DCB Financial (DCBF) 10-Q 2007 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, 2007

OR

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

Commission file number:0-22387

DCB Financial Corp

(Exact name of registrant as specified in its charter)

Ohio	31-1469837
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

110 Riverbend Avenue, Lewis Center, Ohio 43035

(Address of principal executive offices)

(740) 657-7000

(Registrant’s telephone number)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filerso                     Accelerated filerþ                     Non-accelerated filero

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

As of November 2, 2007, the latest practicable date, 3,718,867 shares of the registrant’s no par value common stock were issued and outstanding.

DCB FINANCIAL CORP
FORM 10-Q
For the Nine and Three Month Periods Ended September 30, 2007 and 2006

Table of Contents

	Page
PART I – FINANCIAL INFORMATION
ITEM 1 – Financial Statements
Consolidated Balance Sheets		3
Consolidated Statements of Income		4
Consolidated Statements of Comprehensive Income		5
Condensed Consolidated Statements of Cash Flows		6
Notes to the Consolidated Financial Statements		7
ITEM 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk		21
ITEM 4 – Controls and Procedures		23
PART II – OTHER INFORMATION		24
SIGNATURES		26
EX-31.1
EX-31.2
EX-32.1
EX-32.2

2

DCB FINANCIAL CORP

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

Item 1.Financial Statements

	September 30,			December 31,
	2007			2006
	(unaudited)
ASSETS
Cash and due from financial institutions	$	14,870		$	15,894
Federal funds sold		10,800			—
Total cash and cash equivalents		25,670			15,894
Securities available for sale		89,776			88,071
Loans held for sale		749			1,455
Loans		527,610			552,463
Less allowance for loan losses		(6,038	)		(5,442	)
Net loans		521,572			547,021
Real estate owned		857			—
Investment in FHLB stock		3,670			3,604
Premises and equipment, net		12,320			9,468
Investment in unconsolidated affiliates		1,302			968
Bank owned life insurance		14,743			9,396
Accrued interest receivable and other assets		10,540			8,127
Total assets	$	681,199		$	684,004
LIABILITIES
Deposits
Noninterest-bearing	$	52,428		$	70,428
Interest-bearing		463,352			453,666
Total deposits		515,780			524,094
Federal funds purchased and other short-term borrowings		14,100			1,776
Federal Home Loan Bank advances		87,247			93,736
Accrued interest payable and other liabilities		2,753			2,999
Total liabilities		619,880			622,605
SHAREHOLDERS’ EQUITY
Common stock, no par value, 7,500,000 shares authorized,   4,273,908 issued at September 30, 2007 and 4,273,750 issued at December 31, 2006		3,780			3,780
Retained earnings		70,936			68,807
Treasury stock, at cost, 542,943 and 458,786 shares at September 30, 2007 and December 31, 2006, respectively		(13,189	)		(10,841	)
Accumulated other comprehensive loss		(208	)		(347	)
Total shareholders’ equity		61,319			61,399
Total liabilities and shareholders’ equity	$	681,199		$	684,004

See notes to the consolidated financial statements.

3

DCB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007			2006		2007			2006
Interest and dividend income
Loans	$	9,765		$	10,399	$	29,763		$	29,759
Taxable securities		891			860		2,655			2,585
Tax-exempt securities		224			238		678			708
Federal funds sold and other		79			71		274			149
Total interest income		10,959			11,568		33,370			33,201
Interest expense
Deposits		4,500			4,633		13,972			12,520
Borrowings		1,045			1,098		3,057			3,171
Total interest expense		5,545			5,731		17,029			15,691
Net interest income		5,414			5,837		16,341			17,510
Provision for loan losses		1,100			390		2,784			1,370
Net interest income after provision for loan losses		4,314			5,447		13,557			16,140
Noninterest income
Service charges on deposit accounts		674			691		1,983			1,990
Trust department income		241			165		690			575
Net gain (loss) on sale of assets		(123	)		1		(195	)		(9	)
Gains on sale of loans		62			80		269			255
Treasury management fees		148			132		405			447
Data processing servicing fees		103			92		308			260
Earnings on bank owned life insurance		150			120		402			368
Other		457			146		775			399
Total noninterest income		1,712			1,427		4,637			4,285
Noninterest expense
Salaries and other employee benefits		2,455			2,262		7,196			6,773
Occupancy and equipment		934			801		2,637			2,403
Professional services		107			118		335			390
Advertising		102			111		305			304
Postage, freight and courier		62			66		205			267
Supplies		51			70		211			202
State franchise taxes		106			136		395			399
Other		694			552		1,927			1,595
Total noninterest expense		4,511			4,116		13,211			12,333
Income before income taxes		1,515			2,758		4,983			8,092
Federal income tax expense		432			823		1,193			2,403
Net income	$	1,083		$	1,935	$	3,790		$	5,689
Basic and diluted earnings per common share	$	0.29		$	0.51	$	1.01		$	1.49
Dividends per share	$	0.15		$	0.14	$	0.44		$	0.41

See notes to the consolidated financial statements.

4

DCB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Net income	$	1,083		$	1,935		$	3,790		$	5,689
Unrealized gains on securities available for sale, net of tax benefits		484			605			139			24
Comprehensive income	$	1,567		$	2,540		$	3,929		$	5,713
Accumulated other comprehensive loss	$	(208	)	$	(548	)	$	(208	)	$	(548	)

See notes to the consolidated financial statements.

5

DCB FINANCIAL CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Nine Months Ended
	September 30,
	2007			2006
Cash flows provided by operating activities	$	54		$	5,912
Cash flows provided by (used in) investing activities
Securities available for sale
Purchases		(16,693	)		(7,743	)
Maturities, principal payments and calls		14,172			13,665
Net change in loans		22,395			(4,675	)
Premises and equipment expenditures		(3,690	)		(1,167	)
Net cash flows provided by investing activities		16,184			80
Cash flows provided by (used in) financing activities
Net change in deposits		(8,314	)		25,916
Net change in federal funds purchased and other short-term borrowings		12,324			(10,303	)
Repayment of Federal Home Loan Bank advances		(6,489	)		(16,684	)
Purchase of treasury shares, net		(2,349	)		(329	)
Cash dividends paid		(1,634	)		(1,530	)
Net cash used in financing activities		(6,462	)		(2,930	)
Net change in cash and cash equivalents		9,776			3,062
Cash and cash equivalents at beginning of period		15,894			18,069
Cash and cash equivalents at end of period	$	25,670		$	21,131
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings	$	16,858		$	15,144
Federal income taxes	$	1,850		$	3,214
Supplemental non-cash disclosure:
Unrealized gains on securities designated as available for sale, net of tax benefits	$	139		$	24
Cash dividends declared but unpaid	$	560		$	534

See notes to the consolidated financial statements.

6

DCB FINANCIAL CORP

NOTES TO 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 September 30, 2007, and its results of operations and cash flows for the three and nine month periods ended September 30, 2007 and 2006. 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 2006 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 2006 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, 2007 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 subsidiary, The Delaware County Bank and Trust Company (the “Bank”). All significant intercompany accounts and transactions have been eliminated in consolidation. Management considers the Corporation to operate within one business segment, banking.

To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect amounts reported in the financial statements and disclosures provided, and future results could differ. The allowance for loan losses, fair values of financial instruments and status of contingencies are particularly subject to change.

Income 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.

Earnings per share

Earnings per common share is net income divided by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed including the dilutive effect of additional potential common shares under stock options.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Weighted-average common shares outstanding (basic)		3,730,180		3,814,708		3,750,853		3,816,780
Dilutive effect of assumed exercise of stock options		1,226		6,868		5,863		6,543
Weighted-average common shares outstanding (diluted)		3,731,406		3,821,576		3,756,716		3,823,323

Options to purchase 113,309 and 59,095 shares of common stock with a weighted-average exercise price of $21.90 and $24.79, respectively, for the three month and nine month periods ending September 30, 2007 were outstanding, but were

7

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

excluded from the computation of common share equivalents 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. During the nine months ended September 30, 2007, 44,214 shares were granted to employees under the plan, at a weighted average exercise price of $23.43. Approximately 21,553 shares were exercisable at September 30, 2007. At September 30, 2007 there were 191,364 shares available for grant under this plan.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (”SFAS”) No. 123(R), “Share-Based Payment,” which revises SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) requires that cost related to the fair value of all equity-based awards to employees, including grants of employee stock options, be recognized in the financial statements.

The Corporation adopted the provisions of SFAS No. 123(R) effective January 1, 2006, using the modified prospective transition method, as permitted, and therefore has not restated its financial statements for prior periods. Under this method, the Corporation has applied the provisions of SFAS No. 123(R) to new equity-based awards and to equity-based awards modified, repurchased, or cancelled after January 1, 2006. In addition, the Corporation has recognized compensation cost for the portion of unvested equity-based awards for which the requisite service period had not been rendered as of January 1, 2006. The compensation cost recorded for unvested equity-based awards is based on their grant-date fair value. The Company recorded $14 thousand and $41 thousand after tax in compensation cost for equity-based awards that vested during the three and nine months ended September 30, 2007, compared to $7 thousand and $21 thousand after tax in compensation cost for equity-based awards during the same periods in 2006. The Corporation has $283 thousand after tax of total unrecognized compensation cost related to non-vested equity-based awards granted under its stock incentive plan as of September 30, 2007, which is expected to be recognized over a weighted-average period of 4 years.

The fair value of each option is estimated on the date of grant using the modified Black-Scholes options pricing model with the following weighted-average assumptions used for grants: dividend yield of 2.75% for both 2007 and 2006; expected volatility of 12.0% for both 2007 and 2006; risk-free interest rates of 4.75% for both 2007 and 2006; and expected lives of 10 years for each grant.

The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the US Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of the Corporation’s stock.

8

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

Stock option plan (continued)

A summary of the status of the Corporation’s stock option plan as of September 30, 2007 and December 31, 2006, and changes during the periods then ended are presented below:

	Nine Months Ended
	September 30,
	2007
						WEIGHTED
				WEIGHTED		AVERAGE
				AVERAGE		REMAINING
				EXERCISE		CONTRACTUAL
	SHARES			PRICE		LIFE
Outstanding at beginning of period		70,040		$	27.19	8.0 years
Granted		44,214			23.43	9.8 years
Exercised		(158	)		28.69
Forfeited		(6,045	)		26.20
Outstanding at end of period		108,051		$	25.80	8.9 years
Options exercisable at period end		21,553		$	26.13
Weighted-average fair value of options granted during the period				$	2.57

	Year Ended
	December 31,
	2006
				WEIGHTED
				AVERAGE
				EXERCISE
	SHARES			PRICE
Outstanding at beginning of year		40,687		$	25.31
Granted		34,531			29.94
Exercised		(428	)		30.26
Forfeited		(4,750	)		28.56
Outstanding at end of year		70,040		$	27.19
Options exercisable at year-end		8,959		$	24.49
Weighted-average fair value of options granted during the year				$	6.19

9

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

The following information applies to options outstanding at September 30, 2007:

NUMBER OUTSTANDING	RANGE OF EXERCISE PRICES
108,051	$23.00 — $30.70

Newly Issued Accounting Standards: The Corporation adopted the provisions of FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes,” on January 1, 2007. Previously, the Corporation had accounted for tax contingencies in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies.” As required by Interpretation 48, which clarifies Statement No. 109, “Accounting for Income Taxes,” the Corporation recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Corporation applied Interpretation 48 to all tax positions for which the statute of limitations remained open. As a result of the implementation of Interpretation 48, the Corporation was not required to record any liability for unrecognized tax benefits as of January 1, 2007. There have been no material changes in unrecognized tax benefits since January 1, 2007.

The Corporation is subject to income taxes in the U.S. federal jurisdiction, as well as various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Corporation is no longer subject to U.S. federal, state and local, or non U.S. income tax examinations by tax authorities for the years before 2003.

The Corporation will recognize, if applicable, interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Instruments – an amendment of FASB Statements No. 133 and 140,” to simplify and make more consistent the accounting for certain financial instruments. Specifically, SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to permit fair value remeasurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis. SFAS No. 155 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” to allow a qualifying special purpose entity to hold a derivative instrument that pertains to a beneficial interest other than another derivative financial instrument.

SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006, or January 1, 2007 as to the Corporation, with earlier application allowed. The Corporation adopted SFAS No. 155 as of January 1, 2007 without material effect on the Corporation’s financial position or results of operations.

10

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

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets – an amendment of SFAS No. 140,” to simplify the accounting for separately recognized servicing assets and servicing liabilities. Specifically, SFAS No. 156 amends SFAS No. 140 to require an entity to take the following steps:

• Separately recognize financial assets as servicing assets or servicing liabilities, each time it undertakes an obligation to service a financial asset by entering into certain kinds of servicing contracts;

• Initially measure all separately recognized servicing assets and liabilities at fair value, if practicable, and;

• Separately present servicing assets and liabilities subsequently measured at fair value in the statement of financial position and additional disclosure for all separately recognized servicing assets and servicing liabilities.

Additionally, SFAS No. 156 permits, but does not require, an entity to choose either the amortization method or the fair value measurement method for measuring each class of separately recognized servicing assets and servicing liabilities.

SFAS No. 156 also permits a servicer that uses derivative financial instruments to offset risks on servicing to use fair value measurement when reporting both the derivative financial instrument and related servicing asset or liability.

SFAS No. 156 applies to all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, or January 1, 2007 as to the Corporation, with earlier application permitted. The Corporation adopted SFAS No. 156 as of January 1, 2007, applying the amortization method without financial statement effect. The Corporation’s mortgage servicing assets total less than $60,000 at September 30, 2007 and, therefore, the remaining disclosures required under SFAS No. 156 have been omitted.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement emphasizes that fair value is a market-based measurement and should be determined based on assumptions that a market participant would use when pricing an asset or liability. This Statement clarifies that market participant assumptions should include assumptions about risk as well as the effect of a restriction on the sale or use of an asset. Additionally, this Statement establishes a fair value hierarchy that provides the highest priority to quoted prices in active markets and the lowest priority to unobservable data. This Statement is effective for fiscal years beginning after November 15, 2007, or January 1, 2008 as to the Corporation, and interim periods within those fiscal years. The adoption of this Statement is not expected to have a material adverse effect on the Corporation’s consolidated statements of financial position or results of operations.

In September 2006, the FASB ratified the Emerging Issues Task Force’s (EITF) Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” which requires companies to recognize a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee extending to postretirement periods. The liability should be recognized based on the substantive agreement with the employee. This Issue is effective beginning January 1, 2008. The Issue can be applied as either a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, or a change in accounting principle through retrospective application to all periods. The Corporation is in the process of evaluating the impact the adoption of Issue 06-4 will have on the financial statements, but does not believe that EITF 06-4 will have a material adverse effect on the Corporation’s consolidated statements of financial position or results of operations.

11

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

In September 2006, the Financial Accounting Standards Board ratified a consensus opinion reached by the Emerging Issues Task Force (EITF) on EITF Issue 06-5, “Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized with FASB Technical Bulletin No. 85-4.” The guidance in EITF Issue 06-5 requires policyholders to consider other amounts included in the contractual terms of an insurance policy, in addition to cash surrender value, for purposes of determining the amount that could be realized under the terms of the insurance contract.

If it is probable that contractual terms would limit the amount that could be realized under the insurance contract, those contractual limitations should be considered when determining the realizable amounts. The amount that could be realized under the insurance contract should be determined on an individual policy (or certificate) level and should include any amount realized on the assumed surrender of the last individual policy or certificate in a group policy.

The Company holds a number of life insurance policies, however, the policies do not contain any provisions that would restrict or reduce the cash surrender value of the policies. The consensus in EITF Issue 06-5 is effective for fiscal years
beginning after December 15, 2006. The Company applied the guidance in EITF Issue 06-5 effective January 1, 2007 without effect on the Company’s financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115.” This Statement allows companies the choice to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with FASB’s long term measurement objectives for accounting for financial instruments. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, or January 1, 2008 as to the Corporation, and interim periods within those fiscal years. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No.157, “Fair Value Measurements.” The Corporation is currently evaluating the impact the adoption of SFAS No. 159 will have on the 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 most significant accounting policies followed by the Corporation are presented in Note 1 of Notes to Consolidated Financial Statements contained in the Corporation’s 2006 Annual Report. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

12

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

NOTE 2 — SECURITIES

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

			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	September 30, 2007
U.S. Government and agency obligations	$	25,948	$	20	$	(77	)	$	25,891
State and municipal obligations		23,439		68		(85	)		23,422
Corporate bonds		8,002		22		(52	)		7,972
Mortgage-backed securities		32,643		64		(312	)		32,395
Total debt securities		90,032		174		(526	)		89,680
Other securities		58		46		(8	)		96
Total	$	90,090	$	220	$	(534	)	$	89,776

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at September 30, 2007:

	(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		7	$	6,049	$	(7	)		11	$	9,295	$	(70	)		18	$	15,344	$	(77	)
State and municipal obligations		12		4,046		(32	)		22		8,407		(53	)		34		12,453		(85	)
Corporate bonds		1		4,948		(52	)		—		—		—			1		4,948		(52	)
Mortgage-backed and other securities		23		5,030		(36	)		57		17,612		(284	)		80		22,642		(320	)
Total temporarily impaired securities		43	$	20,073	$	(127	)		90	$	35,314	$	(407	)		133	$	55,387	$	(534	)

Management has the intent and ability to hold these securities for the foreseeable future. The decline in the fair value is primarily due to an increase in market interest rates. The fair values are expected to recover as the securities approach maturity dates.

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”).

13

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

At September 30, 2007, 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 debt securities at September 30, 2007, 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
	Amortized		Fair
	Cost		Value
Due in one year or less	$	10,777	$	10,757
Due from one to five years		9,291		9,256
Due from five to ten years		18,878		18,898
Due after ten years		18,443		18,374
Mortgage-backed and related securities		32,643		32,395
Total debt securities		90,032		89,680
Other securities		58		96
Total	$	90,090	$	89,776

Securities with a carrying amount of $89,680 at September 30, 2007 were pledged to secure public deposits and other obligations.

NOTE 3 — LOANS

Loans were as follows:

	September 30,
	2007
Commercial and industrial	$	39,722
Commercial real estate		195,189
Residential real estate and home equity		207,179
Real estate construction and land development		46,985
Consumer and credit card		38,176
		527,251
Add: Net deferred loan origination costs		359
Total loans receivable	$	527,610

14

DCB FINANCIAL CORP
NOTES TO 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,
	2007			2006			2007			2006
Balance at beginning of period	$	5,324		$	5,792		$	5,442		$	5,535
Provision for loan losses		1,100			390			2,784			1,370
Loans charged off		(475	)		(720	)		(2,486	)		(1,680	)
Recoveries		89			105			298			342
Balance at end of period	$	6,038		$	5,567		$	6,038		$	5,567

Nonperforming loans were as follows:

	September 30,		December 31,
	2007		2006
Loans past due 90 days or more and still accruing	$	7,374	$	3,307
Nonaccrual loans		7,729		5,189
Total	$	15,103	$	8,496
Period-end loans with no allocated allowance for loan losses	$	—	$	—
Period-end loans with allocated allowance for loan losses		7,729		5,189
Total	$	7,729	$	5,189
Amount of the allowance for loan losses allocated	$	4,448	$	1,562
Average of nonperforming loans during the period	$	10,804	$	4,429

15

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

Item 2.Management’s Discussion and Analysis of Financial 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, 2007, compared to December 31, 2006, and the consolidated results of operations for the three and nine months ended September 30, 2007, compared to the same periods in 2006. This discussion is designed to provide shareholders with a more comprehensive review of the operating results and financial position than could be obtained from reading the consolidated financial statements alone. This analysis should be read in conjunction with the consolidated financial statements and related footnotes and the selected financial data included elsewhere in this report.

FORWARD-LOOKING STATEMENTS

Certain statements in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements relating to the financial condition and prospects, lending risks, plans for future business development and marketing activities, capital spending and financing sources, capital structure, the effects of regulation and competition, and the prospective business of both the Corporation and its wholly-owned subsidiary, The Delaware County Bank & Trust Company (the “Bank”). Where used in this report, the word “anticipate,” “believe,” “estimate,” “expect,” “intend,” and similar words and expressions, related to the Corporation or the Bank or their respective management, identify forward-looking statements. Such forward-looking statements reflect the current views of the Corporation and are based on information currently available to the management of the Corporation and the Bank and upon current expectations, estimates, and projections about the Corporation and its industry, management’s belief with respect thereto, and certain assumptions made by management. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to: (i) significant increases in competitive pressure in the banking and financial services industries; (ii) changes in the interest rate environment which could reduce anticipated or actual margins; (iii) changes in political conditions or the legislative or regulatory environment; (iv) general economic conditions, either nationally or regionally (especially in central Ohio), becoming less favorable than expected resulting in, among other things, a deterioration in credit quality of assets; (v) changes occurring in business conditions and inflation; (vi) changes in technology; (vii) changes in monetary and tax policies; (viii) changes in the securities markets; and (ix) other risks and uncertainties detailed from time to time in the filings of the Corporation with the Commission.

The Corporation does not undertake, and specifically disclaims any obligation, to publicly revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

16

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 $681,199 at September 30, 2007, compared to $684,004 at December 31, 2006, a decrease of $2,805. The decrease in assets was mainly attributed to a decline in loans, partially offset by increases in cash and cash equivalents, premises and equipment and bank-owned life insurance.

Cash and cash equivalents increased $9,776, from December 31, 2006 to September 30, 2007, driven by an increase in overnight funds. Total securities increased $1,705, or 1.9%, from $88,071 at December 31, 2006 to $89,776 at September 30, 2007. Securities classified as available for sale at September 30, 2007 totaled $89,776, or 100% of the total securities portfolio. Management classifies securities as available for sale to provide the Corporation with the flexibility to move funds into loans if favorable economic conditions warrant. 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 $32,395 at September 30, 2007, 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 $25,559, or 4.6%, from $553,918 at December 31, 2006 to $528,359 at September 30, 2007. While business loan and commercial real estate activity remains good within the local market, the Bank has experienced a decline in loan balances due to unscheduled payoffs in the commercial portfolio because of intense competitive pricing and a significant reduction in investment property and indirect auto lending activities. Retail loan production, including credit card and home equity loans, experienced stable activity within the branch network. The Bank has no significant loan concentration in any one industry.

Total deposits decreased $8,314, or 1.6%, from $524,094 at December 31, 2006 to $515,780 at September 30, 2007. Reflecting the continued shift from low cost to higher rate deposits and intense competitive pricing, non-interest bearing deposit accounts declined $18,000, from December 31, 2006 to September 30, 2007, while interest bearing deposits increased $9,686, during the same time period. The new Certificate of Deposit Account Registry Service (CDARS) program introduced last year has grown to $61,785 in deposits at September 30, 2007. The growth in CDARS and money market balances has been offset by declines in brokered deposit balances. The slower growth of core deposits is attributed to the continued competition in the Corporation’s geographic area, where the growth of competitors’ branch locations have made it increasingly difficult to obtain deposits. Management intends to continue to develop new products, and to monitor the rate structure of its deposit products to encourage growth in its deposit liabilities.

Total borrowings increased $5,835, or 6.1%, to $101,347 from $95,512 during the nine months ended September 30, 2007. 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. Total overall long term FHLB debt decreased $6,489 from $93,736 at December 31, 2006 to $87,247 at September 30, 2007. Continued reliance on borrowings outside of normal deposit growth could continue an increase in the Corporation’s overall cost of funds.

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 AND SEPTEMBER 30, 2006

Net Income.Net income for the three months ended September 30, 2007 totaled $1,083, compared to net income of $1,935 for the same period in 2006. Earnings per share was $.29 for the three months ended September 30, 2007 compared to $.51 for the three months ended September 30, 2006.

17

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

The decrease in net income was caused by several factors, including a reduction in net interest income due to slower growth in loans because of the slowdown in the economy, pricing competition and a reduction in interest income due to non-accrual loans. Credit costs related to the Corporation’s investment property portfolio caused an increase in the provision for loan losses. Issues associated with the investment property portfolios continue to be experienced by many other financial institutions in Ohio. The opening of two additional branch locations increased expenses due to added staffing and facility costs.

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 was $5,414 for the three months ended September 30, 2007, compared to $5,837 for the same period in 2006. The $423 thousand decrease in the third quarter 2007 compared to 2006 was mainly attributed to a decrease in loan balances due to an exit from the indirect lending program, higher rate driven loan payoffs and slower economic activity. Strong pricing competition and lack of loan growth has continued to pressure the net interest margin. The third quarter’s margin declined slightly to 3.48% on a fully tax equivalent basis, from 3.56% during the same quarter in 2006. The decline is mainly due to reduction in interest income from a reversal of interest to account for non-accruing loans.

The Bank continues to fund new loan growth through higher cost borrowings and deposits associated with the current interest rate environment. The Bank has seen deposit growth primarily in products such as time deposits and money market accounts, which generally carry higher costs compared to checking and savings products, but was able to reduce funding costs by paying back a substantial amount of brokered CDs. Increased funding costs may further negatively impact the net interest margin in future periods if the current competitive environment remains in effect. The Asset/Liability Management Committee, which is responsible for determining deposit rates, continues to closely monitor the Bank’s cost of funds to take advantage of pricing and cash flow opportunities. Additionally, because of the increased competition in the Bank’s primary marketplace, management has continued to recognize the importance of offering special rates on certain deposit products. These special deposit rates tend to negatively affect the Corporation’s net interest margin.

Provision and Allowance for Loan Losses.The provision for loan losses represents the charge to income necessary to adjust the allowance for loan losses to an amount that represents management’s assessment of the losses known and inherent in the Bank’s loan portfolio. All lending activity contains associated risks of loan losses and the Bank recognizes these credit risks as a necessary element of its business activity.

The provision for loan losses totaled $1,100 for the three months ended September 30, 2007, compared to $390 for the same period in 2006. The increase in provision is primarily to account for the potential losses with the investment property real estate portfolio. DCB maintains an allowance for loan losses at a level to absorb management’s estimate of probable inherent credit losses in its portfolio. Non-accrual loans at September 30, 2007 were $7,729 compared to $2,091 at September 30, 2006. 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. Net charge-offs for the three months ended September 30, 2007 were $386, compared to $615 for the three months ended September 30, 2006. Annualized net charge-offs to total loans for the three months ended September 30, 2007 were 0.29% compared to 0.44% at September 30, 2006. The largest percentage of charge-offs during 2007 is attributed to the economic conditions that affected the investment property portfolio. Delinquent loans over thirty days from period to period increased to 3.95% of total loans at September 30, 2007 from 1.98% at September 30, 2006. Non-accrual loans to total loans increased to 1.48% at September 30, 2007, from .38% at September 30, 2006. Management will continue to monitor the credit quality of the lending portfolio and will recognize additional provisions in the future to maintain the allowance for loan losses at an appropriate level.

18

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

Management will continue to focus on activities related to monitoring, collection and workout of delinquent loans. In addition, management will continue to monitor exposure related to industry segments, in order to continually and adequately diversify the loan portfolio. The balance of the allowance for loan losses was $6,038, or 1.14% of total loans at September 30, 2007, compared to $5,567, or 1.00% of total loans at September 30, 2006.

Noninterest Income.Total noninterest income increased $285, or 20.0%, for the three months ended September 30, 2007, compared to the same period in 2006. The change in non-interest revenues from period to period is mainly attributed to increases in trust revenues, data processing services and the equity in an investment in an unconsolidated affiliate, partially offset by losses on the disposal of other real estate owned (OREO) property. There has been an increase in revenues from newer products such as the wholly-owned title agency and wealth management products. These and other new revenue sources to enhance noninterest income continue to be actively pursued, while management remains vigilant to contain operating expenses in this challenging and competitive period. Revenues from other services offered by the Bank generally remained at levels consistent with prior year.

Noninterest Expense.Total noninterest expense increased $395, or 9.6%, for the three months ended September 30, 2007, compared to the same period in 2006. The increase was attributable to salary and employee benefits expenses, occupancy expenses and other administrative expenses, primarily the result of planned staff additions and occupancy expense related to the Corporation’s branch expansion. The branch expansion program remains critical to the Corporation’s long term success in our growing market. Additionally, the Company has experienced an increase in loan expenses mainly due to customer collections and foreclosures, and various other administrative expenses somewhat due to the expansion and increasing complexity of its operations.

Income Taxes.Federal income taxes decreased $391, or 47.5% for the three months ended September 30, 2007 compared to the same period in 2006. The decrease in income tax expense is primarily attributable to a decrease in pre-tax income, an increase in tax-exempt municipal income and an increase in bank owned life insurance. The provision for income taxes totaled $432 for the third quarter ending September 30, 2007 for a total effective tax rate of 28.5%, for the three months ended September 30, 2007 compared to a total effective tax rate of 29.8%, for the three months ended September 30, 2006.

COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHSENDED SEPTEMBER 30, 2007 AND SEPTEMBER 30, 2006

Net Income.Net income for the nine months ended September 30, 2007 totaled $3,790, compared to net income of $5,689 for the same period in 2006. Earnings per share was $1.01 for the nine months ended September 30, 2007, compared to $1.49 for the nine months ended September 30, 2006. The decrease in net income was primarily related to slower growth in loans due to pricing competition, higher borrowing and deposit costs associated with the continued shift from low rate deposits into more expensive products, and credit costs related to the Corporation’s investment property portfolio.

Net Interest Income.Net interest income was $16,341 for the nine months ended September 30, 2007, compared to $17,510 for the same period in 2006. The $1,169 decrease was mainly attributed to a decrease in loan balances, as average earning assets decreased on a year to year basis due to the exit from indirect lending, a high volume of rate driven unscheduled loan payoffs and lower economic activity. With strong pricing competition, the deposit mix shift and lack of loan growth, the net interest margin continues to experience pressure. The Bank has seen deposit growth primarily in products such as time deposits and money market accounts, which generally carry higher costs compared to checking and savings products. These higher cost deposit products and other borrowings may continue to be utilized by management, which may further negatively impact the net interest margin in future periods.

19

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 $2,784 for the nine months ended September 30, 2007, compared to $1,370 for the same period in 2006. The Bank maintains an allowance for loan losses at a level to absorb management’s estimate of probable inherent credit losses in its portfolio. The balance in the provision is primarily reflective of the increase in net charge-offs to $2,188 for the nine months ended September 30, 2007 from $1,338 during the same period in 2006. Annualized net charge-offs for the nine months ended September 30, 2007 were 0.54% compared to 0.32% at September 30, 2006. The largest percentage of charge-offs during 2007 is attributed to the economic conditions that affected the investment property portfolio. Management will continue to monitor the credit quality of the lending portfolio and will recognize additional provisions in the future to maintain the allowance for loan losses at an appropriate level.

Noninterest Income.Total noninterest income increased $352, or 8.2%, for the nine months ended September 30, 2007, compared to the same period in 2006. The change in noninterest revenues from period to period is attributable to an increase in trust revenues, data processing services, and gain on loans sales in the secondary market, partially offset by losses on the disposal of other real estate owned property. Trust services and transactional volume from the Bank’s retail products increased over the previous year’s levels.

Noninterest Expense.Total noninterest expense increased $878, or 7.1%, for the nine months ended September 30, 2007, compared to the same period in 2006. The increase was primarily due to increases in salary and employee benefits expenses, occupancy and other noninterest expense categories, all of which were partially offset by a decline in postage, freight and courier expense. The increase in salary and employee benefits expenses and occupancy expenses is primarily the result of planned staff additions and occupancy expense related to the Corporation’s branch expansion. The salary and benefits expense increase is also somewhat associated with the additions of revenue generating staff in lending and compliance and credit personnel utilized to continue to improve the infrastructure supporting the Company’s growth. The Corporation’s efficiency ratio was 62.98% for the nine month period ended September 30, 2007 compared to 56.59% for the same period in 2006.

Income Taxes.The provision for income taxes totaled $1,193, reflecting an effective tax rate of 23.9% for the nine ended September 30, 2007, and $2,403, an effective tax rate of 29.7% for the nine ended September 30, 2006. The decline in the effective tax rate period over period is attributed to an increase in tax-exempt revenue derived from tax exempt securities and the earnings on bank-owned life insurance, coupled with a favorable impact from the resolution of federal income tax contingencies from prior periods.

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.

20

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

Cash and cash equivalents increased $9,776, or 61.5%, to $25,670 at September 30, 2007 compared to $15,894 at December 31, 2006. Cash and equivalents represented 3.8% of total assets at September 30, 2007 and 2.3% of total assets at December 31, 2006. The Corporation has the ability to borrow funds from the Federal Home Loan Bank and has various correspondent banking partners to purchase overnight federal funds should the Corporation need to supplement its future liquidity needs. Management believes the Corporation’s liquidity position is adequate based on its current level of cash, cash equivalents, core deposits, the stability of its other funding sources, and the support provided by its capital base.

CAPITAL RESOURCES

Total shareholders’ equity decreased $80, or 0.1% between December 31, 2006 and September 30, 2007. The decrease was primarily due to treasury share purchases of $2,349, the declaration of $1,660 in dividends, partially offset by a decrease of $139 in unrealized losses on available for sale securities and by period earnings of $3,790.

Tier 1 capital is shareholders’ equity excluding the unrealized gain or loss on securities classified as available for sale. 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 12.5% at September 30, 2007, while the Tier 1 risk-based capital ratio was 11.4%. 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 9.0% at September 30, 2007.

The following table sets forth the Corporation’s obligations and commitments to make future payments under contract as of September 30, 2007.

	PAYMENT DUE BY YEAR
CONTRACTUAL			Less than 1						More than
OBLIGATIONS	Total		year		1-3 years		3-5 years		5 years
FHLB advances	$	87,247	$	493	$	17,358	$	55,871	$	13,525
Federal funds purchased and other short-term borrowings		14,100		14,100		—		—		—
Operating lease obligations		5,826		197		1,114		1,046		3,469
Loan and line of credit commitments		121,575		121,575		—		—		—
Total Contractual Obligations	$	228,748	$	136,365	$	18,472	$	56,917	$	16,994

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

21

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

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 2006 Annual Report includes a table depicting the changes in the Corporation’s interest rate risk as of December 31, 2006, 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, 2006 that would significantly change their ratio of rate sensitive assets to rate sensitive liabilities.

The Corporation’s NPV is more sensitive to rising rates than declining rates. From an overall perspective, such difference in sensitivity occurs principally because, as rates rise, borrowers do not prepay fixed-rate loans as quickly as they do when interest rates are declining. Thus, in a rising interest rate environment, because the Corporation has fixed-rate loans in its loan portfolio, the amount of interest the Corporation would receive on its loans would increase relatively slowly as loans are slowly prepaid and new loans at higher rates are made. Moreover, the interest the Corporation would pay on its deposits would increase rapidly because the Corporation’s deposits generally have shorter periods for repricing. 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 continue to 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.

22

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

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 September 30, 2007, 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, 2007, 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, 2007, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

23

DCB FINANCIAL CORP

FORM 10-Q
Quarter ended September 30, 2007

PART II — OTHER INFORMATION

Item 1 —	Legal Proceedings:
	There is no pending litigation of a material nature, other than routine litigation incidental to the business of the Corporation and Bank, to which the Corporation or any of its affiliates is a party or of which any of their property is the subject. Further, there are no material legal proceedings in which any director, executive officer, principal shareholder or affiliate of the Corporation is a party or has a material interest, which is adverse to the Corporation or Bank. There is no routine litigation in which the Corporation or Bank is involved, which is expected to have a material adverse impact on the financial position or results of operations of the Corporation or Bank.
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, 2006.
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 7/1/2007 to 7/31/2007	—	—	—	—
Month #2 8/1/2007 to 8/31/2007	2,647	21.90	2,647	197,353
Month #3 9/1/2007 to 9/30/2007	1,866	21.66	1,866	195,487
Total	4,513	21.78	4,513	195,487

(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.

24

DCB FINANCIAL CORP

FORM 10-Q
Quarter ended September 30, 2007
PART II — OTHER INFORMATION

Item 3 —	Defaults Upon Senior Securities:
	There are no matters required to be reported under this item.
Item 4 —	Submission of Matters to a Vote of Security Holders:
	There are no matters required to be reported under this item.
Item 5 —	Other Information:
	There are no matters required to be reported under this item.
Item 6 —	Exhibits:
	Exhibits – The following exhibits are filed as a part of this report:

Exhibit No.	Exhibit
3.1	Amended and Restated Articles of Incorporation of DCB Financial Corp, incorporated by reference to the Company’s Report on Form 10-Q filed with the Commission on November 14, 2003.
3.2	Amended and Restated Articles of Incorporation of DCB Financial Corp, incorporated by reference to the Company’s Report on Form 10-Q filed with the Commission on November 14, 2003.
31.1	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification pursuant to 18 U.S.C. 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification pursuant to 18 U.S.C. 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

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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 9, 2007	/s/ Jeffrey T. BentonJeffrey T. Benton
	President and Chief Executive Officer
Date:November 9, 2007	/s/ John A. UstaszewskiJohn A. Ustaszewski
	Senior Vice President and Chief Financial Officer

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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.

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