DCB Financial (DCBF) 10-Q 2010 Q2 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: JUNE 30, 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	(I.R.S. Employer Identification Number)
incorporation or organization)

110 Riverbend Avenue, Lewis Center, Ohio 43035
(Address of principal executive offices)

(740) 657-7000
(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o     No o

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 filer o Accelerated filer o 
Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company þ

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

Yes o     No þ

As of August 16, 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 Six and Three Month Periods Ended June 30, 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		28
ITEM 4 — Controls and Procedures		29
PART II — OTHER INFORMATION		30
SIGNATURES		32
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

	June 30,			December 31,
	2010			2009
	(unaudited)
ASSETS
Cash and due from financial institutions	$	11,295		$	10,082
Interest bearing deposits		36,201			26,371
Federal funds sold and overnight investments		—			5,000
Total cash and cash equivalents		47,496			41,453
Securities available for sale		86,892			94,100
Securities held to maturity		1,704			1,752
Total securities		88,596			95,852
Loans held for sale, at lower of cost or fair value		1,782			2,442
Loans		463,917			489,482
Less allowance for loan losses		(13,114	)		(10,479	)
Net loans		450,803			479,003
Real estate owned		5,161			4,912
Investment in FHLB stock		3,735			3,773
Premises and equipment, net		13,771			14,435
Investment in unconsolidated affiliates		1,474			1,439
Bank-owned life insurance		16,736			16,326
Deferred federal income taxes, net		4,964			5,239
Accrued interest receivable and other assets		9,763			10,148
Total assets	$	644,281		$	675,022
LIABILITIES
Deposits
Noninterest-bearing	$	61,549		$	60,502
Interest-bearing		470,966			496,953
Total deposits		532,515			557,455
Federal funds purchased and other short-term borrowings		1,083			3,011
Federal Home Loan Bank advances		60,592			63,148
Accrued interest payable and other liabilities		2,473			2,065
Total liabilities		596,663			625,679
SHAREHOLDERS’ EQUITY
Common stock, no par value, 7,500,000 shares authorized, 4,273,908 issued		3,785			3,785
Retained earnings		57,297			60,213
Treasury stock, at cost, 556,523 shares		(13,494	)		(13,494	)
Accumulated other comprehensive income (loss)		30			(1,161	)
Total shareholders’ equity		47,618			49,343
Total liabilities and shareholders’ equity	$	644,281		$	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						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Interest and dividend income
Loans	$	6,303		$	7,230		$	12,759		$	14,334
Taxable securities		683			820			1,405			1,847
Tax-exempt securities		182			252			381			526
Federal funds sold and other		28			32			46			109
Total interest income		7,196			8,334			14,591			16,816
Interest expense
Deposits		1,142			1,919			2,352			4,214
Borrowings		692			836			1,383			1,746
Total interest expense		1,834			2,755			3,735			5,960
Net interest income		5,362			5,579			10,856			10,856
Provision for loan losses		3,386			1,707			5,347			5,142
Net interest income after provision for loan losses		1,976			3,872			5,509			5,714
Noninterest income
Service charges on deposit accounts		658			650			1,263			1,248
Trust department income		268			234			493			470
Net gains on sale of securities		80			462			80			462
Net gains (losses) on sale of assets		(12	)		(135	)		86			(160	)
Gains on sale of loans		78			139			107			190
Treasury management fees		114			136			244			271
Data processing servicing fees		168			138			300			273
Earnings on bank owned life insurance		243			167			410			334
Total other-than-temporary impairment losses		—			(5,190	)		(80	)		(5,190	)
Portion of loss recognized in (reclassified from) other comprehensive income (before taxes)		—			4,410			(950	)		4,410
Net impairment losses recognized in income		—			(780	)		(1,030	)		(780	)
Other		196			94			276			195
Total noninterest income		1,793			1,105			2,229			2,503
Noninterest expense
Salaries and employee benefits		2,599			2,603			5,223			5,127
Occupancy and equipment		1,015			1,087			2,045			2,154
Professional services		396			360			703			523
Advertising		99			94			173			185
Postage, freight and courier		122			68			209			153
Supplies		29			77			59			154
State franchise taxes		152			169			304			338
Federal deposit insurance premiums		396			494			792			654
Other		929			1,322			1,717			2,061
Total noninterest expense		5,737			6,274			11,225			11,349
Loss before income taxes		(1,968	)		(1,297	)		(3,487	)		(3,132	)
Income tax expense (credits)		60			(576	)		(571	)		(1,339	)
Net loss	$	(2,028	)	$	(721	)	$	(2,916	)	$	(1,793	)
Basic and diluted loss per common share	$	(0.54	)	$	(0.19	)	$	(0.78	)	$	(0.48	)
Dividends per share	$	—		$	0.02		$	—		$	0.04

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						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Net loss	$	(2,028	)	$	(721	)	$	(2,916	)	$	(1,793	)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities available for sale, net of taxes (benefits) of $225, ($74), $308 and $26 for the respective periods		438			(144	)		598			51
Reclassification adjustment for realized gains included in net income, net of tax of $27, $157, $27 and $157 for the respective periods		(53	)		(305	)		(53	)		(305	)
Net unrealized gain (loss) on securities held-to-maturity for which a portion of an other-than-temporary impairment has been recognized in income, net of realized losses and net of taxes of $11, ($1,499), $333 and ($1,499) for the respective periods		21			(2,911	)		646			(2,911	)
Comprehensive loss	$	(1,622	)	$	(4,081	)	$	(1,725	)	$	(4,958	)
Accumulated other comprehensive income (loss)	$	30		$	(2,330	)	$	30		$	(2,330	)

See notes to the condensed consolidated financial statements.

5

DCB FINANCIAL CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

	Six Months Ended
	June 30,
	2010			2009
Cash flows provided by operating activities	$	5,456		$	431
Cash flows provided by (used in) investing activities
Securities available for sale
Purchases		(16,195	)		(11,472	)
Maturities, principal payments and calls		9,754			25,109
Sales		15,322			17,439
Net change in loans		21,004			9,324
Proceeds from sale of real estate owned		529			645
Investment in unconsolidated affiliate		(35	)		(45	)
Premises and equipment expenditures		(368	)		(383	)
Net cash provided by investing activities		30,011			40,617
Cash flows provided by (used in) financing activities
Net change in deposits		(24,940	)		(1,546	)
Net change in federal funds purchased and other short-term borrowings		(1,928	)		(984	)
Repayment of Federal Home Loan Bank advances		(2,556	)		(17,404	)
Cash dividends paid		—			(371	)
Net cash used in financing activities		(29,424	)		(20,305	)
Net change in cash and cash equivalents		6,043			20,743
Cash and cash equivalents at beginning of period		41,453			33,632
Cash and cash equivalents at end of period	$	47,496		$	54,375
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings	$	3,815		$	6,065
Supplemental disclosure of non-cash investing and financing activities:
Unrealized gain on securities designated as available for sale, net of tax benefits	$	598		$	51
Transfer from loans to real estate owned	$	1,955		$	897
Loans originated upon sale of real estate owned	$	—		$	397
Cash dividends declared but unpaid	$	—		$	74

See notes to the condensed consolidated financial statements.

6

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

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These 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 June 30, 2010, and its results of operations for the three and six month periods ended June 30, 2010 and 2009 and its cash flows for the six month periods ended June 30, 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 2009 Annual Report on Form 10-K. Refer to the accounting policies of the Corporation described in the Notes to Consolidated Financial Statements contained in the Corporation’s 2009 Annual Report. The Corporation has consistently followed these policies in preparing this Form 10-Q. The results of operations for the three and six month periods ended June 30, 2010 are not necessarily indicative of the results that can 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 here in 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.

Earnings (loss) per share

Earnings (loss) per common share is net income (loss) 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. The computation of earnings (loss) per share is based on the following weighted-average shares outstanding for the periods ended June 30, 2010 and 2009.

	Three and Six Months Ended
	June 30,
	2010		2009
Basic and diluted weighted-average common shares outstanding		3,717,385		3,717,385

Options to purchase 200,742 shares of common stock with a weighted-average exercise price of $19.59 were outstanding, but were excluded from the computation of common share equivalents for both the three and six month periods ended June 30, 2010, because the exercise price was greater than the average fair value of the shares.

7

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

Options to purchase 208,711 shares of common stock with a weighted-average exercise price of $19.59 were outstanding, but were excluded from the computation of common share equivalents for both the three and six month periods ended June 30, 2009, because the exercise price was greater than the average fair value of the shares.

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 June 30, 2010. At June 30, 2010, 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 $48 and $57 in compensation cost for equity-based awards that vested during the six months ended June 30, 2010 and 2009, respectively. The Corporation has $194 of total unrecognized compensation cost related to non-vested equity-based awards granted under its stock option plan as of June 30, 2010, which is expected to be recognized over a weighted-average period of 4.0 years.

Income taxes

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.

During the three month period ended June 30, 2010, management determined that a valuation allowance on the Corporation’s deferred tax assets was necessary, and accordingly, recorded an $875,000, or $0.24 per share, charge to tax expense. The valuation allowance was determined primarily through an analysis of projected future taxable income and consideration of available tax planning strategies based upon information available as of June 30, 2010.

8

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

A summary of the status of the Corporation’s stock option plan as of June 30, 2010 and December 31, 2009, and changes during the periods then ended are presented below:

				Six Months Ended
				June 30,
				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	8.0 years
Options exercisable at period end		85,609		$	24.26

				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)

The following information applies to options outstanding at June 30, 2010:

	RANGE OF
NUMBER OUTSTANDING	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.

In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2010-20, Receivables: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, to improve disclosures about the credit quality of financing receivables and the allowance for credit losses. Companies will be required to provide more information about the credit quality of their financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure. Required disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010, while required disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. Management does not believe that this statement will have a material impact on the Corporation’s consolidated financial statements.

In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures, to improve disclosures about fair value measurements, which requires new disclosures on transfers into and out of Level 1 and 2 measurements of the fair value hierarchy and requires separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures relating to the level of disaggregation and inputs and valuation techniques used to measure fair value.

10

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

It is effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010. The adoption of this pronouncement did not have a material impact on the Corporation’s 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.

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 analyses to determine whether an asset is temporarily 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 this determination is made. Generally, management utilizes third parties to provide appraisals, analysis or market pricing in support of analysis of other-than-temporary impairment.

11

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

NOTE 2 — SECURITIES

The amortized cost and estimated fair values, together with gross unrealized gains and losses, of securities available for sale were as follows:

			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	June 30, 2010
U.S. Government and agency obligations	$	29,885	$	769	$	—		$	30,654
State and municipal obligations		19,953		537		(7	)		20,483
Mortgage-backed and related securities		34,275		1,430		(2	)		35,703
Total debt securities		84,113		2,736		(9	)		86,840
Other securities		57		8		(13	)		52
Total	$	84,170	$	2,744	$	(22	)	$	86,892

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

	Adjusted		Gross			Estimated
	Amortized		Unrealized			Fair
	Cost		Losses			Value
	June 30, 2010
Collateralized debt obligations	$	4,380	$	(2,890	)	$	1,490

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 June 30, 2010:

Collateralized debt obligations determined to be other than temporarily impaired

	June 30,			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 amortized cost		4,380			5,410
Other than temporary impairment not related to credit quality issues		(2,676	)		(3,658	)
Adjusted carrying value	$	1,704		$	1,752
Fair value of securities held to maturity	$	1,490		$	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 six month periods ended June 30, 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		780
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	$	780

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 June 30, 2010 and December 31, 2009:

June 30, 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
State and municipal obligations		3	$	1,150	$	(4	)		1	$	504	$	(3	)		4	$	1,654	$	(7	)
Mortgage-backed and other securities		1		537		(2	)		2		51		(13	)		3		588		(15	)
Collateralized debt obligations		—		—		—			2		1,490		(2,890	)		2		1,490		(2,890	)
Total temporarily impaired securities		4	$	1,687	$	(6	)		5	$	2,045	$	(2,906	)		9	$	3,732	$	(2,912	)

December 31, 2009

	(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
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 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 June 30, 2010.

The Corporation’s unrealized loss on held to maturity investments in collateralized debt obligations relates to an investment in pooled trust securities at an adjusted aggregate cost of $4,380. The unrealized loss was primarily caused by (a) a decrease in performance and regulatory capital resulting from exposure to subprime mortgages and (b) a 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 June 30, 2010.

14

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

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 June 30, 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 June 30, 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.

					Held-to-maturity
	Available for sale				Adjusted
	Amortized		Fair		Carrying		Fair
	Cost		Value		Value		Value
Due in one year or less	$	1,963	$	1,973	$	—	$	—
Due from one to five years		15,261		15,598		—		—
Due from five to ten years		22,368		23,055		—		—
Due after ten years		10,246		10,511		1,704		1,490
Mortgage-backed and related securities		34,275		35,703		—		—
Total debt securities		84,113		86,840		1,704		1,490
Other securities		57		52		—		—
Total	$	84,170	$	86,892	$	1,704	$	1,490

Securities with a carrying value of $84,113 at June 30, 2010 were pledged to secure public deposits and other obligations.

NOTE 3 — LOANS

Loans were as follows:

	June 30,		December 31,
	2010		2009
Commercial and industrial	$	40,081	$	44,123
Commercial real estate		204,242		207,808
Residential real estate and home equity		181,592		180,779
Real estate construction and land development		22,146		37,989
Consumer and credit card		15,795		18,745
		463,856		489,444
Add: Net deferred loan origination costs		61		38
Total loans receivable	$	463,917	$	489,482

15

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

NOTE 4 — ALLOWANCE FOR LOAN LOSSES

Activity in the allowance for loan losses was as follows:

	Three months ended						Six months ended
	June 30,						June 30,
	2010			2009			2010			2009
Balance at beginning of period	$	11,314		$	7,020		$	10,479		$	6,137
Provision for loan losses		3,386			1,707			5,347			5,142
Loans charged off		(1,718	)		(893	)		(2,951	)		(3,547	)
Recoveries		132			161			239			263
Balance at end of period	$	13,114		$	7,995		$	13,114		$	7,995

Nonperforming loans were as follows:

	June 30,		December 31,
	2010		2009
Loans past due 90 days or more and still accruing	$	1,618	$	886
Nonaccrual loans		15,140		11,275
Total	$	16,758	$	12,161
Impaired loans are as follows:
Loans with no allocated allowance for unconfirmed loan losses	$	17,621	$	15,321
Loans with allocated allowance for unconfirmed loan losses		37,961		31,985
Total	$	55,582	$	47,306
Amount of the allowance for loan losses allocated to unconfirmed losses on impaired loans	$	7,539	$	6,326
Average of impaired loans during the period	$	51,411	$	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 June 30, 2010 and December 31, 2009.

			June 30, 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	$	30,654	$	—	$	30,654	$	—
State and municipal obligations		20,483		—		20,483		—
Mortgage-backed and other securities		35,755		52		35,703		—
Total	$	86,892	$	52	$	86,840	$	—

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 and December 31, 2009, 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 June 30, 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 June 30, 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)
June 30, 2010
Impaired loans	$	55,582	$	—	$	—	$	55,582
December 31, 2009
Collateralized debt obligations	$	1,752	$	—	$	—	$	1,752
Impaired loans		6,326		—		—		6,326
Real estate owned		1,470		—		—		1,470

19

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

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

	June 30,				December 31,
	2010				2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets
Cash and cash equivalents	$	47,496	$	47,496	$	41,453	$	41,453
Securities available for sale		86,892		86,892		94,100		94,100
Securities held to maturity		1,704		1,490		1,752		1,752
Loans held for sale		1,782		1,782		2,442		2,442
Loans		463,917		463,302		489,482		490,446
FHLB stock		3,735		3,735		3,773		3,773
Accrued interest receivable		2,231		2,231		2,348		2,348
Financial liabilities
Noninterest-bearing deposits	$	61,549	$	61,549	$	60,502	$	60,502
Interest-bearing deposits		470,966		471,438		496,953		497,434
Federal funds purchased and other short-term borrowings		1,083		1,083		3,011		3,011
FHLB advances		60,592		63,185		63,148		64,040
Accrued interest payable		714		714		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 amounts)

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

INTRODUCTION

In the following pages, management presents an analysis of the consolidated financial condition of DCB Financial Corp (the “Corporation”) at June 30, 2010, compared to December 31, 2009, and the consolidated results of operations for the three and six months ended June 30, 2010, compared to the same periods in 2009. This discussion is designed to provide 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 second quarter of 2010

The Bank provides customary retail and commercial banking services to its customers, including checking and savings accounts, time deposits, IRAs, safe deposit facilities, personal loans, commercial loans, real estate mortgage loans, installment loans, trust, and other wealth management services. The Bank also provides treasury management, bond registrar and paying agent services.

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 pressure mainly attributable to an overall slowdown in economic activity and related increases in unemployment levels, loan foreclosure volume and a decline in real estate values. The Corporation’s business has been under pressure due primarily to market interest rate conditions, competition and a slowdown in the economy. Real estate values, especially in the Bank’s core geographic area, have declined during 2009 and the lower values have continued into the first six months of 2010.

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’s assets totaled $644,281 at June 30, 2010, compared to $675,022 at December 31, 2009, a decrease of $30,741, or 4.6%. The decline is due primarily to an overall slowdown in loan volume. Management’s focus at the Bank has been on managing credit, reducing risk within the loan portfolio and enhancing liquidity and capital in a deteriorating economic environment. Steady progress is being made on resolving these issues but the Bank is still faced with meaningful challenges.

One major component of management’s plan is to reduce the overall size of the Bank’s balance sheet. This reduction is being accomplished through slower loan volume and reducing securities portfolio balances. In accordance with the Corporation’s initiatives management was able to reduce overall deposit and borrowing balances. The reduced size of the balance sheet can then be supported by lower dollar levels of capital, while maintaining adequate liquidity and reducing the overall credit risk.

• Net loss for the three and six months ended June 30, 2010 totaled $2,028 and $2,916, respectively, compared to a net loss in the same periods in 2009 of $721 and $1,793, respectively,

• The provision for loan losses totaled $3,386 and $5,347 for the three and six months ended June 30, 2010, respectively, compared to $1,707 and $5,142 in the same respective periods in 2009. The increase is mainly attributed to declines in overall credit quality and reserves for specific impaired loans. DCB maintains an allowance for loan losses at a level to absorb management’s estimate of probable inherent credit losses in its portfolio.

• An overall decline in loan balances, period to period, contributed to the reduced interest income. The Corporation’s net interest margin for the second quarter increased slightly compared to the second quarter 2009, from 3.55% to 3.57%. This is attributed to improved deposit and loan pricing, core deposit growth and reduced high cost broker deposits and long-term debt.

• Investment securities totaling $6,173 were sold resulting in a net gain on sale of $80. Management expects the decrease of long term debt corresponding to a similar decrease in investable cash balances will provide an overall benefit by increasing the net interest margin. It will also provide additional pledged assets that can be used to secure other long term borrowing options.

• 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 the 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 funding costs. The interest spread depends on the overall account relationship and the creditworthiness of the borrower.

• Deposit rates are reviewed weekly by management and are generally discussed by the Asset/Liability Committee on a monthly basis. The Bank’s primary objective in setting deposit rates is to remain competitive in the market area and to develop funding opportunities while earning an adequate interest rate margin.

• Total borrowings decreased by 6.8%, from $66,159 at December 31, 2009, to $61,675 at June 30, 2010. This is mainly due to management’s decision to repay long term debt to reduce cash balances and decrease other costs on borrowed funds.

• Management reduced deposits by $24,940, or 4.5%, from December 31, 2009 by primarily focusing on reducing reliance on wholesale deposits in its CDARS programs.

22

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

ANALYSIS OF FINANCIAL CONDITION

The Corporation’s assets totaled $644,281 at June 30, 2010, compared to $675,022 at December 31, 2009, a decrease of $30,741, or 4.6%. The decrease is primarily due to a decline in loan balances attributable to reduced activity within the Corporation’s primary markets. Management is implementing this strategy in order to reduce risks in the Corporation’s loan portfolios while increasing overall capital ratios. The Bank’s board of directors and management recognize the continuing constraints of a volatile economic environment and are committed to mitigating risk and maintaining the integrity of the Bank’s balance sheet.

Cash and cash equivalents increased from $41,453 at December 31, 2009 to $47,496 at June 30, 2010. Total securities decreased from $95,852 at December 31, 2009 to $88,596 at June 30, 2010. 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 $35,703 at June 30, 2010, provides the Corporation with a constant cash flow stream from principal repayments and interest payments. Mortgage-backed securities include Federal Home Loan Mortgage Corporation (“FHLMC”), Government National Mortgage Association (“GNMA”) and Federal National Mortgage Association (“FNMA”) participation certificates. The Corporation held no structured notes during any period presented.

Total loans, including loans held for sale, decreased $26,225, or 5.3%, from $491,924 at December 31, 2009 to $465,699 at June 30, 2010. The Company continues to see good quality loan opportunities, as many large banks have cut back on lending, but as previously stated has experienced an overall decline in loan volume, due to reduced activity in our primary markets and planned portfolio runoff. Retail loan production including credit card and home equity loans experienced stable activity within the branch network. Management continued to run-off its indirect paper and investment property portfolios.

As a result of the aforementioned initiatives management was able to reduce overall deposit and borrowing balances. Total deposits decreased $24,940, or 4.5%, from $557,455 at December 31, 2009 to $532,515 at June 30, 2010. The Bank had approximately $134,000 in CDARS deposits outstanding at June 30, 2010 compared to $145,000 at year-end 2009. Noninterest-bearing deposits increased $1,047, or 1.7%, and interest bearing deposits decreased $25,987, or 5.2% during the six month period ended June 30, 2010. Management has focused on reducing deposits from non-core customers in order to manage the cost levels of its deposit portfolio.

Total borrowings decreased $4,484 during the six months ended June 30, 2010, to $61,675, from $66,159 at December 31, 2009. Management will continue to analyze opportunities to reduce high cost long-term debt.

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. Management intends to continue to develop new products, and to monitor the rate structure of its deposit products to encourage growth in its core customer’s deposit liabilities.

23

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

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS
ENDED JUNE 30, 2010 AND JUNE 30, 2009

Net Loss.The Corporation reported a net loss for the three months ended June 30, 2010 totaling $2,028, compared to a net loss of $721 for the same period in 2009. The per share loss was $0.54 for the three months ended June 30, 2010 compared to $0.19 for the three months ended June 30, 2009. Operating results were negatively impacted primarily by an increase in the provision for loan losses associated with commercial and commercial real estate loan portfolios, and by an increase in federal income taxes, while results of operations were favorably affected by an increase in non-interest income and a decrease in non-interest expense.

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

Net interest income decreased by $217, or 3.9%, to $5,362 for the three months ended June 30, 2010 from $5,579 for the same period in 2009 due to reduced levels of earning assets. However, the net interest margin remained stable at 3.57% for the three months ended June 30, 2010, up from 3.55%, for the same periods in 2009. Management has effectively increased margins by using a disciplined approach to setting deposit rates, managing cash balances and aggressive pricing on its loan originations and renewals. Loan originations remained sluggish during the second quarter and the Bank continued to experience run off in the indirect auto, commercial and investment property portfolios. In addition, the Bank experienced some run off on its higher cost deposits while increasing low or no cost balances. The Bank continues to re-price deposits to the lower prevailing rates which helped reduce overall funding costs.

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 $3,386 for the three months ended June 30, 2010, compared to $1,707 for the same period in 2009, an increase of $1,679. Due to deteriorating economic conditions additional reserves were added for commercial real estate loans that have higher risk profiles. The allowance for loan losses was $13,114, or 2.83% of total loans at June 30, 2010, compared to $10,479, or 2.14% of total loans at December 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.

Non-accrual loans at June 30, 2010 increased to $15,140 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. Loans delinquent ninety days and accruing interest increased to $927 at June 30, 2010 from $886 at December 31, 2009. Delinquent loans over thirty days increased to 6.05% of total loans at June 30, 2010 from 1.15% at June 30, 2009. The increase in delinquencies is attributed to two large commercial real estate loans that moved into a delinquent status at quarter end. Since that time one of the two relationships is again current.

24

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

Both of these relationships are being closely monitored by the workout committee and appropriate actions are being taken. 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. A variety of consultants with expertise in loan reviews and loan workouts have been engaged to assist with the loan workout function of the Bank.

Net charge-offs for the three months ended June 30, 2010 increased to $1,587, compared to $733 for the three months ended June 30, 2009. Annualized net charge-offs for the three months ended June 30, 2010 were 1.34% compared to 0.58% for the quarter ending June 30, 2009. The largest percentage of charge-offs during the current quarter was attributed to the continued economic conditions that affected commercial real estate loan portfolios.

Noninterest Income.Total noninterest income increased $688, or 62.3%, for the three months ended June 30, 2010, compared to the same period in 2009. The increase is primarily attributable to the $780 of other-than-temporary impairment losses recorded in the 2009 quarter. The Bank has also been able to increase revenues on its core lines of business, including retail fees and trust activities, and reduce losses on sales of foreclosed assets, which were partially offset by a reduction in gains on sales of securities and loans during the current quarter.

Noninterest Expense.Total noninterest expense decreased $537, or 8.6%, for the three months ended June 30, 2010, compared to the same period in 2009. The decrease was primarily the result of various declines in operating expenses including federal deposit insurance premiums, occupancy, franchise taxes and other expenses, offset by increases in professional services. The decrease in other expenses during 2010 was primarily the result of $533 in pre-payment penalties on FHLB borrowings recorded in the 2009 period. Professional services increased primarily due to external consulting services and legal costs associated with the Corporation’s regulatory obligations and loan workout activities.

Income Taxes.The Corporation recorded a tax expense totaling $60 for the three months ended June 30, 2010, compared to a tax credit of $576 in 2009. The change in income tax expense (benefit) is primarily attributable to recognition of a valuation allowance on deferred tax assets of $876, offset by an increase in pre-tax losses coupled with a decrease in tax exempt income. The valuation allowance was determined based upon an analysis of management’s projection of future taxable income compared to current levels of deferred taxes.

COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS
ENDED JUNE 30, 2010 AND JUNE 30, 2009

Net Loss.The Corporation’s net loss for the six months ended June 30, 2010 totaled $2,916, compared to a net loss of $1,793 for the same period in 2009. The per share loss was $0.78 for the six months ended June 30, 2010, compared to a per share loss of $0.48 for the six months ended June 30, 2009. The increase in the net loss was primarily attributable to an increase in the provision for loan losses and a decrease in federal income tax credits.

Net Interest Income.Net interest income was $10,856 for the six months ended June 30, 2010, unchanged from the same period in 2009. However, the net interest margin increased to 3.60% for the six months ended June 30, 2010, up from 3.44%, for the period ended June 30, 2009. Management has effectively increased margins by using a disciplined approach to setting deposit rates, managing cash balances and aggressive pricing on its loan originations and renewals. Loan originations remained sluggish during the period and the Bank continued to experience run off in the indirect auto, commercial and investment property portfolios. In addition, the Bank experienced some run off on its higher cost deposits while increasing low or no cost balances. The Bank continues to re-price deposits to the lower prevailing rates, which helped reduce overall funding costs.

25

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

Provision and Allowance for Loan Losses.The provision for loan losses totaled $5,347 for the six months ended June 30, 2010, compared to $5,142 for the same period in 2009. The Bank maintains an allowance for loan losses at a level to absorb management’s estimate of probable inherent credit losses in its portfolio.

Annualized net charge-offs for the six months ended June 30, 2010 were 1.14%, down compared to 1.29% for the same period in 2009. The largest percentage of charge-offs during the six months ended June 30, 2010 was attributed to economic conditions that primarily affected the Columbus investment properties, and to a lesser extent the Corporation’s commercial business portfolio. Delinquent loans over thirty days from period to period increased significantly to 6.05% at June 30, 2010 from 1.15% at June 30, 2009, and again are mainly attributed to the commercial and real estate investment portfolios.

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.

Noninterest Income.Total noninterest income decreased by $274, or 11.0%, for the six months ended June 30, 2010, compared to the same period in 2009. The decrease is primarily attributable to the $250 increase in other-than-temporary impairment losses recorded in the 2010 period. The Bank has been able to increase revenues on its core lines of business including retail fees and trust activities and reduce losses on sales of foreclosed assets, which were partially offset by a reduction in gains on sales of securities and loans during the current period.

Noninterest Expense.Total noninterest expense decreased $124, or 1.1%, for the six months ended June 30, 2010, compared to the same period in 2009. The decrease was the result of various declines in operating expenses including occupancy, franchise taxes and other operating expenses, which were partially offset by increases in salaries and employee benefits, federal deposit insurance premiums and professional services. Professional services increased primarily due to external consulting services and legal costs associated with the Corporation’s regulatory obligations and loan workout activities.

Income Taxes.The Corporation recorded a tax credit totaling $571 for the six months ended June 30, 2010, compared to a tax credit of $1,339 for the same period in 2009. The change in income tax benefit is primarily attributable to recognition of a valuation allowance on deferred tax assets of $876 recorded in the period, offset by an increase in pre-tax losses coupled with a decrease in tax exempt income. The valuation allowance was determined based upon an analysis of management’s projection of future taxable income compared to current levels of deferred taxes.

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.

26

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

Cash and cash equivalents increased $6,043, or 14.6%, to $47,496 at June 30, 2010 compared to $41,453 at December 31, 2009. Cash and equivalents represented 7.4% of total assets at June 30, 2010 and 6.1% of total assets at December 31, 2009. The Corporation has the ability to borrow funds from both the Federal Reserve and the Federal Home Loan Bank, should the Corporation need to supplement its liquidity needs. Management believes the Corporation’s liquidity position is adequate based on its current level of cash and cash equivalents, its other funding sources and its ability to liquidate collateral as needed for liquidity purposes.

CAPITAL RESOURCES

Total shareholders’ equity decreased $1,725, or 3.5% between December 31, 2009 and June 30, 2010. The decrease was primarily due to period net losses of $2,916, offset by a $1,191 decrease in unrealized losses on available for sale securities.

Tier 1 capital is shareholders’ equity excluding the unrealized gain or loss on securities included in accumulated other comprehensive income. 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 10.56% at June 30, 2010, while the Tier 1 risk-based capital ratio was 9.31%. 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 6.62% at June 30, 2010. The Corporation’s wholly-owned bank reported a Tier 1 leverage ratio of 6.65% at June 30, 2010.

The following table sets forth the Corporation’s obligations and commitments to make future payments under contract as of June 30, 2010.

	PAYMENT DUE BY YEAR
CONCTRACTUAL OBLIGATIONS	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
FHLB advances	$	60,592	$	9,208	$	45,648	$	3,235	$	2,501
Federal funds purchased and other short-term borrowings		1,083		1,083		—		—		—
Operating lease obligations		6,388		466		1,864		1,865		2,193
Loan and line of credit commitments		72,522		72,522		—		—		—
Total Contractual Obligations	$	140,585	$	83,279	$	47,512	$	5,100	$	4,694

27

DCB FINANCIAL CORP
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
(Dollars in thousands, except per share amounts)

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 2009 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 may not rise as quickly, since loans are repaid at a slower rate, reducing the opportunities to increase rates. Moreover, the interest the Corporation would pay on its deposits may increase because the Corporation’s deposits generally have shorter periods for repricing.

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

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.

28

DCB FINANCIAL CORP
CONTROLS AND PROCEDURES
(Dollars in thousands, except per share amounts)

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 June 30, 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 June 30, 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 quarter ended June 30, 2010, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

29

DCB FINANCIAL CORP
FORM 10-Q
Quarter ended June 30, 2010
PART II — OTHER INFORMATION

Item 1 —	Legal Proceedings:
	There are no matters required to be reported under this item.
Item 1A —	Risk Factors:
	There has been no material change in the nature of the risk factors set forth in the Company’s Form 10-K for the year ended December 31, 2009.
Item 2 —	Unregistered Sales of Equity Securities and Use of Proceeds:

ISSUER PURCHASES OF EQUITY SECURITIES

							(d)
					(c)		Maximum Number
					Total Number of		(or Approximate
	(a)				Shares (or Units)		Dollar Value) of
	Total Number		(b)		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		—		—		—		—
4/1/2010 to 4/30/2010
Month #2		—		—		—		—
5/1/2010 to 5/31/2010
Month #3		—		—		—		—
6/1/2010 to 6/30/2010
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.

Item 3 —	Defaults Upon Senior Securities:
	There are no matters required to be reported under this item.

30

DCB FINANCIAL CORP
FORM 10-Q
Quarter ended June 30, 2010
PART II — OTHER INFORMATION

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

31

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: August 16, 2010	/s/ David Folkwein
	David Folkwein
	Interim President and Chief Executive Officer
Date: August 16, 2010	/s/ John A. Ustaszewski
	John A. Ustaszewski
	Senior Vice President and Chief Financial Officer

32

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.

33