10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

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

For the fiscal year ended December 31, 2006

OR

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

For the transition period from                      to                     

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)	(IRS Employer Identification No.)
110 Riverbend Ave., Lewis Center, Ohio	43035
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (740) 657-7000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Shares, No par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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

At June 30, 2006, the aggregate market value of the voting and non-voting common equity held by nonaffiliates of the registrant, based on a common share price of $31.24 per share (such price being the average of the bid and asked prices on such date) was $119,254,389.

At March 12, 2007, the registrant had 3,735,320 common shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Parts I and II of Form 10-K – Portions of the Annual Report to Shareholders for the year ended December 31, 2006.

Part III of Form 10-K – Portions of the definitive Proxy Statement for the 2007 Annual Meeting of Shareholders of DCB Financial Corp.

TABLE OF CONTENTS

PART I
	Item 1 Description of Business
	Item 1A Risk Factors
	Item 1B. Unresolved Staff Comments
	Item 1B Unresolved Staff Comments
	Item 2 Properties
	Item 3 Legal Proceedings
	Item 4 Submission of Matters to a Vote of Security Holders
PART II
	Item 5 Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases ofEquity Securities
	Item 6 Selected Financial Data
	Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7a Quantitative and Qualitative Disclosures About Market Risk
	Item 8 Financial Statements and Supplementary Data
	Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 9A Controls and Procedures
	Item 9B Other Information
PART III
	Item 10 Directors and Executive Officers of the Registrant
	Item 11 Executive Compensation
	Item 12 Security Ownership of Certain Beneficial Owners and Management
	Item 13 Certain Relationships and Related Transactions
	Item 14 Principal Accountant Fees and Services
PART IV
	Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
INDEX TO EXHIBITS
EX-13
EX-21
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I

Item 1 Description of Business

(a)	General Development of Business
	DCB Financial Corp (“DCB” or the “Corporation”) is a financial services holding company headquartered in Lewis Center, Ohio. The Corporation has one wholly-owned subsidiary bank, the Delaware County Bank and Trust Company (the “Bank”).
	The Corporation was incorporated under the laws of the State of Ohio in 1997, as required by a bank holding company under the Bank Holding Company Act of 1956, as amended, by acquiring all outstanding shares of the Bank. The Corporation acquired all such shares of the Bank after an interim bank merger, consummated on March 14, 1997. The Bank is a commercial bank, chartered under the laws of the State of Ohio, and was organized in 1950.
(b)	Narrative Description of Business
	The Bank provides customary retail and commercial banking services to its customers, including checking and savings accounts, time deposits, IRAs, safe deposit facilities, personal loans, commercial loans, real estate mortgage loans, installment loans, trust, and other wealth management services. The Bank also provides cash management, bond registrar and paying agent services for commercial and public unit entities. Through its own computer department, the Bank provides data processing and other bank operational services to other financial institutions; however, such services are not a significant part of operations or revenue.
	The Bank, grants residential real estate, commercial real estate, consumer and commercial loans to customers located primarily in Delaware, Franklin, Licking, Morrow, Marion and Union Counties, Ohio. General economic conditions in the Corporation’s market area have been sound, including unemployment statistics, which have generally remained stable. Real estate values, especially in the Bank’s core geographic area, have been stable to rising for the last five years.
	The Bank is not significantly affected by seasonal activity or large deposits of any individual depositor. At year-end 2006, deposits of public funds (funds of governmental agencies and municipalities) were 14.2% of total deposits. This amount can fluctuate, but generally not by a material amount. No material industry or group concentrations exist in the loan portfolio.
	Certain risks are involved in granting loans, primarily related to the borrowers’ ability and willingness to repay the debt. Before the Bank extends a new loan to a customer, these risks are assessed through a review of the borrower’s repayment capacity, past and current credit history, the collateral being used to secure the transaction in the event that the customer does not repay the debt, the borrower’s character and other factors. Once the decision has been made to extend credit, the Bank’s independent loan review function and credit officer monitor these factors throughout the life of the loan. All credit relationships greater than $3.0 million are reviewed annually, as are 50% of credit relationships from $500,000 to $3.0 million, 20% of credit relationships from $250,000 to $499,999, and 10% of multifamily mortgage loans. Loan review performs a limited scope review of a minimum of 30 percent of all new loan originations. In addition, any loan identified as a problem credit by management during loan review is assigned to the Bank’s loan “watch list,” is subject to ongoing monitoring by the Bank’s credit quality committee to ensure appropriate action is taken if deterioration occurs.
	Commercial, industrial and agricultural loans are primarily variable rate and include operating lines of credit and term loans made to small businesses primarily based on their ability to repay the loan from the business’s cash flow. Such loans are typically secured by business assets such as equipment and inventory and, occasionally, by the business owner’s principal residence.

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When the borrower is not an individual, the Bank generally obtains the personal guarantee of the business owner. As compared to consumer lending, which includes single-family residence, personal installment loans and automobile loans, commercial lending entails significant additional risks. These loans typically involve larger loan balances and are generally dependent on the business’s cash flow and, thus, may be subject to adverse conditions in the general economy or in a specific industry. Management reviews the borrower’s cash flows when deciding whether to grant the credit to evaluate whether estimated future cash flows will be adequate to service principal and interest of the new obligation in addition to existing obligations.

Commercial real estate and farmland loans are primarily secured by borrower-occupied business real estate and are dependent on the ability of the related business to generate adequate cash flow to service the debt. Such loans primarily carry adjustable interest rates. Commercial real estate loans are generally originated with a loan-to-value ratio of 80% or less. Management performs much of the same analysis whether deciding to grant a commercial real estate loan or a commercial loan.

Residential real estate loans and home equity lines of credit can either be fixed rate, or carry an adjustable rate. These loans are secured by the borrower’s residence. Such loans are made based on the borrower’s ability to repay the debt from employment and other income. Management assesses the borrower’s ability to repay the debt through a review of credit history and ratings, verification of employment and other income, review of debt-to-income ratios and other measures of repayment ability. The Bank generally makes these loans in amounts of 80% or less of the value of collateral. An appraisal is obtained from a qualified real estate appraiser for substantially all loans secured by real estate.

Due to the high level of growth in the Corporation’s market area, construction lending has become a significant part of the Corporation’s overall lending strategy. Construction loans are secured by residential and business real estate, generally occupied by the borrower on completion. The Bank’s construction lending program is established in a manner to minimize risk of this type of lending by not making a significant amount of loans on speculative projects. While not contractually required to do so, the Bank usually makes the permanent loan at the end of the construction phase. Construction loans also are generally made in amounts of 80% or less of the value of collateral.

Consumer installment loans to individuals include loans secured by automobiles and other consumer assets, including second mortgages on personal residences. Consumer loans for the purchase of new automobiles generally do not exceed 85% of the purchase price of the car. Loans for used cars generally do not exceed average wholesale or trade-in value as stipulated in a recent auto industry used car price guide. Credit card and overdraft protection loans are unsecured personal lines of credit to individuals of demonstrated good credit character with reasonably assured sources of income and satisfactory credit histories. Consumer loans generally involve more risk than residential mortgage loans because of the type and nature of collateral and, in certain types of consumer loans, the absence of collateral. Since these loans are generally repaid from ordinary income of an individual or family unit, repayment may be adversely affected by job loss, divorce, ill health or by general decline in economic conditions. The Bank assesses the borrower’s ability to make repayment through a review of credit history, credit ratings, debt-to-income ratios and other measures of repayment ability.

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(b)	Narrative Description of Business (Continued)
	Employees
	At December 31, 2006, the Bank employed 224 employees, 183 of whom were full-time. The Bank offers a number of employee benefits such as health, dental and life insurance, as well as education assistance for qualified employees. A 401(k) retirement plan is also available for eligible employees. No employee is represented by a union or collective bargaining group. Management considers its employee relations to be good. All of the Corporation’s employees are also employed by the Bank.
	Competition
	The Bank operates in a highly competitive industry due to statewide and interstate branching by banks, savings and loan associations and credit unions. In its primary market area of Delaware County, Ohio and surrounding counties, the Bank competes for new deposit dollars and loans with several financial service companies, including large regional and smaller community banks, as well as savings and loan associations, credit unions, finance companies, insurance companies, brokerage firms and investment companies. According to the most recent market data, there are approximately fifteen other deposit-taking and lending institutions competing in the Bank’s primary market. In addition, according to the market data, the Bank currently ranks first in market share with approximately 33.2% of the deposits in the primary market. 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, State and Municipal subdivision issues which comprise a significant portion of the Bank’s investment portfolio, and which rates are used as indices on various loan products. The Bank is competitive with interest rates and loan fees that it charges, and in pricing and the variety of accounts it offers to the depositor. The dominant pricing mechanism on loans is the Prime interest rate as published in the Wall Street Journal. The interest spread over Prime depends on the overall account relationship and the creditworthiness of the borrower. Deposit rates are reviewed weekly by management and are normally 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, while developing funding opportunities that earn an adequate interest rate margin.
	Supervision and Regulation
	The business in which the Corporation and its subsidiaries are engaged is subject to extensive supervision, regulation and examination by various bank regulatory authorities and other governmental agencies. The Bank is subject to supervision, regulation and periodic examination by the State of Ohio Division of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”). The supervision, regulation and examination to which the Corporation and its subsidiaries are subject are intended primarily for the protection of depositors and the deposit insurance funds that insure the deposits of banks, rather than for the protection of security holders.
	Earnings of the Bank are affected by state and federal laws and regulations, and by policies of various regulatory authorities. These policies include, for example, statutory maximum lending rates, requirements on maintenance of reserves against deposits, domestic monetary policies of the Board of Governors of the Federal Reserve System, United States fiscal policy, international currency regulations and monetary policies, certain restrictions on banks’ relationships with many phases of the securities business and capital adequacy and liquidity restraints. As a

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financial holding company, the Corporation is subject to supervision, regulation and periodic examination by the Federal Reserve Board, and is subject to the rules of the SEC.

Liability for Banking Subsidiaries

Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial and managerial strength for each of its subsidiary banks and to commit resources to their support. This support may be required at times when the bank holding company may not have the resources to provide it. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, the FDIC can hold any FDIC-insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with (1) the “default” of a commonly controlled FDIC-insured depository institution; or (2) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution “in danger of default.”

FDICIA

The Federal Deposit Insurance Corporation Act of 1991 (FDICIA), and the regulations promulgated under FDICIA, among other things, established five capital categories for insured depository institutions-well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, and requires federal bank regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements based on these categories. Unless a bank is well capitalized, it is subject to restrictions on its ability to offer brokered deposits and on certain other aspects of its operations. As of December 31, 2006, the Corporation and the Bank were both considered well-capitalized based on the guidelines implemented by FDIC.

Financial Modernization

The Gramm-Leach-Bliley Act (“GLBA”) was signed into law in 1999, and became effective in 2000. It permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized under regulatory prompt corrective action provisions, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act (CRA) by filing a declaration that the bank holding company wishes to become a financial holding company. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board.

The GLBA defines “financial in nature” to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Board has determined to be closely related to banking. Subsidiary banks of a financial holding company must continue to be well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has CRA rating of satisfactory or better.

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(c) Available Information

The Company maintains an Internet web-site at the following web-site address: http://www.dcbfinancialcorp.com. The Company makes available, free of charge through its internet address, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports as soon as reasonably practicable after such materials have been filed with or furnished to the SEC. Copies of these documents may also be obtained, either in electronic or paper form, by contacting Jay D. Wolf, Vice President of Marketing and Customer Relations at 740-657-7000.

Item 1A Risk Factors

Like all financial companies, DCB Financial Corp’s business and results of operations are subject to a number of risks, many of which are outside of our control. The following discussion focuses on the major business risks encountered in the Corporation’s operating environment.

The interest rate environment has compressed our margins and affected our net interest income

The rising interest rate environment, under which the Bank has operated, has increased the Bank’s funding costs at a rate slightly higher than the increase in the yield on loans and investments. This margin compression has affected our net interest income, which is the largest component of our earnings. In addition, our deposits costs have increased somewhat offset by our short-term borrowings at the same time. If these trends continue, we expect that net interest income will continue to be negatively affected.

Based on recent trends, the residential mortgage market may continue to decline during 2007, which in turn could impact our loan origination volume in a negative way. Additionally, the increase in the interest rates could increase our consumer borrower’s debt load, which may lead to higher delinquencies and ultimately charge-offs.

Competition from other financial institutions in our markets

We face significant competition in attracting and retaining deposits in all of our markets. Our most direct competition for deposits has historically come from other financial institutions doing business in our primary market areas of Ohio. The number of competitors’ branches has increased in our primary geographic service area.

The ability to extend credit and assessing the allowance for loan losses

Certain risks are involved in granting loans, primarily related to the borrowers’ ability and willingness to repay the debt. Before the Bank extends a new loan to a customer, these risks are assessed through a review of the borrower’s repayment capacity, past and current credit history, the collateral being used to secure the transaction in case the customer does not repay the debt, the borrower’s character and other factors. Once the decision has been made to extend credit, the Bank’s independent loan review function and credit officer monitor these factors throughout the life of the loan.

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

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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.

Asset and Liability Management and Market Risk

The Corporation’s ALCO committee utilizes a variety of tools to measure and monitor interest rate risk. Interest rate risk is defined as the risk that the Corporation’s financial condition will be adversely affected due to sustained movements in the overall interest structure. To a lesser extent, the Corporation is also exposed to liquidity risk, or the risk that changes in cash flows could adversely affect its ability to honor its financial obligations. The ALCO committee monitors changes in the interest rate environment and changes to its lending and deposit rates based on liquidity and profitability analysis.

Our ability to pay cash dividends is limited.

We are dependent primarily upon the earnings of our operating subsidiaries for funds to pay dividends on our common shares. The payment of dividends by our subsidiaries is subject to certain regulatory restrictions. As a result, any payment of dividends in the future by DCB Financial Corp will be dependent, in large part, on our subsidiaries’ ability to satisfy these regulatory restrictions and our subsidiaries’ earnings, capital requirements, financial condition and other factors. Although our financial earnings and financial condition have allowed us to declare and pay periodic cash dividends to our stockholders, there can be no assurance that our dividend policy or size of dividend distribution will continue in the future.

Legislative or regulatory changes or actions could adversely impact the financial services industry.

The financial services industry is extensively regulated. Banking laws and regulations are primarily intended for the protection of consumers, depositors and the deposit insurance funds, not to benefit our shareholders. Changes in laws and regulations or other actions by regulatory agencies may negatively impact us. Regulatory authorities have extensive discretion in connection on the operation of an institution and the ability to determine the adequacy of an institution’s allowance for loan losses. Failure to comply with applicable laws, regulations and policies could result in sanctions being imposed by the regulatory agencies, including the imposition of civil penalties, which could have a material adverse effect on our operations and financial condition.

We face risks with respect to future expansion.

We may acquire other financial institutions in the future and we may engage in de novo branch expansion. We may also consider and enter into new lines of business or offer new products or services. We may incur substantial costs to expand, and we can give no assurance such expansion will result in the levels of profits we seek.

Item 1B. Unresolved Staff Comments.

  Item 1B Unresolved Staff Comments

The Corporation has no unresolved staff comments.

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I Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential

The information required by this item is set forth in the Company’s Annual Report to Shareholders. Such information is incorporated herein by reference.

II Investment Portfolio

The following table sets forth the carrying amount of securities at December 31, 2006, 2005 and 2004.

(In thousands)	2006		2005		2004
Available for sale
U.S. government and agency obligations	$	21,360	$	24,732	$	26,787
States and municipal obligations		24,510		25,723		19,710
Corporate bonds		8,532		8,025		8,073
Mortgage-backed securities		33,576		38,016		41,470
Total debt securities		87,978		96,496		96,040
Other securities		93		84		83
Total	$	88,071	$	96,580	$	96,123

The following table sets forth information regarding scheduled maturities, fair value and weighted average yields of the Corporation’s debt securities at December 31, 2006. The weighted average yield has been computed using the historical amortized cost for securities available for sale. The weighted average yield on tax-exempt obligations is computed on a taxable equivalent basis based on the statutory federal income tax rate of 34%.

				One			Five
	One			Through			Through			After
	Year			Five			Ten			Ten			Fair Value
(In thousands)	or Less			Years			Years			Years			Total
Available for sale
U.S. government and agency obligations	$	2,769		$	12,714		$	5,377		$	500		$	21,360
States and municipal obligations		406			1,614			11,967			10,523			24,510
Corporate bonds		—			—			—			8,532			8,532
Mortgage-backed securities (1)		452			3,946			3,250			25,928			33,576
	$	3,627		$	18,274		$	20,594		$	45,483		$	87,978
Weighted average yield		4.01	%		4.86	%		4.22	%		5.12	%		4.63	%

(1) Based on contractual terms to maturity. Mortgage-backed securities are subject to prepayment without penalty.

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III Loan Portfolio

Types of Loans

The amounts of gross loans, excluding net deferred loan fees costs outstanding at December 31, 2006, 2005, 2004, 2003, and 2002 are shown in the following table.

(In thousands)	2006		2005		2004		2003		2002
Commercial and industrial	$	44,369	$	47,498	$	49,184	$	51,709	$	45,543
Commercial real estate		200,821		202,649		175,796		156,836		144,646
Residential real estate and home equity		206,488		193,787		170,010		117,098		87,548
Real estate construction and land development		51,584		49,553		34,199		30,120		37,603
Consumer and credit card		48,680		58,653		53,156		48,399		54,821
	$	551,942	$	552,140	$	482,345	$	404,162	$	370,161

The following table summarizes maturity for commercial real estate and other commercial loans at December 31, 2006.

						After one year					After five years
	Less than one year					through five years					through ten years					After ten years
			Weighted					Weighted					Weighted					Weighted
			Average					Average					Average					Average
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Commercial and industrial	$	18,509		8.3	%	$	16,034		7.7	%	$	3,230		7.2	%	$	6,596		8.3	%
Commercial other	$	21,214		8.7	%	$	50,941		7.1	%	$	23,438		7.0	%	$	105,228		7.0	%

As of December 31, 2006, there were $48,327 fixed-rate and $157,028 variable-rate commercial loans maturing in more than one year.

Risk Elements

Nonaccrual and Past Due Loans

The following table summarizes nonaccrual loans and accruing loans, including impaired loans, past due greater than 90 days or more at December 31, 2006, 2005, 2004, 2003, and 2002.

(In thousands)	2006		2005		2004		2003		2002
Nonaccrual loans	$	5,189	$	2,185	$	1,879	$	1,813	$	3,387
Accruing loans past due 90 days or more	$	3,307	$	2,648	$	1,544	$	1,252	$	187

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The policy for placing loans on nonaccrual status is to cease accruing interest on loans when management believes that collection of interest is doubtful, when loans are past due as to principal and interest 90 days or more, except that in certain circumstances when the loan is well secured and in the process of collection. In such cases, loans are individually evaluated in order to determine whether to continue income recognition after 90 days beyond the due dates. When loans are placed on nonaccrual, any accrued interest is charged against interest income.

The additional amount of interest income that would have been recorded on nonaccrual loans, had they been current, totaled $303,000, $127,000, and $128,000 for the years ended December 31, 2006, 2005, and 2004, respectively.

Potential Problem Loans

A business loan is classified as impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller balance loans or loans of a similar nature such as residential mortgage, consumer and credit card loans, and on an individual basis for commercial and commercial real estate loans.

Loan Concentrations

At year-end 2006, there were no concentrations of loans greater than 10% of total loans that are not otherwise disclosed as a category of loans in Item III above.

Other Interest-Bearing Assets

At year-end 2006, there were no other interest-bearing assets required to be disclosed under Item III if such assets were loans.

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IV Summary of Loan Loss Experience

Analysis of the Allowance for Loan Losses

The following table sets forth the activity in the Corporation’s allowance for loan and lease losses for the years ended December 31, 2006, 2005, 2004, 2003, and 2002.

(In thousands)	2006			2005			2004			2003			2002
Balance at beginning of year	$	5,535		$	4,818		$	4,331		$	4,094		$	3,596
Loans charged off:
Commercial		(1,243	)		(193	)		(628	)		(654	)		(1,989	)
Commercial real estate		(59	)		(61	)		(102	)		(60	)		(73	)
Residential real estate and home equity		(78	)		(48	)		(60	)		—			(1	)
Real estate construction		—			—			—			—			—
Consumer and credit card		(955	)		(1,135	)		(524	)		(631	)		(513	)
Lease financing		—			(20	)		(71	)		—			(74	)
Total loans charged off		(2,335	)		(1,457	)		(1,385	)		(1,345	)		(2,650	)
Loan recoveries:
Commercial		13			14			21			50			91
Commercial real estate		—			—			—			—			—
Residential real estate and home equity		—			—			—			—			—
Consumer and credit card		421			142			154			114			102
Lease financing		—			18			1			—			5
Total loan recoveries		434			174			176			164			198
Net loans charged off		(1,901	)		(1,283	)		(1,209	)		(1,181	)		(2,452	)
Provision for loan losses		1,808			2,000			1,696			1,418			2,950
Balance at end of year	$	5,442		$	5,535		$	4,818		$	4,331		$	4,094
Ratio of net charge-offs to average loans outstanding		0.34	%		0.24	%		0.28	%		0.31	%		0.66	%

Allocation of the Allowance for Loan Losses

The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and related ratios. While management’s periodic analysis of the adequacy of allowance for loan losses may allocate portions of the allowance for specific problem-loan situations, the entire allowance is available for any loan charge-off that occurs.

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			Percentage of					Percentage of					Percentage of
			Loans in Each					Loans in Each					Loans in Each
	Allowance		Category to			Allowance		Category to			Allowance		Category to
	Amount		Total Loans			Amount		Total Loans			Amount		Total Loans
(In thousands)	December 31, 2006					December 31, 2005					December 31, 2004
Commercial and industrial	$	1,646		8.03	%	$	2,411		8.59	%	$	3,240		10.18	%
Commercial real estate		2,055		36.44			887		36.64			225		36.37
Residential real estate and home equity		156		37.38			529		35.20			245		35.37
Real estate construction		13		9.34			98		8.96			—		7.08
Consumer and credit card		1,572		8.77			1,610		10.49			1,074		10.73
Lease financing		—		.04			—		.12			34		.27
Total	$	5,442		100.00	%	$	5,535		100.00	%	$	4,818		100.00	%

	December 31, 2003				December 31, 2002
Commercial and industrial	$	2,345	12.77	%	$	2,120	12.30	%
Commercial real estate		698	38.92			891	39.08
Residential real estate and home equity		318	28.92			66	23.65
Real estate construction		—	7.44			20	10.16
Consumer and credit card		970	10.98			706	13.08
Lease financing		—	.97			55	1.73
Unallocated		—	—			236	—
Total	$	4,331	100.00	%	$	4,094	100.00	%

12

V Deposits

Schedule of Average Deposit Amounts and Rates

Average balance of noninterest-bearing demand deposits totaled $63.8 million, $67.5 million, and $64.8 million, for the years ended December 31, 2006, 2005 and 2004. Additional detail regarding the make-up of the Corporation’s average deposit balances and related interest expense can be found on the Corporation’s attached Annual Report to Shareholders.

Maturity Analysis of Time Deposits Greater than $100,000

The following is a schedule of maturities of time certificates of deposit in amounts of $100,000 or more as of December 31, 2006.

(In thousands)
Three months or less	$	37,462
Over three through six months		37,403
Over six through twelve months		16,888
Over twelve months		19,065
Total	$	110,818

VI Return on Equity and Assets

The information required by this item is set forth in the Company’s Annual Report to Shareholders.

VII Short-Term Borrowings

Average outstanding balances of short-term borrowings were 14% of shareholder’s equity for the year ending December 31, 2006, 31% for the year ended December 31, 2005 and 30% for the year ended December 31, 2004. The maximum amount of outstanding borrowings were $139, 178 and $144 for the year ended December 31, 2006, 2005 and 2004.

13

Item 2 Properties

The Bank owns and operates its main office at 110 Riverbend Avenue, Lewis Center, Ohio 43035. The Bank also operates 17 branches and utilizes 10 other properties that are owned or leased as noted below:

1.	Corporate Office, 110 Riverbend Avenue, Lewis Center, Ohio 43015 (owned)
2.	Downtown Delaware Branch Office, 41 N. Sandusky St., Delaware, Ohio 43015 (leased)
3.	William Street Drive–Thru Office, 33 W. William St., Delaware, Ohio 43015 (leased)
4.	Delaware Center Branch Office, 199 S. Sandusky Street, Delaware, Ohio 43015 (owned)
5.	Galena Branch Office, 10 Park Street, Galena, Ohio 43021 (owned)
6.	Ostrander Branch Office, 10 West North Street, Ostrander, Ohio 43061 (owned)
7.	Green Meadows Branch Office, 9201 Columbus Pike, Lewis Center, Ohio 43035 (own bldg., lease land)
8.	Ashley Branch Office, 2 West High Street, Ashley, Ohio 43003 (owned)
9.	Buehler’s Central Office, 800 West Central Avenue, Delaware, Ohio 43015 (leased)
10.	Marysville Downtown Office, 108 South Main Street, Marysville, Ohio 43040 (leased)
11.	Marysville Plaza Office, 1169 West Fifth Street, Marysville, Ohio 43040 (leased)
12.	Sunbury Office, 75 S. Miller Dr., Sunbury, Ohio 43074 (owned)
13.	Highland Lakes Office, 6156 Highland Lakes Avenue, Westerville, Ohio 43085 (leased)
14.	Sawmill Parkway Office, 10149 Brewster Lane, Powell, Ohio 43065 (leased)
15.	Avery Road Office, 6820 Perimeter Loop Road, Dublin, Ohio 43017 (leased)
16.	Willowbrook Branch Office, 100 Willowbrook Way South, Delaware, Ohio 43015 (leased)
17.	Lewis Center Office, 81 Gallopers Ridge East, Lewis Center, Ohio 43035 (leased)
18.	Corporate Center Drive-Thru Property, Corner of Evergreen & US 23, S., Lewis Center, OH 43035 (owned)
19.	Polaris Office, 1942 Polaris Parkway, Columbus, Ohio 43240 (leased)
20.	ATM Express Bank, 554 W. Central Ave., Delaware, Ohio 43015 (leased)
21.	ATM Express Bank, Ohio Wesleyan University, Delaware, Ohio 43015 (leased)
22.	ATM Express Bank, 8208 Marysville Road West, Ostrander, Ohio 43061 (leased)
23.	ATM Express Bank, 1123 Columbus Pike, Delaware, Ohio 43015 (leased)
24.	ATM Express Bank, American Showa, 707 West Cherry Street, Sunbury, Ohio 43074 (leased)
25.	ATM Express Bank, Bureau of Motor Vehicles, 8625 Columbus Pike, Lewis Center, Ohio 43035 (leased)
26.	ATM Express Bank, Dextars IGA, 153 West Water Street, Prospect, Ohio 43342 (leased)
27.	ATM Express Bank, 240 North Liberty Street, Powell, Ohio 43065 (leased)

Management considers its physical properties to be in good operating condition and suitable for the purposes for which they are being used. All the properties owned by the Bank are unencumbered by any mortgage or security interest and are, in management’s opinion, adequately insured.

Item 3 Legal Proceedings

There is no pending litigation of a material nature, other than routine litigation incidental to the business of the Corporation and Bank, to which the Corporation or any of its affiliates is a party or of which any of their property is the subject. Further, there are no material legal proceedings in which any director, executive officer, principal shareholder or affiliate of the Corporation is a party or has a material interest, which is adverse to the Corporation or Bank. There is no routine litigation in which the Corporation or Bank is involved, which is expected to have a material adverse impact on the financial position or results of operations of the Corporation or Bank.

Item 4 Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of the security holders in the fourth quarter of 2006.

14

PART II

Item 5 Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

The information required by this item is set forth in the Company’s Annual Report to Shareholders under the sections captioned “Common Stock and Shareholder Matters” and “Stock Option Plan.” Such information is incorporated herein by reference.

The Bank acts as transfer agent for the Corporation’s common stock.

Item 6 Selected Financial Data

The information required by this item is set forth in the Company’s Annual Report to Shareholders under the section captioned “Selected Consolidated Financial Information and Other Data.” Such information is incorporated herein by reference.

Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information required by this item is set forth in the Company’s Annual Report to Shareholders under the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Such information is incorporated herein by reference.

Item 7a Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is set forth in the Company’s Annual Report to Shareholders under the section captioned “Asset and Liability Management and Market Risk.” Such information is incorporated herein by reference.

Item 8 Financial Statements and Supplementary Data

The information required by this item is set forth in the Company’s Annual Report to Shareholders. Such information is incorporated herein by reference.

Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

Item 9A Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

15

Management’s Report on Internal Control Over Financial Reporting

Management of DCB Financial Corp (the “Corporation”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934. The Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Corporation’s management assessed the effectiveness of the Corporation’s internal control over financial reporting at December 31, 2006, as required by Section 404 of the Sarbanes Oxley Act of 2002. Management’s assessment is based on criteria established in the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and was designed to provide reasonable assurance that the Corporation maintained effective internal control over financial reporting as of December 31, 2006. Based on this assessment, management believes that the Corporation maintained effective control over financial reporting as of December 31, 2006.

The independent registered public accounting firm that audited DCB Financial Corp’s consolidated financial statements included in its Annual Report for the year ended December 31, 2006, has issued an attestation report on the effectiveness of internal control over financial reporting as of December 31, 2006 and management’s assessment of internal control over financial reporting.

16

Item 9B Other Information

None

PART III

Item 10 Directors and Executive Officers of the Registrant

The information required by this item is set forth in the Company’s Proxy Statement to Shareholders in connection with its 2007 Annual Meeting, under the sections captioned “Election of Directors and Information with Respect to Directors and Officers,” and “Section 16(A) Beneficial Ownership Reporting Compliance.” Such information is incorporated herein by reference.

The Company’s Board of Directors has adopted a Code of Ethics and Business Conduct that applies to all of its directors, officers, and employees, including its principal executive, principal financial, and principal accounting officers. A copy of the code of ethics will be provided, at no cost, upon written request to the attention of Mr. Jay D. Wolf, Vice President Marketing and Customer Relations, at the Company’s main office, 110 Riverbend Avenue Lewis Center, Ohio. In addition, a copy of the Code of Ethics and Business Conduct is posted on our website at http: //www.dcbfinancialcorp.com. In the event we make any amendment to, or grant any waiver of, a provision of the Code of Ethics and Business Conduct that applies to the principal executive officer, a principal financial officer, principal accounting officer, or controller, or persons performing similar functions that require disclosure under applicable SEC rules, we intend to disclose such amendment or waiver, the reasons for it, and the nature of any waiver, the name of the person to whom it was granted, and the date, on our internet website.

Item 11 Executive Compensation

The information required by this item is set forth in the Company’s Proxy Statement to Shareholders in connection with its 2007 Annual Meeting, under the section captioned “Executive Compensation and Other Information” and “Committees and Compensation of the Board of Directors.” Such information is incorporated herein by reference.

Item 12 Security Ownership of Certain Beneficial Owners and Management

The information about beneficial ownership of DCB common shares required by this item is set forth in the Company’s Proxy Statement to Shareholders in connection with its 2007 annual meeting, under the section captioned “Security Ownership of Certain Beneficial Owners and Management.” Such information is incorporated herein by reference.

Equity Compensation Plan Information

					Number of securities
					remaining available for future
	Number of securities to be				issuance under equity
	issued upon exercise of		Weighted-average exercise		compensation plans
	outstanding options, warrants		price of outstanding options,		(excluding securities reflected
	and rights		warrants and rights		in column (a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders		70,040	$	27.19		229,960
Equity compensation plan not approved by security holders		0		0		0
Total		70,040	$	27.19		229,960

17

On May 20, 2004 the Company’s shareholders approved the DCB Financial Corp 2004 Long-Term Stock Incentive Plan. This plan authorizes the issuance of up to 300,000 DCB common shares upon exercise of stock options awarded under the plan and in the form of restricted stock and stock awards. Beginning in January 2006, the Company started to expense these options under the methodology set forth in FAS 123. Options are granted for a maximum of ten years. The options vest at an annual rate of 20% over five years, assuming credited service by the designated employee.

Item 13 Certain Relationships and Related Transactions

Information required by this item is set forth in the Company’s Proxy Statement to Shareholders in connection with its 2007 Annual Meeting, under the section captioned “Certain Relationships and Related Transactions.” Such information is incorporated herein by reference.

Item 14 Principal Accountant Fees and Services

Information required by this item is set forth in the Company’s Proxy Statement to Shareholders in connection with its 2007 Annual Meeting under the section captioned “Information Concerning Independent Registered Public Accountants”, and such information is incorporated herein by reference.

18

PART IV

Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) Documents filed as part of Form 10-K

1 The following consolidated financial statements appear in the Corporation’s 2006 Annual Report, Exhibit 13 to Shareholders and are incorporated herein by reference.

Report of Independent Registered Public Accounting Firm	Page	74
Consolidated Balance Sheets	Page	40
Consolidated Statements of Income	Page	41
Consolidated Statement of Comprehensive Income	Page	42
Consolidated Statements of Changes in Shareholders’ Equity	Page	43
Consolidated Statements of Cash Flows	Page	44
Notes to Consolidated Financial Statements	Pages	46

2 Exhibits

3.1	Articles of Incorporation of DCB Financial Corp (incorporated by reference to Registrant’s Form S-4, File No. 333-15579, effective January 10, 1997)
3.2	Code of Regulations of DCB Financial Corp (incorporated by reference to Registrant’s Form S-4, File No. 333-15579, effective January 10, 1997)
10.1	Resignation, Release, and Post-Employment Covenants Agreement by and between DCB Financial Corp., its wholly-owned subsidiary The Delaware County Bank and Trust Company, and Larry D. Coburn (incorporated by reference to Registrant’s report on Form 8-K, filed with the Commission on November 21, 2002)
10.2	Employment agreement with Mr. Whitney (incorporated by reference to Registrant’s Form 10-K, File No. 0-22387, effective March 25, 1998)
10.3	Employment agreement with Mr. Bernon (incorporated by reference to Registrant’s Form 10-K, File No. 0-22387, effective March 27, 2000)
10.4	Employment agreement by and between DCB Financial Corp, its wholly-owned subsidiary The Delaware County Bank and Trust Company, and Jeffrey Benton (incorporated by reference to Registrant’s Form 8-K, File No. 0-22387, effective March 7, 2005).
10.5	DCB Financial Corp 2004 Long-Term Stock Incentive Plan (incorporated by reference to Appendix D to our Proxy Statement, as filed with the SEC on Schedule 14A on April 14, 2004)
13	Annual Report to Shareholders
21	Subsidiaries of DCB Financial Corp
23.1	Consent of Independent Registered Public Accounting Firm
31.1	Rule 13a-14 (a) Certifications
31.2	Rule 13a-14 (a) Certifications
32.1	Section 1350 Certifications
32.2	Section 1350 Certifications

19

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Dated: March 15, 2007	DCB FINANCIAL CORP
	By:	/s/ JEFFREY T. BENTON Jeffrey T. Benton, President & CEO

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Dated: March 15, 2007

Signatures	Title
/s/ JEFFREY T. BENTON Jeffrey Benton	President (Principal Executive Officer), CEO and Director
/s/ JOHN A. USTASZEWSKI John A. Ustaszewski	Senior Vice President and Chief Financial Officer (Principal Financial Officer)
/s/ TERRY M. KRAMER Terry M. Kramer	Director, Chairman of the Board
/s/ JEROME J. HARMEYER Jerome J. Harmeyer	Director
/s/ WILLIAM R. OBERFIELD William R. Oberfield	Director
/s/ EDWARD A. POWERS Edward A. Powers	Director
/s/ GARY M. SKINNER Gary M. Skinner	Director

20

Signatures	Title
/s/ VICKI J. LEWIS Vicki J. Lewis	Director
/s/ ADAM STEVENSON Adam Stevenson	Director
/s/ DONALD J. WOLF Donald J. Wolf	Director
/s/ PHILLIP F. CONNOLLY Phillip F. Connolly	Director

21

INDEX TO EXHIBITS

Exhibit
Number	Description of Document
3.1	Amended Articles of Incorporation of DCB Financial Corp (incorporated by reference to Registrant’s Form S-4, File No. 333-15579, effective January 10, 1997)
3.2	Code of Regulations of DCB Financial Corp (incorporated by reference to Registrant’s Form S-4, File No. 333-15579, effective January 10, 1997)
10.1	Resignation, Release, and Post-Employment Covenants Agreement by and between DCB Financial Corp, its wholly-owned subsidiary The Delaware County Bank and Trust Company, and Larry D. Coburn (incorporated by reference to Registrant’s report on Form 8-K, filed with the Commission on November 21, 2002)
10.2	Employment agreement with Mr. Whitney (incorporated by reference to Registrant’s 1997 Form 10-K, File No. 0-22387, effective March 25, 1998)
10.3	Employment agreement with Mr. Bernon (incorporated by reference to Registrant’s 1997 Form 10-K, File No. 0-22387, effective March 27, 2000)
10.4	Employment agreement by and between DCB Financial Corp, its wholly-owned subsidiary The Delaware County Bank and Trust Company, and Jeffrey Benton (incorporated by reference to Registrant’s Form 8-K, File No. 0-22387, effective March 7, 2005).
10.5	DCB Financial Corp 2004 Long-Term Stock Incentive Plan (incorporated by reference to Appendix D to our Proxy Statement, as filed with the SEC on Schedule 14A on April 14, 2004)
13	Annual Report to Shareholders
21	Subsidiaries of DCB Financial Corp
23.1	Consent of Independent Registered Public Accounting Firm
31.1	Rule 13a-14 (a) Certifications
31.2	Rule 13a-14 (a) Certifications
32.1	Section 1350 Certifications
32.2	Section 1350 Certifications

22

EX-13

EXHIBIT 13

Business of DCB Financial Corp

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

The Bank conducts business from its main office at 110 Riverbend Avenue in Lewis Center, Ohio and from its 17 branch offices located in Delaware, Ohio and surrounding communities. The Bank provides customary retail and commercial banking services to its customers, including checking and savings accounts, time deposits, IRAs, safe deposit facilities, personal loans, commercial loans, real estate mortgage loans, installment loans, night depository facilities and wealth management services. The Bank also provides treasury management, bond registrar and payment agent services. Through its information systems department, the Bank provides data processing, disaster recovery, and check processing services to other financial institutions; however, such services are not a significant part of operations or revenue.

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

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

Common Stock and Shareholder Matters

DCB had 3,814,964 common shares outstanding on February 22, 2007, held of record by approximately 1,466 shareholders. There is no established public trading market for DCB’s common shares. DCB’s common shares are traded on a limited basis on the Over-The-Counter Electronic Bulletin Board. At times however, various brokerage firms maintain daily bid and ask prices for DCB’s common stock. The range of high and low transactions as reported by Sweney, Cartwright & Co. is reported below. These transactions are shown without retail mark-up, mark-down or commissions.

23

	Quarter ended
	March 31,		June 30,		September 30,		December 31,
	2006		2006		2006		2006
High	$	29.50	$	31.75	$	31.25	$	30.25
Low		28.00		29.20		29.25		29.20
Dividends per share		0.13		0.14		0.14		0.14

	March 31,		June 30,		September 30,		December 31,
	2005		2005		2005		2005
High	$	29.00	$	27.15	$	27.90	$	28.85
Low		20.75		25.00		26.05		25.55
Dividends per share		0.11		0.12		0.12		0.13

Management does not have knowledge of the prices in all transactions and has not verified the accuracy of those prices that have been reported. Because of the lack of an established market for DCB’s stock, these prices may not reflect the prices at which the stock would trade in a more active market. DCB sold no securities during 2006 or 2005 that were not registered under the Securities Acts.

Income of DCB primarily consists of dividends, which are generally declared and paid by the Board of Directors of the Bank on a quarterly basis on common shares of the Bank held by DCB. While management of DCB expects to maintain the Corporation’s policy of paying these regular cash dividends in the future, no assurances can be given that any dividends will be declared or, if declared, what the amount of any such dividends will be. See Note 11 to the Consolidated Financial Statements for a description of dividend restrictions.

Selected Consolidated Financial Information and Other Data

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

Selected consolidated financial condition data:

	At December 31,
(In thousands)	2006		2005		2004		2003		2002
Total assets	$	681,872	$	690,896	$	611,685	$	553,297	$	522,998
Cash and cash equivalents		15,894		18,069		11,238		20,349		32,503
Securities available for sale		88,071		96,580		96,123		108,547		96,477
Net loans		547,021		547,510		478,487		400,616		366,487
Deposits		524,094		503,906		454,574		442,352		438,623
Borrowed funds		95,512		128,535		101,028		54,312		29,802
Shareholders’ equity		61,399		56,254		54,261		49,689		52,528

24

Selected Operating Data

	Year ended December 31,
(In thousands, except per share data)	2006		2005		2004		2003		2002
Interest and dividend income	$	44,407	$	36,566	$	27,813	$	26,591	$	30,882
Interest expense		21,315		13,750		7,802		7,973		10,142
Net interest income		23,092		22,816		20,011		18,618		20,740
Provision for loan losses		1,808		2,000		1,696		1,418		2,950
Net interest income after provision for loan losses		21,284		20,816		18,315		17,200		17,790
Noninterest income		5,619		5,654		7,618		6,624		6,259
Noninterest expense		16,452		15,665		15,985		16,508		18,010
Income before income tax		10,451		10,805		9,948		7,316		6,039
Income tax expense		3,098		3,249		2,973		2,287		2,036
Net income	$	7,353	$	7,556	$	6,975	$	5,029	$	4,003
Per Share Data:
Basic earnings per share	$	1.93	$	1.94	$	1.77	$	1.26	$	0.96
Diluted earnings per share	$	1.92	$	1.94	$	1.77	$	1.26	$	0.96
Dividends declared per share	$	0.55	$	0.48	$	0.48	$	0.39	$	0.34

Selected Financial Ratios:

	At or for the year ended December 31,
	2006			2005			2004			2003			2002
Interest rate spread		2.85	%		3.37	%		3.55	%		3.48	%		3.79	%
Net interest margin		3.48			3.66			3.72			3.75			4.24
Return on average equity		12.55			13.68			13.14			10.11			7.82
Return on average assets		1.05			1.15			1.13			0.91			0.76
Average equity to average assets		8.39			8.41			8.60			8.96			9.78
Dividend payout ratio		28.54			24.74			27.12			30.95			35.42
Allowance for loan losses as a percentage of loans past due over 90 days		64.05			114.53			140.75			151.18			114.55

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

Introduction

In the following pages, management presents an analysis of DCB’s consolidated financial condition and results of operations as of and for the year ended December 31, 2006, compared to prior years. This discussion is designed to provide shareholders with a more comprehensive review of the operating results and financial position than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the financial statements, the related footnotes and the selected financial data included elsewhere in this report.

25

Forward-Looking Statements

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

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

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

26

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.

Overview of 2006

The Bank provides customary retail and commercial banking services to its customers, including checking and savings accounts, time deposits, IRAs, safe deposit facilities, personal loans, commercial loans, real estate mortgage loans, installment loans, trust, and other wealth management services. The Bank also provides treasury management, bond registrar and paying agent services.

The Corporation, through the Bank, grants residential real estate, commercial real estate, consumer and commercial loans to customers located primarily in Delaware, Franklin, Licking, Morrow, Marion and Union Counties, Ohio. General economic conditions in the Corporation’s market area have been sound, including unemployment statistics, which have generally remained stable. Real estate values, especially in the Bank’s core geographic area, have been stable to rising for the last five years.

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

• The Corporation’s assets totaled $681,872 at December 31, 2006, compared to $690,896 at December 31, 2005, a decrease of $9,024, or 1.3%. Loans remained relatively flat on a year to year comparison, while securities were down from year to year. Because of the relatively flat loan growth, less funding was required to support the current level of balance sheet growth.

• Shareholders’ equity increased by $5,145 during 2006, as dividends paid of $2,100, net repurchase of 333,482 shares for a total of $2.4 million, and partially offset by a $225 after-tax increase in the fair value of securities designated as available for sale and period earnings of $7,353.

• Net income for 2006 totaled $7,353, a decrease of $203 or 2.7% over net income for 2005 of $7,556. Basic and diluted earnings per share totaled $1.93 and $1.92 for 2006 and $1.94 for 2005. Return on average assets was 1.05% and 1.15% for 2006 and 2005, while return on average equity was 12.55% and 13.68% over the same two years. The decrease in net income was related principally to slower growth in earning assets, run-off and margin pressures due to credit and pricing competition, higher borrowings and deposit costs associated with the current interest rate environment, and higher delinquencies and credit losses.

• With the flattening of the yield curve during the year, the Corporation’s net interest margin decreased from the preceding year. Net interest income, however increased to $21,284 for 2006 compared to $20,816 for 2005. The $468 increase was mainly attributed to increases in earning assets from year over year. However, the Company’s net interest margin continues to experience some pressure as much of the continued loan growth has been funded with borrowings and

27

	higher cost deposits. The Company also experienced slower growth in loan balances, competitive pricing pressures and credit issues attributed to the current interest rate environment.
•	The ability to generate earnings is impacted in part by competitive pricing on loans and deposits, and by changes in the rates on various U.S. Treasury, U. S. Government Agency and State and political subdivision issues which comprise a significant portion of the Bank’s investment portfolio. The Bank is competitive with interest rates and loan fees that it charges, in pricing and variety of accounts it offers to the depositor. The Corporation confirms this by completing regular rate shops and comparisons versus competing financial services companies. The dominant pricing mechanism on loans is the prime interest rate as published in the Wall Street Journal, on a fixed rate plus spread over funding costs. The interest spread depends on the overall account relationship and the creditworthiness of the borrower.
•	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, develop funding opportunities while earning an adequate interest rate margin.

Analysis of Financial Condition

The Corporation’s assets totaled $681,872 at December 31, 2006, compared to $690,896 at December 31, 2005, a decrease of $9,024, or 1.3%. Loans remained relatively flat on a year to year comparison, while securities were down from year to year. Because of the relatively flat loan growth, less funding was required to support the current level of balance sheet growth.

Cash and cash equivalents decreased $2,175, from December 31, 2005 to December 31, 2006. Total securities decreased $8,509, or 8.8%, from $96,580 at December 31, 2005 to $88,071 at December 31, 2006. Management reduced its investment portfolio because of reduced collateral and funding needs. Total securities, including FHLB securities decreased to $91,675 at year-end 2006, compared to $99,907 at year-end 2005. DCB invests primarily in U.S. Treasury notes, obligations of U.S. government agencies, municipal bonds, corporate obligations and mortgage-backed securities. Mortgage-backed securities include Federal Home Loan Mortgage Corporation (“FHLMC”), Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”) participation certificates and collateralized mortgage obligations (“CMOs”). The mortgage-backed securities portfolio, totaling $33,576 at year-end 2006, provides DCB with a continuing cash flow stream from principal repayments, which is utilized to fund other areas of the balance sheet. Management classifies securities as available for sale to provide DCB with the flexibility to redeploy funds into loans as demand warrants. DCB held no derivative securities or structured notes during any period presented.

Total loans decreased slightly, down $582, or 0.1%, from $553,045 at December 31, 2005 to $552,463 at December 31, 2006. The Bank has experienced a decline in loan balances due to unscheduled payoffs in the commercial portfolio due to intense competitive pricing and, on a positive note, from problem loan resolutions. Though slowing, The Bank continues to capture a large percentage of the economic development activity within its geographic region. Residential real estate and home equity loans increased $12,701, or 6.6%, from $193,787 at year-end 2005 to $206,488 at year-end 2006. The geographic

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area in which the Corporation operates continues to experience increases in the commercial and residential real estate activity. Generally, the consumer financing portfolios remained relatively stable or experienced small increases in loans outstanding, somewhat offset by the decline in indirect loans. The Bank’s local market continues to remain active with regard to the amount of commercial real estate development activity. Other loan categories in which the Corporation participates remained relatively stable or experienced small decreases in loans outstanding.

Total deposits increased $20,188, or 4.0%, from $503,906 at December 31, 2005 to $524,094 at December 31, 2006. This growth is mainly attributed to the increase in core deposit activity coupled with activity from the Corporation’s large public fund customers, brokered certificates of deposit, and money market accounts. Noninterest-bearing deposits increased $1,151, or 1.7%, from $68,977 at December 31, 2005 to $70,128 at December 31, 2006; while interest-bearing deposits increased $19,037, or 4.4%, from $434,929 to $453,966 during the same period. The Bank had approximately $32,053 in brokered certificates of deposit outstanding at December 31, 2006. Management intends to continue to develop new products and to monitor the rate structure of its deposit products to encourage growth in deposit liabilities. Total borrowings decreased $33,023, or 25.7%, from $128,535 at December 31, 2005 to $95,512 at December 31, 2006, in response to slower loan growth.

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. In addition, the Corporation has used other borrowings, generally from the FHLB, to fund its loan growth. Continued reliance on outside funding rather than lower cost deposits could increase the Corporation’s overall cost of funds. Interest-bearing demand and money market deposits increased from 49.7% of total interest-bearing deposits at year-end 2005 to 55.3% of total interest-bearing deposits at year-end 2006, as DCB experienced a $34,814, or 16.1%, increase in volume of such accounts. The increase in such deposits has been primarily due to economic trends resulting in the shift of customer funds from other investment alternatives to liquid savings products, such as the creation of new products for the Bank’s public fund customers. DCB experienced a decrease of $11,536 in savings deposits while such accounts decreased from 10.6% of total interest-bearing deposits at December 31, 2005 to 7.6% of total interest-bearing deposits at year-end 2006. Time deposits decreased $4,241, or 2.46%, comprising 37.1% of total interest-bearing deposits at year-end 2006 compared to 39.7% at year-end 2005.

Borrowed funds totaled $95,512 at year-end 2006 compared to $128,535 at year-end 2005. The decline was mainly due to the reduction in FHLB balances attributable to the slower loan growth the Corporation experienced. During 2006, management utilized long-term FHLB advances to fund the loan growth with lower long-term borrowing costs in the current economic environment. Typically, the Company has utilized a matched funding methodology for its long-term borrowing. This was done by matching the rates, terms and expected cash flows of its loans to the various products offered by the FHLB. This matching principle was used to not only provide funding, but also as a means of mitigating interest rate risk associated with originating longer-term fixed rate loans. The Corporation utilizes a number of additional borrowing alternatives of which provide additional balances that are available for the Corporation to use. As of December 31, 2006 additional, unused borrowings available to the Corporation through its various wholesale funding avenues with other bank credit facilities totaled $76,661.

Shareholders’ equity increased by $5,145 during 2006, as dividends paid of $2,098, and net repurchases of 11,684 shares for a total of $335, were more than offset by a $225 after-tax increase in the fair value of securities designated as available for sale and period earnings of $7,353.

During 2005, DCB Financial Corp and its Board of Directors authorized the repurchase of its outstanding shares of common stock. The stock repurchase plan authorizes the Company to make repurchases from

29

time to time in the open market or in privately negotiated transactions. As of March 12, 2007, no shares remained available for repurchase under the Corporation’s stock repurchase program.

Comparison of Results of Operations for the Years Ended December 31, 2006 and December 31, 2005

Net Income. Net income for 2006 totaled $7,353, a decrease of $203 or 2.7% over net income for 2005 of $7,556. Basic and diluted earnings per share totaled $1.93 and $1.92 for 2006 and $1.94 for 2005. Return on average assets was 1.05% and 1.15% for 2006 and 2005, while return on average equity was 12.55% and 13.68% over the same two years. The decrease in net income was related principally to slower growth in earning assets, run-off and margin pressures due to credit and pricing competition, higher borrowings and deposit costs associated with the current interest rate environment, and higher delinquencies and credit losses.

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

Net interest income was $21,284 for 2006 compared to $20,816 for 2005. The $468 increase was mainly attributed to the increase in interest earning assets during the year ended December 31, 2006. However, the Company’s net interest margin continues to experience some pressure as much of the continued loan growth has been funded with borrowings and higher cost deposits. The Company also experienced slower growth in loan balances, competitive pricing pressures and credit issues attributed to the current interest rate environment. To attract the additional deposits needed to fund loan growth, the Company continues to utilize products such as time deposits, brokered deposits and money market accounts, which generally carry higher costs compared to checking and savings products. These higher cost deposit products and other borrowings may continue to be utilized by management, which may negatively impact the net interest margin in future periods.

As a result of the these shifts in the components of interest-earning assets and interest-bearing liabilities, as well as movements in market interest rates, DCB’s net interest margin, which is calculated by dividing net interest income by average interest-earning assets, decreased from 3.66% in 2005 to 3.48% in 2006. Additionally, because of the increased competition in the Bank’s marketplace, management has recognized the importance of offering special rates on certain deposit products. These special deposit rates tend to negatively effect the Corporation’s net interest margin. It is likely that these offerings will continue to be offered to secure liquidity while maintaining market share.

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

DCB’s provision is determined based upon management’s estimate of the overall collectibility of loans within the portfolio as determined by ongoing credit reviews. The provision for the allowance for loan losses totaled $1,808 in 2006, compared to $2,000 in 2005. Net charge-offs for 2006 were $1,902, which

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represents 0.34% of average loans, compared to net charge-offs of $1,283, or 0.24% of average loans in 2005.

The allowance for loan losses decreased by $93 to $5,442 at year-end 2006 from $5,535 at year-end 2005. As a percent of gross loans, the allowance was largely proportional to loans at 0.99% and 1.00% at year-end 2006 and 2005 respectively. However the allocation of the allowance was more heavily weighted toward commercial and commercial real estate at December 31, 2006, as compared to 2005. DCB maintains an allowance for loan losses at a level to absorb management’s estimate of probable inherent credit losses in its portfolio. The percentage of charge-offs during 2006 was mainly attributed to the economic conditions that affected the commercial loan and indirect portfolios in the current year. Non-accrual loans for the period ending December 31, 2006 was $5.189 million compared to $2.185 million for the same period in 2005. The increase in non-accrual loans is mainly attributed to loans in the investment real estate sector that were not currently generating sufficient cash flow to service the debt. Delinquent loans over thirty days from period to period increased to 2.96% at December 31, 2006 from 1.31% at December 31, 2005, and again are mainly attributed to the real estate investment portfolio. Management is of the belief that real estate values are presently stable in the primary lending area. Management will continue to focus on activities related to monitoring, collection, and workout of delinquent loans. Management also continues to monitor exposure to industry segments, and believes that the loan portfolio remains adequately diversified. The Corporation’s provision for loan losses for 2006 was heavily influenced by the slower portfolio growth as well as an increase in the provision related to commercial real estate loans.

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

Noninterest Income. Total noninterest income decreased $35, or 0.6% to $5,619 in 2006 compared to $5,654 in 2005. The change in noninterest income revenues from period to period is mainly attributed to a decline on gains on residential mortgage loans sold within the secondary market and a decline in other noninterest income mainly as a result of receiving the final proceeds from the sale of the Corporation’s investment in ProCentury Corporation during 2005. The Corporation experienced increases in account service charges, trust, treasury management revenue and bank owned life insurance revenue. These increases are generally attributed to a higher number of accounts and customers served by the Corporation. Data processing services and transactional volume from the Bank’s retail products also remained slightly higher than the previous year’s levels.

Noninterest Expense. Total noninterest expense increased $787, or 5.0%, for the year ended December 31, 2006, compared to the same period in 2005. The increase was primarily due to increases in salary and employee benefits expenses, increase in professional services, advertising expenses and other operating expenses. The increase in salary and benefits expense is mainly associated with the addition of revenue generating staff in the lending and wealth management divisions, and to the addition of compliance and credit personnel to continue developing the infrastructure to support future growth. Occupancy expenses decreased mainly due to certain capitalized assets becoming fully depreciated. The aforementioned decrease in noninterest expenses for the year ended December 31, 2006, was then offset

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by an increase in advertising expenses related to the Corporation’s promotions, increase in professional expenses mainly attributable to services related to the Corporation’s planned branch expansion roll outs and related staffing and consulting expenses, and salaries and benefits due to commission and bonus expenses incurred and the addition of staff. The increases in compensation and employee benefits were planned increases related to normal merit increases and staffing associated with the Corporation’s continuing growth in retail operations. With its broad line of products and services, the Corporation expects to continue to manage and be able to meet the needs of the market and obtain the business needed to sustain the additional overhead expenses associated with new operations.

Income Taxes. The change in income tax expense is primarily attributable to the increase in tax exempt earnings offset by the 2006 reduction in pre-tax income. See Note 9 to the Consolidated Financial Statements for additional information regarding income taxes. The provision for income taxes totaled $3,098 in 2006 and $3,249 in 2005 resulting in effective tax rates of 29.6% and 30.1%.

Comparison of Results of Operations for the Years Ended December 31, 2005 and December 31, 2004

Net Income. Net income for 2005 totaled $7,556, an increase of $581 or 8.3% over net income for 2004 of $6,975. Basic and diluted earnings per share totaled $1.94 for 2005 and $1.77 for 2004. Return on average assets was 1.15% and 1.13% for 2005 and 2004, while return on average equity was 13.68% and 13.14% over the same two years. The increase in net income was related principally to growth in earning assets, the allocation of funds from lower yielding to higher yielding asset categories, stable credit trends and increased operating efficiencies.

The Corporation developed new products during 2005 to increase revenues associated with noninterest income. In order to provide comprehensive services in the wealth management area, the Corporation entered into an agreement with Raymond James Financial Services to offer a variety of investment and retirement services to complement the trust services currently offered.

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

Net interest income was $22,816 for 2005 compared to $20,011 for 2004. The $2,805 increase was mainly attributed to the continued increase in earning assets, coupled with the rising rate environment during the year ended December 31, 2005. However, the Company’s net interest margin continues to experience some pressure as much of the continued loan growth has been funded with borrowings and higher cost deposits. To attract the additional deposits needed to fund loan growth, the Company continues to utilize products such as time deposits, brokered deposits and money market accounts, which generally carry higher costs compared to checking and savings products. These higher cost deposit products and other borrowings may continue to be utilized by management, which may negatively impact the net interest margin in future periods.

As a result of the these shifts in the components of interest-earning assets and interest-bearing liabilities, as well as movements in market interest rates, DCB’s net interest margin, which is calculated by dividing net interest income by average interest-earning assets, decreased from 3.72% in 2004 to 3.66% in 2005. Additionally, because of the increased competition in the Bank’s marketplace, management has recognized the importance of offering special rates on certain deposit products. These special deposit rates tend to negatively effect the Corporation’s net interest margin. It is likely that these offerings will continue to be offered to secure liquidity while maintaining market share.

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

DCB’s provision is determined based upon management’s estimate of the overall collectibility of loans within the portfolio as determined by ongoing credit reviews. The provision for the allowance for loan and lease losses totaled $2,000 in 2005, compared to $1,696 in 2004. Net charge-offs for 2005 were $1,283, which represents 0.24% of average loans, compared to net charge-offs of $1,209, or 0.28% of average loans in 2004.

The allowance for loan losses increased by $717 to $5,535 at year-end 2005 from $4,818 at year-end 2004. As a percent of gross loans, the allowance was proportional at 1.00% at year-end 2005 and 2004. DCB maintains an allowance for loan losses at a level to absorb management’s estimate of probable inherent credit losses in its portfolio. The stable percentage of charge-offs during 2005 was mainly attributed to the improved economic conditions that affected the commercial loan portfolio in the current year, and to management’s continuing focus on activities related to monitoring, collection, and workout of delinquent loans. Management continues to monitor exposure to industry segments, and believes that the loan portfolio remains adequately diversified. During 2005, the Corporation’s loan charge-offs largely consisted of retail loans that were originated indirectly through its auto dealer network. The Corporation’s provision for loan losses for 2005 was heavily influenced by portfolio growth as well as an increase in the provision related to impaired loans.

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

Noninterest Income. Total noninterest income decreased $1,964, or 25.8% to $5,654 in 2005 compared to $7,618 in 2004. The decrease was mainly a result of the sale of the Corporation’s investment in ProCentury Corporation, a specialty property and casualty insurance holding company on April 20, 2004. The absence of the gain recognized on the sale of ProCentury investment was partially offset by an increase in the gain on loans sold in the secondary market in 2005. The Corporation also experienced increases in account service charges, trust, and wealth management activities. These increases are generally attributed to a higher number of accounts and customers served by the Corporation. Data processing services and transactional volume from the Bank’s retail products remained at or slightly higher than the previous year’s levels.

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Noninterest Expense.

Total noninterest expense decreased $320, or 2.0%, for the year ended December 31, 2005, compared to the same period in 2004. The decrease was primarily the result of a decline in state franchise taxes, and other noninterest expenses, and occupancy and equipment expenses due to certain capitalized assets becoming fully depreciated. The aforementioned decreases in noninterest expenses for the year ended December 31, 2005, were partially offset by an increase in advertising expenses incurred related to the Corporation’s promotions, increase in professional expenses incurred mainly attributable to services related to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), and salaries and benefits due to commission and bonus expenses incurred. The increases in compensation and employee benefits were planned increases related to normal merit increases and staffing associated with the Corporation’s continuing growth. The additions were mainly associated with revenue generating positions, or infrastructure positions associated with compliance and credit operations. With its broad line of products and services, the Corporation expects to continue to manage and be able to meet the needs of the market and obtain the business needed to sustain the additional overhead expenses associated with new operations.

Income Taxes. The change in income tax expense is primarily attributable to the increase in tax exempt earnings offset by the growth in pre-tax income. See Note 9 to the Consolidated Financial Statements for additional information regarding income taxes. The provision for income taxes totaled $3,249 in 2005 and $2,973 in 2004 resulting in effective tax rates of 30.1% and 29.9%.

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	Year ended December 31,
	2006							2005							2004
	Average		Interest					Average		Interest					Average		Interest
	outstanding		earned/		Yield/			outstanding		earned/		Yield/			outstanding		earned/		Yield/
	balance		paid		rate			balance		paid		rate			balance		paid		rate
Interest-earning assets:
Federal funds sold	$	4,499	$	177		3.93	%	$	238	$	13		5.59	%	$	451	$	8		1.77	%
Taxable securities		67,384		3,447		5.12			73,932		3,091		4.18			78,875		2,855		3.62
Tax-exempt securities (1)		29,272		942		3.22			23,861		800		3.35			19,380		709		3.66
Loans (2)		561,881		39,841		7.09			525,233		32,662		6.22			438,861		24,241		5.52
Total interest-earning assets		663,036		44,407		6.70			623,264		36,566		5.87			537,567		27,813		5.17
Noninterest-earning assets		34,927							33,609							79,696
Total assets	$	697,963						$	656,873						$	617,263
Interest-bearing liabilities:
Demand and money market deposits	$	254,134	$	9,749		3.84	%	$	195,959	$	4,267		2.18	%	$	168,880	$	1,441		0.85	%
Savings deposits		39,480		193		0.49			54,920		271		0.49			61,320		303		0.49
Certificates of deposit		163,302		7,239		4.43			173,216		5,128		2.96			143,359		3,334		2.33
Total deposits		456,916		17,181		3.76			424,095		9,666		2.28			373,559		5,078		1.36
Borrowed funds		97,224		4,134		4.25			125,013		4,084		3.27			107,826		2,724		2.53
Total interest-bearing liabilities		554,140		21,315		3.85			549,108		13,750		2.50			481,385		7,802		1.62
Noninterest-bearing liabilities		85,237							52,519							82,800
Total liabilities		639,377							601,627							564,185
Shareholders’ equity		58,586							55,246							53,078
Total liabilities and shareholders’ equity	$	697,963						$	656,873						$	617,263
Net interest income; interest rate spread			$	23,092		2.85	%			$	22,816		3.37	%			$	20,011		3.55	%
Net interest margin (net interest income as a percent of average interest-earning assets)						3.48	%						3.66	%						3.72	%
Average interest-earning assets to average interest-bearing liabilities						119.65	%						113.50	%						111.67	%

(1)	Interest on tax-exempt securities is reported on a historical basis without tax-equivalent adjustment. Interest on tax-exempt securities on a tax equivalent basis was $1,335 in 2006, $1,222 in 2005, and $1,076 in 2004.
(2)	Includes nonaccrual loans.

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

	Year ended December 31,
	2006 vs. 2005									2005 vs. 2004
	Increase									Increase
	(decrease)									(decrease)
	due to									due to
	Volume			Rate			Total			Volume			Rate			Total
Interest income attributable to:
Federal funds sold	$	239		$	(74	)	$	165		$	(4	)	$	9		$	5
Taxable securities		(275	)		631			356			(180	)		416			236
Tax-exempt securities		182			(40	)		142			165			(74	)		91
Loans		2,278			4,900			7,178			4,770			3,651			8,421
Total interest income		2,424			5,417			7,841			4,751			4,002			8,753
Interest expense attributable to:
Demand and money market deposits		1,266			4,216			5,482			231			2,595			2,826
Savings deposits		(76	)		(2	)		(78	)		(31	)		(1	)		(32	)
Certificates of deposit		(293	)		2,404			2,111			677			1,117			1,794
Borrowed funds		(908	)		958			50			433			927			1,360
Total interest expense		(11	)		7,576			7,565			1,310			4,638			5,948
Increase (decrease) in net interest income	$	2,435		$	(2,159	)	$	276		$	3,441		$	(636	)	$	2,805

Asset and Liability Management and Market Risk

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

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

36

Since income of The Bank is primarily derived from the excess of interest earned on interest-earning assets over the interest paid on interest-bearing liabilities, the ALCO Committee places great importance on monitoring and controlling interest rate risk. The measurement and analysis of the exposure of DCB’s primary operating subsidiary, The Delaware County Bank and Trust Company, to changes in the interest rate environment are referred to as asset/liability modeling. One method used to analyze DCB’s sensitivity to changes in interest rates is the “net portfolio value” (“NPV”) methodology.

NPV is generally considered to be the present value of the difference between expected incoming cash flows on interest-earning and other assets and expected outgoing cash flows on interest-bearing and other liabilities. For example, the asset/liability model that DCB currently employs attempts to measure the change in NPV for a variety of interest rate scenarios, typically for parallel and sustained shifts of +/-100 to +/-300 basis points in market rates. Presented below is an analysis depicting the changes in DCB’s interest rate risk as of December 31, 2006 and 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. These parallel shifts were used to more accurately represent the current interest rate environment in which DCB Financial operates.

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

The following table depicts the ALCO’s four most likely interest rate scenarios and their affect on NPV. At year-end 2006, management expects the interest rate cycle to remain flat or experience a slight down trend. The analysis presented in the table indicates that the banks balance sheet is neutral in either a rising or declining rate environment. This is contrary to previous year’s analysis which depicted more of a benefit in a declining rate cycle. As depicted below, in a rising rate environment a liability sensitive balance sheet results in a moderate decline in NPV. The Corporation has operated within the ALCO’s interest rate risk limits over the last three years.

Change in		December 31, 2006									December 31, 2005
Interest Rate		$ Change			% Change			NPV			$ Change			% Change			NPV
(Basis Points)		In NPV			In NPV			Ratio			In NPV			In NPV			Ratio
	+100	$	(2,145	)		(3	)%		11.8	%	$	(7187	)		(15	)%		5.98	%
Base			—			—			11.9			—			—			6.92
	-100		(324	)		(1	)		11.7			8,456			18			8.01
	-200		(4,855	)		(6	)		10.9			17,670			38			9.16
	-300		(14,531	)		(18	)		9.5			27,109			58			10.29

37

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

Liquidity

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

Cash and cash equivalents decreased $2,175, or 12.0%, from $18,069 at year-end 2005 to $15,894 at year-end 2006. Cash and cash equivalents at year-end 2006 represented 2.3% of total assets compared to 2.6% of total assets at year-end 2005. The Bank has the ability to borrow funds from the Federal Home Loan Bank and has various federal fund sources from correspondent banks, should DCB need to supplement its future liquidity needs in order to meet loan demand or to fund investment opportunities. The Bank also has the ability to issue term brokered certificate of deposits in the secondary market to provide additional funding outside of its normal geographical boundaries.

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

As summarized in the Consolidated Statements of Cash Flows, the most significant transactions which affected the DCB’s level of cash and cash equivalents, cash flows and liquidity during 2006 were securities purchases of $13,932; the net increase in loans of $976; the net increase in deposits of $20,188; securities sales of $12,397; net proceeds from FHLB repayments and federal funds purchased totaling $33,023; and the receipt of proceeds from maturities and repayments of securities of $9,786.

38

Capital Resources

As previously stated, total shareholders’ equity increased $5,145, mainly attributed to 2006 earnings for $7,353, partially offset by cash dividends paid of $2,100, repurchase of 333,482 shares for a total of $2.4 million, and a $225 after tax reduction in the fair value of securities designated as available for sale.

The final number of shares to be purchased through the repurchase plan announced in June 2005 and the price to be paid will depend upon the availability of shares, the prevailing market prices and any other considerations that may, in the opinion of DCB’s Board of Directors or management, affect the advisability of purchasing shares.

Tier 1 capital is shareholders’ equity excluding the net unrealized gains or losses on securities classified as available for sale and a percentage of mortgage-servicing rights. Total capital includes Tier 1 capital plus the allowance for loan losses, not to exceed 1.25% of risk weighted assets. Risk weighted assets are DCB’s total assets after such assets are assessed for risk and assigned a weighting factor based on their inherent risk.

DCB and its subsidiaries meet all regulatory capital requirements. DCB’s consolidated ratio of total capital to risk-weighted assets was 12.12% at year-end 2006, while the Tier 1 risk-based consolidated capital ratio was 11.14%. Regulatory minimums call for a total risk-based capital ratio of 8.0%, at least half of which must be Tier 1 capital. DCB’s consolidated leverage ratio, defined as Tier 1 capital divided by average assets, was 9.01% at year-end 2006 and exceeded the regulatory minimum for capital adequacy purposes of 4.0%.

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

Contractual Obligations

	Payment due by year
			Less than						More than
	Total		1 year		1-3 years		3-5 years		5 years
FHLB advances	$	93,736	$	19,000	$	6,929	$	16,562	$	51,245
Federal funds purchased and other short-term borrowings		1,776		1,776
Operating lease obligations		6,418		790		1,114		1,046		3,468
Loan and line of credit Commitments		142,921		142,921
Total contractual obligations	$	244,851	$	164,487	$	8,043	$	17,608	$	54,713

39

DCB FINANCIAL CORP
CONSOLIDATED BALANCE SHEETS
December 31, 2006 and 2005
(Dollars in thousands, except share amounts)

	2006			2005
ASSETS
Cash and due from financial institutions	$	15,894		$	18,069
Securities available for sale, at fair value		88,071			96,580
Loans held for sale, at lower of cost or market		1,455			1,640
Loans		552,463			553,045
Less allowance for loan losses		(5,442	)		(5,535	)
Net loans		547,021			547,510
Real estate owned		—			386
Investment in FHLB stock		3,604			3,327
Premises and equipment, net		9,468			8,854
Investment in unconsolidated affiliates		968			614
Bank-owned life insurance		9,396			8,898
Accrued interest receivable and other assets		5,995			5,018
Total assets	$	681,872		$	690,896
LIABILITIES
Deposits
Noninterest-bearing	$	70,428		$	68,977
Interest-bearing		453,666			434,929
Total deposits		524,094			503,906
Federal funds purchased and other short-term borrowings		1,776			25,610
Federal Home Loan Bank advances		93,736			102,925
Accrued interest payable and other liabilities		867			2,201
Total liabilities		620,473			634,642
SHAREHOLDERS’ EQUITY
Common stock, no par value, 7,500,000 shares authorized, 4,273,750 and 4,273,200 issued at December 31, 2006 and at December 31, 2005		3,780			3,780
Retained earnings		68,807			63,552
Treasury stock, at cost, 458,786 and 447,102 shares at December 31, 2006 and 2005		(10,841	)		(10,506	)
Accumulated other comprehensive loss		(347	)		(572	)
Total shareholders’ equity		61,399			56,254
Total liabilities and shareholders’ equity	$	681,872		$	690,896

See accompanying notes to consolidated financial statements.

40

DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, 2006, 2005 and 2004
(Dollars in thousands, except per share amounts)

	2006			2005			2004
Interest and dividend income
Loans	$	39,841		$	32,662		$	24,241
Taxable securities		3,447			3,091			2,855
Tax-exempt securities		942			800			709
Federal funds sold and other		177			13			8
Total interest income		44,407			36,566			27,813
Interest expense
Deposits		17,181			9,666			5,078
Borrowings		4,134			4,084			2,724
Total interest expense		21,315			13,750			7,802
Net interest income		23,092			22,816			20,011
Provision for loan losses		1,808			2,000			1,696
Net interest income after provision for loan losses		21,284			20,816			18,315
Noninterest income
Service charges on deposit accounts		2,660			2,592			2,543
Trust department income		738			668			646
Loss on sale of securities		—			—			(4	)
Loss on sale of assets		(7	)		(35	)		(140	)
Gain on sale of loans		350			407			179
Gain on sale of unconsolidated affiliate		—			—			2,638
Treasury management fees		562			469			512
Data processing servicing fees		336			310			288
Earnings on bank owned life insurance		498			441			450
Other		482			802			506
Total noninterest income		5,619			5,654			7,618
Noninterest expense
Salaries and other employee benefits		9,043			8,541			7,941
Occupancy and equipment		3,225			3,244			3,802
Professional services		455			417			274
Advertising		401			394			337
Postage, freight and courier		317			361			376
Supplies		249			247			243
State franchise taxes		548			458			544
Other		2,214			2,003			2,468
Total noninterest expense		16,452			15,665			15,985
Income before income taxes		10,451			10,805			9,948
Income tax expense		3,098			3,249			2,973
Net income	$	7,353		$	7,556		$	6,975
Basic earnings per common share	$	1.93		$	1.94		$	1.77
Diluted earnings per common share	$	1.92		$	1.94		$	1.77

See accompanying notes to consolidated financial statements.

41

DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended December 31, 2006, 2005, and 2004
(Dollars in thousands, except per share data)

	2006			2005			2004
Net income	$	7,353		$	7,556		$	6,975
Reclassification for realized loss on sale of securities included in net income, net of tax benefits		—			—			3
Unrealized gains (losses) on securities available for sale, net of related (taxes) benefits of $(116), $416 and $267 in 2006, 2005 and 2004		225			(807	)		(518	)
Comprehensive income	$	7,578		$	6,749		$	6,460
Accumulated other comprehensive income (loss)	$	(347	)	$	(572	)	$	235

See accompanying notes to consolidated financial statements.

42

DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Year ended December 31, 2006, 2005 and 2004
(Dollars in thousands, except per share amounts)

									Accumulated
									Other			Total
	Common		Retained			Treasury			Comprehensive			Shareholders’
	Stock		Earnings			Stock			Income (Loss)			Equity
Balance at January 1, 2004	$	3,780	$	52,775		$	(7,616	)	$	750		$	49,689
Net income		—		6,975			—			—			6,975
Unrealized losses on securities designated as available for sale, net of tax benefits		—		—			—			(515	)		(515	)
Dividends ($0.48 per share)		—		(1,888	)		—			—			(1,888	)
Balance at December 31, 2004		3,780		57,862			(7,616	)		235			54,261
Net income		—		7,556			—			—			7,556
Unrealized losses on securities designated as available for sale, net of tax benefits		—		—			—			(807	)		(807	)
Purchase of treasury stock-108,672 shares at cost		—		—			(2,890	)		—			(2,890	)
Dividends ($0.48 per share)		—		(1,866	)		—			—			(1,866	)
Balance at December 31, 2005		3,780		63,552			(10,506	)		(572	)		56,254
Net income		—		7,353			—			—			7,353
Unrealized gains on securities designated as available for sale, net of tax benefits		—		—			—			225			225
Purchase of treasury stock-11,684 shares at cost		—		—			(341	)		—			(341	)
Issuance of 550 shares of Treasury stock		—		—			6			—			6
Dividends ($0.55 per share)		—		(2,098	)		—			—			(2,098	)
Balance at December 31, 2006	$	3,780	$	68,807		$	(10,841	)	$	(347	)	$	61,399

See accompanying notes to consolidated financial statements.

43

DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 2006, 2005 and 2004
(Dollars in thousands)

	2006			2005			2004
Cash flows from operating activities
Net income	$	7,353		$	7,556		$	6,975
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation		966			1,049			1,508
Provision for loan losses		1,808			2,000			1,696
Deferred income taxes		(12	)		(2,288	)		(80	)
Loss on sale of securities		—			—			4
Gain on sale of loans		(350	)		(407	)		(179	)
Loss on sale of assets		7			35			140
Gain on sale of unconsolidated affiliate		—			—			(2,638	)
Premium amortization on securities, net		530			868			1,201
FHLB stock dividends		(210	)		(153	)		(106	)
Net change in loans held for sale		185			(518	)		(1,122	)
Earnings on bank owned life insurance		(498	)		(441	)		(450	)
Net changes in other assets and other liabilities		(2,342	)		144			(5,166	)
Net cash provided by operating activities		7,437			7,845			1,783
Cash flows used in investing activities
Securities available for sale
Purchases		(13,932	)		(32,413	)		(48,051	)
Maturities, principal payments, and calls		22,183			31,343			18,670
Sales		—			—			37,039
Purchase of Federal Home Loan Bank stock		(71	)		—			—
Net increase in loans		(976	)		(70,651	)		(79,528	)
Premises and equipment expenditures		(1,580	)		(1,057	)		(499	)
Proceeds from sale of unconsolidated affiliate		—			—			4,394
Proceeds from sale of premises and equipment		—			—			91
Investment in unconsolidated affiliates		(354	)		(319	)		(100	)
Net cash provided by (used in) investing activities		5,270			(73,097	)		(67,984	)
Cash flows provided by (used in) financing activities
Net change in deposits		20,189			49,332			12,222
Net change in federal funds purchased and other short-term borrowings		(23,835	)		20,395			596
Proceeds from Federal Home Loan Bank advances		29,000			171,261			154,459
Repayment of Federal Home Loan Bank advances		(38,189	)		(164,149	)		(108,339	)
Proceeds from sale of real estate owned		386			—			—
Purchase of Federal Home Loan Bank stock		(71	)		—			—
Purchase of treasury stock		(341	)		(2,890	)		—
Issuance of treasury stock		6			—			—
Cash dividends paid		(2,098	)		(1,866	)		(1,848	)
Net cash provided by (used in) financing activities		(14,882	)		72,083			57,090
Net change in cash and cash equivalents		(2,175	)		6,831			(9,111	)
Cash and cash equivalents at beginning of year		18,069			11,238			20,349
Cash and cash equivalents at end of year	$	15,894		$	18,069		$	11,238

See accompanying notes to consolidated financial statements.

44

DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 2006, 2005 and 2004
(Dollars in thousands)

	2006		2005			2004
Supplemental cash flow information
Interest paid	$	20,841	$	12,097		$	7,086
Income taxes paid	$	4,214	$	2,950		$	3,625
Supplemental non cash disclosures
Unrealized gain (losses) on securities designated as available for sale, net of related tax effects	$	225	$	(807	)	$	(515	)

See accompanying notes to consolidated financial statements.

45

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The consolidated financial statements include the accounts of DCB Financial Corp (DCB) and its wholly-owned subsidiaries, The Delaware County Bank and Trust Company (Bank), and DCB Title Services, LLC collectively referred to hereinafter as the Corporation. All intercompany transactions and balances have been eliminated in the consolidated financial statements.

Nature of Operations: DCB provides financial services through its 17 banking locations in Delaware, Franklin and Union Counties, Ohio. Its primary deposit products are checking, savings, and term certificate accounts and its primary lending products are residential mortgage, commercial and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and real estate. Commercial loans are expected to be repaid from cash flow operations of businesses. Real estate loans are secured by both residential and commercial real estate. The Bank also operates a trust department, engages in mortgage banking operations, and supplies data processing and business recovery services to other financial institutions.

Business Segments: While DCB’s management monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a corporation-wide basis. Accordingly, all of DCB’s operations are considered by management to be aggregated in one operating segment.

Use of Estimates: To prepare consolidated 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 value of financial instruments and status of contingencies are particularly subject to change.

Cash Flows: Cash and cash equivalents include cash on hand and deposits with other financial institutions. Net cash flows are reported for customer loan and deposit transactions, federal funds purchased and other short-term borrowings.

Securities: Securities may be classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities may be classified as available for sale as such securities might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported as a component of other comprehensive income. Realized gains and losses on sale of securities are recognized using the specific identification method. The Corporation does not engage in securities trading activities.

(Continued)

46

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Interest income includes premium amortization and accretion of discounts on securities. Gains and losses on sales are based on the net carrying value of the security sold, using the specific identification method. Securities are written down to fair value when a decline in fair value is other than temporary. The Corporation reviews the investment portfolio on a regular basis for other than temporary security impairments. In the event a specific security is determined to be other than temporarily impaired, the Corporation will reduce the carrying value of that security for the amount of the impairment.

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, deferred loan fees and costs and the allowance for loan losses. Loans held for sale are reported at the lower of cost or market, determined in the aggregate.

Interest income is reported using the interest method 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 is 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. 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 are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

A loan is impaired when full payment under the 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 charged off. If no specific impairment is identified an allowance based on loss history for similar types of loans may be applied. 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.

Concentrations of Credit Risk: The Bank grants commercial, real estate and consumer loans primarily in Delaware County, and the surrounding counties. Loans for commercial real estate, agricultural, construction and land development purposes comprise 46% of loans at year end 2006. Loans for commercial purposes comprise 8% of loans, and include loans secured by business assets and agricultural loans. Loans for residential real estate purposes, including home equity loans, aggregate 37% of loans. Loans for consumer purposes are primarily secured by consumer assets and represent 9% of total loans.

(Continued)

47

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Investment in Federal Home Loan Bank Stock: The Corporation is required as a condition of membership in the Federal Home Loan Bank of Cincinnati (FHLB) to maintain an investment in FHLB common stock. The stock is redeemable at par and, therefore, its cost is equivalent to its redemption value. The Corporation’s ability to redeem FHLB shares is dependent on the redemption practices of the FHLB of Cincinnati. At December 31, 2006, the FHLB of Cincinnati placed no restrictions on redemption of shares in excess of a member’s required investment in the stock.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the assets’ useful lives, estimated to be 7 to 39 years for buildings and improvements and five years for furniture, fixtures, and equipment, using the straight line method. An accelerated depreciation method is used for tax purposes. Premises and equipment are reviewed for impairment when events indicate the carrying amount may not be recoverable. Maintenance and repairs are expensed and major improvements are capitalized.

Foreclosed Assets: Assets acquired through foreclosure are initially recorded at the lower of cost or fair value less selling costs when acquired. If fair value declines below the recorded amount, a valuation allowance is recorded through expense. Holding costs after acquisition are expensed as incurred.

Servicing Assets: Servicing assets represent the allocated value of retained servicing on loans sold. Servicing assets are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the assets, using groupings of the underlying loans as to interest rates, and then secondarily as to geographic and prepayment characteristics. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance. The Corporation had net servicing assets of $57 and $76 at December 31, 2006 and 2005.

Bank Owned Life Insurance: The Corporation has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at the lower of its cash surrender value or its net redemption value.

Investment in unconsolidated affiliates: Unconsolidated affiliates consist of the Corporation’s common stock investments in an insurance services firm and a mezzanine financing fund. The Corporation carries its less than 10% investment in unconsolidated affiliates at cost.

Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts of temporary differences between carrying amounts and the 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.

Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

(Continued)

48

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

The computation of earnings per share is as follows for the years ended December 31:

	2006		2005		2004
Weighted-average common shares outstanding (basic)		3,816,322		3,890,717		3,934,760
Dilutive effect of assumed exercise of stock options		17,787		2,994		—
Weighted-average common shares outstanding (diluted)		3,834,109		3,893,711		3,934,760

Options to purchase 26,914 shares of common stock with a weighted-average exercise price of $30.70 were outstanding as of December 31, 2006, but were excluded from the computation of common share equivalents for the year then ended because the exercise price was greater than the average stock price.

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

The Corporation adopted the provisions of SFAS No. 123(R) effective January 1, 2006, using the modified prospective transition method, as permitted, and therefore has not restated its financial statements for prior periods. Under this method, the Corporation has applied the provisions of SFAS No. 123(R) to new equity-based awards and to equity-based awards modified, repurchased, or cancelled after January 1, 2006. In addition, the Corporation has recognized compensation cost for the portion of equity-based awards for which the requisite service period has not been rendered (“unvested equity-based awards”) that were outstanding as of January 1, 2006. The compensation cost recorded for unvested equity-based awards will be based on their grant-date fair value. For the year ended December 31, 2006, the Corporation recorded $44 in compensation cost for equity-based awards that vested during the year ended December 31, 2006. The Corporation has $375 of total unrecognized compensation cost related to non-vested equity-based awards granted under its stock option plan as of December 31, 2006, which is expected to be recognized over a weighted-average period of 3.5 years.

(Continued)

49

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

Prior to the adoption of SFAS No. 123(R), had any stock options been exercised, the Corporation would have presented tax benefits resulting from the exercise of stock options as operating cash flows in the Consolidated Statement of Cash Flows. SFAS No. 123(R) requires that cash flows from the exercise of stock options resulting from tax benefits in excess of recognized cumulative compensation cost (“excess tax benefits”) be classified as financing cash flows. The Company had received no tax benefits from option exercises for the year ended December 31, 2006. There were no options exercised during the years ended December 31, 2005 and 2004.

The Corporation accounted for its equity-based compensation awards prior to the adoption of SFAS No. 123(R) by applying APB Opinion No. 25 and related Interpretations, as permitted by SFAS No. 123. Accordingly, the Corporation did not recognize any compensation cost in its financial statements. Had compensation cost been recognized in accordance with the fair value recognition provisions of SFAS No. 123, the Corporation’s net earnings and earnings per share would have been reduced to the pro forma amounts indicated below for the twelve months ended December 31:

		2005			2004
		(In thousands,
		except per share data)
NET INCOME	As reported	$	7,556		$	6,975
	Stock-based compensation, net of tax		(16	)		(6	)
	Pro-forma	$	7,540		$	6,969
EARNINGS PER SHARE
BASIC	As reported	$	1.94		$	1.77
	Stock-based compensation, net of tax		—			—
	Pro-forma	$	1.94		$	1.77
DILUTED	As reported	$	1.94		$	1.77
	Stock-based compensation, net of tax		—			—
	Pro-forma	$	1.94		$	1.77

The fair value of each option granted 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, 2005 and 2004: dividend yield of 2.75%, 2.00% and 1.75% for 2006, 2005 and 2004, respectively; expected volatility of 12.00% for 2006 and 14.00% for 2005 and 2004, respectively; risk-free interest rates with 4.75% for 2006, 2005 and 4.25% for 2004, respectively; and expected lives of 10 years for each grant.

(Continued)

50

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

A summary of the status of the Corporation’s stock option plan as of December 31, 2006, and changes during the year is presented below:

				2006
				WEIGHTED
				AVERAGE
				EXERCISE
	SHARES			PRICE
Outstanding at beginning of year		40,687		$	25.31
Granted		34,532		$	29.94
Exercised		(428	)	$	30.26
Forfeited		(4,752	)	$	28.56
Outstanding at end of year		70,040		$	27.19
Options exercisable at year-end		8,959		$	24.49
Weighted-average fair value of options granted during the year				$	6.19
Aggregate intrinsic value				$	164

A summary of the status of the Corporation’s stock option plan as of December 31, 2005 and 2004 and changes during the years is presented below:

				2005				2004
				WEIGHTED				WEIGHTED
				AVERAGE				AVERAGE
				EXERCISE				EXERCISE
	SHARES			PRICE		SHARES		PRICE
Outstanding at beginning of year		15,105		$	23.40		—		—
Granted		26,219		$	25.74		15,105	$	23.40
Exercised		—			—		—		—
Forfeited		(637	)	$	23.40		—		—
Outstanding at end of year		40,687		$	25.31		15,105	$	23.40
Options exercisable at year-end		2,894		$	23.40		—		—
Weighted-average fair value of options granted during the year				$	4.68			$	3.44

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

NUMBER OUTSTANDING	RANGE OF EXERCISE PRICES
70,040	$23.40 — $30.70

(Continued)

51

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) consists solely of net unrealized gains (losses) on securities available for sale, which is recognized as a separate component of shareholders’ equity.

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

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

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

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

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

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

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

SFAS No. 156 applies to all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, or January 1, 2007 as to the Corporation, with earlier application permitted. The Corporation adopted SFAS No. 156 as of January 1, 2007 without material effect on the Corporation’s financial position or results of operations.

(Continued)

52

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

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

In September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 was issued to provide consistency between how registrants quantify financial statement misstatements.

Historically, there have been two widely-used methods for quantifying the effects of financial statement misstatements. These methods are referred to as the “roll-over” and “iron curtain” method. The roll-over method quantifies the amount by which the current year income statement is misstated. Exclusive reliance on an income statement approach can result in the accumulation of errors on the balance sheet that may not have been material to any individual income statement, but which may misstate one or more balance sheet accounts. The iron curtain method quantifies the error as the cumulative amount by which the current year balance sheet is misstated. Exclusive reliance on a balance sheet approach can result in disregarding the effects of errors in the current year income statement that results from the correction of an error existing in previously issued financial statements. We have historically used the roll-over method for quantifying identified financial statement misstatements.

SAB 108 established an approach that requires quantification of financial statement misstatements based on the effects of the misstatement on each of the company’s financial statements and the related financial statement disclosures. This approach is commonly referred to as the “dual approach” because it requires quantification of errors under both the roll-over and iron curtain methods.

SAB 108 allows registrants to initially apply the dual approach either by (1) retroactively adjusting prior financial statements as if the dual approach had always been used, or by (2) recording the cumulative effect of initially applying the dual approach as adjustments to the carrying values of assets and liabilities as of January 1, 2006, with an offsetting adjustment recorded to the opening balance of retained earnings. Use of this “cumulative effect” transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose.

Application of SAB 108 had no effect on the Corporation’s financial position or results of operations in 2006.

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” Specifically, FIN 48 prescribes a recognition threshold and a measurement attribute for the financial

(Continued)

53

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

statement recognition and measurement of a tax provision taken or expected to be taken on a tax return. FIN 48 also provides guidance on the related derecognition, classification, interest and penalties, accounting for interim periods, disclosure, and transition of uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006, or January 1, 2007 as to the Corporation. The Corporation adopted the requirements of FIN 48 on January 1, 2007, without material effect on the consolidated financial statements.

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

Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank of $1,000 and $3,143 was required to meet regulatory reserve and clearing balance requirements at year-end 2006 and 2005. The balances maintained in other financial institutions do not earn interest, but do provide an earnings credit used to offset transaction fees.

Dividend Restrictions: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to DCB or by DCB to shareholders. These restrictions pose no practical limit on the ability of the Bank or DCB to pay dividends at historical levels.

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or market conditions could significantly affect the estimates.

Advertising: Advertising costs are expensed as incurred. Advertising expense totaled $78, $143, and $178 for the years ended December 31, 2006, 2005 and 2004.

Reclassification: Certain amounts in the prior year consolidated financial statements have been reclassified to conform to the current year presentation.

(Continued)

54

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 2 — SECURITIES

The fair value of securities available for sale and the related unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

			Gross		Gross
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		Losses			Cost
2006
U.S. Government and agency obligations	$	21,360	$	2	$	(191	)	$	21,549
States and municipal obligations		24,510		106		(78	)		24,482
Corporate bonds		8,532		54		(1	)		8,479
Mortgage-backed securities		33,576		36		(488	)		34,028
Total debt securities		87,978		198		(758	)		88,538
Other securities		93		42		(8	)		59
Total	$	88,071	$	240	$	(766	)	$	88,597

			Gross		Gross
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		Losses			Cost
2005
U.S. Government and agency obligations	$	24,732	$	9	$	(351	)	$	25,074
States and municipal obligations		25,723		141		(225	)		25,807
Corporate bonds		8,025		18		(1	)		8,008
Mortgage-backed securities		38,016		109		(598	)		38,505
Total debt securities		96,496		277		(1,175	)		97,394
Other securities		84		38		(7	)		53
Total	$	96,580	$	315	$	(1,182	)	$	97,447

(Continued)

55

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 2 – SECURITIES (Continued)

The tables below indicate the length of time individual securities have been in a continuous unrealized loss position at December 31, 2006 and 2005:

2006
	(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
	(Dollars in thousands)
U.S. Government and agency obligations		5	$	4,330	$	(12	)		18	$	14,522	$	(179	)		23	$	18,852	$	(191	)
State and municipal obligations		13		3,861		(19	)		17		7,124		(59	)		30		10,985		(78	)
Corporate bonds		1		472		(1	)		—		—		—			1		472		(1	)
Mortgage-backed securities and other		21		4,544		(26	)		79		23,488		(470	)		100		28,032		(496	)
Total temporarily impaired securities		40	$	13,207	$	(58	)		114	$	45,134	$	(708	)		154	$	58,341	$	(766	)

2005
	(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
								(Dollars in thousands)
U.S. Government and agency obligations		12	$	10,805	$	(87	)		17	$	13,008	$	(264	)		29	$	23,813	$	(351	)
State and municipal obligations		23		9,851		(149	)		14		5,824		(76	)		37		15,675		(225	)
Corporate bonds		—		—		—			2		3,008		(1	)		2		3,008		(1	)
Mortgage-backed securities and other		65		17,582		(240	)		40		13,936		(365	)		105		31,518		(605	)
Total temporarily impaired securities		100	$	38,238	$	(476	)		73	$	35,776	$	(706	)		173	$	74,014	$	(1,182	)

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. Management is of the opinion that all unrealized losses are temporary as the fair values are expected to continue to increase as these securities approach maturity.

(Continued)

56

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 2 – SECURITIES (Continued)

The fair value of debt securities at year-end 2006 by contractual maturity was as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

	Fair
	Value
Due in one year or less	$	3,175
Due from one to five years		14,328
Due from five to ten years		17,344
Due after ten years		19,555
Mortgage-backed securities		33,576
	$	87,978

Sales and calls of securities were as follows.

	2006		2005			2004
Proceeds from sales and/or calls	$	12,397	$	15,263		$	37,039
Gross gains		—		1			—
Gross losses		—		(1	)		(4	)

At year-end 2006 and 2005, there were no holdings of securities of any one issuer, other than the U.S. government and agencies thereof, in an amount greater than 10% of shareholders’ equity.

Securities with a carrying amount of $87,443 and $96,156 at year-end 2006 and 2005 were pledged to secure public deposits and other obligations.

(Continued)

57

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 3 — LOANS

At December 31, 2006 and 2005, loans were comprised of the following:

	2006		2005
Commercial and industrial	$	44,369	$	47,498
Commercial real estate		200,821		202,649
Residential real estate and home equity		206,488		193,787
Real estate construction and land development		51,584		49,553
Consumer and credit card		48,680		58,653
		551,942		552,140
Add: Net deferred loan origination costs		521		905
Total loans receivable	$	552,463	$	553,045

Loans to principal officers, directors, and their related affiliates in 2006 in the normal course of business were as follows.

Beginning balance	$	12,978
New loans		14,547
Repayments		(551	)
Ending balance	$	26,974

(Continued)

58

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 4 — ALLOWANCE FOR LOAN LOSSES

Activity in the allowance for loan losses was as follows.

	2006			2005			2004
Beginning balance of year	$	5,535		$	4,818		$	4,331
Provision for loan losses		1,808			2,000			1,696
Loans charged-off		(2,335	)		(1,457	)		(1,385	)
Recoveries		434			174			176
Balance at end of year	$	5,442		$	5,535		$	4,818

Impaired loans were as follows at year-end.

	2006		2005		2004
Year-end loans with no allocated allowance for unconfirmed loan losses	$	—	$	1,845	$	—
Year-end loans with allocated allowance for unconfirmed loan losses		5,189		2,185		601
Total	$	5,189	$	4,030	$	601
Amount of the allowance for loan losses allocated to unconfirmed losses on impaired loans	$	1,562	$	1,060	$	360

	2006		2005		2004
Average of impaired loans during the year	$	2,584	$	1,807	$	709
Interest income recognized during impairment		—		—		—
Cash basis interest income recognized		—		101		—

Allowance on impaired loans was as follows at year-end.

	2006			2005			2004
Beginning balance	$	1,060		$	360		$	580
Provision related to impaired loans		945			940			535
Loans charge-offs (net of recoveries)		(443	)		(240	)		(755	)
Ending balance	$	1,562		$	1,060		$	360

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

(Continued)

59

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 4 — ALLOWANCE FOR LOAN LOSSES (continued)

Nonperforming loans were as follows at year-end.

	2006		2005		2004
Loans past due over 90 days still accruing interest	$	3,307	$	2,648	$	1,544
Nonaccrual loans		5,189		2,185		1,879
Total	$	8,496	$	4,833	$	3,423

Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Interest income that would have been recognized had nonperforming loans performed in accordance with contractual terms totaled $303, $127, and $128, for years ended December 31, 2006, 2005 and 2004, respectively. At December 31, 2006, 2005 and 2004, Management viewed all loans past due and still accruing interest as well-secured and in the process of collection.

(Continued)

60

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 5 — PREMISES AND EQUIPMENT

Year-end premises and equipment were as follows:

	2006			2005
Land	$	1,266		$	1,266
Buildings		8,598			8,403
Furniture and equipment		9,927			8,542
		19,791			18,211
Accumulated depreciation		(10,323	)		(9,357	)
	$	9,468		$	8,854

DCB has entered into operating lease agreements for branch offices and equipment, which expire at various dates through 2023, and provide options for renewals. Rental expense on lease commitments for 2006, 2005 and 2004 amounted to $737, $821 and $914. At December 31, 2006, the total future minimum lease commitments under these leases are summarized as follows.

2007	$	790
2008		588
2009		526
2010		523
2011		523
Thereafter		3,468
	$	6,418

NOTE 6 — INTEREST-BEARING DEPOSITS

Year-end interest-bearing deposits were as follows.

	2006			2005
Interest-bearing demand	$	74,282		$	84,194
Money market		176,451			132,025
Savings deposits		34,623			46,159
Time deposits
In denominations under $100,000		57,492			74,377
In denominations of $100,000 or more		110,818			98,174
	$	453,666		$	434,929
Weighted average interest rate		3.66	%		3.25	%

(Continued)

61

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 6 — INTEREST-BEARING DEPOSITS (Continued)

Scheduled maturities of time deposits for the next five years were as follows:

2007	$	140,408
2008		20,688
2009		6,470
2010		686
2011		58
	$	168,310

At December 31, 2006 and 2005 deposits received from officers, directors and their related affiliates totaled $3,211 and $2,405, respectively.

NOTE 7 — BORROWED FUNDS

Federal funds purchased and other short-term borrowings at December 31, 2006 were comprised of a demand note to the U.S. Treasury totaling $1,776. At December 31, 2005, short-term borrowings were comprised of a demand note to the U.S. Treasury totaling $1,681, federal funds purchased totaling $6,870 and $17.0 million of short-term borrowings from the Federal Reserve Board.

Advances from the Federal Home Loan Bank (FHLB) at year-end were as follows.

Interest	Maturing year		2006			2005
rate range	ending December 31,		(Dollars in Thousands)
2.76% - 4.33%		2006	$	—		$	11,985
3.84% - 5.25%		2007		19,000			14,000
2.79 % - 4.21%		2008		2,671			2,964
3.62% - 4.70%		2009		4,258			5,585
3.77% - 4.67%		2010		1,562			68,391
2.59% - 5.72%		Thereafter		66,245			—
			$	93,736		$	102,925
Weighted average interest rate				4.24	%		4.08	%

(Continued)

62

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 7 — BORROWED FUNDS (Continued)

As a member of the FHLB of Cincinnati, the Bank has the ability to obtain additional borrowings based on DCB Financial’s investment in FHLB stock and other qualified collateral. FHLB advances are collateralized by a blanket pledge of the Bank’s qualifying 1-4 family, multi-family, farm real estate, commercial real estate loan portfolios, and all shares of FHLB stock totaling $226,570 and $3,604, respectively, at December 31, 2006 and $172,352 and $3,327, respectively, at December 31, 2005.

At year-end 2006, required annual principal payments on FHLB advances were as follows:

2007	$	19,000
2008		2,671
2009		4,258
2010		1,562
2011		15,000
Thereafter		51,245
	$	93,736

NOTE 8 — RETIREMENT PLANS

The Corporation provides a 401(k) savings plan for all eligible employees. To be eligible, an individual must complete six months of employment and be 20 or more years of age. Under provisions of the Plan, a participant can contribute a certain percentage of their compensation to the Plan up to the maximum allowed by the IRS. The Corporation also matches a certain percentage of those contributions up to a maximum match of up to 3% of the participant’s compensation. The Corporation may also provide additional discretionary contributions. Employee voluntary contributions are vested immediately and Corporation contributions are fully vested after three years. The 2006, 2005 and 2004 expenses related to this plan were $146, $139 and $128.

The Corporation maintains a deferred compensation plan for the benefit of certain officers. The plan is designed to provide post-retirement benefits to supplement other sources of retirement income such as social security and 401(k) benefits. The amount of each officer’s benefit will generally depend on their salary, and their length of employment. The Corporation accrues the cost of this deferred compensation plan during the working careers of the officers. Expense under this plan totaled $54 in 2006 and $77 in 2005. The total accrued liability under this plan was $335 and $307 at December 31, 2006 and 2005, respectively.

The Corporation has purchased insurance contracts on the lives of the participants in the supplemental post-retirement benefit plan and has named the Corporation as the beneficiary. While no direct connection exists between the deferred compensation plan and the life insurance contracts, it is management’s current intent that the earnings on the insurance contracts be used as a funding source for benefits payable under the plan.

(Continued)

63

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 9 — INCOME TAXES

Income tax expense was as follows.

	2006			2005			2004
Current	$	3,110		$	5,537		$	3,053
Deferred		(12	)		(2,288	)		(80	)
Totals	$	3,098		$	3,249		$	2,973

The difference between financial statement tax provision and amounts computed by applying the statutory federal income tax rate to income before income taxes was as follows.

	2006			2005			2004
Income taxes computed at the statutory federal income tax rate	$	3,553		$	3,674		$	3,382
Tax exempt income		(521	)		(486	)		(468	)
Other		66			61			59
Totals	$	3,098		$	3,249		$	2,973
Effective tax rate		29.6	%		30.1	%		29.9	%

Year-end deferred tax assets and liabilities were comprised of the following.

	2006			2005
Deferred tax assets
Allowance for loan losses	$	1,850		$	1,882
Deferred compensation		136			130
Unrealized loss on securities available for sale		179			296
		2,165			2,308
Deferred tax liabilities
FHLB stock dividends		(406	)		(334	)
Deferred loan origination fees and costs		(82	)		(97	)
Leases		(76	)		(234	)
Depreciation		(293	)		(304	)
Mortgage servicing rights		(19	)		(26	)
Other		(4	)		(4	)
		(880	)		(999	)
Net deferred tax asset	$	1,285		$	1,309

Management is of the opinion that no valuation allowance is necessary with respect to the deferred tax asset based on the amount of taxes currently payable and available for carryback.

(Continued)

64

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 10 — COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

Some financial instruments such as loan commitments, credit lines, letters of credit and overdraft protection are issued to meet customer financing needs. These financing arrangements to provide credit typically have predetermined expiration dates, but can be withdrawn if certain conditions are not met. The commitments may expire without ever having been drawn on by the customer; therefore the total commitment amount does not necessarily represent future cash requirements. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used for loans, including obtaining various forms of collateral, such as real estate or securities at exercise of the commitment or letter of credit.

DCB grants retail, commercial and commercial real estate loans in central Ohio. DCB evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by DCB upon extension of credit, is based upon management’s credit evaluation of each customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income producing commercial properties.

The contractual amount of financing instruments with off-balance-sheet risk was as follows at year-end.

	2006				2005
	Fixed		Variable		Fixed		Variable
	Rate		Rate		Rate		Rate
Commitments to extend credit	$	2,342	$	63,356	$	8,552	$	51,490
Unused lines of credit and letters of credit	$	—	$	75,223	$	—	$	73,887

Commitments to make loans are generally made for periods of 30 days or less. The fixed rate loan commitments have interest rates ranging from 5.14% to 11.25% for 2006 and 4.75% to 7.99% in 2005. Maturities for loans subject to these fixed rate commitments range from up to 1 to 30 years. In the opinion of management, outstanding loan commitments equaled or exceeded prevalent market interest rates at December 31, 2006, such commitments were underwritten in accordance with normal loan underwriting policies, and all disbursements will be funded via normal cash flows from operations and existing excess liquidity.

Legal Proceedings

There is no pending material litigation, other than routine litigation incidental to the business of the Corporation and Bank. Further, there are no material legal proceedings in which any director, executive officer, principal shareholder or affiliate of the Corporation is a party or has a material interest, which is adverse to the Corporation or Bank. Finally, there is no litigation in which the Corporation or Bank is involved which is expected to have a material adverse impact on the financial position or results of operations of the Corporation or Bank.

(Continued)

65

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 11 — REGULATORY CAPITAL

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective-action regulations, involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet various capital requirements can initiate regulatory action.

The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.

The Bank met the well-capitalized requirements, as previously defined, at December 31, 2006. The classification as well capitalized is made periodically by regulators and is subject to change over time. Management does not believe any condition or events have occurred since the latest notification by regulators in 2006 that would have changed the classification.

(Continued)

66

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 11 — REGULATORY CAPITAL (Continued)

Actual and required capital ratios are presented below at year-end.

											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
2006
Total capital to risk-weighted assets
Consolidated	$	67,204		12.1	%	$	44,354		8.0	%		N/A		N/A
Bank		60,639		11.3			42,874		8.0		$	53,592		10.0	%
Tier 1 (core) capital to risk weighted assets
Consolidated		61,762		11.1			22,177		4.0			N/A		N/A
Bank		40,197		7.5			21,437		4.0			32,155		6.0
Tier 1 (core) capital to average assets
Consolidated		61,762		9.0			27,425		4.0			N/A		N/A
Bank		40,197		5.9			27,354		4.0			34,193		5.0
2005
Total capital to risk-weighted assets
Consolidated	$	62,353		11.5	%	$	43,331		8.0	%		N/A		N/A
Bank		60,422		11.2			43,237		8.0		$	54,046		10.0	%
Tier 1 (core) capital to risk weighted assets
Consolidated		56,818		10.5			21,665		4.0			N/A		N/A
Bank		39,887		7.4			21,618		4.0			32,427		6.0
Tier 1 (core) capital to average assets
Consolidated		56,818		8.3			27,263		4.0			N/A		N/A
Bank		39,887		5.9			27,263		4.0			34,079		5.0

Banking regulations limit capital distributions by the Bank. Generally, capital distributions are limited to undistributed net income for the current and prior two years. In addition, dividends may not reduce capital levels below the minimum regulatory requirements disclosed above.

(Continued)

67

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 12 — DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS

Carrying amount and estimated fair values of financial instruments were as follows at year-end.

	2006						2005
	Carrying			Fair			Carrying			Fair
	Amount			Value			Amount			Value
Financial assets
Cash and cash equivalents	$	15,894		$	15,894		$	18,069		$	18,069
Securities available for sale		88,071			88,071			96,580			96,580
Loans held for sale		1,455			1,455			1,640			1,640
Loans		552,463			551,851			553,045			552,973
FHLB stock		3,604			3,604			3,327			3,327
Financial liabilities
Noninterest-bearing deposits	$	(70,428	)	$	(70,428	)	$	(68,977	)	$	(68,977	)
Interest-bearing deposits		(453,666	)		(456,372	)		(434,929	)		(437,234	)
Federal funds purchased and other short-term borrowings		(1,776	)		(1,776	)		(25,610	)		(25,610	)
FHLB advances		(93,736	)		(91,936	)		(102,925	)		(106,249	)

The estimated fair value of cash and cash equivalents, loans held for sale, FHLB stock, noninterest bearing deposits, fed funds purchased and other short-term borrowings approximates the related carrying amounts. Estimated fair value for securities is based on quoted market values for individual securities or for equivalent securities. 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 values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. 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.

(Continued)

68

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 13 – PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

Condensed financial information of DCB Financial Corp was as follows.

CONDENSED BALANCE SHEETS
December 31, 2006 and 2005

	2006		2005
Assets
Cash and cash equivalents	$	1,118	$	41
Investment in Bank		39,834		39,302
Subordinated note from Bank		17,652		16,902
Investment in unconsolidated affiliate		968		614
Other assets		1,857		1,746
Total assets	$	61,429	$	58,605
Liabilities
Other liabilities	$	30	$	2,351
Shareholders’ Equity		61,399		56,254
Total liabilities and shareholders’ equity	$	61,429	$	58,605

CONDENSED STATEMENTS OF INCOME
Years ended December 31, 2006, 2005 and 2004

	2006		2005		2004
Income
Equity in earnings of Bank	$	7,658	$	7,548	$	5,411
Gain on sale of ProCentury Corporation		—		—		2,638
Other		565		276		46
Total income		8,223		7,824		8,095
Operating expenses		870		268		323
Income before income taxes		7,353		7,556		7,772
Federal income tax expense		—		—		797
Net income	$	7,353	$	7,556	$	6,975

(Continued)

69

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 14 – PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)

CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 2006, 2005 and 2004

	2006			2005			2004
Cash flows from operating activities
Net income	$	7,353		$	7,556		$	6,975
Adjustments to reconcile net income to cash provided by operating activities:
(Undistributed earnings of) excess distributions from Bank		(307	)		(808	)		452
Net change in other assets and liabilities		(2,432	)		(949	)		(3,330	)
Net cash from operating activities		4,614			5,799			4,097
Cash flows used in investing activities
Investment in unconsolidated affiliates		(354	)		(319	)		(100	)
Issuance of subordinated note to Bank		(750	)		(750	)		(2,652	)
Net cash used in investing activities		(1,104	)		(1,069	)		(2,752	)
Cash flows from financing activities
Cash dividends paid		(2,098	)		(1,866	)		(1,848	)
Purchase of treasury stock, net		(335	)		(2,890	)		—
Net cash from financing activities		(2,433	)		(4,756	)		(1,848	)
Net change in cash and cash equivalents		1,077			(26	)		(503	)
Cash and cash equivalents at beginning of year		41			67			570
Cash and cash equivalents at end of year	$	1,118		$	41		$	67

(Continued)

70

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 15 – CONCENTRATIONS

At December 31, 2006, approximately 14.2% of the Bank’s deposits were received from public institutions. These concentration pose possible liquidity and earnings risk to the Corporation. However, in the opinion of management, the potential risks associated with such deposit concentration is more than offset at December 31, 2006 by the Corporation’s available lending and borrowing capacity.

NOTE 16 – DETAILS OF OPERATING EXPENSES

The following table details the composition of occupancy and equipment expenses for the years ended December 31, 2006, 2005, and 2004.

	2006		2005		2004
Bank premises rent	$	486	$	482	$	477
Bank premises maintenance		398		415		380
Bank depreciation		281		279		286
Equipment lease		251		339		437
Equipment depreciation		493		453		629
Software maintenance		624		507		498
Other		692		769		1,095
Total	$	3,225	$	3,244	$	3,802

The following table details the composition of other operating expenses for the years ended December 31, 2006, 2005, and 2004.

	2006		2005		2004
ATM and debit cards	$	379	$	342	$	472
Telephone		374		338		422
Other		1,461		1,323		1,574
Total	$	2,214	$	2,003	$	2,468

(Continued)

71

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 17 – QUARTERLY FINANCIAL DATA (Unaudited)

The following tables summarizes the Corporation’s quarterly results for the years ended December 31, 2006 and 2005.

	THREE MONTHS ENDED
	December 31,		September 30,		June 30,		March 31,
	(In thousands, except per share data)
2006:
Total interest income	$	11,206	$	11,568	$	11,089	$	10,544
Total interest expense		5,623		5,731		5,240		4,721
Net interest income	$	5,583	$	5,837	$	5,849	$	5,823
Provision for losses on loans		438		390		420		560
Noninterest income		1,335		1,427		1,473		1,384
Noninterest expense		4,121		4,116		4,213		4,002
Income before income taxes	$	2,359	$	2,758	$	2,689	$	2,645
Federal income tax expense		695		823		795		785
Net income	$	1,664	$	1,935	$	1,894	$	1,860
Earnings per share:
Basic	$	0.44	$	0.51	$	0.50	$	0.49
Diluted	$	0.43	$	0.51	$	0.50	$	0.49

(Continued)

72

DCB FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
(Dollars in thousands)

NOTE 17 – QUARTERLY FINANCIAL DATA (Unaudited) (Continued)

	THREE MONTHS ENDED
	December 31,		September 30,		June 30,		March 31,
	(In thousands, except per share data)
2005:
Total interest income	$	10,055	$	9,559	$	8,846	$	8,106
Total interest expense		4,231		3,700		3,152		2,667
Net interest income	$	5,824	$	5,859	$	5,694	$	5,439
Provision for losses on loans		465		545		520		470
Noninterest income		1,435		1,350		1,397		1,472
Noninterest expense		3,861		3,805		3,901		4,098
Income before income taxes	$	2,933	$	2,859	$	2,670	$	2,343
Federal income tax expense		878		877		786		708
Net income	$	2,055	$	1,982	$	1,884	$	1,635
Earnings per share:
Basic	$	0.54	$	0.51	$	0.48	$	0.41
Diluted	$	0.54	$	0.51	$	0.48	$	0.41

(Continued)

73

REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
DCB Financial Corp
Lewis Center, Ohio

We have audited the accompanying consolidated balance sheets of DCB Financial Corp as of December 31, 2006, and 2005, and the related consolidated statements of income, changes in shareholders’ equity, comprehensive income, and cash flows for each of the three years in the period ended December 31, 2006. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of DCB Financial Corp as of December 31, 2006, and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

As more fully described in Note 1, the Corporation changed its method of accounting for share-based compensation plans in accordance with Statement of Financial Accounting Standards No. 123(R) as of January 1, 2006.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) the effectiveness of DCB Financial Corp’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of DCB Financial Corp’s internal control over financial reporting and an unqualified opinion on the effectiveness of DCB Financial Corp’s internal control over financial reporting.

/s/ GRANT THORNTON, LLP
Grant Thornton, LLP

Cincinnati, Ohio
March 15, 2007

74

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders of DCB Financial Corp

          We have audited management’s assessment, included in the accompanying Management Report on Internal Control over Financial Reporting, that DCB Financial Corp (DCB) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). DCB Financial Corp’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of DCB’s internal control over financial reporting based on our audit.

          We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

          A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

          Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

          In our opinion, management’s assessment that DCB Financial Corp maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the control criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, DCB Financial Corp has maintained effective internal control over financial reporting as of December 31, 2005, based on Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

          We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), DCB Financial Corp’s consolidated balance sheets as of December 31, 2006 and 2005, and the related statements of income, shareholders’ equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2006, and our report dated March 15, 2007, expressed an unqualified opinion on those financial statements.

GRANT THORNTON LLP

Cincinnati, Ohio
March 15, 2007

75

EX-21

EXHIBIT 21

SUBSIDIARIES OF DCB FINANCIAL CORP

1.	The Delaware County Bank and Trust Company Delaware, Ohio DCB Financial Corp owns 100%
2.	DCB Title Services, LLC Delaware, Ohio DCB Financial Corp owns 100%

76

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our reports dated March 15, 2007, accompanying the consolidated financial statements and management’s assessment of the effectiveness of internal control over financial reporting in the Annual Report of DCB Financial Corp (the Company) on Form 10-K for the year ended December 31, 2006. We hereby consent to the incorporation by reference of said report in the Registration Statements of DCB Financial Corp on Form S-3, filed with the Securities and Exchange Commission (the Commission) on March 30, 1999, the Company’s Form S-8, filed with the Commission on November 17, 1999, the Company’s Form S-8, filed with the Commission on May 9, 2002, and the Company’s Form S-8, filed with the Commission on June 18, 2004.

/s/ GRANT THORNTON LLP

Cincinnati, Ohio
March 15, 2007

77

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Jeffrey T. Benton, President and Chief Executive Officer of DCB Financial Corp, certify that:

1.	I have reviewed this annual report on Form 10-K of DCB Financial Corp;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) [This paragraph intentionally left blank.]

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 15, 2007	/s/ Jeffrey T. Benton
	(Signature)
	Jeffrey T. Benton Title: President and Chief Executive Officer

78

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, John A. Ustaszewski, Chief Financial Officer of DCB Financial Corp, certify that:

1.	I have reviewed this annual report on Form 10-K of DCB Financial Corp;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	[This paragraph intentionally left blank.]
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 15, 2007	/s/ John A. Ustaszewski
	(Signature)
	John A. Ustaszewski Title: Senior Vice President and Chief Financial Officer

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EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ENACTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of DCB Financial Corp (the “Company”) on Form 10-K for the period ending December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeffrey T. Benton, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

          (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

          (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Jeffrey T. Benton

Jeffrey T. Benton
President and Chief Executive Officer
March 15, 2007

80

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ENACTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of DCB Financial Corp (the “Company”) on Form 10-K for the period ending December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John A. Ustaszewski, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

          (3) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

          (4) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John A. Ustaszewski

John A. Ustaszewski
Senior Vice-President and Chief Financial Officer
March 15, 2007

81