealized loss on investments in collateralized debt obligations relates to an aggregate $4,380 investment in pooled trust securities. The unrealized loss was primarily caused by (a) a recent decrease in performance and regulatory capital resulting from exposure to subprime mortgages and (b) a recent sector downgrade by industry analysts. The Corporation currently expects the obligations to be settled at a price less than the amortized cost basis of the investments (that is, the Corporation expects to recover less than the entire amortized cost basis of the security). The Corporation has recognized a loss equal to the credit loss, establishing a new, lower amortized cost basis. The credit loss was calculated by comparing expected discounted cash flows based on performance indicators of the underlying assets in the security to the carrying value of the investment. Because the Corporation does not intend to sell the investment and it is not more likely than not the Corporation will be required to sell the investment before recovery of its new, lower amortized cost basis, which may be maturity, it does not consider the remainder of the investment in the securities to be other-than-temporarily impaired at March 31, 2010.

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, 2010, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.

The amortized cost and estimated fair value of all debt securities at March 31, 2010, 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	$	1,660	$	1,675	$	—	$	—
Due from one to five years		14,508		14,799		—		—
Due from five to ten years		26,995		27,414		—		—
Due after ten years		11,331		11,540		4,380		1,672
Mortgage-backed and related securities		37,765		38,975		—		—
Total debt securities		92,259		94,403		4,380		1,672
Other securities		57		52		—		—
Total	$	92,316	$	94,455	$	4,380	$	1,672

Securities with a carrying value of $87,789 at March 31, 2010 were pledged to secure public deposits and other obligations.

15

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)

NOTE 3 — LOANS

Loans were as follows:

	March 31,
	2010
Commercial and industrial	$	41,976
Commercial real estate		210,451
Residential real estate and home equity		185,705
Real estate construction and land development		25,728
Consumer and credit card		16,785
		480,645
Add: Net deferred loan origination costs		82
Total loans receivable	$	480,727

NOTE 4 — ALLOWANCE FOR LOAN LOSSES

Activity in the allowance for loan losses was as follows:

	Three months ended
	March 31,
	2010			2009
Balance at beginning of period	$	10,479		$	6,137
Provision for loan losses		1,961			3,435
Loans charged off		(1,233	)		(2,654	)
Recoveries		107			102
Balance at end of period	$	11,314		$	7,020

Nonperforming loans were as follows:

	March 31,		December 31,
	2010		2009
Loans past due 90 days or more and still accruing	$	1,252	$	886
Nonaccrual loans		15,160		11,275
Total	$	16,412	$	12,161
Impaired loans are as follows:
Loans with no allocated allowance for unconfirmed loan losses	$	11,062	$	15,321
Loans with allocated allowance for unconfirmed loan losses		40,033		31,985
Total	$	51,095	$	47,306
Amount of the allowance for loan losses allocated to unconfirmed losses on impaired loans	$	7,680	$	6,326
Average of impaired loans during the period	$	43,205	$	20,435

16

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)

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

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

Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include certain equity securities and U.S. Government and agency obligations. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Government and agency obligations, state and municipal obligations, corporate bonds and mortgage-backed securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

The following table presents the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2010 and December 31, 2009.

			March 31, 2010
			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
U.S. Government and agency obligations	$	28,626	$	2,033	$	26,593	$	—
State and municipal obligations		25,750		—		25,750		—
Corporate bonds		1,052		—		1,052		—
Mortgage-backed and other securities		39,027		1,135		37,892		—
Total	$	94,455	$	3,168	$	91,287	$	—

17

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)

			December 31, 2009
			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
U.S. Government and agency obligations	$	27,455	$	998	$	26,457	$	—
State and municipal obligations		25,952		—		25,952		—
Corporate bonds		1,039		—		1,039		—
Mortgage-backed and other securities		39,654		63		39,591		—
Total	$	94,100	$	1,061	$	93,039	$	—

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 recognized other than temporary impairment on the securities as of March 31, 2010, based upon a Level 3 estimate of fair value, including a discounted cash flows calculation and a fair value estimate from an independent evaluation of the securities.

Impaired loans

At March 31, 2010 and December 31, 2009, 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.

18

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)

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, 2010 and December 31, 2009.

			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2010
Collateralized debt obligations	$	1,672	$	—	$	—	$	1,672
Impaired loans		40,907		—		—		40,907
Real estate owned		2,013		—		—		2,013
December 31, 2009
Collateralized debt obligations	$	1,752	$	—	$	—	$	1,752
Impaired loans		6,326		—		—		6,326
Real estate owned		1,470		—		—		1,470

Carrying amount and estimated fair values of financial instruments were as follows:

	March 31,				December 31,
	2010				2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets
Cash and cash equivalents	$	65,500	$	65,500	$	41,453	$	41,453
Securities available for sale		94,455		94,455		94,100		94,100
Securities held to maturity		1,672		1,672		1,752		1,752
Loans held for sale		2,313		2,313		2,442		2,442
Loans		480,727		480,526		489,482		490,446
FHLB stock		3,754		3,754		3,773		3,773
Accrued interest receivable		2,266		2,266		2,348		2,348

19

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)

	March 31,				December 31,
	2010				2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial liabilities
Noninterest-bearing deposits	$	61,329	$	61,329	$	60,502	$	60,502
Interest-bearing deposits		512,844		513,321		496,953		497,434
Federal funds purchased and other short-term borrowings		1,261		1,261		3,011		3,011
FHLB advances		61,507		62,180		63,148		64,040
Accrued interest payable		699		699		654		654

The estimated fair value of cash and cash equivalents, FHLB stock, accrued interest receivable, noninterest bearing deposits, federal funds purchased and other short-term borrowings and accrued interest payable approximates the related carrying amounts.

For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of loans held for sale is based on market quotes. Fair values of long-term FHLB advances are based on current rates for similar financing. Fair values of off-balance-sheet items are based on the current fee or cost that would be charged to enter into or terminate such agreements, which are not material.

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, 2009.

20

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 Conditionand 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, 2010, compared to December 31, 2009, and the consolidated results of operations for the three months ended March 31, 2010, compared to the same period in 2009. 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” within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements relating to the financial condition and prospects, lending risks, plans for future business development and marketing activities, capital spending and financing sources, capital structure, the effects of regulation and competition, and the prospective business of both the Corporation and its wholly-owned subsidiary The Delaware County Bank & Trust Company (the “Bank”). Where used in this report, the word “anticipate,” “believe,” “estimate,” “expect,” “intend,” and similar words and expressions, related 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 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 2010

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.

21

DCB FINANCIAL CORP
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)

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 slow down in economic activity and related increases in unemployment levels, loan foreclosure volume and a decline in real estate values. The Corporation’s business has been under pressure due primarily to market interest rate conditions, competition and a slow down in the economy. Real estate values, especially in the Bank’s core geographic area, have declined during the past several years and the lower values have continued into the first three months of 2010.

• The Corporation’s assets totaled $688,235 at March 31, 2010, compared to $675,022 at December 31, 2009, an increase of $13,213, or 2.0%. The increase in assets was mainly attributed to an increase in cash and cash equivalents.

• Net loss for the first three months of 2010 totaled $888, an improvement over the net loss of $1,071 for the same period in 2009.

• The provision for loan losses totaled $1,961 for the three months ended March 31, 2010 compared to $3,435 in the first three months of 2009. DCB maintains an allowance for loan losses at a level to absorb management’s estimate of probable inherent credit losses in its portfolio.

• The Corporation recognized a $1,030 other-than-temporary impairment charge on its investment in collateralized debt obligations during the 2010 quarter.

• The Corporation’s net interest margin increased from the same period in 2009. Net interest income increased to $5,494 for the three months ended March 31, 2010 compared to $5,277 for the same period in 2009. The $217 increase was mainly attributed to management’s ability to re-price deposits on a year to year comparison, which helped reduce overall funding costs.

• 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, in pricing and variety of accounts it offers to the depositor. The Corporation confirms this by completing regular rate shops and comparisons versus competing financial services companies. The dominant pricing mechanism on loans is the prime interest rate as published in theWall Street Journal, on a fixed rate plus 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, develop funding opportunities while earning an adequate interest rate margin.

• Total borrowings decreased by 5.1%, from $66,159 at December 31, 2009, to $62,768 at March 31, 2010. This is mainly due to a reduced reliance on borrowed funds because of the improved ability to raise deposits from its core customer base.

ANALYSIS OF FINANCIAL CONDITION

The Corporation’s assets totaled $688,235 at March 31, 2010, compared to $675,022 at December 31, 2009, an increase of $13,213, or 2.0%. Cash and cash equivalents increased from $41,453 at December 31, 2009 to $65,500 at March 31, 2010 as a result an increase in deposits and reduced origination volume. Total securities increased slightly from $95,852 at December 31, 2009 to $96,127 at March 31, 2010. Management utilizes investment securities to provide the Corporation with the flexibility to move funds into loans as demand warrants, and as collateral for various borrowing opportunities.

22

DCB FINANCIAL CORP
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)

The increase in interest-bearing deposit balances is attributed to proceeds from the decline in loans and strong deposit growth. The Corporation invests primarily in U.S. Treasury notes, U.S. government agencies, municipal bonds, corporate obligations and mortgage-backed securities.

The mortgage-backed securities portfolio, totaling $38,975 at March 31, 2010, provides the Corporation with a constant cash flow stream from principal repayments and interest payments. The Corporation held no structured notes during any period presented.

Total loans, including loans held for sale, decreased $8,884, or 1.8%, from $491,924 at December 31, 2009 to $483,040 at March 31, 2010. Commercial and industrial, construction and consumer financing experienced decreases in loans outstanding. The Corporation continues to see growth and good loan opportunities in commercial real estate loans, as many large banks have cut back on lending.

Total deposits increased $16,718, or 3.0%, from $557,455 at December 31, 2009 to $574,173 at March 31, 2010. Deposit growth stems primarily from increased CDARS balances, which provide increased levels of FDIC insurance coverage for certificate of deposits. The Bank had approximately $166,000 in CDARS deposits outstanding at March 31, 2010. Noninterest-bearing deposits increased $827, or 1.4%, and interest bearing deposits increased $15,891, or 3.2% during the quarter ended March 31, 2010.

The Corporation utilizes a variety of alternative funding sources due to competitive challenges within its primary market. Total borrowings decreased $3,391 during the three months ended March 31, 2010, from $66,159 at December 31, 2009, as borrowings were repaid with proceeds from deposit growth. Typically, the Company utilizes a matched funding methodology for its borrowing and deposit activities. This is done by matching the rates, terms and expected cash flows of its loans to the various liability products. This matching principle is used to not only provide funding, but also as a means of mitigating interest rate risk associated with originating longer-term fixed-rate loans. Continued reliance on borrowings outside of normal deposit growth may increase the Corporation’s overall cost of funds.

COMPARISON OF RESULTS OF OPERATIONS

Net Loss.The Corporation reported a net loss for the three months ended March 31, 2010 totaling $888, compared to a net loss of $1,071 for the same period in 2009. The per share loss was $0.24 for the three months ended March 31, 2010 compared to a per share loss of $0.29 for the three months ended March 31, 2009, an improvement of $0.05 per share. Operating results were negatively impacted by the other-than-temporary impairment write down of investment securities and a significant increase in FDIC deposit insurance premiums.

Net Interest Income.Net interest income represents the amount by which interest income on interest-earning assets exceeds interest expense on interest-bearing liabilities. Net interest income is the largest component of the Corporation’s income, and is affected by the interest rate environment and the volume and the composition of interest-earning assets and interest-bearing liabilities.

Net interest income was $5,494 for the three months ended March 31, 2010 and $5,277 for the same period in 2009. Loan originations remained sluggish during the first quarter and The Bank continued to experience run off in the indirect auto, residential mortgage and investment property portfolios. Other loan portfolios remained stable or increased slightly. The Bank experienced strong growth in key core deposit product categories and was able to re-price those deposits on a year to year comparison, which helped reduce overall funding costs. The Bank still holds substantial cash like balances, which provide the necessary liquidity for The Bank’s funding needs, but provided minimal returns in the 2010 quarter.

23

DCB FINANCIAL CORP
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)

The Bank has mainly experienced growth primarily in CDARS deposits along with good growth in most other deposit products. Increased funding costs may further negatively impact the net interest margin in future periods if the current competitive environment remains in effect. The Corporation has been able to reduce its overall borrowings, mainly through the FHLB, by replacing them with customer deposits that have grown significantly. The Corporation’s net interest margin for the first quarter increased compared to the first quarter 2009, from 3.39% to 3.63%. Interest expense decreased by $1,304, or 40.7%, due primarily to a decline in the cost of deposits and borrowings and a decrease in borrowings outstanding, partially offset by an increase in deposits.

The Asset/Liability Management Committee, which is responsible for determining deposit rates, continues to closely monitor the Bank’s cost of funds to take advantage of pricing and cash flow opportunities. Additionally, because of the increased competition in the Bank’s primary marketplace, management has continued to recognize the importance of offering special rates on certain deposit products. These special deposit rates tend to negatively affect the Corporation’s net interest margin. It is likely that these rates will continue to be offered to secure liquidity while maintaining market share.

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.

The provision for loan losses totaled $1,961 for the three months ended March 31, 2010, compared to $3,435 for the same period in 2009, a decline of $1,474, or 42.9%. DCB maintains an allowance for loan losses at a level to absorb management’s estimate of probable inherent credit losses in its portfolio. The largest percentage of charge-offs during 2010 was attributed to the economic conditions that affected the Columbus investment property and commercial loan portfolios. Non-accrual loans at March 31, 2010 increased to $15,160 from $11,275 at December 31, 2009. 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 increased to 3.84% of total loans at March 31, 2010 from 1.92% at March 31, 2009, and again are mainly attributed to the real estate investment and commercial portfolios. In addition, delinquent loans over thirty days increased somewhat from 3.0% of total loans at December 31, 2009 to 3.84% of total loans at March 31, 2010. Management will continue to focus on activities related to monitoring, collection, and workout of delinquent loans. Management also continues to monitor exposure to industry segments, and believes that the loan portfolio remains adequately diversified.

Net charge-offs for the three months ended March 31, 2010 were to $1,126, compared to $2,552 for the three months ended March 31, 2009. Annualized net charge-offs for the three months ended March 31, 2010 were 0.9% compared to 2.0% for the quarter ending March 31, 2009. The allowance for loan losses was $11,314, or 2.35% of total loans at March 31, 2010, compared to $7,020, or 1.37% of total loans at March 31, 2009. 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.

To assist in identifying potential loan losses, management maintains a methodology for establishing appropriate loan loss values. A Board-approved policy directs management to “develop and maintain an appropriate, systematic, and consistently applied process to determine the amounts of the Allowance for Loan Losses.” The methodology that management adopted involves identifying both specific and non-specific components. The specific allowance allocation is determined from information provided through the Bank’s watch list, loan review function and loan grade status applied to specific credits. The allocated allowance is developed by utilizing historical net loss components for each identified segment of the loan portfolio. Additionally, current economic condition factors are used to adjust the historical net loss components. Management performs an analysis of the loan portfolio on a monthly basis, and evaluates economic conditions as they relate to potential credit risk within its portfolios on a quarterly basis.

24

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 decreased $962, or 68.8%, for the three months ended March 31, 2010, compared to the same period in 2009. The decrease was primarily attributable to a $1,030 write down related to other-than-temporarily impaired securities during the quarter, offset by a $98 gain on sales of foreclosed properties compared to a loss of $25 for the same period in 2009. The securities were written down to reflect the reduced interest and principal payments that management expects to receive, as economic conditions have negatively affected these instruments’ underlying issuers.

Noninterest Expense.Total noninterest expense increased $413, or 8.1%, for the three months ended March 31, 2010, compared to the same period in 2009. The increase was the result of increases in professional services, salaries and employee benefits and Federal deposit insurance premiums, which were offset by a reduction in occupancy expenses for the quarter, compared to 2009. Professional services increased primarily due to external consulting services associated with the Corporation’s regulatory obligations and filings and loan workout activities,

Income Taxes.The Corporation recorded a tax credit totaling $631 for the three months ended March 31, 2010, compared to tax credit of $764 in 2009. The change in income tax benefit is primarily attributable to the decrease in pre-tax losses.

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 increased $24,047, or 58.0%, to $65,500 at March 31, 2010 compared to $41,453 at December 31, 2009. Cash and equivalents represented 9.5% of total assets at March 31, 2010 and 6.1% of total assets at December 31, 2009. The Corporation has the ability to borrow funds from the Federal Home Loan Bank and has various correspondent banking partners to purchase overnight federal funds should the Corporation need to supplement its future liquidity needs. 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 decreased $117, or 0.2%, between December 31, 2009 and March 31, 2010. The decrease was primarily due to period net losses of $888, offset by a decrease of $771 in accumulated other comprehensive losses.

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 regulatory capital requirements. The ratio of total capital to risk-weighted assets was 10.5% at March 31, 2010, while the Tier 1 risk-based capital ratio was 9.2%. Regulatory minimums call for a total risk-based capital ratio of 8.0%, at least half of which must be Tier 1 capital. The Corporation’s leverage ratio, defined as Tier 1 capital divided by average assets, was 6.6% at March 31, 2010. The Corporation’s wholly-owned bank reported total capital to risk-weighted assets of 10.6% at March 31, 2010.

25

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, 2010.

	PAYMENT DUE BY YEAR
			Less than 1						More than
CONTRACTUAL OBLIGATIONS	Total		year		1-3 years		3-5 years		5 years
FHLB advances	$	61,507	$	4,184	$	50,821	$	3,605	$	2,897
Federal funds purchased and other short-term borrowings		1,261		1,261		—		—		—
Operating lease obligations		6,621		699		1,864		1,864		2,194
Loan and line of credit commitments		70,006		70,006		—		—		—
Total Contractual Obligations	$	139,395	$	76,150	$	52,685	$	5,469	$	5,091

In addition the Corporation has an investment in an unconsolidated affiliate in a mezzanine financing fund with an outstanding commitment of $960.

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 Delaware County Bank and Trust Company, 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 parallel shifts of 100 to 300 basis points in market rates.

The Corporation’s Annual Report includes a table depicting the changes in the Corporation’s interest rate risk as of December 31, 2009, as measured by changes in NPV for instantaneous and sustained parallel shifts of -100 to +300 basis points in market interest rates. Management believes that no events have occurred since December 31, 2009 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.

26

DCB FINANCIAL CORP
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)

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.

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.

Item 4.Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2010, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2010, in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended March 31, 2010, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting, except with respect to controls related to determination of fair value and evaluation of other-than-temporary impairment of collateralized debt obligations.

27

DCB FINANCIAL CORP
FORM 10-Q
Quarter ended March 31, 2010

PART II — OTHER INFORMATION

Item 1 — Legal Proceedings:

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

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds:

ISSUER PURCHASES OF EQUITY SECURITIES

	(a)		(b)		(c)		(d)
							Maximum Number
					Total Number of		(or Approximate
					Shares (or Units)		Dollar Value) of
	Total Number				Purchased as Part		Shares (or Units) that
	of Shares (or		Average Price		of Publicly		May Yet Be
	Units)		Paid per Share		Announced Plans		Purchased Under the
Period	Purchased		(or Unit)		or Programs(1)		Plans or Programs
Month #l		—		—		—		—
1/1/2010 to 1/31/2010
Month #2		—		—		—		—
2/1/2010 to 2/28/2010
Month #3		—		—		—		—
3/1/2010 to 3/31/2010
Total	—		—		—		184,907

(1) On August 16, 2007, the Company announced a repurchase program which authorizes the repurchase of up to 200,000 of its common shares over a two year period commencing August 15, 2007.

28

DCB FINANCIAL CORP
FORM 10-Q
Quarter ended March 31, 2010
PART II — OTHER INFORMATION

Item 3 — Defaults Upon Senior Securities:

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

Item 4 — Submission of Matters to a Vote of Security Holders:

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 the Company’s Report on Form 10-Q filed with the Commission on November 14, 2003.
	3.2	Amended and Restated Articles of Incorporation of DCB Financial Corp, incorporated by reference to the Company’s Report on Form 10-Q filed with the Commission on November 14, 2003.
	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

29

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 17, 2010	/s/ Jeffrey BentonJeffrey Benton
	President and Chief Executive Officer
Date: May 17, 2010	/s/ John A. UstaszewskiJohn A. Ustaszewski
	Senior Vice President and Chief Financial Officer

30

DCB FINANCIAL CORP

INDEX TO EXHIBITS

EXHIBIT
NUMBER		DESCRIPTION
	3.1	Amended and Restated Articles of Incorporation of DCB Financial Corp, incorporated by reference to the Company’s Report on Form 10-Q filed with the Commission on November 14, 2003.
	3.2	Amended and Restated Articles of Incorporation of DCB Financial Corp, incorporated by reference to the Company’s Report on Form 10-Q filed with the Commission on November 14, 2003.
	31.1	Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of Chief Financial Officer 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.

31