EXHIBIT 13

Business of DCB Financial Corp

DCB Financial Corp (“DCB” or the “Corporation”) was incorporated under the laws of the State of Ohio on March 14, 1997, upon approval by the shareholders of The Delaware County Bank and Trust Company (the “Bank”) for the purpose of becoming a financial institution bank holding company by acquiring all of the outstanding shares of the Bank. The Bank is a commercial bank, chartered under the laws of the State of Ohio, and was organized in 1950. The Bank is a wholly-owned subsidiary of DCB.

The Bank conducts business from its main office at 110 Riverbend Avenue in Lewis Center, Ohio and from its 19 branch offices located in Delaware, Ohio and surrounding communities. 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, night depository facilities and wealth management services. The Bank also provides treasury management, bond registrar and payment agent services. Through its information systems department, the Bank provides data processing, disaster recovery, and check processing services to other financial institutions; however, such services are not a significant part of operations or revenue.

DCB, through the Bank, grants residential real estate, commercial real estate, consumer and commercial loans to customers located primarily in Delaware, Franklin, and Union Counties, Ohio. Unemployment statistics in these counties have historically been among the lowest in the State of Ohio. Real estate values have historically been stable, although during 2009 real estate values declined in DCB’s market area. DCB also invests in U.S. Government and agency obligations, obligations of states and political subdivisions, corporate obligations, mortgage-backed securities, commercial paper and other investments permitted by applicable law. Funds for lending and other investment activities come primarily from customer deposits, borrowed funds, and to a lesser extent, from principal repayments on securities and loan and security sales.

As a financial holding company, DCB is subject to regulation, supervision and examination by the Federal Reserve Board. As a commercial bank chartered under the laws of the State of Ohio, the Bank is subject to regulation, supervision and examination by the State of Ohio Division of Financial Institutions and the Federal Deposit Insurance Corporation (the “FDIC”). The FDIC insures deposits in the Bank up to applicable limits. The Bank is also a member of the Federal Home Loan Bank (the “FHLB”) of Cincinnati.

Common Stock and Shareholder Matters

DCB had 3,717,385 common shares outstanding on March 15, 2010, held of record by approximately 1,470 shareholders. There is no established public trading market for DCB’s common shares. DCB’s common shares are traded on a limited basis on the Over-The-Counter Electronic Bulletin Board. At times however, various brokerage firms maintain daily bid and ask prices for DCB’s common stock. The range of high and low transactions as reported by Sweney, Cartwright & Co. is reported below. These transactions are shown without retail mark-up, mark-down or commissions.

		Quarter ended
		March 31,				June 30,				September 30,				December 31,
		2009				2009				2009				2009
High		$	9.00			$	9.00			$	10.75			$	9.50
Low			5.10				5.40				7.65				6.50
Dividends per share			0.02				0.02				0.02				0.00

		March 31,				June 30,				September 30,				December 31,
		2008				2008				2008				2008
High		$	17.00			$	16.00			$	15.50			$	14.75
Low			12.90				13.55				12.50				8.00
Dividends per share			0.16				0.16				0.16				0.08

Management does not have knowledge of the prices in all transactions and has not verified the accuracy of those prices that have been reported. Because of the lack of an established market for DCB’s stock, these prices may not reflect the prices at which the stock would trade in a more active market. DCB sold no securities during 2009 or 2008 that were not registered under the Securities Acts.

Income of DCB primarily consists of dividends, which may be declared by the Board of Directors of the Bank and paid on common shares of the Bank held by DCB. During 2009 management of DCB has ceased the payment of regular cash dividends and, no assurances can be given that any dividends will be declared or, if declared in the future, what the amount of any such dividends will be. See Note 11 to the Consolidated Financial Statements for a description of dividend restrictions.

Selected Consolidated Financial Information and Other Data

The following tables set forth certain information concerning the consolidated financial condition, results of operations and other data regarding DCB at the dates and for the periods indicated.

Selected consolidated financial
condition data:		At December 31,
(In thousands)		2009				2008				2007				2006				2005
Total assets		$	675,022			$	712,564			$	680,786			$	684,004			$	690,896
Cash and cash equivalents			41,453				34,658				32,068				15,894				18,069
Securities available for sale			94,100				111,360				89,009				88,071				96,580
Securities held to maturity			1,752				8,002				—				—				—
Net loans			479,003				507,076				512,195				547,021				547,510
Deposits			557,455				565,153				510,874				524,094				503,906
Borrowed funds			66,159				88,384				110,082				95,512				128,535
Shareholders’ equity			49,343				56,059				57,068				61,399				56,254

Selected Operating Data		Year ended December 31,
(In thousands, except per share data)		2009				2008				2007				2006				2005
Interest income		$	32,341			$	38,405			$	43,556			$	44,407			$	36,566
Interest expense			10,558				16,743				22,154				21,315				13,750
Net interest income			21,783				21,662				21,402				23,092				22,816
Provision for loan losses			9,398				8,177				10,159				1,808				2,000
Net interest income after provision for loan losses			12,385				13,485				11,243				21,284				20,816
Noninterest income			3,219				5,487				5,928				5,619				5,654
Noninterest expense			22,989				20,884				17,962				16,452				15,665
Income (loss) before income tax			(7,385	)			(1,912	)			(791	)			10,451				10,805
Income tax expense (credit)			(3,185	)			(2,241	)			(930	)			3,098				3,249
Net income (loss)		$	(4,200	)		$	329			$	139			$	7,353			$	7,556
Per Share Data:
Basic earnings (loss) per share		$	(1.13	)		$	0.09			$	0.04			$	1.93			$	1.94
Diluted earnings (loss) per share		$	(1.13	)		$	0.09			$	0.04			$	1.92			$	1.94
Dividends declared per share		$	0.06			$	0.56			$	0.60			$	0.55			$	0.48

		At or for the year ended December 31,
Selected Financial Ratios:		2009				2008				2007				2006				2005
Interest rate spread			3.21	%			2.97	%			2.90	%			2.85	%			3.37	%
Net interest margin			3.38				3.29				3.36				3.48				3.66
Return on average equity			*				0.55				0.23				12.55				13.68
Return on average assets			*				0.05				0.02				1.05				1.15
Average equity to average assets			7.64				8.42				8.88				8.39				8.41
Dividend payout ratio			*				*				*				28.50				24.74
Allowance for loan losses as a percentage of loans past due over 90 days			84.08				105.01				64.05				64.05				114.53

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands, except per share amounts)

Introduction

In the following pages, management presents an analysis of DCB’s consolidated financial condition and results of operations as of and for the year ended December 31, 2009, compared to prior years. This discussion is designed to provide shareholders with a more comprehensive review of the operating results and financial position than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the financial statements, the 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 and Trust Company (the “Bank”). Where used in this report, the word “anticipate,” “believe,” “estimate,” “expect,” “intend,” and similar words and expressions, as they relate 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.

Recent Accounting Standards: FASB ASC 805-10 contains guidance relating to business combinations and applies to all transactions or other events in which one entity obtains control of one or more businesses. It requires all assets acquired, liabilities assumed and any noncontrolling interest to be measured at fair value at the acquisition date. The guidance requires certain costs such as acquisition-related costs that were previously recognized as a component of the purchase price, and expected restructuring costs that were previously recognized as an assumed liability, to be recognized separately from the acquisition as an expense when incurred.

The standards apply prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 (January 1, 2009 as to the Corporation) and may not be applied before that date. The Corporation adopted the new guidance effective January 1, 2009, as required, without material effect on the Corporation’s financial statements.

FASB ASC 810-10 relates to noncontrolling interests in consolidated financial statements, and establishes accounting and reporting standards for the noncontrolling interest (formerly known as minority interest) in a subsidiary and for the deconsolidation of a subsidiary. A subsidiary includes a variable interest entity that is consolidated by a primary beneficiary.

A noncontrolling interest in a subsidiary, previously reported in the statement of financial position as a liability or in the mezzanine section outside of permanent equity, is required to be included within consolidated equity as a separate line item. Further, consolidated net income will be reported at amounts that include either the parent (or primary beneficiary) and the noncontrolling interest with separate disclosure on the face of the consolidated statement of income of the amounts attributable to the parent and to the noncontrolling interest.

The standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Corporation adopted FASB ASC 810-10 effective January 1, 2009, as required, without material effect on the Corporation’s financial statements.

FASB ASC 820-10 governs the determination of when the volume and level of activity for an asset or liability have significantly decreased and identifying transactions that are not orderly, and addresses the criteria to be used in the determination of an active market in determining whether observable transactions are Level 1 or Level 2 under the fair value hierarchy. The guidance reiterates that fair value is based on the notion of exit price in an orderly transaction between willing market participants at the valuation date and is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.

FASB ASC 310-10 governs recognition and presentation of other-than-temporary impairments and replaces the requirement that an entity’s management must assert it has both the intent and the ability to hold an impaired debt security until recovery with a requirement that management assert:

•

It does not have the intent to sell the security; and

•

It is more-likely-than-not it will not have to sell the security before recovery of its amortized cost basis less any current period credit losses

If those two assertions are true, only the portion of the impairment due to credit loss is recorded in income. Other portions of the impairment (any portions not related to credit loss) are recorded in other comprehensive income. Credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, the entire amortized cost basis of the security will not be recovered (that is, a credit loss exists) and an other-than-temporary impairment shall be considered to have occurred and the portion of the loss attributable to the credit loss is recorded in net income. The guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.

FASB ASC 825-10 governs interim disclosures about fair values of financial instruments and requires publicly traded companies to include disclosures about fair value in interim financial statements for all financial instruments. The specific disclosures required include the method(s) and significant assumptions used to estimate the fair value of financial instruments, as well as changes in those methods and assumptions, and the carrying values of those instruments. The disclosures must clearly identify how the carrying value reported in the disclosures relates to what is reported in the statement of financial position. The guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.

Management adopted the foregoing three new issues effective June 30, 2009, as required. Adoption of the standards resulted in the recognition of credit-related other-than-temporary impairment on held-to-maturity securities totaling $2,621 and non-credit-related other-than-temporary impairment totaling $3,680, or $1,730 and $2,429, respectively, net of tax, during 2009.

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 after November 15, 2009 (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 after November 15, 2009 (January 1, 2010 as to the Corporation) 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.

Critical Accounting Policies

DCB’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the financial services industry. The application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; as this information changes, the financial statements could reflect different estimates, assumptions, and judgments.

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

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

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

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

Overview of 2009

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 pressures mainly attributable to market interest rate conditions, competition and a slow down in the economy. Real estate values, especially in the Bank’s core geographic area, have declined during 2009.

Construction loans are secured by residential and business real estate, generally occupied by the borrower on completion. The Bank’s construction lending program is established in a manner to minimize risk of this type of lending by not making a significant amount of loans on speculative projects. Construction loans also are generally made in amounts of 80% or less of the value of collateral.

The Corporation currently operates in an economic environment that has caused and continues to cause lowered earnings due to higher credit defaults across the banking industry. Management addressed these economic issues through a change in infrastructure, increasing its resources related to credit and compliance and by creating strategies for the long term benefit of its shareholders. These strategies include lowering asset levels, reducing staff to control cost, and pricing loans and products more appropriately.

The following addresses highlights from 2009.

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The Corporation’s assets totaled $675,022 at December 31, 2009, compared to $712,564 at December 31, 2008, a decrease of $37,542, or 5.3%. The decrease in assets was mainly attributed to a decline in loans and investment securities.

•

Net loss for 2009 totaled $4,200, a decrease of $4,529, compared to net income for 2008 of $329. The 2009 operating results were negatively affected by a $2,621 other-than-temporary impairment loss recognized on investment securities, a $1,221 increase in the provision for loan losses and a $1,211 increase in federal deposit insurance premiums.

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The provision for loan losses totaled $9,398 for the year ended December 31, 2009 compared to $8,177 in 2008. DCB maintains an allowance for loan losses at a level to absorb management’s estimate of probable inherent credit losses in its portfolio.

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The Corporation’s net interest margin increased from the preceding year. Net interest income increased to $21,783 for 2009 compared to $21,662 for 2008. The $121 increase was mainly attributed to a decline in interest expense on deposits and borrowings.

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The ability to generate earnings is impacted in part by competitive pricing on loans and deposits, and by changes in the rates on various U.S. Treasury, U. S. Government Agency and State and political subdivision issues which comprise a significant portion of the Bank’s investment portfolio. The Bank is competitive with interest rates and loan fees that it charges, in pricing and variety of accounts it offers to the depositor. The Corporation confirms this by completing regular rate shops and comparisons versus competing financial services companies. The dominant pricing mechanism on loans is the prime interest rate as published in the Wall 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.

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Deposit rates are reviewed weekly by management and are 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 develop funding opportunities while earning an adequate interest rate margin.

Analysis of Financial Condition

The Corporation’s assets totaled $675,022 at December 31, 2009, compared to $712,564 at December 31, 2008, a decrease of $37,542, or 5.3%. The decrease in assets was attributed to a decline in the Corporation’s investment securities coupled with a decrease in the Corporation’s loan balances.

Cash and cash equivalents increased $6,795, from December 31, 2009 to December 31, 2008. The increase in cash and cash equivalents is mainly due to an increase in overnight funds. Total securities decreased $23,510, or 19.7%, from $119,362 at December 31, 2008 to $96,230 at December 31, 2009. DCB invests primarily in U.S. Treasury notes, obligations of U.S. government agencies, municipal bonds, corporate obligations, collateralized debt obligations and mortgage-backed securities. Mortgage-backed securities include Federal Home Loan Mortgage Corporation (“FHLMC”), Government National Mortgage Association (“GNMA”) and Federal National Mortgage Association (“FNMA”) participation certificates and collateralized mortgage obligations (“CMOs”). The mortgage-backed securities portfolio, totaling $39,591 at year-end 2009, provides DCB with a continuing cash flow stream from principal repayments, which is utilized to fund other areas of the balance sheet. Management classifies securities as available for sale to provide DCB with the flexibility to redeploy funds into loans as demand warrants. DCB held no derivative securities or structured notes during any period presented.

Total loans decreased $23,731, or 4.6%, from $513,213 at December 31, 2008 to $489,482 at December 31, 2009. The Bank experienced a decline in loan balances due to slowing business loan and commercial real estate activity. Another factor was the targeted reduction in investment property and indirect auto lending activities. Retail loan production, including credit card and home equity loans, grew modestly. The Bank has no significant loan concentration in any one industry.

Retail loan balances including direct, credit card and home equity loans also declined. The geographic area in which the Bank operates continues to experience a slowdown in commercial and residential real estate activity. Though slowing, the Bank continues to capture a large percentage of the economic development activity within its geographic region. Generally, other loan categories in which the Bank participates remained relatively stable or experienced decreases in loans outstanding.

Deferred tax assets are the deferred taxes attributable to deductible temporary differences and carryforwards. Management has determined after the deferred tax asset has been measured using the applicable enacted tax rate and provisions of the enacted tax law it is more likely than not that a valuation allowance is not required for the period ending 2009. A valuation allowance is only needed when, based on the weight of the available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of a deferred tax asset will not be realized. Management has determined that a realization of the deferred tax asset is primarily likely than not dependent on whether there will be sufficient future taxable income of the appropriate character (e.g., ordinary income) in the period during which deductible temporary differences reverse or within the carryforward periods available under the tax law. 

Assessing the need for, or the sufficiency of, a valuation allowance management evaluated all available evidence, both negative and positive. Management evaluated both negative evidence (e.g., cumulative losses in recent years) and positive evidence (forecasted taxable income and tax planning strategies) in determining whether or not a valuation allowance was required. 

Management prepared budgets and projections to document potential future taxable income and determined that the positive evidence necessary to overcome the negative evidence is primarily attributable to future taxable income and whether or not it was sufficient within the carryforward periods available under the tax law. The following sources of taxable income are available under the tax law to realize a portion or all of the tax benefit for deductible temporary differences and carryforwards:

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Future reversals of existing taxable temporary differences

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Tax planning strategies such as converting tax exempt income to taxable income and sale / leaseback opportunities

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Future taxable income exclusive of reversing temporary differences and carryforwards

Total deposits decreased $7,698, or 1.4%, from $565,153 at December 31, 2008 to $557,455 at December 31, 2009. The Bank had approximately $145,000 in CDARS deposits outstanding at December 31, 2009, primarily from public fund customers. Growth of core deposits improved with an influx of saving deposit balances and demand accounts, but was offset by a decline in interest-bearing deposits.

Demand deposit accounts increased $11,484, or 23.4%, money market savings balances increased $10,144, while regular savings increased $1,869, or 6.2% during the year ended December 31, 20009. Total certificates decreased $34,577, or 12.0%, during the year ended December 31, 2009. Management intends to continue to develop new products and to monitor the rate structure of its deposit products to encourage growth in deposit liabilities.

DCB experienced an increase of $1,869 in savings deposits while such accounts increased from 5.9% of total interest-bearing deposits at December 31, 2008 to 6.5% of total interest-bearing deposits at year-end 2009. Interest-bearing demand and money market deposits increased from 38.1% of total interest-bearing deposits at year-end 2008 to 42.3% of total interest-bearing deposits at year-end 2009, as DCB experienced a $13,502, or 6.9%, increase in volume of such accounts. The increase in such deposits has been primarily due to economic trends resulting in the shift of customer funds from other investment alternatives to liquid savings products, such as the creation of new products for the Bank’s public fund customers.

The Corporation utilizes a variety of alternative deposit funding sources to overcome the competitive challenges experienced within its primary market. Utilizing brokered certificates of deposit and money market sweeps, the Corporation is able to provide additional funding for the loan portfolio. In addition, the Corporation has used other borrowings, generally from the FHLB, to fund its loan originations. Continued reliance on outside funding rather than lower cost deposits could increase the Corporation’s overall cost of funds.

Borrowed funds totaled $66,159 at year-end 2009 compared to $88,384 at year-end 2008. Total FHLB advances decreased $19,866 from $83,014 at December 31, 2008 to $63,148 at December 31, 2009. Typically, the Company has utilized a matched funding methodology for its long-term borrowing. This was done by matching the rates, terms and expected cash flows of its loans to the various products offered by the FHLB. This matching principle was used to not only provide funding, but also as a means of mitigating interest rate risk associated with originating longer-term fixed rate loans. As of December 31, 2009 additional, unused borrowings available to the Corporation through its various wholesale funding avenues with other bank credit facilities totaled $93,764.

Total shareholders’ equity decreased $6,716, or 12.0% between December 31, 2008 and December 31, 2009. The decrease was primarily due to period net losses of $4,200, coupled with the declaration of $520 in dividends and a $1,996 decrease in accumulated other comprehensive loss.

Comparison of Results of Operations for the Years Ended December 31, 2009 and December 31, 2008

Net Income (Loss). Net loss for 2009 totaled $4,200, a decrease of $4,529, compared to net income for 2008 of $329. Diluted loss per share totaled $1.13 for 2009 compared to diluted earnings per share of $0.09 for 2008. The Corporation’s net interest income improved slightly, but net income was negatively impacted by continued losses and related expenses in the Bank’s declining real estate and Columbus investment property portfolio. Additionally, the Corporation recognized an other-than-temporary impairment charge on its collateralized debt obligations, consisting of two pooled trust preferred securities, which were written down by $2,621. While some other income sources increased, overall they declined due to the losses on disposal of foreclosed real estate and other than temporary impairment on the Corporation’s held to maturity securities. Non interest expenses increased due to continued credit workout costs and expenses attributable to increased FDIC insurance costs.

Net Interest Income. Net interest income represents the amount by which interest income on interest-earning assets exceeds interest paid on interest-bearing liabilities. Net interest income is the largest component of DCB’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 $21,783 for 2009 compared to $21,662 for 2008. The Bank’s interest expense declined by $6,185, or 36.9%, in 2009 compared to 2008, but this decline was substantially offset by a decrease in interest income of $6,064, or 15.8%. The Bank was able to reduce funding costs by reducing its balances of brokered CDs and borrowed funds. Increased funding costs may negatively impact the net interest margin in future periods if the current competitive environment remains in effect.

As a result of the shifts in the components of interest-earning assets and interest-bearing liabilities, as well as movements in market interest rates, DCB’s net interest margin, which is calculated by dividing net interest income by average interest-earning assets, increased from 3.29% in 2008 to 3.38% in 2009. Additionally, because of the increased competition in the Bank’s marketplace, management has recognized the importance of offering special rates on certain deposit products. These special deposit rates, when offered, tend to negatively affect the Corporation’s net interest margin. It is likely that these offerings will continue to be offered to secure liquidity while maintaining market share.

Provision and Allowance for Loan Losses. The provision for loan losses represents the charge to income necessary to adjust the allowance for loan losses to an amount that represents management’s assessment of the losses known and inherent in the Bank’s loan portfolio. All lending activity contains associated risks of loan losses and the Bank recognizes these credit risks as a necessary element of its business activity. To assist in identifying potential loan losses, the Bank maintains a credit administration function that regularly evaluates lending relationships as well as overall loan portfolio conditions. One of the primary objectives of this credit administration function is to make recommendations to management as to both specific loss allowances and overall portfolio loss allowances. Management further evaluates these allowance levels through an ongoing credit quality process, which in addition to evaluating the current credit quality of the lending portfolios, examines other economic indicators and trends, which could affect the overall loss rates associated with the lending process.

DCB’s provision is determined based upon management’s estimate of the overall collectability of loans within the portfolio as determined by ongoing credit reviews. The provision for loan losses totaled $9,398 in 2009, compared to $8,177 in 2008.

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 December 31, 2009 increased to $11,275 compared to $4,698 at December 31, 2008. The majority of non-accrual balances are attributed to loans in the investment real estate sector that were not generating sufficient cash flow to service the debt. Delinquent loans over thirty days increased to 3.01% at December 31, 2009 from 1.92% at December 31, 2008, mainly due to the real estate investment portfolio.

During 2009 management both added and developed its resources related to its credit monitoring function. In addition to designating a chief credit officer processes and procedures were enhanced to allow for improved monitoring of problem credits. This included loan portfolio reviews, loan quality reviews and regular credit quality meetings between management, lending staff and the credit function. To that end, management will continue to monitor the credit quality of the loan portfolio and may recognize additional provisions in the future if needed to maintain the allowance for loan losses at an appropriate level. 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 adequately diversify the loan portfolio. The balance of the allowance for loan losses was $10,479, or 2.13% of total loans at December 31, 2009, compared to $6,137, or 1.25% of total loans at December 31, 2008.

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

Noninterest Income. Total noninterest income decreased $2,268, or 41.3% to $3,219 in 2009 compared to $5,487 in 2008. The decrease was primarily attributable to a $2,621 write down related to other than temporarily impaired securities partially offset by a $300 decline in losses on sales of foreclosed properties compared to 2008. The investment securities were written down to reflect the reduced interest and principal payments that management expects to receive, as economic conditions have negatively affected the instrument’s underlying collateral. Additionally, the Bank experienced a decline in trust revenue streams and treasury management revenue, of $51 and $64, respectively, due primarily to the current economic environment, which were partially offset by increases in gains on sale of securities of $324 and gains on sale of newly originated loans of $118 for the year ended December 31, 2009, compared to 2008.

Noninterest Expense. Total noninterest expense increased $2,105, or 10.1%, for the year ended December 31, 2009, compared to 2008. The increase was due primarily to an increase in salaries and employee benefits, an increase in federal deposit insurance premiums and an increase in franchise taxes. The significant increase in federal deposit insurance premiums is attributed to higher base premium rates impacting the financial industry in order to replenish the deposit insurance fund.

Income Taxes. The Corporation recorded a tax credit totaling $3,185 for the year ended December 31, 2009, compared to a tax credit of $2,241 in 2008. The increase in income tax credits was primarily attributable to the 2009 increase in pre-tax losses and increases in nontaxable interest income and revenue from bank-owned life insurance policies.

Comparison of Results of Operations for the Years Ended December 31, 2008 and December 31, 2007

Net Income. Net income for 2008 totaled $329, an increase of $190, or 136.7%, compared to net income for 2007 of $139. Diluted earnings per share totaled $.09 for 2008 and $0.04 for 2007. Return on average assets was 0.05% for 2008 and 0.02% for 2007, while return on average equity was 0.55% and 0.23% over the same two years. The Corporation’s net interest income improved slightly, but net income was negatively impacted by continued losses and related expenses in the Bank’s declining Columbus investment property portfolio. While most other income sources increased, overall they declined due to the losses on disposal of foreclosed real estate. Expenses increased due to continued credit workout costs, expenses of the new branches and increased FDIC insurance costs. During the year the Bank recognized a credit attributable to tax liabilities, primarily due to a change in accounting estimate related to the Corporation’s income taxes.

Net Interest Income. Net interest income represents the amount by which interest income on interest-earning assets exceeds interest paid on interest-bearing liabilities. Net interest income is the largest component of DCB’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 $21,662 for 2008 compared to $21,402 for 2007. Strong deposit pricing competition, lower overall rates and lack of loan growth have continued to pressure the net interest margin. The Bank has seen deposit growth primarily in products such as time deposits and CDARS, which generally carry higher costs compared to checking and savings products, but was able to help reduce funding costs by reducing its balances of brokered CDs and borrowed funds. Increased funding costs may further negatively impact the net interest margin in future periods if the current competitive environment remains in effect.

As a result of the these shifts in the components of interest-earning assets and interest-bearing liabilities, as well as movements in market interest rates, DCB’s net interest margin, which is calculated by dividing net interest income by average interest-earning assets, decreased from 3.36% in 2007 to 3.29% in 2008. Additionally, because of the increased competition in the Bank’s marketplace, management has recognized the importance of offering special rates on certain deposit products. These special deposit rates tend to negatively affect the Corporation’s net interest margin. It is likely that these offerings will continue to be offered to secure liquidity while maintaining market share.

Provision and Allowance for Loan Losses. The provision for loan losses represents the charge to income necessary to adjust the allowance for loan losses to an amount that represents management’s assessment of the losses known and inherent in the Bank’s loan portfolio. All lending activity contains associated risks of loan losses and the Bank recognizes these credit risks as a necessary element of its business activity. To assist in identifying potential loan losses, the Bank maintains a credit administration function that regularly evaluates lending relationships as well as overall loan portfolio conditions. One of the primary objectives of this credit administration function is to make recommendations to management as to both specific loss allowances and overall portfolio loss allowances. Management further evaluates these allowance levels through an ongoing credit quality process, which in addition to evaluating the current credit quality of the lending portfolios, examines other economic indicators and trends, which could affect the overall loss rates associated with the lending process.

DCB’s provision is determined based upon management’s estimate of the overall collectability of loans within the portfolio as determined by ongoing credit reviews. The provision for loan losses totaled $8,177 in 2008, compared to $10,159 in 2007.

DCB maintains an allowance for loan losses at a level to absorb management’s estimate of probable inherent credit losses in its portfolio. The largest percentage of charge-offs during the year ended December 31, 2008 resulted from Columbus investment property loans. Non-accrual loans at December 31, 2008 decreased to $4,698 compared to $10,360 at December 31, 2007. The majority of non-accrual balances are attributed to loans in the investment real estate sector that were not generating sufficient cash flow to service the debt. Delinquent loans over thirty days decreased to 1.92% at December 31, 2008 from 3.31% at December 31, 2007, mainly due to the real estate investment portfolio. In addition, charge- offs subsequent to December 31, 2008, totaled $1,691, reflecting aggregate losses incurred in that same period, mitigated by $70 in recoveries for the same period. Additionally, management recorded $2,135 of provision expense in the period subsequent to December 31, 2008 related primarily to unforeseen circumstances where borrowers unexpectedly declared bankruptcy or otherwise discontinued operations. Management attributes the sudden increase of this provision to the current economic climate.

Management will continue to monitor the credit quality of the loan portfolio and may recognize additional provisions in the future if needed to maintain the allowance for loan losses at an appropriate level. 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 adequately diversify the loan portfolio. The balance of the allowance for loan losses was $6,137, or 1.20% of total loans at December 31, 2008, compared to $8,298, or 1.59% of total loans at December 31, 2007.

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

Noninterest Income. Total noninterest income decreased $441, or 7.4% to $5,487 in 2008 compared to $5,928 in 2007. The change in noninterest income revenues from period to period is mainly attributed to an increase in losses on sales of real estate acquired through foreclosure. The increases in revenue components are generally attributed to a higher number of accounts and customers served by the Corporation. Excluding losses on the disposal of OREO property, the Bank’s core noninterest revenue generally increased or remained at levels consistent with the prior year. In addition, new revenue sources to enhance noninterest income are being actively pursued.

Noninterest Expense. Total noninterest expense increased $2,922, or 16.3%, for the year ended December 31, 2008, compared to 2007. The increase was due to a rise in occupancy expenses and salary and wages attributable to the Corporation’s branch expansion, and increases in FDIC insurance premiums and consulting and professional expenses. The increase in consulting and professional fees was due to the management of OREO properties and workout loans, a new independent loan review function, increased audit costs and an increase in expense related to various consultants with expertise in risk mitigation strategies.

Income Taxes. The Corporation recorded a tax credit totaling $2,241 for the year ended December 31, 2008, compared to a tax credit of $930 in 2007. The increase in income tax credits was primarily attributable to the 2008 increase in pre-tax losses and increases in nontaxable interest income and revenue from bank-owned life insurance policies. During the year the Bank also recognized a $1,061 credit attributable to tax liabilities, primarily due to a change in accounting estimate related to the Corporation’s income taxes. See Note 9 to the Consolidated Financial Statements for additional information regarding income taxes.

The following table presents certain of the Corporation’s average balance sheet information and reflects the average yield on interest-earning assets and the average cost of interest-bearing liabilities for the years ended December 31, 2009, 2008 and 2007. Such yields and costs are derived by dividing annual income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the years presented. Average balances are derived from daily balances, net of the allowance for loan losses.

		Year ended December 31,
		2009												2008												2007
		Average				Interest								Average				Interest								Average				Interest
		outstanding				earned/				Yield/				outstanding				earned/				Yield/				outstanding				earned/				Yield/
		balance				paid				rate				balance				paid				rate				balance				paid				rate
Interest-earning assets:
Federal funds sold		$	43,057			$	167				0.39	%		$	30,930			$	614				1.99	%		$	4,604			$	298				6.47	%
Taxable securities			75,050				3,299				4.40				87,169				3,954				4.54				68,588				3,585				5.23
Tax-exempt securities (1)			22,452				987				4.40				23,589				1,010				4.28				24,705				892				3.61
Loans (2)			504,844				27,888				5.52				517,635				32,827				6.34				538,608				39,781				7.20
Total interest-earning assets			645,403				32,341				5.01				659,323				38,405				5.82				636,505				43,556				6.84
Noninterest-earning assets			62,481												53,246												44,612
Total assets		$	707,884											$	712,569											$	681,117
Interest-bearing liabilities:
Demand and money market deposits		$	198,012			$	651				0.33	%		$	221,018			$	3,128				1.42	%		$	259,051			$	9,618				3.71	%
Savings deposits			32,828				54				0.16				29,697				136				0.46				31,343				151				0.48
Certificates of deposit			292,095				6,624				2.27				251,665				9,426				3.75				173,377				8,323				4.80
Total deposits			522,935				7,329								502,380				12,690				2.53				463,771				18,092				3.90
Borrowed funds			64,246				3,229				5.03				84,825				4,053				4.78				98,459				4,062				4.13
Total interest-bearing liabilities			587,181				10,558				1.80				587,205				16,743				2.85				562,230				22,154				3.94
Noninterest-bearing liabilities			66,612												65,395												58,379
Total liabilities			653,793												652,600												620,609
Shareholders’ equity			54,091												59,969												60,508
Total liabilities and shareholders’   equity		$	707,884											$	712,569											$	681,117
Net interest income; interest rate spread						$	21,783				3.21	%						$	21,662				2.97	%						$	21,402				2.90	%
Net interest margin (net interest income as a percent of average interest-earning assets)											3.38	%											3.29	%											3.36	%
Average interest-earning assets to average interest-bearing liabilities											109.92	%											112.28	%											113.21	%

The table below describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected DCB’s interest income and expense during the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume (multiplied by prior year rate); (2) changes in rate (multiplied by prior year volume); and, (3) total changes in rate and volume. The combined effects of changes in both volume and rate, that are not separately identified, have been allocated proportionately to the change due to volume and change due to rate:

		Year ended December 31,
		2009 vs. 2008												2008 vs. 2007
		Increase												Increase
		(decrease)												(decrease)
		due to												due to
		Volume				Rate				Total				Volume				Rate				Total
Interest income attributable to:
Federal funds sold		$	236			$	(684	)		$	(447	)		$	1,700			$	(1,394	)		$	306
Taxable securities			(550	)			(105	)			(655	)			971				(603	)			368
Tax-exempt securities			(49	)			26				(23	)			(40	)			168				128
Loans			(810	)			(4,128	)			(4,939	)			(1,509	)			(4,444	)			(5,953	)
Total interest income			(1,173	)			(4,891	)			(6,064	)			1,122				(6,273	)			(5,151	)
Interest expense attributable to:
Demand and money market deposits			(326	)			(2,151	)			(2,477	)			(1,412	)			(5,078	)			(6,490	)
Savings deposits			14				(97	)			(82	)			(8	)			(6	)			(14	)
Certificates of deposit			1,514				(4,316	)			(2,802	)			3,758				(2,655	)			1,103
Borrowed funds			(982	)			159				(824	)			(563	)			553				(10	)
Total interest expense			220				(6,405	)			(6,185	)			1,775				(7,186	)			(5,411	)
Increase (decrease) in net   interest income		$	(1,393	)		$	1,514			$	121			$	(653	)		$	913			$	260

Asset and Liability Management and Market Risk

The Asset/Liability Committee (“ALCO”) of DCB Financial Corp utilizes a variety of tools to measure and monitor interest rate risk. This is defined as the risk that DCB’s financial condition will be adversely affected due to movements in interest rates. To a lesser extent, DCB is also exposed to liquidity risk, or the risk that changes in cash flows could adversely affect its ability to honor its financial obligations. The ALCO committee monitors changes in the interest rate environment, and how these changes affect its lending and deposit rates, liquidity and profitability.

In order to reduce the adverse effect of changing interest rates, the Corporation developed a matched funding program through the FHLB to match longer term commercial and real estate loans with liabilities of similar term and rate structures. Also, the Corporation offered special deposit programs correlated to prevailing asset maturities.

Since income of the Bank is primarily derived from the excess of interest earned on interest-earning assets over the interest paid on interest-bearing liabilities, the ALCO Committee places great importance on monitoring and controlling interest rate risk. The measurement and analysis of the exposure of DCB’s primary operating subsidiary, the Bank, to changes in the interest rate environment are referred to as asset/liability modeling. One method used to analyze DCB’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 DCB currently employs attempts to measure the change in NPV for a variety of interest rate scenarios, typically for parallel and sustained shifts of -100 to +300 basis points in market rates. Presented below is an analysis depicting the changes in DCB’s interest rate risk as of December 31, 2009 and December 31, 2008, as measured by changes in NPV for instantaneous and sustained parallel shifts of +100 to -300 basis points in market interest rates. These parallel shifts were used to more accurately represent the current interest rate environment in which the Corporation operates.

As illustrated in the tables, the Bank’s balance sheet NPV is more sensitive to a 100 basis point decline in rates than it is to a 100 basis point increase in rates. From an overall perspective, such difference in sensitivity occurs principally because of the relatively short term structure of the liability side of the balance sheet. Though the institution does employ variable loan structures, these structures generally adjust based on annual time frames compared to daily or weekly time frames for liabilities. This risk was offset somewhat by management’s use of matched funding principles for longer term loans, and the use of other interest rate management techniques. Additionally, as rates rise borrowers are less likely to refinance or payoff loans prior to contractual maturities, increasing the risk that the Bank may hold below market rate loans in a rising rate environment.

The following table depicts the ALCO’s four most likely interest rate scenarios and their affect on NPV. As depicted below, in a rising rate environment a liability sensitive balance sheet results in a moderate decline in NPV. The Corporation has operated within the ALCO’s interest rate risk limits over the last three years.

Change in						December 31, 2009												December 31, 2008
Interest Rate						$ Change				% Change				NPV				$ Change				% Change				NPV
(Basis Points)						In NPV				In NPV				Ratio				In NPV				In NPV				Ratio
	+300					$	(1,358	)			(2.29	)%			8.98	%		$	(3,186	)			(5.6)	%			7.8	%
	+200						326				.55				9.16				(775	)			(1.4	)			8.1
	+100						901				1.52				9.04				975				1.7				8.2
Base							—				—				—				—				—				—
	-100						(5,495	)			(9.28	)%			7.89	%			(3,786	)			(6.7)	%			7.3	%

In a rising interest rate environment, DCB’s net interest income can be negatively affected. Moreover, rising interest rates could negatively affect DCB’s earnings due to diminished loan demand. As part of its interest rate risk strategy, DCB has attempted to utilize adjustable-rate and short-term-duration loans and investments. DCB intends to limit the addition of unhedged fixed-rate long-duration loans and securities to its portfolio.

Certain shortcomings are inherent in this method of analysis presented in the computation of estimated NPV. Certain assets such as adjustable-rate loans have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In addition, the portion of adjustable-rate loans in the Corporation’s portfolio could decrease in future periods if market interest rates remain at or decrease below current levels due to refinancing activity. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate from those assumed in the table. Finally, the ability of many borrowers to repay their adjustable-rate debt may decrease in the case of an increase in interest rates.

Liquidity

Liquidity is the ability of DCB to fund customers’ needs for borrowing and deposit withdrawals. The purpose of liquidity management is to assure sufficient cash flow exists to meet all financial commitments and to capitalize on business expansion opportunities. This ability depends on the institution’s financial strength, asset quality and types of deposit and investment instruments offered by the Bank to its customers. DCB’s principal sources of funds are deposits, loan and securities repayments, maturities of securities, sales of securities available for sale and other funds provided by operations. The Bank also has the ability to obtain funding from other sources including the FHLB, Federal Reserve, and through its correspondent bank relationships. 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. DCB 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 $7,013, or 20.2%, to $41,671 at year-end 2009 from $34,658 at year-end 2008. Cash and cash equivalents represented 6.2% of total assets for the year ended December 31, 2009 compared to 4.9% for 2008. The Bank has the ability to borrow funds from the Federal Home Loan Bank and has various federal fund sources from correspondent banks, should it need to supplement its future liquidity needs in order to meet loan demand or to fund investment opportunities. The Bank also has the ability to issue term brokered certificates of deposit in the secondary market to provide additional funding outside of its normal geographical boundaries.

In addition to funding maturing deposits and other deposit liabilities, DCB also has off-balance sheet commitments in the form of lines of credit and letters of credit utilized by customers in the normal course of business. Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. These off-balance sheet commitments are not considered to have a major effect on the liquidity position of the Corporation. Further, management believes DCB’s liquidity position is strong based on its stable level of cash, cash equivalents, core deposits, the stability of its other funding sources and the support provided by its capital base.

Capital Resources

As previously stated, total shareholders’ equity decreased $6,716, or 12.0% between December 31, 2008 and December 31, 2009. The decrease was primarily due to period net losses of $4,200, coupled with the declaration of $520 in dividends and a $1,996 decrease in accumulated other comprehensive income.

Tier 1 capital is shareholders’ equity excluding the net unrealized gains or losses included in other comprehensive income and a percentage of mortgage-servicing rights. 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 DCB’s total assets after such assets are assessed for risk and assigned a weighting factor based on their inherent risk.

DCB and its subsidiaries meet all regulatory capital requirements. DCB’s consolidated ratio of total capital to risk-weighted assets was 11.0% at year-end 2009, while the Tier 1 risk-based consolidated capital ratio was 9.8%. Regulatory minimums call for a total risk-based capital ratio of 8.0%, at least half of which must be Tier 1 capital. DCB’s consolidated leverage ratio, defined as Tier 1 capital divided by average assets, was 7.3% at year-end 2009 and exceeded the regulatory minimum for capital adequacy purposes of 4.0%. The Corporation’s wholly-owned bank reported a Tier 1 leverage ratio of 7.8% at December 31, 2009. The following table sets forth the Corporation’s obligations and commitments to make future payments under contract as of December 31, 2009.

		Payment due by year
						Less than 1												More than
Contractual Obligations		Total				year				1-3 years				3-5 years				5 years
FHLB advances		$	63,148			$	4,446			$	51,143			$	4,430			$	3,129
Federal funds purchased and other short-term borrowings			3,011				3,011				—				—				—
Operating lease obligations			6,854				932				1,864				1,864				2,194
Loan and line of credit and other commitments			86,632				86,632				—				—				—
Total contractual obligations		$	156,645			$	92,021			$	53,007			$	6,294			$	5,323

DCB FINANCIAL CORP

CONSOLIDATED BALANCE SHEETS

December 31, 2009 and 2008

(Dollars in thousands, except share amounts)

		2009				2008
ASSETS
Cash and due from financial institutions		$	10,082			$	20,658
Interest bearing deposits			26,371				10,000
Federal funds sold and overnight investments			5,000				4,000
Total cash and cash equivalents			41,453				34,658
Securities available for sale			94,100				111,360
Securities held to maturity			1,752				8,002
Total securities			95,852				119,362
Loans held for sale, at lower of cost or fair value			2,442				1,083
Loans			489,482				513,213
Less allowance for loan losses			(10,479	)			(6,137	)
Net loans			479,003				507,076
Real estate owned			4,912				5,071
Investment in FHLB stock			3,773				3,796
Premises and equipment, net			14,435				15,537
Investment in unconsolidated affiliates			1,439				1,277
Bank-owned life insurance			16,326				15,623
Accrued interest receivable and other assets			15,387				9,081
Total assets		$	675,022			$	712,564
LIABILITIES
Deposits
Noninterest-bearing		$	60,502			$	49,018
Interest-bearing			496,953				516,135
Total deposits			557,455				565,153
Federal funds purchased and other short-term borrowings			3,011				5,370
Federal Home Loan Bank advances			63,148				83,014
Accrued interest payable and other liabilities			2,065				2,968
Total liabilities			625,679				656,505
SHAREHOLDERS’ EQUITY
Common stock, no par value, 7,500,000 shares authorized,   4,273,908 shares issued			3,785				3,785
Retained earnings			60,213				64,933
Treasury stock, at cost, 556,523 shares			(13,494	)			(13,494	)
Accumulated other comprehensive income (loss)			(1,161	)			835
Total shareholders’ equity			49,343				56,059
Total liabilities and shareholders’ equity		$	675,022			$	712,564

See accompanying notes to consolidated financial statements.

DCB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF OPERATIONS

Year ended December 31, 2009, 2008 and 2007

(Dollars in thousands, except per share amounts)

		2009				2008				2007
Interest and dividend income
Loans		$	27,888			$	32,827			$	38,781
Taxable securities			3,299				3,954				3,585
Tax-exempt securities			987				1,010				892
Federal funds sold and other			167				614				298
Total interest income			32,341				38,405				43,556
Interest expense
Deposits			7,329				12,690				18,092
Borrowings			3,229				4,053				4,062
Total interest expense			10,558				16,743				22,154
Net interest income			21,783				21,662				21,402
Provision for loan losses			9,398				8,177				10,159
Net interest income after provision for loan losses			12,385				13,485				11,243
Noninterest income
Service charges on deposit accounts			2,621				2,653				2,656
Trust department income			859				910				876
Gain on sale of securities			631				307				33
Loss on sale of assets			(780	)			(1,080	)			(228	)
Gain on sale of loans			311				193				344
Treasury management fees			469				533				551
Data processing servicing fees			573				491				408
Earnings on bank owned life insurance			703				660				567
Total other-than-temporary impairment losses			(6,301	)			—				—
Portion of loss recognized in other comprehensive income (before taxes)			3,680				—				—
Net impairment losses recognized in income			(2,621	)			—				—
Other			453				820				721
Total noninterest income			3,219				5,487				5,928
Noninterest expense
Salaries and employee benefits			10,276				9,918				9,643
Occupancy and equipment			4,496				4,452				3,663
Professional services			992				1,060				475
Advertising			439				447				427
Postage, freight and courier			334				306				286
Supplies			301				338				290
State franchise taxes			656				499				463
Federal deposit insurance premiums			1,815				604				90
Other			3,680				3,260				2,625
Total noninterest expense			22,989				20,884				17,962
Loss before income tax credits			(7,385	)			(1,912	)			(791	)
Income tax credits			(3,185	)			(2,241	)			(930	)
Net income (loss)		$	(4,200	)		$	329			$	139
Basic earnings (loss) per common share		$	(1.13	)		$	0.09			$	0.04
Diluted earnings (loss) per common share		$	(1.13	)		$	0.09			$	0.04

See accompanying notes to consolidated financial statements.

DCB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Year ended December 31, 2009, 2008, and 2007

(In thousands)

		2009				2008				2007
Net income (loss)		$	(4,200	)		$	329			$	139
Unrealized gains on securities available for sale, net of related taxes of $430, $490 and $235 in 2009, 2008 and 2007, respectively			834				951				456
Net unrealized losses on securities held-to-maturity for which a portion of an other-than-temporary impairment has been recognized in income, net of taxes of $1,251			(2,429	)			—				—
Amortization of unrealized losses on held-to-maturity securities, net of taxes of $7			15				—				—
Reclassification adjustment for realized gains included in net income, net of taxes of $215, $104 and $11 in 2009, 2008 and 2007, respectively			(416	)			(203	)			(22	)
Comprehensive income (loss)		$	(6,196	)		$	1,077			$	573
Accumulated other comprehensive income (loss)		$	(1,161	)		$	835			$	87

See accompanying notes to consolidated financial statements.

DCB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Year ended December 31, 2009, 2008 and 2007

(Dollars in thousands, except per share amounts)

														Accumulated
														Other				Total
		Common				Retained				Treasury				Comprehensive				Shareholders’
		Stock				Earnings				Stock				Income (Loss)				Equity
Balance at January 1, 2007			3,780				68,807				(10,841	)			(347	)			61,399
Net income			—				139				—				—				139
Unrealized gains on securities designated as available for sale, net of realized gains and tax effects			—				—				—				434				434
Purchase of treasury stock- 97,737 shares at cost			—				—				(2,653	)			—				(2,653	)
Issuance of 158 shares			5				—				—				—				5
Dividends ($0.60 per share)			—				(2,256	)			—				—				(2,256	)
Balance at December 31, 2007			3,785				66,690				(13,494	)			87				57,068
Net income			—				329				—				—				329
Unrealized gains on securities designated as available for sale, net of realized gains and tax effects			—				—				—				748				748
Dividends ($0.56 per share)			—				(2,086	)			—				—				(2,086	)
Balance at December 31, 2008			3,785				64,933				(13,494	)			835				56,059
Net loss			—				(4,200	)			—				—				(4,200	)
Unrealized gains on securities designated as available for sale, net of realized gains and tax effects			—				—				—				418				418
Unrealized losses on securities designated as held-to-maturity, net			—				—				—				(2,414	)			(2,414	)
Dividends ($0.06 per share)			—				(520	)			—				—				(520	)
Balance at December 31, 2009		$	3,785			$	60,213			$	(13,494	)		$	(1,161	)		$	49,343

See accompanying notes to consolidated financial statements.

DCB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended December 31, 2009, 2008 and 2007

(Dollars in thousands)

		2009				2008				2007
Cash flows from operating activities
Net income (loss)		$	(4,200	)		$	329			$	139
Adjustments to reconcile net income to net cash   provided by (used in) operating activities
Depreciation			1,822				1,622				1,180
Provision for loan losses			9,398				8,177				10,159
Deferred income taxes			(2,618	)			291				(1,051	)
Gain on sale of securities			(631	)			(307	)			(33	)
Gain on sale of loans			(311	)			(193	)			(344	)
Loss on sale of assets			780				1,080				228
Stock option plan expense			115				75				83
Premium amortization on securities, net			514				426				270
FHLB stock dividends			(103	)			(192	)			(66	)
Other-than-temporary impairment loss			2,621				—				—
Loans originated for sale in the secondary market			(22,250	)			(17,387	)			(23,531	)
Proceeds from sale of loans			22,569				17,575				23,875
Earnings on bank owned life insurance			(703	)			(660	)			(567	)
Net changes in other assets and other liabilities			(4,669	)			1,836				(2,282	)
Net cash provided by operating activities			(2,334	)			12,672				8,060
Cash flows used in investing activities
Securities
Purchases			(43,387	)			(64,798	)			(22,711	)
Maturities, principal payments, and calls			60,257				35,512				22,194
Net change in loans			18,206				(9,243	)			22,632
Premises and equipment expenditures			(684	)			(2,981	)			(5,890	)
Purchase of bank-owned life insurance policies			—				—				(5,000	)
Proceeds from sale of real estate owned			674				1,238				745
Investment in unconsolidated affiliates			(162	)			(7	)			(302	)
Net cash provided by (used in) investing activities			34,904				(40,279	)			11,668
Cash flows provided by (used in) financing activities
Net change in deposits			(7,698	)			54,279				(13,220	)
Net change in federal funds purchased   and other short-term borrowings			(2,359	)			(11,226	)			14,820
Proceeds from Federal Home Loan Bank advances			—				205				26,500
Repayment of Federal Home Loan Bank advances			(19,866	)			(10,677	)			(26,750	)
Purchase of treasury stock			—				—				(2,653	)
Issuance of treasury stock			—				—				5
Cash dividends paid			(520	)			(2,384	)			(2,256	)
Net cash provided by (used in) financing activities			(30,443	)			30,197				(3,554	)
Net change in cash and cash equivalents			6,795				2,590				16,174
Cash and cash equivalents at beginning of year			34,658				32,068				15,894
Cash and cash equivalents at end of year		$	41,453			$	34,658			$	32,068

See accompanying notes to consolidated financial statements.

DCB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended December 31, 2009, 2008 and 2007

(Dollars in thousands)

		2009				2008				2007
Supplemental disclosure of cash flow information Cash paid during the year for:
Interest on deposits and borrowings		$	11,072			$	16,868			$	22,160
Income taxes		$	—			$	1,145			$	1,805
Supplemental disclosure of non cash investing and financing activities:
Unrealized gains on securities designated as available for sale, net of related tax effects		$	834			$	951			$	456
Unrealized losses on securities designated as held-to-maturity, net of amortization and tax effects		$	(2,414	)		$	—			$	—
Transfers from loans to real estate owned		$	1,748			$	6,190			$	2,379
Loans originated upon sale of real estate owned		$	1,232			$	—			$	384
Cash dividends declared but unpaid		$	—			$	298			$	595
Transfer of securities from available for sale to the held to maturity classification		$	—			$	8,002			$	—