DCB FINANCIAL CORP - FORM 10-Q

Attached files

file	filename
EX-31.2 - EX-31.2 - DCB FINANCIAL CORP	c19960exv31w2.htm
EX-32.1 - EX-32.1 - DCB FINANCIAL CORP	c19960exv32w1.htm
EX-31.1 - EX-31.1 - DCB FINANCIAL CORP	c19960exv31w1.htm
EXCEL - IDEA: XBRL DOCUMENT - DCB FINANCIAL CORP	Financial_Report.xls
EX-32.2 - EX-32.2 - DCB FINANCIAL CORP	c19960exv32w2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended: JUNE 30, 2011


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.

Yes þ No o

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

Yes þ No o

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


Large accelerated filers o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ

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

Yes o No þ

As of August 12, 2011, the latest practicable date, 3,717,385 shares of the registrant’s no par value common stock were issued and outstanding.

DCB FINANCIAL CORP
FORM 10-Q
For the Six Month Periods Ended June 30, 2011 and 2010

Table of Contents


	Page

PART I — FINANCIAL INFORMATION

ITEM 1 — Financial Statements

Condensed Consolidated Balance Sheets		3

Condensed Consolidated Statements of Operations		4

Condensed Consolidated Statements of Comprehensive Loss		5

Condensed Consolidated Statements of Cash Flows		6

Notes to the Condensed Consolidated Financial Statements		7

ITEM 1A — Risk Factors		30

ITEM 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		31

ITEM 3 — Quantitative and Qualitative Disclosures About Market Risk		39

ITEM 4 — Controls and Procedures		40

PART II — OTHER INFORMATION		41

SIGNATURES		43

EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

DCB FINANCIAL CORP

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)


Item 1.		Financial Statements


	June 30,			December 31,
	2011			2010
	(unaudited)
ASSETS
Cash and due from financial institutions	$	13,934		$	10,024
Interest-bearing deposits		100,186			23,497

Total cash and cash equivalents		114,120			33,521
Securities available-for-sale		70,864			69,597
Securities held-to-maturity		1,267			1,313

Total securities		72,131			70,910
Loans held for sale, at lower of cost or fair value		118			753
Loans		395,264			424,864
Less allowance for loan losses		(11,355	)		(12,247	)
Net loans		383,909			412,617
Real estate owned		4,796			5,284
Investment in FHLB stock		3,799			3,799
Premises and equipment, net		12,612			13,175
Bank-owned life insurance		17,489			17,073
Accrued interest receivable and other assets		7,093			7,973

Total assets	$	616,067		$	565,105


LIABILITIES
Deposits
Noninterest-bearing	$	67,959		$	63,695
Interest-bearing		456,099			401,381

Total deposits		524,058			465,076
Federal funds purchased and other short-term borrowings		1,404			1,265
Federal Home Loan Bank advances		51,842			58,502
Accrued interest payable and other liabilities		2,601			2,848

Total liabilities		579,905			527,691

SHAREHOLDERS’ EQUITY
Common stock, no par value, 7,500,000 shares authorized, 4,273,908 issued		3,785			3,785
Retained earnings		46,064			47,883
Treasury stock, at cost, 556,523 shares		(13,494	)		(13,494	)
Accumulated other comprehensive loss		(193	)		(760	)

Total shareholders’ equity		36,162			37,414

Total liabilities and shareholders’ equity	$	616,067		$	565,105

See Notes to condensed consolidated financial statements.

DCB FINANCIAL CORP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share data)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Interest and dividend income
Loans	$	5,106		$	6,303		$	10,434		$	12,759
Taxable securities		540			683			1,050			1,405
Tax-exempt securities		87			182			180			381
Federal funds sold and other		37			28			57			46

Total interest income		5,770			7,196			11,721			14,591

Interest expense
Deposits		697			1,142			1,399			2,352
Borrowings		585			692			1,222			1,383

Total interest expense		1,282			1,834			2,621			3,735


Net interest income		4,488			5,362			9,100			10,856

Provision for loan losses		2,536			3,386			3,211			5,347


Net interest income after provision for loan losses		1,952			1,976			5,889			5,509

Noninterest income
Service charges on deposit accounts		647			658			1,210			1,263
Trust department income		206			268			465			493
Net gain (loss) on sales of securities		—			80			—			80
Net gain (loss) on sale of assets		(14	)		(12	)		97			86
Gains on sale of loans		19			78			38			107
Treasury management fees		101			114			214			244
Data processing servicing fees		286			168			426			300
Earnings on bank owned life insurance		249			243			416			410
Total other-than-temporary impairment losses		—			—			(75	)		(80	)
Portion of loss recognized in (reclassified from) other comprehensive loss (before taxes)		—			—			(17	)		(950	)

Net impairment losses recognized in income		—			—			(92	)		(1,030	)
Other		251			196			473			276

Total noninterest income		1,745			1,793			3,247			2,229

Noninterest expense
Salaries and other employee benefits		2,767			2,599			5,172			5,223
Occupancy and equipment		920			1,015			1,946			2,045
Professional services		355			396			761			703
Advertising		91			99			177			173
Postage, freight and courier		63			122			158			209
Supplies		49			29			87			59
State franchise taxes		125			152			250			304
Federal deposit insurance premiums		482			396			889			792
Other		969			929			1,811			1,717

Total noninterest expense		5,821			5,737			11,251			11,225


Net loss before income tax credits		(2,124	)		(1,968	)		(2,115	)		(3,487	)
Income tax (credits) expense		(268	)		60			(292	)		(571	)

Net loss	$	(1,856	)	$	(2,028	)	$	(1,823	)	$	(2,916	)


Basic and diluted loss per common share	$	(0.50	)	$	(0.55	)	$	(0.49	)	$	(0.78	)

Dividends per share	$	—		$	—		$	—		$	—

See Notes to the condensed consolidated financial statements.

DCB FINANCIAL CORP

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(Dollars in thousands)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010

Net loss	$	(1,856	)	$	(2,028	)	$	(1,823	)	$	(2,916	)

Reclassification adjustment for realized gains (losses) included in net income, net of taxes of $0, $27, $31 and $27		—			(53	)		61			(53	)

Unrealized gains on securities available-for-sale, net of taxes of $259, $225, $245 and $308		502			438			476			598

Net unrealized gains on securities held-to-maturity for which a portion of an other-than-temporary impairment has been recognized in income, net of realized losses and net of taxes of $323, $11, $4, and $333		627			21			11			646


Comprehensive loss	$	(727	)	$	(1,622	)	$	(1,275	)	$	(1,725	)

See Notes to the condensed consolidated financial statements.

DCB FINANCIAL CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)


	Six Months Ended
	June 30,
	2011			2010

Cash flows provided by (used in) operating activities	$	(2,825	)	$	5,456

Cash flows provided by investing activities
Securities
Purchases		(13,868	)		(16,195	)
Maturities, principal payments and calls		13,208			9,754
Sales		—			15,322
Net change in loans		30,586			21,004
Proceeds from sale of real estate owned		1,324			529
Investment in unconsolidated affiliate		—			(35	)
Premises and equipment expenditures		(287	)		(368	)

Net cash flows provided by investing activities		30,963			30,011

Cash flows provided by financing activities
Net change in deposits		58,982			(24,940	)
Net change in federal funds purchased and other short-term borrowings		139			(1,928	)
Repayment of Federal Home Loan Bank advances		(6,660	)		(2,556	)

Net cash provided by financing activities		52,461			(29,424	)


Net change in cash and cash equivalents		80,599			6,043

Cash and cash equivalents at beginning of period		33,521			41,453


Cash and cash equivalents at end of period	$	114,120		$	47,496


Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings	$	2,611		$	3,815

Supplemental disclosure of non-cash investing and financing activities:
Transfers from loans to real estate owned	$	658		$	1,955

Cash dividends declared but unpaid	$	—		$	—

See Notes to the condensed consolidated financial statements.

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These consolidated interim financial statements are prepared without audit and reflect all adjustments which, in the opinion of management, are necessary to present fairly the financial position of DCB Financial Corp (the “Corporation”) at June 30, 2011, and its results of operations and cash flows for the six month periods ended June 30, 2011 and 2010. All such adjustments are normal and recurring in nature. The accompanying consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not purport to contain all necessary financial disclosures required by accounting principles generally accepted in the United States of America that might otherwise be necessary in the circumstances, and should be read in conjunction with the consolidated financial statements, and notes thereto, included in its Annual Report as of December 31, 2010. Refer to the accounting policies of the Corporation described in the Notes to Consolidated Financial Statements contained in the Corporation’s Annual Report as of December 31, 2010. The Corporation has consistently followed these policies in preparing this Form 10-Q. The results of operations for the three and six month periods ended June 30, 2011, are not necessarily indicative of the results that may be expected for the entire year.

The accompanying consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries, The Delaware County Bank and Trust Company (the “Bank”), DCB Title Services LLC, Datatasx LLC and ORECO (collectively referred to herein after as the “Corporation”). All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Management considers the Corporation to operate within one business segment, banking. Subsequent to the end of the first quarter 2011, Management entered into an agreement to sell the outstanding contracts serviced through Datatasx LLC. It is estimated that those contracts will be converted to the new provider by the end of the third quarter 2011. On a pre-tax net basis, Datatasx contributed approximately $273 in the first and second quarters of 2011 to the consolidated companies. Management considers both the net contribution and Datatasx’s balance sheet to be immaterial to financial results on a consolidated basis.

To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect amounts reported in the financial statements and disclosures provided, and future results could differ. The allowance for loan losses, fair values of financial instruments and status of contingencies are particularly subject to change. Income tax expense is based on the effective tax rate expected to be applicable for the entire year. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A full valuation allowance was taken in 2010, reducing the deferred tax assets.

Earnings per share

Earnings per common share is net income divided by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed including the dilutive effect of additional potential common shares under stock options. Weighted-average shares for basic and diluted earnings per share are presented below.


	Three and Six Months Ended
	June 30,
	2011		2010
Weighted-average common shares outstanding (basic)		3,717,385		3,717,385
Dilutive effect of assumed exercise of stock options		—		—

Weighted-average common shares outstanding (diluted)		3,717,385		3,717,385

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

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Options to purchase 275,249 shares of common stock with a weighted-average exercise price of $11.85, were outstanding at June 30, 2011, but were excluded from the computation of common share equivalents for the three and six month periods then ended because the exercise price was greater than the average fair value of the shares.

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

Stock option plan

The Corporation’s shareholders approved an employee share option plan (the “Plan”) in May 2004. This plan grants certain employees the right to purchase shares at a predetermined price. The plan is limited to 300,000 shares. The shares granted to employees vest 20% per year over a five year period. The options expire after ten years. No shares were granted for the six month period ending June 30, 2011. At June 30, 2011, 104,457 shares were exercisable and 14,194 shares were available for grant under this plan.

The Corporation recognizes compensation cost for unvested equity-based awards based on their grant-date fair value. The Corporation recorded $30 and $24 in compensation cost for equity based awards for the three months ended June 30, 2011 and 2010, respectively. The Corporation recorded $60 and $49 in compensation cost for equity-based awards that vested during the six months ended June 30, 2011 and 2010, respectively. The Corporation has $105 of total unrecognized compensation cost related to non-vested equity-based awards granted under its stock option plan as of June 30, 2011, which is expected to be recognized over a weighted-average period of 2.81 years.

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

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

A summary of the status of the Corporation’s stock option plan as of June 30, 2011 and December 31, 2010, and changes during the periods then ended are presented below:


				Six Months Ended
				June 30,
				2011
						Weighted
						Average
				Weighted		Remaining
				Average Exercise		Contractual
	Shares			Price		Life

Outstanding at beginning of period		285,806		$	11.87	8.6 years
Issued		500			3.35
Forfeited		(11,057	)		17.98


Outstanding at end of period		275,249		$	11.85	7.67 years


Options exercisable at period end		104,457		$	21.14


				Year Ended
				December 31,
				2010
						Weighted
				Weighted		Average Remaining
				Average Exercise		Contractual
	Shares			Price		Life
Outstanding at beginning of year		204,883		$	24.77	8.6 years
Granted		131,816			3.50	9.9 years
Forfeited		(50,893	)		21.30


Outstanding at end of year		285,806		$	11.87	8.6 years


Options exercisable at year end		81,800		$	18.27


Weighted-average fair value of options granted during the year				$	0.76

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

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The following information applies to options outstanding at June 30, 2011:


	Range of
Number Outstanding	Exercise Prices

68,554		$23.00 – $30.70
41,380		$14.15 – $16.90
165,315		$3.50 –$9.00

Application of Critical Accounting Policies

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

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

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

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

The valuation of other assets requires that management utilize a variety of estimates and analysis to determine whether an asset is impaired or other-than-temporarily impaired (“OTTI”). 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.

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

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, unamortized deferred loan fees and costs and the allowance for loan losses.

Interest income is accrued based on the unpaid principal balance and includes amortization of net deferred loan fees and costs over the loan term. Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for loans placed on nonaccrual status are reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable but unconfirmed credit losses, increased by the provision for loan losses and decreased by charge-offs net of recoveries. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the required allowance balance based on past loan loss experience, augmented by additional estimates related to the nature and volume of the portfolio, information about specific borrower situations, estimated collateral values, economic conditions and other factors.

A loan is impaired when full payment of interest and principal under the original contractual loan terms is not expected. Commercial and industrial loans, commercial and multi-family real estate, and land development loans are individually evaluated for impairment. If a loan is impaired, the loan amount exceeding fair value, based on the most current information available is reserved. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment, and accordingly, such loans are not separately identified for impairment disclosures.

FASB ASU 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. In April 2011, the FASB issued ASU 2011-02, which provides additional guidance to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this update are effective for the Corporation beginning in the quarter ended September 30, 2011 and are to be applied retrospectively to January 1, 2011. In addition, the modification disclosures described in ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which were subsequently deferred by ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings, will be effective on a prospective basis beginning in the quarter ended September 30, 2011. The Corporation has not completed evaluating the impact of ASU 2011-02 on its consolidated financial statements.

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

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

FASB ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the “Boards”) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the Codification in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The impact of adoption of this ASU is not expected to be material.

FASB ASU 2011-05, Presentation of Comprehensive Income. In June 2011, the FASB issued ASU 2011-05, which provides entities with the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income, along with a total for other comprehensive income, and a total amount for comprehensive income. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. This update should be applied retrospectively effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. As the Corporation currently reports comprehensive income in two separate but consecutive statements with all of the components required by ASU 2011-05, the adoption of this guidance will not have an impact on the consolidated financial statements.

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

NOTE 2 — SECURITIES

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

June 30, 2011


			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Costs		Gains		Losses			Value

U.S. Government and agency obligations	$	37,318	$	998	$	(4	)	$	38,312
State and municipal obligations		10,514		332		(22	)		10,824
Mortgage-backed securities		20,574		1,154		—			21,728


Total	$	68,406	$	2,484	$	(26	)	$	70,864

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

Adjusted

Gross

Estimated

Amortized

Unrealized

Fair

Cost

Gains

Value

Collateralized Debt Obligations

1,267

633

1,900

December 31, 2010


			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Costs		Gains		Losses			Value

U.S. Government and agency obligations	$	29,510	$	599	$	(123	)	$	29,986
State and municipal obligations		12,153		193		(84	)		12,262
Mortgage-backed securities		26,290		1,059		—			27,349


Total	$	67,953	$	1,851	$	(207	)	$	69,597

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

Adjusted

Gross

Estimated

Amortized

Unrealized

Fair

Cost

Gains

Value

Collateralized Debt Obligations

1,313

367

1,680

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

NOTE 2 — SECURITIES (continued)

Credit Losses Recognized on Investments

The following table provides information about debt securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income for the six month periods ended June 30, 2011 and 2010.

Accumulated Credit Losses:


	Six Months Ended
	June 30,
	2011		2010

Credit losses on debt securities held
Beginning of period	$	3,924	$	2,621
Additions related to other-than-temporary losses not previously recognized		92		1,030
Reductions due to sales		—		—
Reductions due to change in intent or likelihood of sale		—		—
Additions related to increases in previously recognized other-than-temporary losses		—		—
Reductions due to increases in expected cash flows		—		—


End of period	$	4,016	$	3,651

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

NOTE 2 — SECURITIES (continued)

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at June 30, 2011 and December 31, 2010:

June 30, 2011


	(Less than 12 months)							(12 months or longer)										Total
Description of	Number of		Fair		Unrealized			Number of		Fair		Unrealized		Number of		Fair		Unrealized
Securities	investments		value		losses			investments		value		losses		investments		value		losses

U.S. Government and agency obligations		1	$	1,078	$	(4	)		—	$	—	$	—		1	$	1,078	$	(4	)
State and municipal obligations		4		1,729		(22	)		—		—		—		4		1,729		(22	)
Mortgage-backed securities and other		—		—		—			—		—		—		—		—		—


Total securities		5	$	2,807	$	(26	)		0	$	0	$	0		5	$	2,807	$	(26	)


December 31, 2010

	(Less than 12 months)							(12 months or longer)										Total
Description of	Number of		Fair		Unrealized			Number of		Fair		Unrealized		Number of		Fair		Unrealized
Securities	investments		value		losses			investments		value		losses		investments		value		losses
U.S. Government and agency obligations		10	$	9,904	$	(123	)		—	$	—	$	—		10	$	9,904	$	(123	)
State and municipal obligations		9		3,575		(84	)		—		—		—		9		3,575		(84	)
Mortgage-backed securities and other		—		—		—			—		—		—		—		—		—


Total securities		19	$	13,479	$	(207	)		0	$	0	$	0		19	$	13,479	$	(207	)

The unrealized losses on the Corporation’s investments in U.S. Government and agency obligations, state and political subdivision obligations and mortgage-backed securities were caused primarily by changes in interest rates. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Corporation does not intend to sell the investments and it is not more likely than not the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at June 30, 2011 or December 31, 2010.

The Corporation’s unrealized loss on investments in collateralized debt obligations relates to an original investment of $8,000 in pooled trust securities. The company evaluates those investments on a quarterly basis for other-than-temporary impairment and other unrealized losses due to temporary market factors. The unrealized losses were primarily attributed to: declines in the performance of the underlying collateral due to weakness in the economy, and a lower than investment grade rating by industry analysts.

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

NOTE 2 — SECURITIES (continued)

Credit losses on these securities are calculated by comparing expected discounted cash flows based on performance indicators of the underlying assets in the security to the carrying value of the investment. Because the Corporation does not intend to sell the investment and it is not more likely than not the Corporation will be required to sell the investment before recovery of its new, lower amortized cost basis, which may be maturity, it does not consider the remainder of the investment in the securities to be other-than-temporarily impaired at June 30, 2011.

Substantially all mortgage-backed securities are backed by pools of mortgages that are insured or guaranteed by the Federal National Mortgage Association (“FNMA”), the Government National Mortgage Association (“GNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”).

At June 30, 2011, 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 other than the pooled trust securities as noted above.

The amortized cost and estimated fair value of all debt securities at June 30, 2011, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown separately since they are not due at a single maturity date.


	Available-for-sale				Held-to-maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	—	$	—	$	—	$	—

Due from one to five years		19,219		19,565		—		—

Due from five to ten years		18,896		19,686		—		—
Due after ten years		9,717		9,885		1,267		1,900
Mortgage-backed and related securities		20,574		21,728		—		—

Total	$	68,406	$	70,864	$	1,267	$	1,900

Securities with a fair value of $65,803 at June 30, 2011 were pledged to secure public deposits and other obligations.

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

NOTE 3 — LOANS

Loans at June 30, 2011 and December 31, 2010, were as follows:


	June 30,		December 31,
	2011		2010

Commercial and industrial	$	135,351	$	155,410
Commercial real estate		148,425		152,374
Residential real estate and home equity		90,284		93,646
Consumer and credit card		21,186		23,411

		395,246		424,841
Add: Net deferred loan origination costs		18		23


Total loans receivable	$	395,264	$	424,864

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

NOTE 4 — CREDIT QUALITY

Allowance for Credit Losses

The allowance consists of both specific and general components. The specific component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the collateral value, or value of expected discounted cash flows of the impaired loan, is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process. Management utilizes historical loss rates in the calculation by applying weights, so that the most recent data bears a larger impact on future loss rate calculations. Management has the ability to adjust these loss rates by utilizing risk ratings based on current period trends. If current period trends differ either positively or negatively from the given weighted historical loss rates, adjustments can be made. The risk ratings either increase the expected loss rates, or decrease the expected loss rates, depending on the variance on actual versus historical trends. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risking rating data.

Management also utilizes its assessment of general economic conditions, and other localized economic data to more fully support its loan loss estimates. General economic data may include: inflation rates, savings rates and national unemployment rates. Local data may include: unemployment rates; housing starts; real estate valuations; and other economic data specific to the Corporation’s market area. Though not specific to individual loans, these economic trends can have an impact on portfolio performance as a whole.

A loan is impaired when full payment of interest and principal under the original contractual loan terms is not expected. Commercial and industrial loans, commercial real estate, including construction, land development and multi-family real estate loans are individually evaluated for impairment. If a loan is impaired, the loan amount exceeding fair value based on the most current information available is reserved. Management has developed a process by which commercial and commercial real estate loans receiving an internal grade of substandard or doubtful are individually evaluated for impairment through a loan quality review (“LQR”). The LQR details the various attributes of the relationship and collateral and determines based on the most recent available information if a specific reserve needs to be applied and at what level. The LQR process for all loans meeting the specific review criteria is completed on a quarterly basis.

Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment, and accordingly, such loans are not separately identified for impairment disclosures.

Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Uncollectability is usually determined based on a pre-determined number of days in the case of consumer loans, or, in the case of commercial loans, is based on delinquency, collateral and other legal considerations. Consumer loans are charged-off prior to 120 days of delinquency, but could be charged off earlier, depending on the individual circumstances. Mortgage loans are charged down prior to 180 days of delinquency, but could be charged off sooner, again, depending upon individual circumstance. Typically, loans collateralized by consumer real estate are partially charged down to the estimated liquidation value, which is generally based on appraisal less costs to hold and liquidate. Commercial and commercial real estate loans are evaluated for impairment and typically reserved based on the results of the analysis, then subsequently charged down to a recoverable value when loan repayment is deemed to be collateral dependent. Both consumer and commercial loans can be partially charged down depending on a number of factors including: the remaining strength of the borrower and guarantor; the type and value of the collateral, and the ease of liquidating collateral; and whether or not collateral is brought onto the bank’s balance sheet via repossession.

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

NOTE 4 — CREDIT QUALITY (continued)

In the case of commercial and commercial real estate loans, charge-off, partial or whole, takes place when Management determines that full collectability of principal balance is unlikely to occur. Subsequent recoveries, if any, are credited to the allowance. Management’s policies for determining impairment, reserves and charge-offs are reviewed and approved by the Board of Directors on an annual basis, and were not materially changed in 2011. Management estimates the required allowance balance based on past loan loss experience, augmented by additional estimates related to the nature and volume of the portfolio, information about specific borrower situations, estimated collateral values, economic conditions and other factors.

Loans on non-accrual or loans on non-accural status at the time of restructuring may be eligible to be returned to an accruing status after six months of compliance with the modified loan terms. However, there are number of factors associated with a restructure the could prevent a loan from returning to accruing status, even after remaining in compliance with modified loan terms for the aforementioned six month period. For example: deteriorating collateral, negative cash flow changes and inability to reduce debt to income ratios.

The following table depicts the charge-offs, recoveries and provision for various categories of loans in the Corporation’s portfolios and indicates whether loans in those categories were individually or collectively evaluated for impairment. It also provides the dollar amount of reserves allocated to those portfolios based on Management’s analysis. Note that commercial and industrial loans decreased provision is the result of loans that were individually evaluated for impairment and assigned reserves in prior periods either improving their credit quality or paying off which subsequently reduced the need for carrying reserves.

Six Months Ended June 30, 2011


										Residential
										Real Estate
	Consumer and			Commercial and			Commercial			and Home
	Credit Card			Industrial			Real Estate			Equity			Total

Beginning Balance	$	796		$	4,174		$	6,786		$	491		$	12,247

Charge Offs		(342	)		(1,654	)		(2,251	)		(57	)		(4,304	)
Recoveries		132			45			17			7			201
Provision		139			(820	)		3,851			41			3,211


Ending Balance	$	725		$	1,745		$	8,403		$	482		$	11,355


Individually evaluated for impairment	$	—		$	504		$	7,385		$	—		$	7,889
Collectively evaluated for impairment		725			1,241			1,018			482			3,466


Ending Balance	$	725		$	1,745		$	8,403		$	482		$	11,355


Financing Receivables

Individually evaluated for impairment	$	—		$	15,584		$	44,284		$	—		$	59,868
Collectively evaluated for impairment		21,186			119,767			104,141			90,284			335,378


Total	$	21,186		$	135,351		$	148,425		$	90,284		$	395,246

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

NOTE 4 — CREDIT QUALITY (continued)

Year Ended December 31, 2010


										Residential
										Real Estate
	Consumer and			Commercial and			Commercial			and Home
	Credit Card			Industrial			Real Estate			Equity			Total

Beginning Balance	$	874		$	2,476		$	6,817		$	312		$	10,479

Charge Offs		(824	)		(2,261	)		(6,175	)		(498	)		(9,758	)
Recoveries		200			270			4			12			486
Provision		546			3,689			6,140			665			11,040


Ending Balance	$	796		$	4,174		$	6,786		$	491		$	12,247


Individually evaluated for impairment	$	—		$	2,812		$	5,158		$	—		$	7,970
Collectively evaluated for impairment		796			1,362			1,628			491			4,277


Ending Balance	$	796		$	4,174		$	6,786		$	491		$	12,247


Financing Receivables

Individually evaluated for impairment	$	—		$	18,967		$	42,104		$	—		$	61,071
Collectively evaluated for impairment		23,411			136,443			110,270			93,646			363,770


Total	$	23,411		$	155,410		$	152,374		$	93,646		$	424,841

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

NOTE 4 — CREDIT QUALITY (continued)

Impaired Loans

A loan is considered impaired when based on current information and events, it is probable the Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Generally, commercial and commercial real estate loans with risk grades Substandard, Vulnerable, Doubtful, or Loss, with aggregate relationships greater than $250 are evaluated for impairment. Interest income on impaired loans is recognized when accrued, for loans that remain in a performing status. Loans that are not performing and in a non-accrual status recognize interest only on a cash basis of circumstances warrant.

The following tables indicate impaired loans with and without an allocated allowance:

At and for the six months ended June 30, 2011


			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With No Related Allowance Recorded
Consumer and Credit Card	$	—	$	—	$	—	$	—	$	—
Commercial and Industrial		3,898		4,041		—		4,738		111
Commercial Real Estate		9,748		10,624		—		14,472		212
Residential RE and Home Equity		—		—		—		—		—
With Allowance Recorded
Consumer and Credit Card		—		—		—		—		—
Commercial and Industrial		11,686		13,818		504		11,607		362

Commercial Real Estate		34,536		45,245		7,385		24,707		859
Residential RE and Home Equity		—		—		—		—		—
Total
Consumer and Credit Card		—		—		—		—		—
Commercial and Industrial		15,584		17,859		504		16,345		473
Commercial Real Estate		44,284		55,869		7,385		39,179		1,071
Residential RE and Home Equity		—		—		—		—		—


Total	$	59,868	$	73,728	$	7,889	$	55,524	$	1,544

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

NOTE 4 — CREDIT QUALITY (continued)

At and for the year ended December 31, 2010


			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With No Related Allowance Recorded
Consumer and Credit Card	$	—	$	—	$	—	$	—	$	—
Commercial and Industrial		5,615		5,757		—		4,196		295
Commercial Real Estate		17,529		20,855		—		14,597		993
Residential RE and Home Equity		—		—		—		—		—
With Allowance Recorded
Consumer and Credit Card		—		—		—		—		—
Commercial and Industrial		13,352		15,238		2,812		13,651		741
Commercial Real Estate		24,575		28,823		5,158		25,209		821
Residential RE and Home Equity		—		—		—		—		—
Total
Consumer and Credit Card		—		—		—		—		—
Commercial and Industrial		18,967		20,995		2,812		17,847		1,036
Commercial Real Estate		42,104		49,678		5,158		39,806		1,814
Residential RE and Home Equity		—		—		—		—		—


Total	$	61,071	$	70,673	$	7,970	$	57,653	$	2,850

The allowance for impaired loans is included in the Corporation’s overall allowance for loan losses. The provision necessary to increase this allowance is included in the Corporation’s overall provision for losses on loans.

Financing receivables on nonaccrual status at June 30, 2011 and December 31, 2010 are as follows:


	June 30,		December 31,
	2011		2010

Consumer and credit card	$	46	$	33
Commercial and industrial		3,827		6,043
Commercial real estate		12,724		10,102
Residential real estate and home equity		893		389


Total	$	17,490	$	16,567

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

NOTE 4 — CREDIT QUALITY (continued)

Credit Quality Indicators

Corporate risk exposure by risk profile was as follows at June 30, 2011:


	Commercial and		Commercial Real
Category	Industrial		Estate

Prime-1	$	4,258	$	561
Good-2		17,709		18,949
Fair-3		39,881		33,524
Compromised-4		33,364		38,440
Vulnerable-5		19,712		5,612
Substandard-6		20,427		51,221
Doubtful-7		—		—
Loss-8		—		—


Total	$	135,351	$	148,307

Corporate risk exposure by risk profile was as follows at December 31, 2010:


	Commercial and		Commercial Real
Category	Industrial		Estate

Prime-1	$	8,459	$	561
Good-2		22,355		20,404
Fair-3		45,853		39,067
Compromised-4		31,628		27,692
Vulnerable-5		22,154		11,785
Substandard-6		24,959		52,865
Doubtful-7		2		—
Loss-8		—		—


Total	$	155,410	$	152,374

Risk Category Descriptions

Prime — 1

Prime loans based on liquid collateral, with adequate margin or supported by a strong financial statement audited with an unqualified opinion from a CPA firm. The character and repayment ability of the borrowers are excellent and without question. High liquidity, minimum risk, strong ratios, and low handling costs are common to these loans. This classification will also include all loans secured by CDs or cash equivalents.

Good — 2

Good loans of above average quality. Borrowers have a modest degree of risk. The margin of protection is good. Elements of strength are present in areas such as liquidity, stability of margins and cash flows, diversity of assets, and lack of dependence on one type of business or customer. Reasonable access to alternative bank financing is present and borrowers can obtain favorable rates and terms. These are well established regional firms and excellent local companies operating in a reasonably stable industry that may be moderately affected by the business cycle. Management and owners have unquestioned character, as demonstrated by repeated performance.

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

NOTE 4 — CREDIT QUALITY (continued)

Fair — 3

Satisfactory loans of average or slightly above average risk — having some deficiency or vulnerability to changing economic conditions, but still fully collectible. Projects should clearly demonstrate at least break-even debt service coverage. May be some weakness but with offsetting features of other support readily available. These loans are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered.

Compromised — 4

This risk grade may be established for a loan considered satisfactory but which is of below average credit risk due to financial weaknesses or uncertainty. The loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in Compromised classification is considered acceptable and within normal underwriting guidelines, so long as the loan is given the proper level of management supervision. Loans are considered Compromised when the following conditions apply:

•

At inception, the loan was properly underwritten and did not possess an unwarranted level of credit risk; also the loan met the above criteria for a risk grade of 1 (Prime), 2 (Good), 3 (Fair) or 4 (Compromised).

•

At inception, the loan was secured with collateral possessing a loan-to-value adequate to protect the Bank from loss.

•

The loan exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance.

•

During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the business is in an industry which is known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted.

Vulnerable (Special Mention) — 5

Loans which possess some credit deficiency or potential weakness which deserves close attention, but which do not yet warrant substandard classification. Such loans pose unwarranted financial risk that, if not corrected, could weaken the loan and increase risk in the future. The key distinctions of a Vulnerable (Special Mention) classification are that (1) it is indicative of an unwarranted level of risk, and (2) weaknesses are considered “potential”, versus “well-defined”, impairments to the primary source of loan repayment.

Substandard — 6

Loans that are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. One or more of the following characteristics may be exhibited in loans classified Substandard:

•

Loans, which possess a defined credit weakness and the likelihood that a loan will be paid from the primary source, is uncertain. Financial deterioration is underway and very close attention is warranted to ensure that the loan is collected without loss.

•

Loans are inadequately protected by the current net worth and paying capacity of the obligor.

•

The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment such as collateral liquidation or guarantees.

•

Loans are characterized by the distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

•

Unusual courses of action are needed to maintain a high probability of repayment.

•

The borrower is not generating enough cash flow to repay loan principal; however, continues to make interest payments.

•

The lender is forced into a subordinated or unsecured position due to flaws in documentation.

•

Loans have been restructured so that payment schedules, terms and collateral represent concessions to the borrower when compared to the normal loan terms.

•

The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

•

There is a significant deterioration in the market conditions and the borrower is highly vulnerable to these conditions.

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

NOTE 4 — CREDIT QUALITY (continued)

Doubtful — 7

One or more of the following characteristics may be exhibited in loans classified Doubtful:

•

Loans have all of the weaknesses of those classified as Substandard. Additionally, however, these weaknesses make collection or liquidation in full based on existing conditions improbable.

•

The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.

•

The possibility of loss is high, but, because of certain important pending factors, which may strengthen the loan, loss classification is deferred until its exact status is known. A Doubtful classification is established during this period of deferring the realization of the loss.

Loss — 8

Loans are considered uncollectible and of such little value that continuing to carry them as assets on the institution’s financial statements is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

Consumer Risk

Consumer risk based on payment activity at June 30, 2011 is as follows.


			Residential Real
	Consumer and		Estate and Home
Payment Category	Credit Card		Equity

Performing	$	20,965	$	89,108
Non-Performing		221		1,176


Total	$	21,186	$	90,284

Consumer risk based on payment activity at December 31, 2010 is as follows.


			Residential Real
	Consumer and		Estate and Home
Payment Category	Credit Card		Equity

Performing	$	22,970	$	92,832
Non-Performing		441		814


Total	$	23,411	$	93,646

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

NOTE 4 — CREDIT QUALITY (continued)

Age Analysis of Past Due Loans

The following table presents past due loans aged as of June 30, 2011.


													Recorded
			60-89		Greater								Investment
			Days		than 90						Total		> 90 days
	30-59 Days		Past		Days Past		Total				Financing		and
Category	Past Due		Due		Due		Past Due		Current		Receivables		Accruing

Consumer and Credit Card	$	129	$	42	$	221	$	392	$	20,794	$	21,186	$	175
Commercial and Industrial		135		523		776		1,434		133,917		135,351		350
Commercial Real Estate		1,954		—		9,230		11,184		137,241		148,425		—
Residential Real Estate and Home Equity		36		163		1,176		1,375		88,909		90,284		283


Total	$	2,254	$	728	$	11,403	$	14,385	$	380,861	$	395,246	$	808

The following table presents past due loans aged as of December 31, 2010.


													Recorded
			60-89		Greater								Investment
			Days		than 90						Total		> 90 days
	30-59 Days		Past		Days Past		Total				Financing		and
Category	Past Due		Due		Due		Past Due		Current		Receivables		Accruing

Consumer and Credit Card	$	300	$	104	$	441	$	845	$	22,566	$	23,411	$	407
Commercial and Industrial		359		3		1,373		1,735		153,675		155,410		991
Commercial Real Estate		885		2,050		10,118		13,053		139,321		152,374		35
Residential Real Estate and Home Equity		472		123		814		1,409		92,237		93,646		425


Total	$	2,016	$	2,280	$	12,746	$	17,042	$	407,799	$	424,841	$	1,858

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

NOTE 5 — FAIR VALUE MEASUREMENTS

The Corporation accounts for fair value measurements in accordance with FASB ASC 820, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The standard describes three levels of inputs that may be used to measure fair value:

		Level 1 Quoted prices in active markets for identical assets or liabilities

		Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

		Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

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

Securities

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

The following table presents the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2011 and December 31, 2010:


			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
June 30, 2011	Fair Value		(Level 1)		(Level 2)		(Level 3)
U.S. Government and agency obligations	$	38,312	$	—	$	38,312	$	—
State and municipal obligations		10,824		—		10,824		—
Mortgage-backed		21,728		—		21,728		—


Total	$	70,864	$	—	$	70,864	$	—

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

NOTE 5 — FAIR VALUE MEASUREMENTS (continued)


			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
December 31, 2010	Fair Value		(Level 1)		(Level 2)		(Level 3)
U.S. Government and agency obligations	$	29,986	$	—	$	29,986	$	—
State and municipal obligations		12,262		—		12,262		—
Mortgage-backed and other securities		27,349		—		27,349		—


Total	$	69,597	$	—	$	69,597	$	—

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

Securities

Certain collateralized debt obligations are classified as held to maturity. The Corporation recognized other-than-temporary impairment on the securities as of June 30, 2011, based upon a Level 3 estimate of fair value, including a discounted cash flows calculation and a fair value estimate from an independent evaluation of the securities.

Impaired loans

At June 30, 2011 and December 31, 2010, impaired loans consisted primarily of loans secured by nonresidential and commercial real estate. Management has determined fair value measurements on impaired loans primarily through evaluations of appraisals performed.

Real Estate Owned

Real estate acquired through, or in lieu of, loan foreclosure is held for sale and initially recorded at fair value (based on current appraised value) at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Management has determined fair value measurements on real estate owned primarily through evaluations of appraisals performed.

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

NOTE 5 — FAIR VALUE MEASUREMENTS (continued)

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2011 and December 31, 2010.

June 30, 2011


			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)

Collateralized debt obligations	$	1,900	$	—	$	—	$	1,900
Impaired loans		38,333		—		—		38,333
Real estate owned		682		—		—		682

December 31, 2010


			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)

Collateralized debt obligations	$	1,313	$	—	$	—	$	1,313
Impaired loans		24,187		—		—		24,187
Real estate owned		449		—		—		449

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

NOTE 5 — FAIR VALUE MEASUREMENTS (continued)

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


	June 30,				December 31,
	2011				2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets
Cash and cash equivalents	$	114,120	$	114,120	$	33,521	$	33,521
Securities available-for-sale		70,864		70,864		69,597		69,597
Securities held-to-maturity		1,267		1,900		1,313		1,680
Loans held for sale		118		118		753		753
Loans		383,909		377,580		412,617		401,967
FHLB stock		3,799		3,799		3,799		3,799
Accrued interest receivable		1,595		1,595		1,673		1,673


	June 30,				December 31,
	2011				2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial liabilities
Noninterest-bearing deposits	$	67,952	$	67,952	$	63,695	$	63,695
Interest-bearing deposits		456,099		456,561		401,381		402,131
Federal funds purchased and other short-term borrowings		1,404		1,404		1,265		1,265
FHLB advances		51,842		53,200		58,502		60,581
Accrued interest payable		346		346		336		336

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

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


Item 1A.		Risk Factors

There has been no material change in the nature of the risk factors set forth in the Company’s Form 10-K for the year ended December 31, 2010.

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 June 30, 2011, compared to December 31, 2010, and the consolidated results of operations for the three and six months ended June 30, 2011, compared to the same periods in 2010. 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 Securities and Exchange Commission.

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

Overview of the second quarter of 2011

The Corporation, through the Bank provides customary retail banking services to its customers, including checking and savings accounts, time deposits, IRAs, safe deposit facilities, personal loans, real estate mortgage loans and installment loans. The Bank also provides trust and wealth management products and services through its own trust department and its Raymond James affiliation. It also offers a variety of commercial and commercial real estate loans along with treasury management services to various commercial businesses.

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

The Corporation, through the Bank, grants residential real estate, commercial real estate, consumer and commercial loans to customers located primarily in Delaware, Franklin, Licking, Morrow, Marion and Union Counties, Ohio. The economic conditions in the Corporation’s market are one of the strongest within the State of Ohio, however, these conditions continue to present challenges to the banking industry. There continues to be a slowdown in economic activity, increases in unemployment levels, increased loan foreclosure volume and a decline in real estate values. The Corporation’s business has been under pressure due primarily to decreased market activity, which has resulted in declining loan portfolios. Real estate values, especially in the Bank’s core geographic area, have declined during the past several years, and have not shown signs of increased prices or activity during 2011.

•

During the second quarter 2011 the company developed a corporate restructuring plan that included a reduction in force (RIF), branch closures and a restructure of the retail division in order to realign staff with the Corporation strategies to increase retail deposits and retail lending. The restructure will result in the elimination of approximately 32 full-time equivalent employees and the closure of five branch locations. For the second quarter, the Corporation recognized approximately $255 of restructure costs which mainly consists of severance payments for affected employees. The restructure is expected to save the Corporation approximately $1,000 per year on an annualized basis.

•

The Corporation and its wholly-owned subsidiary, The Delaware County Bank & Trust currently operate under various written orders from regulatory bodies. Among other things, the Bank was required to reach a tier-1 capital ratio of 9% and a risk-based capital level of 13% by January 2011. The Bank has not yet achieved these numbers, but continues to explore various options and alternatives designed to address those requirements.

•

The Companies are in ongoing communication with both the FDIC and the ODFI, and is subject to ongoing examination for compliance with the written agreements. The Corporation cannot predict when all terms of the written agreements will be satisfied, but will continue to work diligently with the agencies, and believes that it is making progress towards addressing all facets of the agreements.

•

The Corporation’s assets totaled $616,067 at June 30, 2011 compared to $565,105 at December 31, 2010. Though this indicates an increase in assets, the change was due to a large deposit of approximately $50,000 that was made on the last day of the quarter that subsequently swept off the balance sheet the following day. Taking that transaction into consideration, the actual assets size of the Corporation was flat from year-end, and will likely trend down through the remainder of the year.

•

Overall loan balances continue to decline due to lower market activity. Loans, excluding loans held for resale, stood at $395,264 at June 30, 2011 compared to $424,864 at December 31, 2010, a decline of $29,718.

•

Net loss for the three and six months ended June 30, 2011 totaled $1,856 and $1,823, respectively, compared to a net loss in the same periods in 2010 of $2,028 and $2,916. The decline in losses is mainly attributed to the decline in the provision for loan losses period to period, offset by a decline in net interest income.

•

The provision for loan losses totaled $2,536 and $3,211 for the three and six month periods ended June 30, 2011 compared to $3,386 and $5,347 for the three and six month periods ended June 30, 2010. DCB maintains an allowance for loan losses at a level to absorb management’s estimate of probable inherent credit losses in its portfolio. The decline in provision from the prior year is attributed to the stabilization of problem credits and the improvement in related credit metrics.

•

The Corporation did not write down its investment in preferred trust securities during the second quarter 2011. It did recognize a $92 other-than-temporary impairment charge on these investments in the first quarter 2011. The credit quality of these bonds has stabilized, but additional future losses for other-than-temporary impairment could occur if the collateral supporting these bonds declines.

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

•

The Corporation’s net interest income declined from the same period in 2010. Net interest income decreased to $4,488 for the second quarter and $9,100 for the six months ended June 30, 2011 compared to $5,362 and $10,856 for the comparable periods in 2010. The lower net interest income is mainly attributed to the overall decline in interest earning assets within the loan and investment portfolios.

•

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 the index. The interest spread depends on the overall account relationship and the creditworthiness of the borrower.

•

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

•

FHLB advances decreased to $51,842 at June 30, 2011 from $58,502 at December 31, 2010. This is mainly due to a reduced reliance on borrowed funds because of the improved ability to raise deposits from its core customer base. Additionally, Management has used excess cash to reduce the overall size of the balance sheet by paying down debt, in turn, supporting its capital ratios.

ANALYSIS OF FINANCIAL CONDITION

The Corporation’s assets totaled $616,067 at June 30, 2011, compared to $565,105 at December 31, 2010, an increase of $50,962. However, as previously noted, a transaction of approximately $50,000 took place on the last day of the quarter that was subsequently wired out of the bank, thereby reducing the overall asset level by that amount. Cash and cash equivalents also increased due to this transaction, but returned to normalized levels the following day. However, overall liquidity inherent in the balance sheet has increased since year-end. Total securities increased to $72,131 at June 30, 2011 from $70,910 at December 31, 2010. The increase in investment securities is due to the reallocation of earning assets from loans into securities. This strategy creates higher levels of interest income in lieu of allocating to cash-like investments, and provides the Corporation with the flexibility to move funds into loans as demand warrants, and as collateral for various borrowing opportunities.

Total loans, excluding loans held for sale, decreased $29,718, from $424,864 at December 31, 2010 to $395,264 at June 30, 2011. The decline in outstanding loan balances is mainly due to the lower volume of new originations due to the current economy and the charge-off of non-performing loans. The Corporation’s loan originations have remained lower, as the availability of quality lending opportunities within the Bank’s market place remain low.

Total deposits increased from $465,076 at December 31, 2010 to $524,051 at June 30, 2011. The large increase in deposits is mainly due to one large transaction that was made on the last day of the quarter that subsequently was wired out of the bank, which reduced deposits to a normalized position. However, the Corporation has been successful in increasing retail deposits through product and rate specials. The Bank has also reduced in balances of CDARS deposits outstanding at June 30, 2011, as it continues to focus on increase core retail accounts.

On an as needed basis, the Corporation utilizes a variety of alternative funding sources due to competitive challenges within its primary market. Total FHLB advances decreased $6,660 during the six months ended June 30, 2011. The decline in long-term borrowings was mainly attributed to normal pay downs based on pre-determined amortization schedules. Additionally, the Corporation did not initiate any new long-term borrowings in 2011, as its liquidity position has been sufficient to fund its loan and investment activities.

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

The Corporation 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. Additional reliance on borrowings outside of normal deposit growth may increase the Corporation’s overall cost of funds.

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2011 AND JUNE 30, 2010

Net Income (Loss). The Corporation reported net loss of $1,856 for the three month period ended June 30, 2011, compared to a net loss of $2,028 for the same period in 2010. The improvement in profitability was mainly attributed to reduced provision expense offset by a decline in net interest income and an increase in salary and benefit expense for the Corporation’s restructuring.

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

Net interest income was $4,488 for the three month period ended June 30, 2011, and $5,362 for the same period in 2010. This decline is mainly attributed to lower interest earning assets, mainly a decline in loan balances. As noted, the current economic activity in the Corporation’s market area has declined, resulting in lower loan originations. Additionally, Management has focused on reducing risk in its portfolios by tightening credit standards, further reducing the universe of quality loan originations available. Management has also focused on reducing low yielding cash balances by increasing its investment securities portfolio.

As noted, the Corporation continues to reduce its overall borrowings, mainly through the FHLB, by replacing them with customer deposits and by reducing the overall size of the balance sheet through deposit run-off. Deposits normally are less expensive than borrowing which contributes to the stable net interest margin the Bank has experienced. Net interest margin for the second quarter remained stable in the second quarter 2011 at 3.38%, which is comparable to both the first quarter 2011 and the fourth quarter 2010. Additionally, the cost of deposits has remained controlled, which has also contributed to the stable margin.

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

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

The provision for loan losses totaled $2,536 for the three months ended June 30, 2011, compared to $3,386 for the same period in 2010. This decline from the previous year’s quarter is mainly attributed to the overall improvement in credit quality within the Bank’s loan portfolios. Other contributing factors include improvement in delinquencies, improved workout results and stabilized real estate values, after periods of decline, within the Bank’s market area. Management maintains an allowance for loan losses at a level to absorb management’s estimate of probable inherent credit losses in its portfolio.

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

Non-accrual loans at June 30, 2011 were $17,490, an increase of only $923 over the December 31, 2010 balance of $16,567. The portfolio of problems loans have stabilized in response to workout activities, and fewer new problem loans have surfaced. 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 3.64% of total loans at June 30, 2011 from 4.01% at December 31, 2010. Delinquent loans are mainly attributed to the real estate investment and commercial portfolios.

The allowance for loan losses was $11,355, or 2.87% of total loans at June 30, 2011, compared to $12,247, or 2.88% of total loans at December 31, 2010. Net charge-offs for the three month period ended June 30, 2011 were $1,481, which were mainly attributed to commercial real estate loans. Through June 30, 2011 annualized net charge-offs were 2.00%. During the second quarter, $7,074 of loans were restructured. Of that amount, only $1,651 qualified as restructured troubled debt. The restructures that did not qualify as restructured troubled debt consisted of $4,913 of business loans and $510 of real estate loans. 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.

Noninterest Income. Total noninterest income of $1,745 showed a slight decline from the $1,793 recognized in the second quarter 2010. The slight decline is attributed to reduced trust revenues and a decline in gains on security sales, offset by an increase in data processing service fees.

Noninterest Expense. Total noninterest expense increased $84, or 1.46%, for the three months ended June 30, 2011 compared to the same period in 2010. The increase in non-interest expense is mainly attributed to the $255 of expense recognized for the corporate restructuring approved during the second quarter. Without that one-time charge, total non-interest expense would have been $5,566 resulting in a decline of $171 from the second quarter 2010. The Corporation’s reduced staffing levels during the quarter as a result of the early retirement and RIF in the fourth quarter 2010 continues to benefit the bottom line. The restructuring currently underway will also provide cost savings related to not only salary and benefits, but occupancy expenses and maintenance expenses as well. The Corporation continues to experience larger than normal costs associated with legal and consulting as a result of the credit issues within its loan portfolios. As workout results improve the expectations are that professional and legal fees will decline accordingly in future periods.

Income Taxes. The Corporation recorded a tax credit totaling $268 for the three months ended June 30, 2011, compared to tax expense of $60 in the same period in 2010. In 2010, Management recognized a full allowance on the net deferred tax asset. Management is maintaining its full allowance tax position each quarter.

COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND JUNE 30, 2010

Net Income (Loss). The Corporation reported net loss of $1,823 for the six month period ended June 30, 2011, compared to a loss of $2,916 for the same period in 2010. The improvement in profitability was mainly attributed to reduced provision expense and reduced recognition of other-than-temporary impairment. Generally, noninterest revenue and noninterest expense were even with the same period from the prior year.

Net interest income was $9,100 for the six month period ended June 30, 2011, and $10,586 for the same period in 2010. The decline in net interest income is mainly attributed to lower interest earning assets when compared to the same period in 2010. The Corporation has been reducing its balance sheet in order to increase capital ratios, but has also experienced a decline in loan originations due to the challenging economic environment. In lieu of increasing loan balances, Management has allocated excess cash balances into its security portfolio in order to increase yield on earning assets while providing collateral to fund future borrowing ability.

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

As noted, the Corporation has been able to reduce its overall borrowings, mainly through the FHLB, by paying down debt with cash generated from the declining loan portfolio, and from an increase in retail deposits. Deposits normally are less expensive than borrowing which contributes to the stable net interest margin the Bank has experienced. Net interest margin for the second quarter remained stable at 3.52%, which is comparable to both the first quarter 2011 and the fourth quarter 2010. This stabilization is due to a reduction in low earning cash balances, and the ability to manage the overall cost of deposits.

The provision for loan losses totaled $3,211 for the six months ended June 30, 2011, compared to $5,347 for the same period in 2010. This decline in provision expense from the previous year’s quarter is mainly attributed to the overall improvement in credit quality within the Bank’s loan portfolios. Overall, problem loans have declined since year-end 2010, and delinquencies are down. Management maintains an allowance for loan losses at a level to absorb management’s estimate of probable inherent credit losses in its portfolio.

The allowance for loan losses was $11,355, or 2.87% of total loans at June 30, 2011, compared to $12,247, or 2.88% of total loans at December 31, 2010. Net charge-offs for the six month period ended June 30, 2011 were $4,103, which were mainly attributed to commercial real estate loans. 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.

Noninterest Income. Total noninterest income increased $1,018 for the six months ended June 30, 2011, compared to the same period in 2010. The increase was primarily attributable to the decline OTTI in losses offset by losses on securities sold. In the first half 2010 the other-than-temporary impairment recognized was $1,030 versus $92 in 2011. Other revenue categories such as service charges and trust fees declined slightly, but were offset with increase in data processing revenue.

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

Noninterest Expense. Total noninterest expense increased slightly in the first six months of the year compared to 2011. The increase was the result of recognizing $255 of restructure expense in the second quarter for severance payments for displaced employees. The restructure is expected to reduce overhead by approximately $1,000 annually. The Company continues to reduce staffing levels through both attrition and employee RIFs in order to better match full-time equivalent (FTE) employee count to the overall size of operations. The Corporation continues to experience higher expenses associated with legal and consulting as a result of the credit issues within its loan portfolios. As workout results improve the expectations are that professional and legal fees will decline accordingly in future periods.

Income Taxes. The Corporation recorded a tax credit totaling $292 for the six months ended June 30, 2011, compared to tax credit of $571 in the same period in 2010. In 2010, Management recognized a full allowance on the net deferred tax asset, and continues to record a full valuation allowance.

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

LIQUIDITY

Liquidity is the ability of the Corporation to fund customers’ needs for borrowing and deposit withdrawals. The purpose of liquidity management is to assure sufficient cash flow to meet all of the financial commitments and to capitalize on opportunities for business expansion. This ability depends on the financial strength, asset quality and types of deposit and investment instruments offered by the Corporation to its customers. The Corporation’s principal sources of funds are deposits, loan and security repayments, maturities of securities, sales of securities available for sale and other funds provided by operations. The Bank also has the ability to borrow from the FHLB. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan and mortgage-backed security prepayments are more influenced by interest rates, general economic conditions, and competition. The Corporation maintains investments in liquid assets based upon management’s assessment of (1) need for funds, (2) expected deposit flows, (3) yields available on short-term liquid assets and (4) objectives of the asset/liability management program.

Cash and cash equivalents increased $33,521 to $114,120 at June 30, 2011 as compared to December 31, 2010. The increase in cash equivalents is mainly due to one large deposit that was made on the last day of the quarter, but then subsequently wired out the following day. The Bank continues to offer a number of retail deposit programs to increase core deposits while reducing reliance on large depositors and CDARS deposits. Cash and equivalents represented 18.5% of total assets at June 30, 2011 and 5.9% of total assets at December 31, 2010. The Corporation has the ability to borrow funds from the Federal Home Loan Bank and the Federal Reserve 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 $1,252 between December 31, 2010 and June 30, 2011 to $36,162. The decrease is primarily due to period losses of $1,823 offset by a decrease in accumulated other comprehensive loss.

Tier 1 capital is shareholders’ equity excluding the unrealized gain or loss on securities and intangible assets. Total capital includes Tier 1 capital plus the allowance for loan losses, not to exceed 1.25% of risk-weighted assets. Risk-weighted assets are the Corporation’s total assets after such assets are assessed for risk and assigned a weighting factor defined by regulation based on their inherent risk.

The Corporation and its subsidiaries are required to meet certain published regulatory capital requirements. Additionally, the Bank is required to meet other capital requirements imposed via written agreements with FDIC and ODFI. The published requirements for the Bank are a total risk-based capital ratio of 8.0%, at least half of which must be Tier 1 capital to be considered well capitalized. Per the written agreements, the Bank is required to reach a tier-1 capital level of 9% and a total risk-based capital level of 13%. The Bank has not met the required guidelines at June 30, 2011, but continues to analyze various strategic options in order to increase capital levels. The Bank’s tier-1 capital ratio at June 30, 2011 was 6.22%, while its total risk-based capital ratio was 9.47%.

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

The following table sets forth the Corporation’s obligations and commitments to make future payments under contract as of June 30, 2011.


	Payment Due by Year
			Less than 1						More than
Contractual Obligations	Total		year		1-3 years		3-5 years		5 years

FHLB advances	$	51,842	$	25,000	$	17,188	$	6,574	$	3,080
Federal funds purchased and other short-term borrowings		1,404		1,404		—		—		—
Operating lease obligations		3,665		733		1,047		945		940
Loan and line of credit commitments		70,683		40,952		—		—		29,731


Total Contractual Obligations	$	127,594	$	68,089	$	18,235	$	7,519	$	33,751


Item 3.		Quantitative and Qualitative Disclosure About Market Risk

ASSET AND LIABILITY MANAGEMENT AND MARKET RISK

The Corporation’s primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. Interest rate risk is the possibility that the Corporation’s financial condition will be adversely affected due to movements in interest rates. The income of financial institutions is primarily derived from the excess of interest earned on interest-earning assets over the interest paid on interest-bearing liabilities. Accordingly, the Corporation places great importance on monitoring and controlling interest rate risk. The measurement and analysis of the exposure of the Corporation’s primary operating subsidiary, The Delaware County Bank and Trust Company, to changes in the interest rate environment are referred to as asset/liability management. One method used to analyze the Corporation’s sensitivity to changes in interest rates is the “net portfolio value” (“NPV”) methodology.

NPV is generally considered to be the present value of the difference between expected incoming cash flows on interest-earning and other assets and expected outgoing cash flows on interest-bearing and other liabilities. For example, the asset/liability model that the Corporation currently employs attempts to measure the change in NPV for a variety of interest rate scenarios, typically for up and down parallel shifts of 100 to 400 basis points in market rates.

The Corporation’s Annual Report includes a table depicting the changes in the Corporation’s interest rate risk as of December 31, 2010, as measured by changes in NPV for instantaneous and sustained parallel shifts of -100 to +400 basis points in market interest rates. Management believes that no events have occurred since December 31, 2010 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.

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

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

As with any method of measuring interest rate risk, certain shortcomings are inherent in the NPV approach. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and mortgage-backed securities and early withdrawal levels from certificates of deposit would likely deviate significantly from those assumed in making risk calculations.


Item 4.		Controls and Procedures

The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as of June 30, 2011, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of June 30, 2011, in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporation’s periodic SEC filings.

There was no change in the Corporation’s internal control over financial reporting that occurred during the Corporation’s fiscal quarter ended June 30, 2011, that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting, except with respect to controls related to determination of fair value and evaluation of other-than-temporary impairment of collateralized debt obligations.

DCB FINANCIAL CORP
FORM 10-Q
Quarter ended June 30, 2011

PART II — OTHER INFORMATION


Item 1		— Legal Proceedings:

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


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

ISSUER PURCHASES OF EQUITY SECURITIES

(d)

(c)

Maximum Number

Total Number of

(or Approximate

(a)

Shares (or Units)

Dollar Value) of

Total Number

(b)

Purchased as Part

Shares (or Units) that

of Shares (or

Average Price

of Publicly

May Yet Be

Units)

Paid per Share

Announced Plans

Purchased Under the

Period

Purchased

(or Unit)

or Programs⁽¹⁾

Plans or Programs

Month #l
4/1/2011 to
4/30/2011

—

Month #2
5/1/2011 to
5/31/2011

—

Month #3
6/1/2011 to
6/30/2011

—

Total

—

184,907


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

DCB FINANCIAL CORP

FORM 10-Q
Quarter ended June 30, 2011
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

DCB FINANCIAL CORP

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		DCB FINANCIAL CORP (Registrant)

Date: August 15, 2011		/s/ Thomas R. Whitney Thomas R. Whitney
		Interim President and Chief Executive Officer

Date: August 15, 2011		/s/ John A. Ustaszewski John A. Ustaszewski
		Senior Vice President and Chief Financial Officer

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.

DCB FINANCIAL CORP - FORM 10-Q - August 15, 2011

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