DCB Financial (DCBF) 10-Q 2010 Q3 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:September 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.

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 November 12, 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 and Nine Month Periods Ended September 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		31
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

	September 30,			December 31,
	2010			2009
	(unaudited)
ASSETS
Cash and due from financial institutions	$	10,481		$	10,082
Interest bearing deposits		31,422			26,371
Federal funds sold and overnight investments		—			5,000
Total cash and cash equivalents		41,903			41,453
Securities available for sale		79,974			94,100
Securities held to maturity		1,733			1,752
Total securities		81,707			95,852
Loans held for sale, at lower of cost or fair value		6,109			2,442
Loans		448,210			489,482
Less allowance for loan losses		(12,727	)		(10,479	)
Net loans		435,483			479,003
Real estate owned		4,704			4,912
Investment in FHLB stock		3,773			3,773
Premises and equipment, net		13,429			14,435
Investment in unconsolidated affiliates		1,623			1,439
Bank-owned life insurance		16,903			16,326
Deferred federal income taxes, net		—			5,239
Accrued interest receivable and other assets		9,536			10,148
Total assets	$	615,170		$	675,022
LIABILITIES
Deposits
Noninterest-bearing	$	65,943		$	60,502
Interest-bearing		445,879			496,953
Total deposits		511,822			557,455
Federal funds purchased and other short-term borrowings		1,099			3,011
Federal Home Loan Bank advances		59,387			63,148
Accrued interest payable and other liabilities		3,997			2,065
Total liabilities		576,305			625,679
SHAREHOLDERS’ EQUITY
Common stock, no par value, 7,500,000 shares authorized, 4,273,908 issued		3,785			3,785
Retained earnings		48,240			60,213
Treasury stock, at cost, 556,523 shares		(13,494	)		(13,494	)
Accumulated other comprehensive income (loss)		334			(1,161	)
Total shareholders’ equity		38,865			49,343
Total liabilities and shareholders’ equity	$	615,170		$	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						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Interest and dividend income
Loans	$	6,097		$	6,815		$	18,856		$	21,149
Taxable securities		621			715			2,026			2,562
Tax-exempt securities		145			233			526			759
Federal funds sold and other		33			31			79			140
Total interest income		6,896			7,794			21,487			24,610
Interest expense
Deposits		1,056			1,704			3,408			5,918
Borrowings		686			747			2,069			2,493
Total interest expense		1,742			2,451			5,477			8,411
Net interest income		5,154			5,343			16,010			16,199
Provision for loan losses		4,531			1,766			9,878			6,908
Net interest income after provision for loan losses		623			3,577			6,132			9,291
Noninterest income
Service charges on deposit accounts		652			692			1,915			1,940
Trust department income		225			191			718			661
Net gains on sale of securities		63			—			143			462
Net gains (losses) on sale of assets		28			(91	)		114			(251	)
Gains on sale of loans		144			63			251			253
Treasury management fees		117			107			361			378
Data processing servicing fees		163			167			463			440
Earnings on bank owned life insurance		167			167			577			501
Other-Than-Temporary-Losses
Total other-than-temporary impairment losses		—			(1,111	)		(80	)		(6,301	)
Portion of loss recognized in (reclassified from) other comprehensive income (before taxes)		—			(634	)		(950	)		3,776
Net impairment losses recognized in income		—			(1,745	)		(1,030	)		(2,525	)
Other		152			123			428			318
Total noninterest income		1,711			(326	)		3,940			2,177
Noninterest expense
Salaries and employee benefits		2,611			2,590			7,834			7,717
Occupancy and equipment		1,104			1,138			3,149			3,292
Professional services		475			109			1,178			632
Advertising		121			122			294			307
Postage, freight and courier		77			84			286			237
Supplies		43			63			102			217
State franchise taxes		152			149			456			487
Federal deposit insurance premiums		375			757			1,167			1,411
Other		1,284			832			3,001			2,893
Total noninterest expense		6,242			5,844			17,467			17,193
Loss before income taxes		(3,908	)		(2,593	)		(7,395	)		(5,725	)
Income tax (credits)		5,151			(1,143	)		4,580			(2,482	)
Net loss	$	(9,059	)	$	(1,450	)	$	(11,975	)	$	(3,243	)
Basic and diluted loss per common share	$	(2.44	)	$	(0.39	)	$	(3.22	)	$	(0.87	)
Dividends per share	$	—		$	0.02		$	—		$	0.06

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						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Net loss	$	(9,059	)	$	(1,450	)	$	(11,975	)	$	(3,243	)
Unrealized gain (loss) on securities available for sale, net of taxes (benefits) of $67, $292, $476 and $489 for the respective periods		325			899			923			950
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, $216, $344 and ($1,284)for the respective periods		21			418			667			(2,492	)
Reclassification adjustment for realized gains included in net income, net of tax of $22, $0, $49 and $157 for the respective periods		(42	)		—			(95	)		(305	)
Comprehensive loss	$	(8,755	)	$	(133	)	$	(10,480	)	$	(5,090	)
Accumulated other comprehensive income (loss)	$	334		$	(1,012	)	$	334		$	(1,012	)

See notes to the condensed consolidated financial statements.

5

DCB FINANCIAL CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Nine Months Ended
	September 30,
	2010			2009
Cash flows provided by operating activities	$	1,474		$	5,599
Cash flows provided by (used in) investing activities
Securities available for sale
Purchases		(19,734	)		(35,036	)
Maturities, principal payments and calls		25,739			32,594
Sales		9,435			17,439
Net change in loans		32,895			11,528
Proceeds from sale of real estate owned		2,465			840
Investment in unconsolidated affiliate		(184	)		(143	)
Premises and equipment expenditures		(334	)		(646	)
Net cash provided by investing activities		50,282			26,576
Cash flows provided by (used in) financing activities
Net change in deposits		(45,633	)		28,842
Net change in federal funds purchased and other short-term borrowings		(1,912	)		(2,249	)
Repayment of Federal Home Loan Bank advances		(3,761	)		(18,838	)
Cash dividends paid		—			(446	)
Net cash used in financing activities		(51,306	)		7,309
Net change in cash and cash equivalents		450			39,484
Cash and cash equivalents at beginning of period		41,453			33,632
Cash and cash equivalents at end of period	$	41,903		$	73,116
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings	$	4,885		$	8,727
Supplemental disclosure of non-cash investing and financing activities:
Unrealized gain on securities designated as available for sale, net of tax benefits	$	125		$	950
Transfer from loans to real estate owned	$	2,356		$	1,329
Loans originated upon sale of real estate owned	$	—		$	5,331
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)

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 September 30, 2010, and its results of operations for the three and nine month periods ended September 30, 2010 and 2009 and its cash flows for the nine month periods ended September 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 nine month periods ended September 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 are 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 September 30, 2010 and 2009.

	Three and Nine Months Ended
	September 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 nine month periods ended September 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)

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 nine month periods ended September 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 September 30, 2010. At September 30, 2010, 54,622 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 $74 and $86 in compensation cost for equity-based awards that vested during the nine months ended September 30, 2010 and 2009, respectively. The Corporation has $168 of total unrecognized compensation cost related to non-vested equity-based awards granted under its stock option plan as of September 30, 2010, which is expected to be recognized over a weighted-average period of approximately 4.0 years.

8

DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

				Nine Months Ended
				September 30,
				2010
						WEIGHTED
				WEIGHTED		AVERAGE
				AVERAGE		REMAINING
				EXERCISE		CONTRACTUAL
	SHARES			PRICE		LIFE
Outstanding at beginning of period		204,833		$	19.59	8.6 years
Forfeited		(31,484	)	$	19.65
Outstanding at end of period		173,349		$	18.76	6.9 years
Options exercisable at period end		86,606		$	22.32

				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)

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

NUMBER OUTSTANDING	RANGE OF EXERCISE PRICES
77,788	$23.00 – $30.70
47,711	$16.90
47,850	$7.50 – $9.00

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 September 30, 2010, management determined that a valuation allowance on the Corporation’s deferred tax assets was necessary, and accordingly, recorded a $5.1 million 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 September 30, 2010.

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.

10

DCB FINANCIAL CORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In July 2010, 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. This statement focuses on disclosures and will not impact 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 for other economic and qualitative 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)

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
	September 30, 2010
U.S. Government and agency obligations	$	29,843	$	1,260	$	(5	)	$	31,098
State and municipal obligations		16,955		748		(1	)		17,702
Mortgage-backed and related securities		30,023		1,155		(4	)		31,174
Total debt securities		76,821		3,163		(10	)		79,974
Other securities		—		—		—			—
Total	$	76,821	$	3,163	$	(10	)	$	79,974

			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
	September 30, 2010
Collateralized debt obligations	$	4,380	$	(2,647	)	$	1,733

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 September 30, 2010:

Collateralized debt obligations determined to be other than temporarily impaired

	September 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		(2,647	)		(3,658	)
Adjusted carrying value	$	1,733		$	1,752
Fair value of securities held to maturity	$	1,733		$	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 nine month periods ended September 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 September 30, 2010 and December 31, 2009:

September 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
U.S. Government and agency obligations		1	$	995	$	(5	)		—	$	—	$	—			1	$	995	$	(5	)
Corporate bonds		—		—		—			2		1,733		(2,647	)		2		1,733		(2,647	)
State and municipal obligations		2		815		(1	)		—		—		—			2		815		(1	)
Mortgage-backed		1		492		(4	)		—		—		—			1		492		(4	)
Total temporarily impaired securities		4	$	2,302	$	(10	)		2	$	1,733	$	(2,647	)		6	$	4,035	$	(2,657	)
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		(3,659	)		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 basis 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 September 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 of the underlying issuers, 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 September 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 September 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, except that the Corporation held two issues the CDO labeled “PreTSL” which had a carrying value of $4.38 million which was greater than 10% of shareholder’s equity. These securities with an original face of $8.0 million have been charged down to $4.38 million and are carried on the books net of OTTI at $1.73 million.

The amortized cost and estimated fair value of all debt securities at September 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.

	Available for sale				Held-to-maturity
					Adjusted
	Amortized		Fair		Carrying		Fair
	Cost		Value		Value		Value
Due in one year or less	$	964	$	967	$	—	$	—
Due from one to five years		16,616		17,001		—		—
Due from five to ten years		19,119		20,291		—		—
Due after ten years		10,099		10,541		4,380		1,733
Mortgage-backed and related securities		30,023		31,174		—		—
Total debt securities		76,821		79,974		4,380		1,733
Other securities		—		—		—		—
Total	$	76,821	$	79,974	$	4,380	$	1,733

Securities with a carrying value of $79,974 at September 30, 2010 were pledged to secure public deposits and other obligations.

NOTE 3 — LOANS

Loans were as follows:

	September 30,		December 31,
	2010		2009
Commercial and industrial	$	41,608	$	44,123
Commercial real estate		216,599		207,808
Residential real estate and home equity		154,456		180,779
Real estate construction and land development		22,001		37,989
Consumer and credit card		13,504		18,745
		448,168		489,444
Add: Net deferred loan origination costs		42		38
Total loans receivable	$	448,210	$	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						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
Balance at beginning of period	$	13,114		$	7,995			10,479		$	6,137
Provision for loan losses		4,531			1,766			9,878			6,908
Loans charged off		(5,062	)		(986	)		(8,012	)		(4,533	)
Recoveries		144			73			382			336
Balance at end of period	$	12,727		$	8,848		$	12,727		$	8,848

Nonperforming loans were as follows:

	September 30,		December 31,
	2010		2009
Loans past due 90 days or more and still accruing	$	3,582	$	886
Nonaccrual loans		13,806		11,275
Total	$	17,388	$	12,161
Impaired loans are as follows:
Loans with no allocated allowance for unconfirmed loan losses	$	23,378	$	15,321
Loans with allocated allowance for unconfirmed loan losses		39,486		31,985
Total	$	62,864	$	47,306
Amount of the allowance for loan losses allocated to unconfirmed losses on impaired loans	$	8,254	$	6,326
Average of impaired loans during the period	$	62,131	$	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 September 30, 2010 and December 31, 2009.

			September 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	$	31,098	$	—	$	31,098	$	—
State and municipal obligations		17,702		—		17,702		—
Mortgage-backed		31,174		—		31,174		—
Total	$	79,974	$	—	$	79,974	$	—

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 September 30, 2010 and December 31, 2009, impaired loans consisted primarily of loans secured by non-owner occupied and commercial real estate. Management has determined fair value measurements on impaired loans primarily through appraisals or other analysis supplied by third-party providers.

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 appraisals or other analysis performed by third-party providers.

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 September 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		Change in Fair
	Value		(Level 1)		(Level 2)		(Level 3)		Value for 2010
September 30, 2010
Impaired loans	$	31,232	$	—	$	—	$	31,232	$	3,740
Real Estate Owned	$	4,605	$	—	$	—		4,605	$	0
Collateralized debt obligations	$	1,733	$	—	$	—	$	1,733	$	1,030
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:

	September 30,				December 31,
	2010				2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets
Cash and cash equivalents	$	41,903	$	41,903	$	41,453	$	41,453
Securities available for sale		79,974		79,974		94,100		94,100
Securities held to maturity		1,733		1,610		1,752		1,752
Loans held for sale		6,109		6,109		2,442		2,442
Loans		448,210		446,159		489,482		490,446
FHLB stock		3,773		3,773		3,773		3,773
Accrued interest receivable		2,231		2,231		2,348		2,348
Financial liabilities
Noninterest-bearing deposits	$	65,943	$	65,943	$	60,502	$	60,502
Interest-bearing deposits		445,879		445,849		496,953		497,434
Federal funds purchased and other short-term borrowings		1,099		1,099		3,011		3,011
FHLB advances		59,387		61,927		63,148		64,040
Accrued interest payable		591		591		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

During the nine-month period ending September 30, 2010 the Corporation entered into a Memorandum of Understanding (“MOU”) with the Federal Reserve Bank of Cleveland (“Fed”). This MOU prohibits the Corporation from performing certain actions without prior approval of the Fed. Though Management believes it can meet all of its obligations and reporting requirements related to the MOU, there are no assurances that the restrictions placed on it by the Fed will be lifted during any particular time period.

On October 29, 2010 DCB Financial Corp announced on Form 8-K that its wholly-owned subsidiary bank had entered into a Consent Order (“Order”) with the Federal Deposit Insurance Corp. (“FDIC”) and a Written Agreement (“Agreement”) with the Ohio Division of Financial Institutions (“ODFI”). The Order and Agreement are substantially the same, and require the Bank to attain a tier-1 capital ratio of 9% and a risk-based capital ratio of 13% during the term of the agreement. Also, the Order and Agreement require the Bank to address other issues related to its operations. Though Management believes it can meet all of the requirements in the Consent and Agreement, there are no assurances that it can do so. Additionally, though the Bank may be successful in addressing all issues in the Order and Agreement, there can be no assurances that the restrictions placed on it by the FDIC and ODFI will be lifted during any particular time period.

Because of the Order and Agreement, the Bank my have further restrictions placed on it’s issuance of deposit products. These restrictions may include limits on the types, amounts and rates it offers. This may reduce the Bank’s ability to fulfill its strategic plans, or reduce the overall profitability of the Corporation.

On July 21, 2010, the President signed into law the “Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010” (the “Act”). This new law may significantly change the regulation of financial institutions and the financial services industry. Because the Act requires various federal agencies to adopt a broad range of regulations with significant discretion, many of the details of the new law and its effect on the Bank and the Corporation will not be known for months and perhaps even years. Although it is impossible for management to predict at this time all of the effects of the Act on the Corporation and the Bank (as well as the rest of the industry), it is possible that the Bank’s interest expense could increase and deposit insurance premiums could change, and steps may well be taken to increase required qualifying capital levels The Corporation expects that in light of the Act, as well as the MOU, the Agreement and the Order, operating and compliance costs will increase and could adversely impact its financial condition and results of operation.

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 September 30, 2010, compared to December 31, 2009, and the consolidated results of operations for the three and nine months ended September 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 Third 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 lack of sustainable economic activity within the Corporation’s market area. Additional economic pressures are due to higher than historical unemployment levels, increased loan foreclosure volume and a decline in real estate values. The Corporation’s business has also been under pressure from market interest rate conditions and competition from other financial institutions in the area. Real estate values, especially in the Bank’s core geographic area, have declined during the first half of 2010, and no noticeable increase in overall values were seen in the most recent quarter.

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 $615,170 at September 30, 2010, compared to $675,022 at December 31, 2009, a decrease of $59,852. The decline is due primarily to an overall slowdown in loan volume and Management’s initiatives to reduce the overall level of assets. This has been accomplished by reducing certain deposit levels, mainly large time deposits held by select customers. Management’s overall 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. Continuous progress is being made on addressing these issues, but the Bank is still faced with meaningful challenges.

• As previously noted on Form 8-K filed with the Securities Exchange Commission, the Bank has entered into a Consent Order (“Order”) with the Federal Deposit Insurance Corp, and a Written Agreement (“Agreement”) with the Ohio Division of Financial Institutions. Among other items, the Bank is required to achieve and maintain a 9% tier-1 capital ratio and a 13% total risk-weighted capital ratio while operating under the Order and Agreement.

• Net loss for the three and nine months ended September 30, 2010 totaled $9,059 and $11,975, compared to a net loss in the same periods in 2009 of $1,450 and $3,243 respectively. The increase in loss during the comparable periods is mainly attributed to increase provision expense and the recording of an allowance for the Corporation’s deferred tax assets.

• The provision for loan losses totaled $4,531 and $9,878 for the three and nine months ended September 30, 2010, compared to $1,766 and $6,908 in the same respective periods in 2009. The increase is mainly attributed to declines in overall credit quality coupled with increased provision 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 earning assets, period to period, contributed to the reduced interest income. Loans declined by $41.3 million from $489.5 million to $448.2 million at September 30, 2010. Additionally, the Corporation’s available-for-sale investment portfolio declined by $14.1 million to $79.9 million at quarter-end. The declines in earning assets is attributed to reduced loan volume attributed to lower market activity and the liquidation of securities to provide liquidity for the Corporation.

• The Corporation’s net interest margin for the third quarter increased slightly compared to the second quarter 2010, from 3.57% to 3.59%. This is attributed to improved deposit and loan pricing, core deposit growth and reduced high cost broker deposits and long-term debt.

• 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.

22

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

• Total borrowings decreased by $3.7 million from $63.1 million at December 31, 2009, to $59.4 million at September 30, 2010. This is mainly due to management’s decision to continue to reduce long term debt in order to lower the costs associated with long-term debt compared to deposits.

• Management reduced deposits by $45.6 million, or 8.2%, from December 31, 2009 by primarily focusing on reducing reliance on large time deposits from non-core customers and CDARs time deposits.

ANALYSIS OF FINANCIAL CONDITION

The Corporation’s assets totaled $615 million at September 30, 2010, compared to $675 million at December 31, 2009, a decrease of approximately $60 million, or 8.9%. Cash and cash equivalents remained flat from year-end 2009. Total securities available for sale decreased from $94.1 million at December 31, 2009 to $79.9 million at September 30, 2010. The decline in AFS securities is mainly attributed to the sale of securities to create additional balance sheet liquidity. The Bank utilizes its AFS investment portfolio to collateralize borrowing options in order to secure additional liquidity sources.

Total loans decreased $41.3 million, or 8.4%, from $489.4 million to $448.2 million at September 30, 2010. The Corporation continues to experience a decline in loan balances due to reduced loan activity in our primary markets for loans meeting our credit criteria and planned portfolio runoff. Retail loan balances remained stable, but run-off of commercial and commercial real estate, including charged-off loans accounting for most of the decline. Management expects a continued reduction in the size of the Bank’s balance sheet in the short-term as a result of the general decline in quality credits available in the current economy, in order to execute its workout strategy for problem loans and increase its capital ratios. Management also continued to focus on loan diversification and has initiated plans to focus further on qualified commercial and industrial, and small business lending in lieu of commercial real estate loans. The decrease in loan balances reflects the utilization of proceeds from loan payoffs to fund deposit withdrawals and to repay borrowings which has reduced the Bank’s balance sheet and improved capital ratios.

Total deposits decreased approximately $45.6 million, or 8.1%, from December 31, 2009 to $511.8 million at September 30, 2010. The Bank had approximately $110 million CDARS deposits outstanding at September 30, 2010 compared to $145 million at year-end 2009. Noninterest-bearing deposits increased $5.4 million, or 8.9%, while interest bearing deposits decreased approximately $50 million, or 10.3% during the nine month period ended September 30, 2010. The Corporation utilizes a variety of alternative funding sources due to competitive challenges within its primary market including special rate time deposits, CDARs time deposits and other deposit specials. Total borrowings decreased $3.7 million during the nine months ended September 30, 2010, from $63.1 million at December 31, 2009 to $59.4 million at quarter end. Management has focused on reducing deposits from non-core customers in order to manage the cost of its deposit portfolio.

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

The Corporation’s net loss of $9.06 million, or $2.44 per basic and diluted share for the three months ended September 30, 2010, compared to a net loss of $1.45 million, or $0.39 per basic and diluted share for the same period in 2009. The increase in the net loss primarily reflects an increase in the provision for loan losses and a write-down of the Corporation’s deferred tax assets. Management continues to evaluate classified loans on a quarterly basis to determine if a loan is impaired, and if reserves are required to be allocated to any particular loan relationship. The increase in loan reserve for the third-quarter is the result of the completion of this analysis. The allowance for taxes was the result of the completion of analysis related to deferred tax assets and the estimate that the Corporation, based on current information and applicable tax guidance, would be unable to more likely than not support the carrying value of the tax asset.

23

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

Net Interest Income

Net interest income of $5.2 million decreased slightly from $5.3 million for the three months ended September 30, 2009. This is mainly attributed to the overall reduction in earning assets, as Management has implemented initiatives to reduce the overall size of the balance sheet. Overall, loan originations remained sluggish during the quarter due to slowing economic conditions in the Bank’s primary market. Additionally, run-off in the indirect auto, residential mortgage and investment property portfolios has contributed to the overall reduction in loan balances. The lower loan origination volume has allowed management to reduce the overall level of deposits, with reductions seen in the higher cost products and non-core funding. Low cost or no cost transactional and savings account balances have seen increases as the Bank focuses on building its core deposit balances. The Bank continues to re-price deposits on a year to year comparison, which helped reduce overall deposit funding costs to near 80 basis points at the end of the third quarter 2010. The Bank has also reduced its balances in large time deposits, particularly in the public fund sector as the need for these funds has diminished as the balance sheet is being strategically restructured.

Net interest margin improved slightly to 3.59% for the three and nine months ended September 30, 2010, from 3.34% compared to the same period in 2009. Management has effectively increased margins through management of deposit rates, managing low yielding cash balances and risk-based pricing on its loan originations and renewals. Analysis indicates that the balance sheet is relatively risk neutral in terms of future earnings under various interest rate scenarios.

Noninterest Income

Total noninterest income increased to $1.7 million from a deficit of $326 thousand for the three months ended September 30, 2010, compared to the same period in 2009. The increase is primarily attributable to the effect of other-than-temporary impairment losses recorded in the 2009 third-quarter. The OTTI losses were attributed to the write-down of CDOs in the Corporation’s held-to-maturity portfolio. These investments stabilized during 2010 and no additional impairment recognition was necessary during the third-quarter 2010. Overall, non-interest revenue (excluding CDO impairment) was up due to improved net gains on sales of loans and other assets compared to the third quarter 2009. This is attributed to the improved market conditions for residential real estate loans, and the increased emphasis the Corporation has placed on originating secondary market paper. Management has set an initiative to utilize additional resources to originate residential mortgage paper in order to grow non-interest revenue.

Noninterest Expense

Total noninterest expense of $6.2 million increased $399 thousand for the three months ended September 30, 2010, compared to the same period in 2009. The increase was mainly attributed to legal and consulting costs associated with the Bank’s non-performing loan portfolios. Management has spent significant time and resources in workout initiatives for problem loans in order to mitigate their adverse impact on the balance sheet and operating results. Related expenses include various consulting, legal and property management services necessary to properly assist management in the workout process. Overall, salary and benefit expense of $2.6 million remain similar to the third-quarter 2009 as well as most other operating expense categories.

Tax Expense

During the quarter, Management performed an analysis on its deferred tax assets and determined that it should charge down the asset to a net realizable position. Subsequent to that analysis, a $5.1 million charge was taken. The deferred tax asset continued to increase primarily due to ongoing operating losses. For regulatory purposes the deferred tax asset was already discounted against capital for measurement purposes, the recognition of the valuation allowance did not impact the bank’s regulatory capital ratios.

Credit Quality Review

Non-accrual loans at September 30, 2010 increased to $13.8 million from $11.2 million 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, including commercial real estate loans. Loans delinquent ninety days and accruing interest were $3.5 million at September 30, 2010. Delinquent loans over thirty days decreased to 4.14% of total loans at quarter end from 6.05% at June 30, 2010. However, the 4.14% delinquency still remains elevated compared to September 30, 2009 when the ratio stood at 1.37%. Overall, delinquencies in the retail loan portfolios are favorable as compared to published industry averages, as consumer real estate loans were 1.04%, credit cards were 2.71% and consumer direct loans were 2.84% at the end of the third quarter 2010. Management will continue to commit significant internal and external resources to activities related to monitoring, collection, and workout of problem loans. Management also continues to monitor exposure to industry segments, and believes that the loan portfolio remains appropriately diversified.

24

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 $4.5 million for the three months ended September 30, 2010, compared to $1.7 million for the same period in 2009, an increase of $2.8 million. The increased provision for the third quarter was the result of the analysis related to management’s loan quality review process for all bank watch list loan relationships. On a quarterly basis, Management reviews all classified loan relationships and analyzes to determine if a loan is impaired, and if so, the amount of reserves needed to be allocated to that particular relationship. The allowance for loan losses was $12.7 million or 2.84% of total loans at September 30, 2010, compared to $10.5 million, or 2.14% of total loans at December 31, 2009.

Charge-offs

Net charge-offs for the three months ended September 30, 2010 increased to $4.9 million, compared to $913 thousand for the three months ended September 30, 2009. Quarterly net charge-offs were 4.3%, while annualized net charge-offs for the nine months ended September 30, 2010 were 2.15%. Management charged-off these loans as they were deemed uncollectible and ultimately as a means to correctly value them on the balance sheet. The majority of the charge-offs for the quarter related to commercial real estate loans that were previously reserved for, but are now being charged down to their current collateral value.

COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND SEPTEMBER 30, 2009

Net Loss.The Corporation’s net loss for the nine months ended September 30, 2010 totaled $11,975, compared to a net loss of $3,243 for the same period in 2009. The per share loss was $3.22 for the nine months ended September 30, 2010, compared to a per share loss of $0.87 for the nine months ended September 30, 2009. The increase in the net loss was primarily attributable to an increase in provision expense for loan losses and a deferred tax allowance taken in the third quarter 2010.

Net Interest Income.Net interest income was $16,010 for the nine months ended September 30, 2010, which was very comparable to the $16,199 for the same period in 2009. However, the net interest margin increased to 3.60% for the nine months ended September 30, 2010, up from 3.39%, for the period in 2009. The increase in margin is mainly attributed to management of deposit rates, reduced average cash balances and improved 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 which has resulted in lower earning assets. The Bank continues to reduce wholesale deposit funding which is typically higher cost compared to retail deposits. 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 totaled $9,878 for the nine months ended September 30, 2010, compared to $6,908 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 nine months ended September 30, 2010 were 2.15%, an increase compared to 1.13% for the same period in 2009. The largest percentage of charge-offs during the nine months ended September 30, 2010 was attributed to economic conditions that primarily affected the commercial real estate portfolio, and to a lesser extent the Corporation’s commercial business portfolio. Delinquent loans over thirty days from period to period increased significantly to 4.14% at September 30, 2010 from 1.37% at September 30, 2009, and again are mainly attributed to the commercial and real estate investment portfolios.

25

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 by $1.8 million, for the nine months ended September 30, 2010, compared to the same period in 2009. The decrease is primarily attributable to a reduction in impairment charges on CDO securities coupled with a decline in losses attributed to other real-estate owned asset sales. The Bank has been able to either increase revenues on its core lines of business, including retail fees and trust activities, or at least maintain comparable revenue streams.

Noninterest Expense.Total noninterest expense increased $274 thousand, or 1.6%, for the nine months ended September 30, 2010, compared to the same period in 2009. The increase is attributed to the additional expenses associated with legal and consulting necessary to monitor and manage the Bank’s non-performing loan portfolio. Expenses were offset by a decline in FDIC insurance premiums, as 2009 included a one-time assessment in addition to normal insurance charges. Salary and benefit expenses were flat as the Corporation adjusts its workforce to remain aligned to the overall size of the balance sheet and market activities.

Income Taxes.The Corporation recorded a tax expense of $4.5 million for the nine months ended September 30, 2010, compared to a tax credit of $2.5 million for the same period in 2009. The change in income tax is attributed to the allowance taken in the third-quarter 2010 after a review of the Corporation’s deferred tax asset position. 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.

Cash and cash equivalents increased $450 thousand to $41.9 million at September 30, 2010. Cash and equivalents represented 6.8% of total assets at September 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 $10,478, between December 31, 2009 and September 30, 2010. The decrease was primarily due to period net losses of $11,975 offset by an increase in accumulated other comprehensive income.

26

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

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 Bank’s ratio of total capital to risk-weighted assets was 9.87% at September 30, 2010, while the tier-1 capital ratio was 6.18%. Regulatory minimums call for a total risk-based capital ratio of 8.0%, at least half of which must be Tier 1 capital.

The following table sets forth the Corporation’s obligations and commitments to make future payments under contract as of September 30, 2010, though in the case of loan and line of credit commitments, it is possible, but unlikely that the entire committed amount will be funded within the given time period.

	PAYMENT DUE BY YEAR
CONTRACTUAL			Less than 1						More than
OBLIGATIONS	Total		year		1-3 years		3-5 years		5 years
FHLB advances	$	59,387	$	8,854	$	45,129	$	2,620	$	2,784
Federal funds purchased and other short-term borrowings		1,099		1,099		—		—		—
Operating lease obligations		5,979		757		1,864		1,896		1,462
Loan and line of credit commitments		72,977		72,977		—		—		—
Total Contractual Obligations	$	139,442	$	83,687	$	46,993	$	4,516	$	4,246

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 400 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 +400 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 Interim President and 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 September 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 September 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 September 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 September 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		—		—		—		—
7/1/2010 to 7/31/2010
Month #2		—		—		—		—
8/1/2010 to 8/31/2010
Month #3		—		—		—		—
9/1/2010 to 9/30/2010
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 September 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: November 15, 2010	/s/ David Folkwein
	David Folkwein
	Interim President and Chief Executive Officer
Date: November 15, 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 Interim President and 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