DCB FINANCIAL CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: SEPTEMBER 30, 2004

OR

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

Commission file number: 0-22387

DCB Financial Corp
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(Exact name of registrant as specified in its charter)

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

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

(740) 657-7000
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(Registrant's telephone number)

Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 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 X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Exchange Act).

Yes X No
--------- ----------

As of November 5, 2004, the latest practicable date, 3,934,760 shares of the
registrant's no par value common stock were issued and outstanding.

DCB FINANCIAL CORP
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2004
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Table of Contents

PART I - FINANCIAL INFORMATION

DCB FINANCIAL CORP
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

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Item 1. Financial Statements

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See notes to the consolidated financial statements.

3.

DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)

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See notes to the consolidated financial statements.

4.

DCB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share data)
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See notes to the consolidated financial statements.

5.

DCB FINANCIAL CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

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See notes to the consolidated financial statements.

6.

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

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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the financial position of DCB Financial Corp. (the "Corporation") at September
30, 2004, and its results of operations and cash flows for the three and nine
month periods ended September 30, 2004 and 2003. All such adjustments are normal
and recurring in nature. The accompanying consolidated financial statements have
been prepared in accordance with the instructions of Form 10-Q and, therefore,
do not purport to contain all necessary financial disclosures required by
accounting principles generally accepted in the United States of America that
might otherwise be necessary in the circumstances, and should be read in
conjunction with financial statements, and notes thereto, of the Corporation for
the year ended December 31, 2003, included in its 2003 Annual Report. Refer to
the accounting policies of the Corporation described in the Notes to
Consolidated Financial Statements contained in the Corporation's 2003 Annual
Report. The Corporation has consistently followed these policies in preparing
this Form 10-Q.

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

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

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

Earnings per common share is net income divided by the weighted average number
of shares of common stock outstanding during the period. The weighted average
number of common shares outstanding was 3,934,760 for the three and nine months
ended September 30, 2004. The weighted average number of common shares
outstanding was 3,934,760 and 4,022,201 for the three and nine months ended
September 30, 2003. The Corporation has introduced and adopted a long-term stock
option plan in May of 2004, which provides for the issuance of up to 300,000
options. As of September 30, 2004, 14,917 shares have been granted, subject to a
five year vesting schedule. The fair value of granted options are not disclosed
as there is no pro forma effect on earnings or earnings per share for the three
and nine month periods ended September 30, 2004.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

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

The most significant accounting policies followed by the Corporation are
presented in Note 1 of Notes to Consolidated Financial Statements contained in
the Corporation's 2003 Annual Report. These policies, along with the disclosures
presented in the other financial statement notes and in this financial review,
provide information on how significant assets and liabilities are valued in the
financial statements and how those values are determined.

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7.

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

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NOTE 2 - SECURITIES

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

The table below indicates the length of time individual securities have been in
a continuous unrealized loss position at September 30, 2004:

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
recent increases in market interest rates. The fair values are expected to
recover as securities approach maturity dates.

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8.

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

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

At September 30, 2004, there were no holdings of securities of any one issuer,
other than the U.S. government and its agencies, in an amount greater than 10%
of shareholders' equity.

The amortized cost and estimated fair value of debt securities at September 30,
2004, by contractual maturity, are shown below. Actual maturities may differ
from contractual maturities because issuers may have the right to call or prepay
obligations. Mortgage-backed securities are shown separately since they are not
due at a single maturity date.

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9.

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

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NOTE 3 - LOANS AND LEASES

Loans and leases were as follows:

NOTE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES

Activity in the allowance for loan and lease losses was as follows:

Nonperforming loans were as follows:

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10.

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

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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations

INTRODUCTION

In the following pages, management presents an analysis of the consolidated
financial condition of DCB Financial Corp (the "Corporation") at September 30,
2004, compared to December 31, 2003, and the consolidated results of operations
for the three and nine months ended September 30, 2004, compared to the same
periods in 2003. This discussion is designed to provide shareholders with a more
comprehensive review of the operating results and financial position than could
be obtained from reading the consolidated financial statements alone. This
analysis should be read in conjunction with the consolidated financial
statements and related footnotes and the selected financial data included
elsewhere in this report.

FORWARD-LOOKING STATEMENTS

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

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

ANALYSIS OF FINANCIAL CONDITION

The Corporation's assets totaled $598,306 at September 30, 2004, compared to
$553,297 at December 31, 2003, an increase of $45,009, or 8.13%. The increase is
attributed to the Corporation's ability to continue to capture a growing share
of the economic development activity with its geographic region. This growth is
mainly attributable to the increases in commercial and commercial real estate,
in addition to residential real estate growth.

Cash and cash equivalents decreased $64 from December 31, 2003 to September 30,
2004. This decline is attributable to the use of cash and cash equivalents to
fund loan growth. Total securities decreased $9,941, or 9.16%, from $108,547 at
December 31, 2003 to $98,606 at September 30, 2004. The decrease was the result
of the proceeds from sales, maturities, calls and principal repayments not being
reinvested in order to fund loan growth. The Corporation invests primarily in
U.S. Treasury notes, 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") and Federal National Mortgage Association ("FNMA")
participation certificates.

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11.

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

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At September 30, 2004, all securities were designated as available for sale.
Management classifies securities as available for sale to provide the
Corporation with the flexibility to move funds into loans as demand warrants.
The mortgage-backed securities portfolio, totaling $38,575 at September 30,
2004, provides the Corporation with a constant cash flow stream from principal
repayments and interest payments. The Corporation held no structured notes
during any period presented.

Total loans and leases increased $55,679, or 13.75%, to $460,626 at September
30, 2004 from $404,947 at December 31, 2003. The increase is attributed mainly
to the continued growth of commercial and residential real estate and land
development, which were partially off set by a general decline in various
industrial and consumer lending categories. Other loan categories in which the
Corporation participates, commercial, industrial, and consumer financing,
remained relatively stable or experienced small declines in loans outstanding.
The Bank's local market continues to experience increases in the amount of
commercial real estate development activity. The Bank has no significant loan
concentration in any one industry.

Total deposits increased $16,310, or 3.69%, to $458,662 at September 30, 2004
from $442,352 at December 31, 2003. This is mainly due to the increase in public
fund interest bearing deposit account balances which management initiated during
the third quarter ending September 30, 2004. Noninterest-bearing deposits
decreased $10,466, or 13.34%, while interest-bearing deposits increased $26,776,
or 7.36%. The Corporation continues to use borrowings, generally FHLB
borrowings, to fund its loan growth. Total borrowings increased to $83,140 from
$54,312 in order to fund the loans growth during the nine months ended September
30, 2004. Continued reliance on outside funding could increase the Corporation's
overall cost of funds.

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2004 AND SEPTEMBER 30, 2003

NET INCOME. Net income for the three months ended September 30, 2004 totaled
$1,507, compared to net income of $1,012 for the same period in 2003. Earnings
per share was $.38 for the three months ended September 30, 2004 compared to
$.26 for the three months ended September 30, 2003. The increase in earnings is
mainly attributed to the increase in net interest margin of the Corporation.

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

Net interest income was $5,125 for the three months ended September 30, 2004,
compared to $4,455 for the same period in 2003. The $670 increase in the third
quarter 2004 compared to 2003 was mainly attributed to an increase in the margin
and increased loan balances. The increase in the margin is mainly attributable
to the rising rate of environment during the third quarter, which allowed
earning assets to reprice higher than liabilities and other borrowings. The
Asset/Liability Management Committee, which is responsible for determining
deposit rates, continues to closely monitor the Bank's cost of funds to take
advantage of pricing and cash flow opportunities.

PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES. The provision for loan and
lease losses totaled $497 for the three months ended September 30, 2004,
compared to $375 for the same period in 2003. The growth in the provision is
reflective of the overall growth in the Corporation's loan portfolio. Though
there was strong loan growth, credit quality continued to show improvement.
Non-accrual loans declined to $1.84 million at September 30, 2004 from $2.48
million at the end of the third quarter 2003, due primarily to repayments of
nonaccrual loans. Net charge-offs for the three months ended September 30, 2004
remained stable at $423, as compared to $422 for the three months ended
September 30, 2003.

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12.

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

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Annualized net charge-offs for the three months ended September 30, 2004 and
September 30, 2003 were 31 basis points. Delinquent loans over thirty days
improved from period to period, decreasing to 1.22% at September 30, 2004 from
2.10% at September 30, 2003. Management will continue to monitor the credit
quality of the lending portfolio and will recognize additional provisions in the
future to maintain the allowance for loan and lease losses at an appropriate
level. The allowance for loan and lease losses totaled $4,649, or 1.01% of total
loans and leases at September 30, 2004, compared to $4,331, or 1.07% of total
loans and leases at December 31, 2003.

NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income decreased
$124, or 8.61%, for the three months ended September 30, 2004, compared to the
same period in 2003. The decrease was mainly a result in a decline in the volume
of loans sold in the secondary market, as the Bank made a strategic decision to
retain a larger percentage of residential real estate loans.

During the third quarter, the Bank's noninterest income was aided by the
development of an overdraft assurance program for retail customers. This program
automatically funds overdrafted checks for eligible customers on a per item
service fee. Also during the quarter the Bank experienced an increase in losses
on sales of vehicles returned from lease, generally reflecting the current
softness in the pre-owned vehicle market.

Total noninterest expense decreased $211, or 5.22%, for the three months ended
September 30, 2004, compared to the same period in 2003. The decrease was
primarily the result of decreases in salaries and employee benefits, occupancy
and equipment expenses, and professional and legal fees. Management has reduced
staff through attrition, realignment and early retirement opportunities in order
to reduce overall salary and benefit costs. The decline in occupancy and
equipment expenses was mainly attributable to capitalized costs becoming fully
depreciated reducing depreciation expense for the 2004 quarter. The reduction in
professional and legal fees is mainly attributed to non-recurring legal costs
associated with shareholder matters in the third quarter 2003.

INCOME TAXES. The provision for income taxes totaled $609, for an effective tax
rate of 28.78%, for the three months ended September 30, 2004 and $469, for an
effective tax rate of 31.67%, for the three months ended September 30, 2003. The
decline in effective tax rate is primarily attributable to the increase in
tax-exempt municipal security holdings and an increase in bank-owned life
insurance contracts, whose earnings stream is tax-exempt.

COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
AND SEPTEMBER 30, 2003

NET INCOME. Net income for the nine months ended September 30, 2004 totaled
$5,371, compared to net income of $3,718 for the same period in 2003. Earnings
per share was $1.37 for the nine months ended September 30, 2004 compared to
$.93 for the nine months ended September 30, 2003. The increase in earnings is
mainly attributed to the sale of the Corporation's investment in ProCentury, an
unconsolidated affiliate, and an increase in net interest margin of the
Corporation.

NET INTEREST INCOME. Net interest income was $14,609 for the nine months ended
September 30, 2004, compared to $13,931 for the same period in 2003. The $678
increase for the nine months ended September 30, 2004, compared to the same
period in 2003 was mainly attributed to an increase in the Bank's spread, as
well as the growth in loan balances. The spread, or margin increase is generally
attributed to the current interest rate environment where loans have been
repricing upward at faster pace than deposit costs.

PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES. The provision for loan and
lease losses totaled $1,318 for the nine months ended September 30, 2004,
compared to $1,063 for the same period in 2003. The growth in the provision is
reflective of the overall growth in the Corporation's loan portfolio, and to a
lesser extent, the increase in net-

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13.

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

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charge offs between the two periods. Net charge-offs for the nine months ended
September 30, 2004 were $1,000 compared to net charge-offs of $902 for the same
period in 2003. Management will continue to monitor the credit quality of the
lending portfolio and will recognize additional provisions in the future to
maintain the allowance for loan and lease losses at an appropriate level. The
allowance for loan and lease losses totaled $4,649, or 1.01% of total loans and
leases at September 30, 2004, compared to $4,331, or 1.07% of total loans and
leases at December 31, 2003.

NONINTEREST INCOME AND NONINTEREST EXPENSE. Total noninterest income increased
$1,324, or 26.34%, for the nine months ended September 30, 2004, compared to the
same period in 2003. The increase was mainly a result of the sale of the
Corporation's investment in ProCentury Corporation, a specialty property and
casualty insurance holding company. The gain of $2.6 million, recognized on the
sale of ProCentury investment was partially offset by a decrease in the volume
of loans sold in the secondary market, which is mainly attributed to retaining
these loans within the retail portfolios. In addition, transactional volume from
the Bank's retail products remained at or below the previous year's levels.

Total noninterest expense decreased $495, or 3.97%, for the nine months ended
September 30, 2004, compared to the same period in 2003. The decrease was
primarily the result of decreases in salaries and employee benefits, occupancy
and equipment expenses, professional services and shareholder matters.
Management has reduced staff through attrition, realignment and early retirement
opportunities in order to reduce overall salary and benefit costs. A decline in
occupancy and equipment expenses was mainly attributable to capitalized costs
becoming fully depreciated reducing depreciation expense for the period. The
reduction in professional and legal fees is mainly attributed to non-recurring
legal costs associated with shareholder matters throughout 2003.

INCOME TAXES. The provision for income taxes totaled $2,293, for an effective
tax rate of 29.92%, for the nine months ended September 30, 2004 and $1,704, or
an effective tax rate of 31.43%, for the nine months ended September 30, 2003.
As stated previously the decline in the effective tax rate is attributed to an
increase in tax-exempt revenue derived from tax exempt securities and the
earnings on bank-owned life insurance.

LIQUIDITY

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

Cash and cash equivalents decreased $64, or .31%, to $20,285 at September 30,
2004 compared to $20,349 at December 31, 2003. Cash and equivalents represented
3.39% of total assets at September 30, 2004 and 3.68% of total assets at
December 31, 2003. The Corporation has the ability to borrow funds from the
Federal Home Loan Bank and has various correspondent banking partners to
purchase overnight federal funds should the Corporation need to supplement its
future liquidity needs. The Corporation also has the ability to issue brokered
time deposits to supplement deposits raised from its customer base. Management
believes the Corporation's liquidity position is adequate based on its current
level of cash, cash equivalents, core deposits, the stability of its other
funding sources and the support provided by its capital base.

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14.

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

- --------------------------------------------------------------------------------

CAPITAL RESOURCES

Total shareholders' equity increased $3,683 between December 31, 2003 and
September 30, 2004. The increase was primarily due to period earnings of $5,371,
partially offset by $232 after-tax decrease in accumulated other comprehensive
income and the declaration of $1,456 in dividends.

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

The Corporation and its subsidiaries meet all regulatory capital requirements.
The ratio of total capital to risk-weighted assets was 11.63% at September 30,
2004, while the Tier 1 risk-based capital ratio was 10.69%. Regulatory minimums
call for a total risk-based capital ratio of 8.0%, at least half of which must
be Tier 1 capital. The Corporation's leverage ratio, defined as Tier 1 capital
divided by average assets, was 8.79% at September 30, 2004.

The following table sets forth the Corporation's obligations and commitments to
make future payments under contract as of September 30, 2004.

In the opinion of management, all loan commitments equal or exceed market rates
of interest.

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15.

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

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

ASSET AND LIABILITY MANAGEMENT AND MARKET RISK

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

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

The Corporation's 2003 Annual Report includes a table depicting the changes in
the Corporation's interest rate risk as of December 31, 2003, as measured by
changes in NPV for instantaneous and sustained parallel shifts of -100 to +300
basis points in market interest rates. Management believes that no events have
occurred since December 31, 2003 that would significantly change their ratio of
rate sensitive assets to rate sensitive liabilities.

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

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

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16.

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

- --------------------------------------------------------------------------------

Item 4. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
September 30, 2004, pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective as of
September 30, 2004, in timely alerting them to material information relating to
the Company (including its consolidated subsidiaries) required to be included in
the Company's periodic SEC filings.

There was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended September 30, 2004, that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.

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17.

DCB FINANCIAL CORP
FORM 10-Q
Quarter ended September 30, 2004
PART II - OTHER INFORMATION

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Item 1 - Legal Proceedings:
There are no matters required to be reported under this item.

Item 2 - Changes in Securities:
There are no matters required to be reported under this item.

Item 3 - Defaults Upon Senior Securities:
There are no matters required to be reported under this item.

Item 4 - Submission of Matters to a Vote of Security Holders:
There are no matters required to be reported under this item.

Item 5 - Other Information:
There are no matters required to be reported under this item.

Item 6 - Exhibits and Reports on Form 8-K:

(a) Exhibits - The following exhibits are filed as a part of this
report:

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18.

DCB FINANCIAL CORP

SIGNATURES

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

DCB FINANCIAL CORP
-------------------------------------
(Registrant)

Date: November 5, 2004 /s/ Jeffrey Benton
---------------- -------------------------------------
(Signature)
Jeffrey Benton
President and Chief Executive Officer

Date: November 5, 2004 /s/ John A. Ustaszewski
---------------- -------------------------------------
(Signature)
John A. Ustaszewski
Vice President and Chief Financial
Officer

19.

DCB FINANCIAL CORP

INDEX TO EXHIBITS

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20.