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: MARCH 31, 2006

OR

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

Commission file number: 0-22387

DCB Financial Corp

(Exact name of registrant as specified in its charter)

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

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

(740) 657-7000

(Registrant’s telephone number)

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

Yes þ                 No o

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

Large accelerated filers o Accelerated filer þ Non-accelerated filer o

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 May 5, 2006, the latest practicable date, 3,814,414 shares of the registrant’s no par value common stock were issued and outstanding.

DCB FINANCIAL CORP
FORM 10-Q
QUARTER ENDED MARCH 31, 2006

Table of Contents

	Page
PART I — FINANCIAL INFORMATION
ITEM 1 — Financial Statements
Consolidated Balance Sheets		3
Consolidated Statements of Income		4
Consolidated Statements of Comprehensive Income		5
Condensed Consolidated Statements of Cash Flows		6
Notes to the Condensed Consolidated Financial Statements		7
ITEM 1A — Risk Factors		14
ITEM 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
ITEM 3 — Quantitative and Qualitative Disclosures About Market Risk		19
ITEM 4 — Controls and Procedures		20
PART II — OTHER INFORMATION		21
SIGNATURES		23

DCB FINANCIAL CORP

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

Item 1. Financial Statements

	March 31,			December 31,
	2006			2005
	(unaudited)
ASSETS
Cash and due from financial institutions	$	14,115		$	18,069
Securities available for sale		98,114			96,580
Loans held for sale		915			1,640
Loans		567,905			553,045
Less allowance for loan losses		(5,617	)		(5,535	)
Net loans		562,288			547,510
Real estate owned		263			386
Investment in FHLB stock		3,375			3,327
Premises and equipment, net		8,976			8,854
Investment in unconsolidated affiliates		983			614
Bank owned life insurance		9,026			8,898
Accrued interest receivable and other assets		5,693			5,018
Total assets	$	703,748		$	690,896
LIABILITIES
Deposits
Noninterest-bearing	$	64,155		$	68,977
Interest-bearing		475,963			434,929
Total deposits		540,118			503,906
Federal funds purchased and other short-term borrowings		13,729			25,610
Federal Home Loan Bank advances		91,090			102,925
Accrued interest payable and other liabilities		1,627			2,201
Total liabilities		646,564			634,642
SHAREHOLDERS’ EQUITY
Common stock, no par value, 7,500,000 shares authorized, 4,273,200 issued at March 31, 2006 and December 31, 2005		3,780			3,780
Retained earnings		64,916			63,552
Treasury stock, at cost, 458,786 and 447,112 shares at March 31, 2006 and December 31, 2005		(10,841	)		(10,506	)
Accumulated other comprehensive loss		(671	)		(572	)
Total shareholders’ equity		57,184			56,254
Total liabilities and shareholders’ equity	$	703,748		$	690,896

DCB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended
	March 31,
	2006			2005
Interest and dividend income
Loans	$	9,427		$	7,218
Taxable securities		854			760
Tax-exempt securities		233			184
Federal funds sold and other		30			—
Total interest income		10,544			8,162
Interest expense
Deposits		3,646			1,818
Borrowings		1,075			850
Total interest expense		4,721			2,668
Net interest income		5,823			5,494
Provision for loan losses		560			470
Net interest income after provision for loan losses		5,263			5,024
Noninterest income
Service charges on deposit accounts		628			571
Trust department income		218			165
Net loss on sales of assets		(4	)		(12	)
Gains on sale of loans		51			49
Gain on sale of investment in unconsolidated affiliate		—			184
Treasury management fees		153			101
Data processing servicing fees		83			73
Earnings on bank owned life insurance		128			96
Other		127			190
Total noninterest income		1,384			1,417
Noninterest expense
Salaries and other employee benefits		2,217			2,212
Occupancy and equipment		787			880
Professional services		115			182
Advertising		74			87
Postage, freight and courier		97			94
Supplies		68			61
State franchise taxes		134			108
Other		510			474
Total noninterest expense		4,002			4,098
Income before income taxes		2,645			2,343
Federal income tax expense		785			707
Net income	$	1,860		$	1,636
Basic and diluted earnings per common share	$	0.49		$	0.42
Dividends per share	$	0.13		$	0.11

DCB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

	Three Months Ended
	March 31,
	2006			2005
Net income	$	1,860		$	1,636
Unrealized losses on securities available for sale, net of tax benefits		(99	)		(470	)
Comprehensive income	$	1,761		$	1,166
Accumulated other comprehensive loss	$	(671	)	$	(235	)

DCB FINANCIAL CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Three Months Ended
	March 31,
	2006			2005
Cash flows provided by operating activities	$	1,953		$	976
Cash flows used in investing activities
Securities available for sale
Purchases		(7,743	)		(8,033	)
Maturities, principal payments and calls		2,797			4,464
Sales		3,112			5,020
Net change in loans		(15,389	)		(24,341	)
Premises and equipment expenditures		(347	)		(77	)
Net cash flows used in investing activities		(17,570	)		(22,967	)
Cash flows provided by financing activities
Net change in deposits		36,212			12,820
Net change in federal funds purchased and other short-term borrowings		(11,881	)		17,408
Repayment of Federal Home Loan Bank advances		(11,835	)		(6,394	)
Purchase of treasury shares, net		(334	)		—
Cash dividends paid		(499	)		(433	)
Net cash provided by financing activities		11,663			23,401
Net change in cash and cash equivalents		(3,954	)		1,410
Cash and cash equivalents at beginning of period		18,069			11,238
Cash and cash equivalents at end of period	$	14,115		$	12,648
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest on deposits and borrowings	$	4,567		$	2,292
Cash dividends declared but unpaid	$	497		$	433

See notes to the consolidated financial statements.

6.

DCB FINANCIAL CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These interim financial statements are prepared without audit and reflect all adjustments which, in the opinion of management, are necessary to present fairly the financial position of DCB Financial Corp (the “Corporation”) at March 31, 2006, and its results of operations and cash flows for the three month periods ended March 31, 2006 and 2005. 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 2005 Annual Report. Refer to the accounting policies of the Corporation described in the Notes to Consolidated Financial Statements contained in the Corporation’s 2005 Annual Report. The Corporation has consistently followed these policies in preparing this Form 10-Q.

The accompanying consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiary, The Delaware County Bank and Trust Company (the “Bank”). All significant intercompany accounts and transactions have been eliminated in consolidation. Management considers the Corporation to operate within one business segment, banking.

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

Income tax expense is based on the effective tax rate expected to be applicable for the entire year. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

Earnings per share

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

	Three Months Ended
	March 31,
	2006		2005
Weighted-average common shares outstanding (basic)		3,821,202		3,934,760
Dilutive effect of assumed exercise of stock options		5,573		1,162
Weighted-average common shares outstanding (diluted)		3,826,775		3,935,922

7.

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

Stock option plan

The Corporation’s shareholders approved an employee share option plan in May 2004. This plan grants certain employees the right to purchase shares at a pre-determined price. The plan is limited to 300,000 shares. The shares granted to employees vest 20% per year over a five year period. The options expire after ten years. During 2006, 6,132 shares were issued to employees under the plan, at a price of $28.85. Approximately 11,000 shares will become exercisable during 2006.

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

The Corporation has adopted the provisions of SFAS No. 123(R) effective January 1, 2006, using the modified prospective transition method, as permitted, and therefore have not restated its financial statements for prior periods. Under this method, the Corporation has applied the provisions of SFAS No. 123(R) to new equity-based awards and to equity-based awards modified, repurchased, or cancelled after January 1, 2006. In addition, the Corporation has recognized compensation cost for the portion of unvested equity-based awards for which the requisite service period has not been rendered as of January 1, 2006. The compensation cost recorded for unvested equity-based awards is based on their grant-date fair value. For the three months ended March 31, 2006, the Company recorded $3 thousand after tax in compensation cost for equity-based awards that vested during the three months ended March 31, 2006. The Corporation has $170 thousand of total unrecognized compensation cost related to non-vested equity-based awards granted under its stock incentive plan as of March 31, 2006, which is expected to be recognized over a weighted-average period of 9 years.

Prior to January 1, 2006, the Corporation utilized APB Opinion No. 25 and related Interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized in prior periods for the plan. Had compensation cost for the Corporation’s stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the accounting method utilized in SFAS No. 123, the Corporation’s net earnings and earnings per share would have been reported as the pro forma amounts indicated below:

		Three Months Ended
		March 31,
		2005
		(In thousands, except per share data)
NET EARNINGS	As reported	$	1,636
	Stock-based compensation, net of tax		(2	)
	Pro-forma	$	1,634
EARNINGS PER SHARE
BASIC	As reported	$	0.42
	Stock-based compensation, net of tax		—
	Pro-forma	$	0.42
DILUTED	As reported	$	0.42
	Stock-based compensation, net of tax		—
	Pro-forma	$	0.42

8.

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

Stock option plan (continued)

The fair value of each option is estimated on the date of grant using the modified Black-Scholes options pricing model with the following weighted-average assumptions used for grants in 2006 and 2005: dividend yield of 2.25% and 2.0% for 2006 and 2005, respectively; expected volatility of 14.0% for 2006 and 2005, respectively; risk-free interest rates with 4.75% and 4.25% for 2006 and 2005, respectively; and expected lives of 10 years for each grant.

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

A summary of the status of the Corporation’s stock option plan as of March 31, 2006 and December 31, 2005 and changes during the periods then ended are presented below:

	Three Months Ended
	March 31,
	2006
					WEIGHTED
			WEIGHTED		AVERAGE
			AVERAGE		REMAINING
			EXERCISE		CONTRACTUAL
	SHARES		PRICE		LIFE
Outstanding at beginning of year		40,687	$	25.31	8 years
Granted		6,132		28.85	10 years
Exercised		—		—
Forfeited		—		—
Outstanding at end of period		46,819	$	25.40	9 years
Options exercisable at period end		3,627	$	23.40
Weighted-average fair value of options granted during the period			$	4.34

9.

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

Stock option plan (continued)

	Year Ended
	December 31,
	2005
				WEIGHTED
				AVERAGE
				EXERCISE
	SHARES			PRICE
Outstanding at beginning of year		15,105		$	23.40
Granted		26,219		$	25.74
Exercised		—			—
Forfeited		(637	)	$	23.40
Outstanding at end of year		40,687		$	25.31
Options exercisable at year-end		2,894		$	23.40
Weighted-average fair value of options granted during the year				$	4.68

The following information applies to options outstanding at March 31, 2006:

NUMBER OUTSTANDING	RANGE OF EXERCISE PRICES
46,819	$23.40 — $28.85

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

10.

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

SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006, or January 1, 2007 as to the Corporation’s, with earlier application allowed. The Corporation’s is currently evaluating SFAS No. 155, but does not expect it to have a material effect on the Corporation’s financial position or results of operations.

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

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

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

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

Additionally, SFAS No. 156 permits, but does not require, an entity to choose either the amortization method or the fair value measurement method for measuring each class of separately recognized servicing assets and servicing liabilities. SFAS No. 156 also permits a servicer that uses derivative financial instruments to offset risks on servicing to use fair value measurement when reporting both the derivative financial instrument and related servicing asset or liability.

SFAS No. 156 applies to all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, or January 1, 2007 as to the Corporation, with earlier application permitted. The Corporation is currently evaluating SFAS No. 156, but does not expect it to have a material effect on the Corporation’s financial position or results of operations.

Application of Critical Accounting Policies

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

The most significant accounting policies followed by the Corporation are presented in Note 1 of Notes to Consolidated Financial Statements contained in the Corporation’s 2005 Annual Report. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

11.

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

NOTE 2 – SECURITIES

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

			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	March 31, 2006
U.S. Government and agency obligations	$	23,545	$	8	$	(358	)	$	23,195
State and municipal obligations		26,799		96		(200	)		26,695
Corporate bonds		8,489		40		—			8,529
Mortgage-backed securities		40,245		82		(716	)		39,611
Total debt securities		99,078		226		(1,274	)		98,030
Other securities		53		38		(7	)		84
Total	$	99,131	$	264	$	(1,281	)	$	98,114

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at March 31, 2006:

	(Less than 12 months)							(12 months or longer)
			Estimated		Gross					Estimated		Gross					Estimated		Total
Description of	Number of		Fair		Unrealized			Number of		Fair		Unrealized			Number of		Fair		Unrealized
Securities	investments		value		losses			investments		value		losses			investments		value		losses
U.S. Government and agency obligations		9	$	8,257	$	(79	)		17	$	12,974	$	(279	)		26	$	21,231	$	(358	)
State and municipal obligations		27		10,064		(114	)		15		6,829		(86	)		42		16,893		(200	)
Mortgage-backed and other securities		52		13,839		(196	)		51		18,238		(527	)		103		32,077		(723	)
Total temporarily impaired securities		88	$	32,160	$	(389	)		83	$	38,041	$	(892	)		171	$	70,201	$	(1,281	)

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

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

12.

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

At March 31, 2006, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.

The amortized cost and estimated fair value of debt securities at March 31, 2006, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown separately since they are not due at a single maturity date.

	Available for sale
	Amortized		Fair
	Cost		Value
Due in one year or less	$	5,793	$	5,740
Due from one to five years		13,672		13,491
Due from five to ten years		16,461		16,294
Due after ten years		22,907		22,894
Mortgage-backed and related securities		40,245		39,611
Total debt securities		99,078		98,030
Other securities		53		84
Total	$	99,131	$	98,114

Securities with a carrying amount of $97,072 at March 31, 2006 were pledged to secure public deposits and other obligations.

NOTE 3 — LOANS

Loans were as follows:

	March 31,
	2006
Commercial and industrial	$	49,207
Commercial real estate		206,449
Residential real estate and home equity		204,688
Real estate construction and land development		50,378
Consumer and credit card		56,407
		567,129
Add: Net deferred loan origination costs		776
Total loans receivable	$	567,905

Loans with a carrying amount of $5,774 at March 31, 2006 were pledged to secure other borrowings.

13.

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

NOTE 4 — ALLOWANCE FOR LOAN LOSSES

Activity in the allowance for loan losses was as follows:

	Three months ended
	March 31,
	2006			2005
Balance at beginning of period	$	5,535		$	4,818
Provision for loan losses		560			470
Loans charged off		(601	)		(194	)
Recoveries		123			21
Balance at end of period	$	5,617		$	5,115

Nonperforming loans were as follows:

	March 31,		December 31,
	2006		2005
Loans past due 90 days or more and still accruing	$	1,433	$	2,648
Nonaccrual loans		2,015		2,185
Total	$	3,448	$	4,833
Impaired loans (most of which are included in nonperforming loans above) were as follows:
Period-end loans with no allocated allowance for loan losses	$	—	$	—
Period-end loans with allocated allowance for loan losses		2,015		1,655
Total	$	2,015	$	1,655
Amount of the allowance for loan losses allocated	$	1,035	$	759
Average of impaired loans during the period	$	1,959	$	1,116

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, 2005.

14.

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 March 31, 2006, compared to December 31, 2005, and the consolidated results of operations for the three months ended March 31, 2006, compared to the same period in 2005. This discussion is designed to provide shareholders with a more comprehensive review of the operating results and financial position than could be obtained from reading the consolidated financial statements alone. This analysis should be read in conjunction with the consolidated financial statements and related footnotes and the selected financial data included elsewhere in this report.

FORWARD-LOOKING STATEMENTS

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

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

ANALYSIS OF FINANCIAL CONDITION

The Corporation’s assets totaled $703,748 at March 31, 2006, compared to $690,896 at December 31, 2005, an increase of $12,852, or 7.4%, on an annualized basis. The increase in assets was mainly attributed to loan growth the Corporation experienced within its normal markets, particularly in commercial and residential real estate. The funding that accommodated this loan growth was supplied through deposit growth.

Cash and cash equivalents decreased $3,954 from December 31, 2005 to March 31, 2006. Total securities increased $1,534, or 1.6%, from $96,580 at December 31, 2005 to $98,114 at March 31, 2006. Securities and investment securities classified as available for sale at March 31, 2006 totaled $98,114, or 100% of the total securities portfolio. Management classifies securities as available for sale to provide the Corporation with the flexibility to move funds into loans if

15.

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

favorable economic conditions warrant. The Corporation invests primarily in U.S. Treasury notes, U.S. government agencies, municipal bonds, corporate obligations and mortgage-backed securities. The mortgage-backed securities portfolio, totaling $39,611 at March 31, 2006, provides the Corporation with a constant cash flow stream from principal repayments and interest payments. Mortgage-backed securities include Federal Home Loan Mortgage Corporation (“FHLMC”), Government National Mortgage Association (“GNMA”) and Federal National Mortgage Association (“FNMA”) participation certificates. The Corporation held no structured notes during any period presented.

Total loans, including loans held for sale, increased $14,135, or 2.5%, from $554,685 at December 31, 2005 to $568,820 at March 31, 2006. On an annualized basis total loans, including loans held for sale, increased $59,548, or 11.7%, from $509,272 at March 31, 2005 to $568,820 at March 31, 2006. The increase is attributed mainly to the continued growth of residential real estate and home equity, real estate construction and land development, and commercial real estate loans. Other loan categories in which the Corporation participates, commercial, industrial, and consumer financing, remained relatively stable or experienced small increases in loans outstanding. The Bank’s local market continues to experience increases in the amount of commercial real estate development activity. The Bank has no significant loan concentration in any one industry.

Total deposits increased $36,212, or 7.2%, from $503,906 at December 31, 2005 to $540,118 at March 31, 2006. This growth is mainly attributed to the increase in deposit activity from the Corporation’s larger public fund customers. The Corporation utilizes a variety of alternative deposit funding sources to overcome the competitive challenges experienced within its primary market. Utilizing brokered certificates of deposits and money market sweeps, the Corporation is able to provide additional funding for the Company’s loan portfolio. The Bank had approximately $32,133 in brokered certificates of deposit outstanding at March 31, 2006 compared to $23,231 at December 31, 2005. The slower growth of core deposits is attributed to the competition in the Corporation’s geographic area, where the growth of competitors’ branch locations have made it increasingly difficult to obtain deposits. Management intends to continue to develop new products, and to monitor the rate structure of its deposit products to encourage the growth within its deposit liabilities. Noninterest-bearing deposits decreased $4,822, or 7.0%, while interest-bearing deposits increased $41,034, or 9.4%. Total borrowings decreased to $104,819 from $128,535 during the three months ended March 31, 2005. Typically, the Company utilizes a matched funding methodology for its borrowing and deposit activities. This is done by matching the rates, terms and expected cash flows of its loans to the various liability products. This matching principle is used to not only provide funding, but also as a means of mitigating interest rate risk associated with originating longer-term fixed rate loans. Continued reliance on borrowings outside of normal deposit growth could continue an increase in the Corporation’s overall cost of funds.

COMPARISON OF RESULTS OF OPERATIONS

Net Income. Net income for the three months ended March 31, 2006 totaled $1,860, compared to net income of $1,636 for the same period in 2005. Earnings per share was $.49 for the three months ended March 31, 2006 compared to $.42 for the three months ended March 31, 2005, a quarter over quarter increase of 16.7%. The increase in earnings is mainly attributed to the increase in net interest income due to growth in earning assets.

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

Net interest income was $5,823 for the three months ended March 31, 2006, compared to $5,494 for the same period in 2005. The $329 increase in the first quarter 2006 compared to 2005 was mainly attributed to an increase in earning assets coupled with the rising rate environment. 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

16.

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

tend to negatively affect the Corporation’s net interest margin. It is likely that these offerings will continue to be offered to secure liquidity while maintaining market share.

The Company’s first quarter net interest margin decreased to 3.62% on a fully tax equivalent basis, from 3.76% during the first quarter 2005. The decline is primarily attributed to funding continued loan growth through higher cost deposits and other borrowings. The Bank has seen deposit growth primarily in products such as time deposits and money market accounts, which generally carry higher costs compared to checking and savings products. Funding costs may further negatively impact the net interest margin in future periods if the current competitive and rising rate environments remain in effect.

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 $560 for the three months ended March 31, 2006, compared to $470 for the same period in 2005. The growth in the provision is reflective of the continued growth in the Corporation’s loan portfolio, and to an increase in net charge offs between the two periods. Non-accrual loans for the three months ended March 31, 2006 were $2,015 compared to non-accrual loans of $1,939 for the same period in 2005. Net charge-offs for the three months ended March 31, 2006 increased to $478, as compared to $173 for the three months ended March 31, 2005. Annualized net charge-offs for the three months ended March 31, 2006 were 0.34% compared to 0.14% at March 31, 2005. The majority of the charge-offs were related to an indirect retail payer program originated through a dealer network. Delinquent loans over thirty days improved period to period, decreasing to 1.38% at March 31, 2006 from 1.53% at March 31, 2005. Management will continue to monitor the credit quality of the lending portfolio and will recognize additional provisions in the future to maintain the allowance for loan losses at an appropriate level. The allowance for loan losses increased to $5,617, or .99% of total loans at March 31, 2006, compared to $5,535, or 1.00% of total loans at December 31, 2005.

Noninterest Income. Total noninterest income decreased $33, or 2.3%, for the three months ended March 31, 2006, compared to the same period in 2005. The change in non-interest revenues from period to period is mainly attributed to a $184 thousand gain recognized on the sale of an investment in an unconsolidated affiliate during the first three months of 2005, offset by an increase in cash management revenues, trust revenue, and an increase in service charges and retail fees.

Noninterest Expense.

Total noninterest expense decreased $96, or 2.3%, for the three months ended March 31, 2006, compared to the same period in 2005. The decrease was primarily the result of a decrease in professional expenses incurred due to expenses incurred related to Section 404 consulting, coupled with a decline in occupancy and advertising expenses.

Income Taxes. The change of income tax expense is primarily attributable to the increase in tax exempt earnings primarily offset by municipal income and an increase in bank owned life insurance in income before income taxes. The provision for income taxes totaled $785, for an effective tax rate of 29.7%, for the three months ended March 31, 2006 and $707, for an effective tax rate of 30.2%, for the three months ended March 31, 2005.

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

17.

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

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 decreased $3,954, or 21.9%, to $14,115 at March 31, 2006 compared to $18,069 at December 31, 2005. Cash and equivalents represented 2.0% of total assets at March 31, 2006 and 2.6% of total assets at December 31, 2005. The Corporation has the ability to borrow funds from the Federal Home Loan Bank and has various correspondent banking partners to purchase overnight federal funds should the Corporation need to supplement its future liquidity needs. Management believes the Corporation’s liquidity position is adequate based on its current level of cash, cash equivalents, core deposits, the stability of its other funding sources, and the support provided by its capital base.

CAPITAL RESOURCES

Total shareholders’ equity increased $930 between December 31, 2005 and March 31, 2006. The increase was primarily due to period earnings of $1,860, partially offset by the declaration of $497 in dividends and the repurchase of 11,684 shares for a total of $334 thousand.

Tier 1 capital is shareholders’ equity excluding the unrealized gain or loss on securities classified as available for sale 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 meet all regulatory capital requirements. The ratio of total capital to risk-weighted assets was 11.1% at March 31, 2006, while the Tier 1 risk-based capital ratio was 10.1%. Regulatory minimums call for a total risk-based capital ratio of 8.0%, at least half of which must be Tier 1 capital. The Corporation’s leverage ratio, defined as Tier 1 capital divided by average assets, was 8.1% at March 31, 2006.

The following table sets forth the Corporation’s obligations and commitments to make future payments under contract as of March 31, 2006.

	PAYMENT DUE BY YEAR
CONCTRACTUAL			Less than 1						More than
OBLIGATIONS	Total		year		1-3 years		3-5 years		5 years
FHLB advances	$	91,090	$	—	$	14,435	$	14,807	$	61,848
Federal funds purchased and other short-term borrowings		13,729		13,729
Operating lease obligations		7,533		859		1,378		1,049		4,247
Loan and line of credit commitments		147,105		147,105		—		—		—
Total Contractual Obligations	$	259,457	$	161,693	$	15,813	$	15,856	$	66,095

18.

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

Item 3. Quantitative and Qualitative Disclosure About Market Risk

ASSET AND LIABILITY MANAGEMENT AND MARKET RISK

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

NPV is generally considered to be the present value of the difference between expected incoming cash flows on interest-earning and other assets and expected outgoing cash flows on interest-bearing and other liabilities. For example, the asset/liability model that the Corporation currently employs attempts to measure the change in NPV for a variety of interest rate scenarios, typically for parallel shifts of 100 to 300 basis points in market rates.

The Corporation’s 2005 Annual Report includes a table depicting the changes in the Corporation’s interest rate risk as of December 31, 2005, as measured by changes in NPV for instantaneous and sustained parallel shifts of -100 to +300 basis points in market interest rates. Management believes that no events have occurred since December 31, 2005 that would significantly change their ratio of rate sensitive assets to rate sensitive liabilities.

The Corporation’s NPV is more sensitive to rising rates than declining rates. From an overall perspective, such difference in sensitivity occurs principally because, as rates rise, borrowers do not prepay fixed-rate loans as quickly as they do when interest rates are declining. Thus, in a rising interest rate environment, because the Corporation has fixed-rate loans in its loan portfolio, the amount of interest the Corporation would receive on its loans would increase relatively slowly as loans are slowly prepaid and new loans at higher rates are made. Moreover, the interest the Corporation would pay on its deposits would increase rapidly because the Corporation’s deposits generally have shorter periods for repricing. The Corporation can utilize various tools to reduce exposure to changes in interest rates including offering floating versus fixed rate products, or utilizing interest rate swaps. Additional consideration should also be given to today’s current interest rate levels. Several deposit products are within 200 basis points of zero percent and other products within 300 basis points. Should rates continue to decline, fewer liabilities could be repriced down to offset potentially lower yields on loans. Thus decreases could also impact future earnings and the Corporation’s NPV.

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

19.

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

Item 4. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2006, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2006, in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended March 31, 2006, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

20.

DCB FINANCIAL CORP
FORM 10-Q
Quarter ended March 31, 2006

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 1/1/2006 to 1/31/2006		1,248	$	28.50		1,248		90,080
Month #2 2/1/2006 to 2/28/2006		10,436	$	28.61		10,436		79,644
Month #3 3/1/2006 to 3/31/2006
Total		11,684	$	28.56		11,684		79,644

(1) On June 17, 2005, 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 June 16, 2005.

21.

DCB FINANCIAL CORP

FORM 10-Q
Quarter ended March 31, 2006
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

22

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: May 10, 2006	/s/ Jeffrey Benton
	(Signature)
	Jeffrey Benton President and Chief Executive Officer
Date: May 10, 2006	/s/ John A. Ustaszewski
	(Signature)
	John A. Ustaszewski Senior Vice President and Chief Financial Officer

23

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.

24