Edgar Filing: DNB FINANCIAL CORP /PA/

dnbjune2011.htm

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: June 30, 2011

[ ] 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: 1-34242

DNB Financial Corporation

(Exact name of registrant as specified in its charter)

Pennsylvania	23-2222567
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

4 Brandywine Avenue - Downingtown, PA 19335

(Address of principal executive offices and Zip Code)

(610) 269-1040

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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 x

No o

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

Yes x

No o

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

	Large accelerated filer o		Accelerated filer o
	Non-accelerated filer o		Smaller reporting company x

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

Yes o

No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock ($1.00 Par Value)

(Class)

2,679,467 (Shares Outstanding as of August 10, 2011)

DNB FINANCIAL CORPORATION AND SUBSIDIARY

INDEX

	PART I - FINANCIAL INFORMATION	PAGE NO

ITEM 1.	FINANCIAL STATEMENTS (Unaudited):

	CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
	June 30, 2011 and December 31, 2010	3

	CONSOLIDATED STATEMENTS OF OPERATIONS
	Three and Six Months Ended June 30, 2011 and 2010	4

	CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME	5
	Six Months Ended June 30, 2011 and 2010

	CONSOLIDATED STATEMENTS OF CASH FLOWS
	Six Months Ended June 30, 2011 and 2010	6

	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	7

ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK,	40

ITEM 4T.	CONTROLS AND PROCEDURES	41

	PART II - OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	41

ITEM 1A.	RISK FACTORS	41

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	42

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	42

ITEM 4.	REMOVED AND RESERVED	42

ITEM 5.	OTHER INFORMATION	42

ITEM 6.	EXHIBITS	42

SIGNATURES		43

EXHIBIT INDEX

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

DNB Financial Corporation and Subsidiary

Consolidated Statements of Financial Condition (Unaudited)

	June 30,			December 31,
(Dollars in thousands, except share and per share data)	2011			2010
Assets
Cash and due from banks	$	30,479		$	18,360
Federal funds sold		—			8,000
Cash and cash equivalents		30,479			26,360
AFS investment securities (amortized cost of $115,528 and $144,205)		115,849			142,161
HTM investment securities (fair value of $40,008 and $8,723)		39,780			8,431
Total investment securities		155,629			150,592
Loans and leases		417,473			396,171
Allowance for credit losses		(6,443	)		(5,884	)
Net loans and leases		411,030			390,287
Restricted stock		3,898			4,201
Office property and equipment, net		8,073			8,248
Accrued interest receivable		2,392			2,283
OREO & other repossessed property		3,966			4,324
Bank owned life insurance (BOLI)		8,257			8,137
Intangible assets		185			160
Net deferred taxes		3,056			3,822
Other assets		3,032			3,918
Total assets	$	629,997		$	602,332
Liabilities and Stockholders’ Equity
Liabilities
Non-interest-bearing deposits	$	64,756		$	58,948
Interest-bearing deposits:
NOW		168,186			163,104
Money market		114,309			89,944
Savings		44,123			42,521
Time		127,246			138,229
Total deposits		518,620			492,746
Federal Home Loan Bank of Pittsburgh (FHLBP) advances		20,000			25,000
Repurchase agreements		29,196			23,349
Junior subordinated debentures		9,279			9,279
Other borrowings		610			2,602
Total borrowings		59,085			60,230
Accrued interest payable		468			527
Other liabilities		3,128			3,621
Total liabilities		581,301			557,124
Stockholders’ Equity
Preferred stock, $10.00 par value;
1,000,000 shares authorized; $1,000 liquidation preference per share; 11,750 issued		11,556			11,541
Common stock, $1.00 par value;
10,000,000 shares authorized; 2,874,694 issued		2,888			2,884
Stock warrants		151			151
Treasury stock, at cost; 202,639 and 213,545 shares, respectively		(4,404	)		(4,515	)
Surplus		35,333			35,294
Retained earnings		3,903			2,069
Accumulated other comprehensive loss, net		(731	)		(2,216	)
Total stockholders’ equity		48,696			45,208
Total liabilities and stockholders’ equity	$	629,997		$	602,332
See accompanying notes to unaudited consolidated financial statements.

DNB Financial Corporation and Subsidiary

Consolidated Statements of Operations (Unaudited)

	Three Months Ended June 30				Six Months Ended June 30
(Dollars in thousands, except per share data)	2011		2010		2011		2010
Interest Income:
Interest and fees on loans and leases	$	5,675	$	5,239	$	11,281	$	10,370
Interest and dividends on investment securities:
Taxable		939		1,245		1,776		2,693
Exempt from federal taxes		1		19		1		64
Interest on cash and cash equivalents		19		23		28		50
Total interest and dividend income		6,634		6,526		13,086		13,177
Interest Expense:
Interest on NOW, money market and savings		280		504		577		1,134
Interest on time deposits		584		765		1,184		1,653
Interest on FHLB advances		211		328		438		849
Interest on repurchase agreements		39		54		76		119
Interest on junior subordinated debentures		76		100		156		220
Interest on other borrowings		21		21		53		43
Total interest expense		1,211		1,772		2,484		4,018
Net interest income		5,423		4,754		10,602		9,159
Provision for credit losses		426		400		852		826
Net interest income after provision for credit losses		4,997		4,354		9,750		8,333
Non-interest Income:
Service charges		265		329		541		672
Wealth management		221		200		429		416
Increase in cash surrender value of BOLI		60		62		120		123
Gain on sale of investment securities, net		1		279		2		975
Gain on sale of loans		93		—		225		—
Other fees		307		282		591		535
Total non-interest income		947		1,152		1,908		2,721
Non-interest Expense:
Salaries and employee benefits		2,145		2,115		4,345		4,218
Furniture and equipment		319		363		650		722
Occupancy		447		399		973		855
Professional and consulting		264		319		563		585
Advertising and marketing		191		177		347		281
Printing and supplies		45		44		82		85
FDIC insurance		117		209		309		420
FHLB prepayment penalties		—		—		—		560
Other expenses		564		520		1,077		1,022
Total non-interest expense		4,092		4,146		8,346		8,748
Income before income tax expense		1,852		1,360		3,312		2,306
Income tax expense		564		413		1,009		684
Net income	$	1,288	$	947	$	2,303	$	1,622
Preferred stock dividends and accretion of discount		154		155		309		309
Net income available to Common Shareholders	$	1,134	$	792	$	1,994	$	1,313
Earnings per common share:
Basic	$	0.43	$	0.30	$	0.75	$	0.50
Diluted	$	0.42	$	0.30	$	0.74	$	0.50
Cash dividends per common share	$	0.03	$	0.03	$	0.06	$	0.06
Weighted average common shares outstanding:
Basic		2,670,406		2,631,824		2,667,394		2,626,100
Diluted		2,689,998		2,631,855		2,692,813		2,626,116
See accompanying notes to unaudited consolidated financial statements.

DNB FINANCIAL CORPORATION AND Subsidiary

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Unaudited)

(Dollars in thousands)

	Preferred Stock		Common Stock		Stock Warrants		Treasury Stock			Surplus		Retained Earnings			Accumulated Other Compre- hensive Loss			Total

Balance at January 1, 2011	$	11,541	$	2,884	$	151	$	(4,515	)	$	35,294	$	2,069		$	(2,216	)	$	45,208
Comprehensive income:
Net income for six months ended June 30, 2011		—		—		—		—			—		2,303			—			2,303
Other comprehensive income, net of tax:
Accretion of discount on AFS to HTM reclassification		—		—		—		—			—		—			1			1
Unrealized gains on AFS securities, net		—		—		—		—			—		—			1,484			1,484
Total comprehensive income		—		—		—		—			—		—			—			3,788
Preferred stock discount accretion		15		—		—		—			—		(15	)		—			—
Restricted stock compensation expense		—		4		—		—			26		—			—			30
Stock option compensation		—		—		—		—			13		—			—			13
Cash dividends ($0.06 per share)		—		—		—		—			—		(160	)		—			(160	)
Cash dividends-Preferred		—		—		—		—			—		(294	)		—			(294	)
Sale of treasury shares to 401(k) (10,906 shares)		—		—		—		111			—		—			—			111
Balance at June 30, 2011	$	11,556	$	2,888	$	151	$	(4,404	)	$	35,333	$	3,903		$	(731	)	$	48,696

	Preferred Stock		Common Stock		Stock Warrants		Treasury Stock			Surplus		(Accumulated Deficit) Retained Earnings			Accumulated Other Compre- hensive (Loss) Income			Total

Balance at January 1, 2010	$	11,511	$	2,875	$	151	$	(4,727	)	$	35,179	$	(666	)	$	(1,447	)	$	42,876
Comprehensive income:
Net income for six months ended June 30, 2010		—		—		—		—			—		1,622			—			1,622
Other comprehensive income, net of tax:
Unrealized gains on AFS securities, net		—		—		—		—			—		—			1,610			1,610
Total comprehensive income		—		—		—		—			—		—			—			3,232
Preferred stock discount accretion		15		—		—		—			—		(15	)		—			—
Restricted stock compensation expense		—		5		—		—			57		—			—			62
Stock option compensation		—		—		—		—			5		—			—			5
Cash dividends ($0.06 per share)		—		—		—		—			—		(158	)		—			(158	)
Cash dividends-Preferred		—		—		—		—			—		(294	)		—			(294	)
Sale of treasury shares to 401(k) (16,231 shares)		—		—		—		106			—		—			—			106
Balance at June 30, 2010	$	11,526	$	2,880	$	151	$	(4,621	)	$	35,241	$	489		$	163		$	45,829

See accompanying notes to unaudited consolidated financial statements.

DNB Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended June 30,
(Dollars in thousands)	2011			2010
Cash Flows From Operating Activities:
Net income	$	2,303		$	1,622
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		1,198			1,736
Provision for credit losses		852			826
Unvested stock amortization		43			67
Net gain on sale of securities		(2	)		(975	)
Net loss on sale and write down of OREO and other repossessed property		1			4
(Increase) decrease in accrued interest receivable		(109	)		287
Decrease in other assets		886			862
Earnings from investment in BOLI		(120	)		(123	)
Decrease in accrued interest payable		(59	)		(187	)
Increase in deferred tax benefit (expense)		—			171
Gain on sale of loans		(225	)		—
Decrease in other liabilities		(560	)		(736	)
Net Cash Provided By Operating Activities		4,208			3,554
Cash Flows From Investing Activities:
Activity in available-for-sale securities:
Sales		15,762			114,964
Maturities, repayments and calls		19,895			19,645
Purchases		(27,944	)		(158,674	)
Activity in held-to-maturity securities:
Sales		—			29,855
Maturities, repayments and calls		2,666			5,843
Purchases		(13,932	)		(2,137	)
Net decrease (increase) in restricted stock		303			(298	)
Proceeds from sale of loans		2,890			—
Net increase in loans and leases		(26,241	)		(10,683	)
Purchases of premises and equipment		(279	)		(211	)
Proceeds from sale of OREO and other repossessed property		424			1,268
Net Cash Used By Investing Activities		(26,456	)		(428	)
Cash Flows From Financing Activities:
Net increase (decrease) in deposits		25,874			(5,969	)
Repayment of FHLB advances		(5,000	)		(23,000	)
Net increase in short term repurchase agreements		5,847			10,906
Decrease in lease obligations		(11	)		(10	)
Dividends paid		(454	)		(452	)
Sale of treasury stock, net		111			106
Net Cash Provided by (Used By) Financing Activities		26,367			(18,419	)
Net Change in Cash and Cash Equivalents		4,119			(15,293	)
Cash and Cash Equivalents at Beginning of Period		26,360			43,832
Cash and Cash Equivalents at End of Period	$	30,479		$	28,539
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest	$	2,543		$	4,205
Income taxes		1,159			670
Supplemental Disclosure of Non-cash Flow Information:
Transfer securities from AFS to HTM, at fair value (amortized cost of $20,228)		20,112			—
Transfers from loans and leases to real estate owned		—			483
See accompanying notes to unaudited consolidated financial statements.

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of DNB Financial Corporation (referred to herein as the "Corporation" or "DNB") and its subsidiary, DNB First, National Association (the "Bank") have been prepared in accordance with the instructions for Form 10-Q and therefore do not include certain information or footnotes necessary for the presentation of financial condition, statement of operations and statement of cash flows required by generally accepted accounting principles. However, in the opinion of management, the consolidated financial statements reflect all adjustments (which consist of normal recurring adjustments) necessary for a fair presentation of the results for the unaudited periods. Prior amounts not affecting net income are reclassified when necessary to conform to current period classifications. The results of operations for the three and six-month periods ended June 30, 2011 are not necessarily indicative of the results which may be expected for the entire year. The consolidated financial statements should be read in conjunction with the Annual Report and report on Form 10-K for the year ended December 31, 2010.

Subsequent Events-- Management has evaluated events and transactions occurring subsequent to June 30, 2011 for items that should potentially be recognized or disclosed in these Consolidated Financial Statements. The evaluation was conducted through the date these financial statements were issued.

NOTE 2: INVESTMENT SECURITIES

The amortized cost and estimated fair values of investment securities, as of the dates indicated, are summarized as follows:

	June 30, 2011
(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Held To Maturity
Government Sponsored Entities (GSE) mortgage-backed securities	$	17,089	$	284	$	(84	)	$	17,289
Corporate bonds		1,551		30		—			1,581
Collateralized mortgage obligations GSE		8,760		32		(37	)		8,755
State and municipal tax-exempt		12,380		3		—			12,383
Total	$	39,780	$	349	$	(121	)	$	40,008

Available For Sale
US Government agency obligations	$	49,841	$	99	$	(275	)	$	49,665
GSE mortgage-backed securities		34,218		477		(12	)		34,683
Collateralized mortgage obligations GSE		6,730		21		(8	)		6,743
Corporate bonds		24,712		243		(210	)		24,745
Equity securities		27		—		(14	)		13
Total	$	115,528	$	840	$	(519	)	$	115,849

	December 31, 2010
(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Held To Maturity
GSE mortgage-backed securities	$	7,085	$	291	$	—		$	7,376
Collateralized mortgage obligations GSE		1,346		14		(13	)		1,347
Total	$	8,431	$	305	$	(13	)	$	8,723

Available For Sale
US Government agency obligations	$	45,128	$	32	$	(916	)	$	44,244
GSE mortgage-backed securities		64,463		127		(592	)		63,998
Collateralized mortgage obligations GSE		17,155		14		(551	)		16,618
Corporate bonds		17,432		159		(303	)		17,288
Equity securities		27		—		(14	)		13
Total	$	144,205	$	332	$	(2,376	)	$	142,161

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Included in unrealized losses are market losses on securities that have been in a continuous unrealized loss position for twelve months or more and those securities that have been in a continuous unrealized loss position for less than twelve months. The table below details the aggregate unrealized losses and aggregate fair value of the underlying securities whose fair values are below their amortized cost at June 30, 2011 and December 31, 2010.

June 30, 2011

(Dollars in thousands)	Total Fair Value		Total Unrealized Loss			Fair value Impaired Less Than 12 Months		Unrealized Loss Less Than 12 Months			Fair value Impaired More Than 12 Months		Unrealized Loss More Than 12 Months
Held To Maturity
Collateralized mortgage obligations GSE	$	7,633	$	(37	)	$	7,633	$	(37	)	$	—	$	—
US Government agency obligations		12,195		(84	)		12,195		(84	)		—		—
Total	$	19,828	$	(121	)	$	19,828	$	(121	)	$	—	$	—


Available For Sale
Corporate bonds	$	15,739	$	(210	)	$	15,739	$	(210	)	$	—	$	—
US Government agency obligations		19,429		(275	)		19,429		(275	)		—		—
Collateralized mortgage obligations GSE		2,452		(8	)		2,452		(8	)		—		—
GSE mortgage-backed securities		3,984		(12	)		2,932		(11	)		1,052		(1	)
Equity securities		13		(14	)		—		—			13		(14	)
Total	$	41,617	$	(519	)	$	40,552	$	(504	)	$	1,065	$	(15	)

	December 31, 2010
(Dollars in thousands)	Total Fair Value		Total Unrealized Loss			Fair value Impaired Less Than 12 Months		Unrealized Loss Less Than 12 Months			Fair value Impaired More Than 12 Months		Unrealized Loss More Than 12 Months
Held To Maturity
Collateralized mortgage obligations GSE	$	789	$	(13	)	$	789	$	(13	)	$	—	$	—
Total	$	789	$	(13	)	$	789	$	(13	)	$	—	$	—


Available For Sale
Corporate bonds	$	9,845	$	(303	)	$	9,845	$	(303	)	$	—	$	—
US Government agency obligations		28,972		(916	)		28,972		(916	)		—		—
Collateralized mortgage obligations GSE		12,539		(551	)		12,539		(551	)		—		—
GSE mortgage-backed securities		40,013		(592	)		40,013		(592	)		—		—
Equity securities		13		(14	)		—		—			13		(14	)
Total	$	91,382	$	(2,376	)	$	91,369	$	(2,362	)	$	13	$	(14	)

As of June 30, 2011, there were 5 mortgage backed securities, 15 corporate bonds, 5 agency notes, 3 collateralized mortgage obligations, and 6 equity securities which were in an unrealized loss position. DNB does not intend to sell these securities and management of DNB does not expect to be required to sell any of these securities prior to a recovery of its cost basis. Management does not believe any individual unrealized loss as of June 30, 2011 represents an other-than-temporary impairment. There were 6 equity securities and one MBS fixed rate security that were impaired for more than 12 months. DNB reviews its investment portfolio on a quarterly basis judging each investment for other-than-temporary impairment (OTTI). The OTTI analysis focuses on duration and amount a security is below book. As of June 30, 2011, the following securities were reviewed:

GSE mortgage-backed securities. There is currently one security classified as MBS fixed rate that has been impaired for more than twelve months. The current loss on the security is less than $1,000. The market value has declined as interest rates have risen since this security was purchased but DNB anticipates a recovery in the market value as this security approaches its maturity date or as rates decline. DNB expects to collect all principal and interest payments defined under the original terms. There are no securities classified as MBS fixed rate that have a loss greater than 10% of the book value.

Equity securities. DNB’s investment in six marketable equity securities consists primarily of investments in common stock of community banks. The unrealized losses on the six investments in the Equity securities portfolio were all impaired for more than twelve months. The severity and duration of the impairment are driven by higher collateral losses, wider credit spreads, and changes in interest rates within the financial services sector. DNB evaluated the prospects of all issuers in relation to the severity and duration of

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

the impairment. Based on this analysis and an evaluation of DNB’s ability and intent to hold these investments for a reasonable period of time sufficient for each security to increase to DNB’s cost, DNB does not intend to sell these investments and it is not more likely than not that DNB will be required to sell the investments before recovery of their cost, DNB does not consider these investments to be other-than-temporarily impaired at June 30, 2011.

The amortized cost and estimated fair value of investment securities as of June 30, 2011, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid without penalties.

	Held to Maturity				Available for Sale
(Dollars in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	—	$	—	$	2,633	$	2,642
Due after one year through five years		—		—		47,387		47,620
Due after five years through ten years		5,353		5,645		30,412		30,036
Due after ten years		34,427		34,363		35,069		35,538
No stated maturity		—		—		27		13
Total investment securities	$	39,780	$	40,008	$	115,528	$	115,849

DNB sold $15.8 million and $115.0 million securities from the AFS portfolio during the six month period ending June 30, 2011 and 2010, respectively. During the same respective periods, DNB sold $0 and $29.9 million from the HTM portfolio. Gains and losses resulting from investment sales, redemptions or calls were as follows:

	Six Months Ended June 30
(Dollars in thousands)	2011			2010
Gross realized gains-AFS	$	85		$	1,168
Gross realized gains-HTM		—			178
Gross realized losses-AFS		(83	)		(168	)
Gross realized losses-HTM		—			(203	)
Net realized gain	$	2		$	975

In June 2011, DNB reclassified 3 mortgage backed securities and 2 collateralized mortgage obligations with book values (net carrying amount) of $12.5 million and $7.7 million, respectively, from available-for-sale (AFS) to held-to-maturity (HTM). The fair value of the 3 mortgage backed securities and 2 collateralized mortgage obligations was $12.4 million and $7.7 million, respectively. The $116,000 difference between their book value and their fair value will be amortized as an adjustment to the carrying value of the investment securities over the remaining lives.

At June 30, 2011 and 2010, investment securities with a carrying value of approximately $128 million and $105 million, respectively, were pledged to secure public funds, repurchase agreements, FHLB advances and for other purposes as required by law.

NOTE 3: LOANS AND LEASES

The following table sets forth information concerning the composition of total loans and leases outstanding, as of the dates indicated.

(Dollars in thousands)	June 30 2011			Dec. 31 2010
Residential mortgage	$	28,887		$	30,929
Commercial mortgage		232,591			218,099
Commercial		108,415			97,544
Lease financing		385			898
Consumer		47,195			48,701
Total loans and leases	$	417,473		$	396,171
Less allowance for credit losses		(6,443	)		(5,884	)
Net loans and leases	$	411,030		$	390,287

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Included in the loan portfolio are loans for which DNB has ceased the accrual of interest (i.e. non-accrual loans). Loans of approximately $6.9 million and $7.2 million as of June 30, 2011 and December 31, 2010, respectively, were on a non-accrual basis. DNB also had loans of approximately $23,000 and $1,000 that were 90 days or more delinquent, but still accruing, as of June 30, 2011 and December 31, 2010, respectively. If contractual interest income had been recorded on non-accrual loans, interest would have been increased as shown in the following table:

	Six Months Ended June 30
(Dollars in thousands)	2011		2010
Interest income which would have been recorded under original terms	$	165	$	217
Interest income recorded during the year		—		(8	)
Net impact on interest income	$	165	$	209

NOTE 4: ALLOWANCE FOR CREDIT LOSSES

Changes in the allowance for credit losses, for the years indicated, are as follows:

	Six Months Ended June 30
(Dollars in thousands)	2011			2010
Beginning balance	$	5,884		$	5,477
Provision		852			826
Loans charged off		(186	)		(301	)
Leases charged off		(187	)		—
Recoveries		80			26
Net charge-offs		(293	)		(275	)
Ending balance	$	6,443		$	6,028
Reserve for unfunded loan commitments	$	113		$	104

Impaired loans are loans individually evaluated for collectability, and which will probably not be collected in accordance with their contractual terms. Information regarding impaired loans is presented as follows:

	Six Months Ended June 30
(Dollars in thousands)	2011		2010
Total recorded investment	$	6,976	$	8,998
Impaired loans with a specific allowance		3,971		7,397
Impaired loans without a specific allowance		3,005		1,601
Average recorded investment		7,073		9,113
Specific allowance allocation		578		922
Total cash collected		823		1,386
Interest income recorded		6		56

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of June 30, 2011 and December 31, 2010:

Age Analysis of Past Due Loans Receivables

									June 30, 2011
													Loans Receivable
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivables		> 90 Days and Accruing
Residential mortgage	$	109	$	—	$	1,918	$	2,027	$	26,860	$	28,887	$	—
Commercial mortgage		48		—		733		781		231,810		232,591		—
Commercial:
Commercial term		6		—		885		891		79,210		80,101		—
Commercial construction		—		—		3,185		3,185		25,129		28,314		—
Lease financing		—		—		77		77		308		385		1
Consumer:
Home equity		61		3		58		122		39,027		39,149		—
Other		80		121		25		226		7,820		8,046		22
Total	$	304	$	124	$	6,881	$	7,309	$	410,164	$	417,473	$	23

									December 31, 2010
													Loans Receivable
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivables		> 90 Days and Accruing
Residential mortgage	$	77	$	110	$	2,334	$	2,521	$	28,408	$	30,929	$	—
Commercial mortgage		175		—		834		1,009		217,090		218,099		—
Commercial:
Commercial term		73		182		360		615		69,965		70,580		—
Commercial construction		—		—		3,180		3,180		23,784		26,964		—
Lease financing		41		—		273		314		584		898		—
Consumer:
Home equity		33		—		58		91		40,306		40,397		—
Other		71		—		2		73		8,231		8,304		—
Total	$	470	$	292	$	7,041	$	7,803	$	388,368	$	396,171	$	—

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table sets forth those assets that are: (i) placed on non-accrual status, (ii) contractually delinquent by 90 days or more and still accruing, (iii) troubled debt restructurings other than those included in items (i) and (ii), and (iv) OREO as a result of foreclosure or voluntary transfer to DNB as well as other repossessed assets.

Non-Performing Assets

(Dollars in thousands)	June 30 2011		Dec. 31 2010
Non-accrual loans:
Residential mortgage	$	1,918	$	2,334
Commercial mortgage		733		834
Commercial		4,076		3,722
Lease financing		76		273
Consumer		63		60
Total non-accrual loans		6,866		7,223
Loans 90 days past due and still accruing (*)		23		—
Troubled debt restructurings		—		—
Total non-performing loans		6,889		7,223
Other real estate owned & other repossessed property		3,966		4,324
Total non-performing assets	$	10,855	$	11,547

Asset quality ratios:

Non-performing loans to total loans	1.65	%	1.82	%
Non-performing assets to total assets	1.72		1.92
Allowance for credit losses to:
Total loans and leases	1.54		1.49
Non-performing loans and leases	93.5		81.5

(*) One loan at December 31, 2010 had a balance less than $1,000

The following tables summarize information in regards to impaired loans by loan portfolio class as of and for the three and six months ended June 30, 2011 and as of and for the year ended December 31, 2010.

Impaired Loans

June 30, 2011

(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment 3 months ended June 30, 2011		Average Recorded Investment 6 months ended June 30, 2011		Interest Income Recognized 3 months ended June 30, 2011		Interest Income Recognized 6 months ended June 30, 2011
With no related allowance recorded:
Residential mortgage	$	2,031	$	2,387	$	—	$	323	$	430	$	—	$	—
Commercial mortgage		681		683		—		641		688		—		5
Commercial:
Commercial term		157		157		—		201		199		—		1
Commercial construction		—		—		—		462		462		—		—
Lease financing		76		76		—		108		163		—		—
Consumer		60		61		—		61		61		—		—
With allowance recorded:
Residential mortgage		—		—		—		1,578		1,648		—		—
Commercial mortgage		52		52		25		26		35		—		—
Commercial:
Commercial term		735		757		377		761		623		—		—
Commercial construction		3,184		3,506		176		2,720		2,720		—		—
Lease financing		—		—		—		66		44		—		—
Consumer		—		—		—		—		—		—		—
Total:
Residential mortgage		2,031		2,387		—		1,901		2,078		—		—
Commercial mortgage		733		735		25		667		723		—		5
Commercial:
Commercial term		892		914		377		962		822		—		1
Commercial construction		3,184		3,506		176		3,182		3,182		—		—
Lease financing		76		76		—		174		207		—		—
Consumer		60		61		—		61		61		—		—
Total	$	6,976	$	7,679	$	578		6,947	$	7,073	$	—	$	6

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	December 31, 2010
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential mortgage	$	638	$	780	$	—	$	1,092	$	—
Commercial mortgage		782		792		—		916		70
Commercial:
Commercial term		197		250		—		282		3
Commercial construction		460		895		—		818		31
Lease financing		273		826		—		335		7
Consumer		60		61		—		43		1
With allowance recorded:
Residential mortgage		1,696		2,071		103		1,606		—
Commercial mortgage		52		52		22		39		—
Commercial:
Commercial term		345		345		145		369		1
Commercial construction		2,720		2,720		223		3,063		—
Lease financing		—		—		—		—		—
Consumer		—		—		—		—		—
Total:
Residential mortgage		2,334		2,851		103		2,698		—
Commercial mortgage		834		844		22		955		70
Commercial:
Commercial term		542		595		145		651		4
Commercial construction		3,180		3,615		223		3,881		31
Lease financing		273		826		—		335		7
Consumer		60		61		—		43		1
Total	$	7,223	$	8,792	$	493	$	8,563	$	113

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the DNB’s internal risk rating system as of June 30, 2011 and December 31, 2010.

Credit Quality Indicators

	June 30, 2011
(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Residential mortgage	$	27,339	$	—	$	1,548	$	—	$	28,887
Commercial mortgage		215,560		7,639		9,392		—		232,591
Commercial:
Commercial term		78,512		214		978		397		80,101
Commercial construction		19,431		—		8,883		—		28,314
Lease financing		385		—		—		—		385
Consumer:
Home equity		39,081		—		68		—		39,149
Other		8,046		—		—		—		8,046
Total	$	388,354	$	7,853	$	20,869	$	397	$	417,473

December 31, 2010

(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Residential mortgage	$	28,595	$	—	$	2,334	$	—	$	30,929
Commercial mortgage		202,062		10,054		5,983		—		218,099
Commercial:
Commercial term		68,916		241		1,423		—		70,580
Commercial construction		18,294		—		8,670		—		26,964
Lease financing		765		—		—		133		898
Consumer:
Home equity		40,386		—		11		—		40,397
Other		8,304		—		—		—		8,304
Total	$	367,322	$	10,295	$	18,421	$	133	$	396,171

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables sets forth the composition of DNB’s allowance for credit losses as of June 30, 2011 and activity for the quarter and six months ended June 30, 2011.

Allowance for Credit Losses and Recorded Investment in Loans Receivables

(Dollars in thousands)	Commercial			Lease financing			Residential mortgage			Consumer			Unallocated		Total
Allowance for credit losses:
Beginning balance - April 1, 2011	$	4,472		$	121		$	521		$	486		$	707	$	6,307
Charge-offs		(6	)		(187	)		(126	)		—			—		(319	)
Recoveries		1			—			16			12			—		29
Provisions		218			85			(25	)		(16	)		164		426
Ending balance - June 30, 2011	$	4,685		$	19		$	386		$	482		$	871	$	6,443

(Dollars in thousands)	Commercial			Lease financing			Residential mortgage			Consumer			Unallocated		Total
Allowance for credit losses:
Beginning balance - January 1, 2011	$	4,387		$	86		$	454		$	482		$	475	$	5,884
Charge-offs		(20	)		(187	)		(166	)		—			—		(373	)
Recoveries		5			1			62			12			—		80
Provisions		313			119			36			(12	)		396		852
Ending balance - June 30, 2011	$	4,685		$	19		$	386		$	482		$	871	$	6,443
Ending balance: individually evaluated for impairment	$	578		$	—		$	—		$	—		$	—	$	578
Ending balance: collectively evaluated for impairment	$	4,107		$	19		$	386		$	482		$	871	$	5,865
Loans receivables:
Ending balance	$	341,006		$	385		$	28,887		$	47,195				$	417,473
Ending balance: individually evaluated for impairment	$	4,809		$	76		$	2,031		$	60				$	6,976
Ending balance: collectively evaluated for impairment	$	336,197		$	309		$	26,856		$	47,135				$	410,497
Reserve for unfunded loan commitments	$	95		$	—		$	—		$	18				$	113

NOTE 5: EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed based on the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the treasury stock method and reflects the potential dilution that could occur from the exercise of stock options, and warrants and the amortized portion of unvested stock awards. Stock options and unvested stock awards for which the exercise or the grant price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation. Treasury shares are not deemed outstanding for calculations. There were no anti-dilutive stock warrants outstanding, 149,561 anti-dilutive stock options outstanding, and no anti-dilutive stock awards at June 30, 2011. There were 186,311 anti-dilutive stock warrants, 160,084 anti-dilutive stock options outstanding and 22,326 anti-dilutive stock awards at June 30, 2010. See Note 12 for a discussion of stock warrants issued in conjunction with Preferred shares issued to the U.S. Treasury Department as part of the CPP. The following table sets forth the computation of basic and diluted earnings per share:

	Three Months Ended							Six Months Ended
	June 30, 2011							June 30, 2011
(In thousands, except per-share data)	Income		Shares		Amount			Income		Shares		Amount
Basic EPS
Income available to common stockholders	$	1,134		2,670	$	0.43		$	1,994		2,667	$	0.75
Effect of potential dilutive common stock equivalents– stock options, restricted shares and warrants		—		20		(.01	)		—		26		(.01	)
Diluted EPS
Income available to common stockholders after assumed conversions	$	1,134		2,690	$	0.42		$	1,994		2,693	$	0.74

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2010						June 30, 2010
(In thousands, except per-share data)	Income		Shares		Amount		Income		Shares		Amount
Basic EPS
Income (loss) available to common stockholders	$	792		2,632	$	0.30	$	1,313		2,626	$	0.50
Effect of potential dilutive common stock equivalents– stock options, restricted shares and warrants		—		—		—		—		—		—
Diluted EPS
Income (loss) available to common stockholders after assumed conversions	$	792		2,632	$	0.30	$	1,313		2,626	$	0.50

NOTE 6: OTHER COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes all changes in stockholders' equity during the period, except those resulting from investments by owners and distributions to owners. Comprehensive income (loss) for all periods consisted of net income (loss) and other comprehensive income relating to the change in unrealized losses on investment securities available for sale. Comprehensive income (loss), net of tax, is disclosed in the following table. The effect of pension adjustments will be made during the last quarter of each fiscal year.

(Dollars in thousands)	Before-Tax Amount			Tax Expense			Net-of-Tax Amount
Three Months Ended June 30, 2011:
Net Income							$	1,288
Other Comprehensive Income:
Unrealized holding gains arising during the period	$	1,942		$	(660	)		1,282
Discount on AFS to HTM reclassification		(116	)		39			(77	)
Accretion of discount on AFS to HTM reclassification		1			—			1
Less reclassification for gains included in net income		(1	)		—			(1	)
Total comprehensive income							$	2,493
Three Months Ended June 30, 2010:
Net Income							$	947
Other Comprehensive Income:
Unrealized holding gains arising during the period	$	1,894		$	(644	)		1,250
Accretion of discount on AFS to HTM reclassification		576			(196	)		380
Less reclassification for gains included in net income		(305	)		104			(201	)
Total comprehensive income							$	2,376

(Dollars in thousands)	Before-Tax Amount			Tax Expense			Net-of-Tax Amount
Six Months Ended June 30, 2011:
Net Income							$	2,303
Other Comprehensive Income:
Unrealized holding gains arising during the period	$	2,367		$	(805	)		1,562
Discount on AFS to HTM reclassification		(116	)		39			(77	)
Accretion of discount on AFS to HTM reclassification		1			—			1
Less reclassification for gains included in net income		(2	)		1			(1	)
Total comprehensive income							$	3,788
Six Months Ended June 30, 2010:
Net Income							$	1,622
Other Comprehensive Income:
Unrealized holding gains arising during the period	$	2,845		$	(967	)		1,878
Accretion of discount on AFS to HTM reclassification		594			(202	)		392
Less reclassification for gains included in net income		(1,000	)		340			(660	)
Total comprehensive income							$	3,232

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The components of accumulated other comprehensive loss included in stockholders’ equity, are as follows:

(Dollars in thousands)	Before-Tax Amount			Tax Effect			Net-of-Tax Amount
June 30, 2011
Net unrealized gain on AFS securities	$	321		$	(109	)	$	212
Discount on AFS to HTM reclassification		(115	)		39			(76	)
Unrealized actuarial losses-pension		(1,314	)		447			(867	)
Total of all items above	$	(1,108	)	$	377		$	(731	)
December 31, 2010
Net unrealized loss on AFS securities	$	(2,044	)	$	695		$	(1,349	)
Unrealized actuarial losses-pension		(1,314	)		447			(867	)
Total of all items above	$	(3,358	)	$	1,142		$	(2,216	)

NOTE 7: JUNIOR SUBORDINATED DEBENTURES

DNB has two issuances of junior subordinated debentures (the “debentures”) as follows. The majority of the proceeds of each issuance were invested in DNB’s subsidiary, DNB First, National Association, to increase the Bank’s capital levels. The junior subordinated debentures issued in each case qualify as a component of capital for regulatory purposes. DNB Capital Trust I and II are special purpose Delaware business trusts, which are not consolidated.

DNB Capital Trust I

DNB’s first issuance of junior subordinated debentures was on July 20, 2001. This issuance of debentures are floating rate and were issued to DNB Capital Trust I, a Delaware business trust in which DNB owns all of the common equity. DNB Capital Trust I issued $5 million of floating rate (6 month Libor plus 3.75%, with a cap of 12%) capital preferred securities to a qualified institutional buyer. The proceeds of these securities were used by the Trust, along with DNB’s capital contribution, to purchase $5,155,000 principal amount of DNB’s floating rate junior subordinated debentures. The preferred securities have been redeemable since July 25, 2006 and must be redeemed upon maturity of the debentures on July 25, 2031.

DNB Capital Trust II

DNB’s second issuance of junior subordinated debentures was on March 30, 2005. This issuance of debentures are floating rate and were issued to DNB Capital Trust II, a Delaware business trust in which DNB owns all of the common equity. DNB Capital Trust II issued $4.0 million of floating rate (the rate was fixed at 6.56% for the first 5 years and is now adjusting at a rate of 3-month LIBOR plus 1.77%) capital preferred securities. The proceeds of these securities were used by the Trust, along with DNB’s capital contribution, to purchase $4.1 million principal amount of DNB’s floating rate junior subordinated debentures. The preferred securities have been redeemable since May 23, 2010. The preferred securities must be redeemed upon maturity of the debentures on May 23, 2035.

NOTE 8: RECENT ACCOUNTING PRONOUNCEMENTS

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which updated ASC 310, Receivables. The updated guidance requires more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses, including a roll-forward schedule of the allowance for credit losses for the period on a portfolio segment basis, as well as additional information about the aging and credit quality of receivables by class of financing receivables as of the end of the period. The new and amended disclosures that relate to information as of the end of a reporting period was effective for the Corporation as of December 31, 2010. The disclosures that include information for activity that occurs during a reporting period was effective for the first interim reporting period beginning after December 31, 2010. While the guidance had an impact on the presentation of certain disclosures within our financial statements, the guidance did not have any impact on the Corporation’s consolidated financial statements.

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In April 2011, the FASB issued Accounting Standards Update No. 2011-02 for guidance on Receivables (Topic 310) regarding a creditor’s determination of whether a restructuring is a troubled debt restructuring. The amendments in this update apply to all creditors, both public and nonpublic, that restructure certain receivables. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: the restructuring constitutes a concession and the debtor is experiencing financial difficulties. The amendments clarify the guidance on a creditor’s evaluation of whether it has granted a concession and on a creditor’s evaluation of whether a debtor is experiencing financial difficulties. For public entities, the amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. Management does not anticipate that the adoption of this guidance will have a material impact on the Corporation's consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” The provisions of ASU No. 2011-05 allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The statement(s) are required to be presented with equal prominence as the other primary financial statements. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The provisions of ASU No. 2011-05 are effective for the Corporation’s interim reporting period beginning on or after December 15, 2011, with retrospective application required. The adoption of ASU No. 2011-05 is expected to result in presentation changes to the Corporation’s statements of income and the addition of a statement of comprehensive income. The adoption of ASU No. 2011-05 will have no impact on the Corporation’s consolidated financial statements.

NOTE 9: STOCK-BASED COMPENSATION

Stock Option Plan

DNB has a Stock Option Plan for employees and directors. Under the plan, options (both qualified and non-qualified) to purchase a maximum of 643,368 (as adjusted for subsequent stock dividends) shares of DNB’s common stock could be issued to employees and directors. Under the plan, option exercise prices must equal the fair market value of the shares on the date of option grant and the option exercise period may not exceed ten years. Vesting of options under the plan is determined by the Plan Committee. There were 198,421 shares available for grant at June 30, 2011. All options with the exception of 44,600 options granted on April 23, 2010 are immediately exercisable. The options granted on April 23, 2010 have a fair value of $100,000 or $2.25 per share, based on a risk free interest rate of 3.273%, a dividend yield of 1.73% and a volatility of 35.564% and are subject to four year cliff vesting. These options which expire on April 23, 2017 if not exercised or cancelled, have an exercise price of $6.93 per share, and the shares are restricted from resale for two years after exercise. These options are exercisable only at and after such time as the market value of the common stock first equals or exceeds $7.97, which is 115% of the $6.93 exercise price. DNB expensed $13,000 during the six months ended June 30, 2011 and anticipates additional expense of $70,000 through April 23, 2014, the date the options can first be exercised.

Stock option activity is indicated below:

	Number Outstanding			Weighted Average Exercise Price
Outstanding January 1, 2011		203,575		$	16.96
Issued		—			—
Exercised		—			—
Forfeited		—			—
Expired		(9,414	)		11.16
Outstanding June 30, 2011		194,161		$	17.24

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Number Outstanding			Weighted Average Exercise Price
Outstanding January 1, 2010		169,503		$	19.19
Issued		44,600			6.93
Exercised		—			—
Forfeited		(9,419	)		(9.23	)
Expired		—			—
Outstanding June 30, 2010		204,684		$	16.98

The weighted-average price and weighted average remaining contractual life for the outstanding options are listed below for the dates indicated.

June 30, 2011
Range of						Weighted Average
Exercise Prices		Number Outstanding		Number Exercisable		Exercise Price		Remaining Contractual Life	Intrinsic Value
$	6.93-10.99		44,600		0	$	6.93	5.82 years	$	136,922
	11.00-13.99		0		0		12.67	0.00 years		—
	14.00-19.99		82,419		82,419		17.44	3.48 years		—
	20.00-22.99		19,101		19,101		22.78	3.48 years		—
	23.00-24.27		48,041		48,041		24.27	3.80 years		—
Total			194,161		149,561	$	17.24	4.10 years	$	136,922

June 30, 2010
Range of						Weighted Average
Exercise Prices		Number Outstanding		Number Exercisable		Exercise Price		Remaining Contractual Life	Intrinsic Value
$	6.93-10.99		44,600		0	$	6.93	6.82 years	$	2,230
	11.00-13.99		9,414		9,414		11.16	1.00 years		—
	14.00-19.99		82,805		82,805		17.44	4.48 years		—
	20.00-22.99		19,824		19,824		22.78	4.48 years		—
	23.00-24.27		48,041		48,041		24.27	4.80 years		—
Total			204,684		160,084	$	16.98	4.91 years	$	2,230

Stock-Based Compensation

DNB maintains an Incentive Equity and Deferred Compensation Plan. The plan provides that up to 243,101 (as adjusted for subsequent stock dividends) shares of common stock may be granted, at the discretion of the Board, to individuals of the Corporation. Shares already granted are issuable on the earlier of three years after the date of the grant or a change in control of DNB if the recipients are then employed by DNB (“Vest Date”). Upon issuance of the shares, resale of the shares is restricted for an additional one year, during which the shares may not be sold, pledged or otherwise disposed of. Prior to the Vest Date and in the event the recipient terminates association with DNB for reasons other than death, disability or change in control, the recipient forfeits all rights to the shares that would otherwise be issued under the grant.

Share awards granted by the plan were recorded at the date of award based on the market value of shares. Awards are being amortized to expense over the three-year cliff-vesting period. DNB records compensation expense equal to the value of the shares being amortized. For the three and six-month periods ended June 30, 2011, $15,000 and $30,000 was amortized to expense. For the three and six-month periods ended June 30, 2010, $36,000 and $62,000 was amortized to expense. At June 30, 2011, approximately $72,000 in additional compensation will be recognized over the remaining service period of approximately 1.31 years. At June 30, 2011, 192,420 shares were reserved for future grants under the plan.

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Stock grant activity is indicated below:

	Shares		Weighted Average Stock Price
Non-vested stock awards—January 1, 2011		22,750	$	7.91
Granted		—		—
Forfeited		—		—
Vested		—		—
Non-vested stock awards—June 30, 2011		22,750	$	7.91

	Shares			Weighted Average Stock Price
Non-vested stock awards—January 1, 2010		24,101		$	13.43
Granted		14,200			6.93
Forfeited		(500	)		9.55
Vested		(1,275	)		12.26
Non-vested stock awards—June 30, 2010		36,526		$	11.00

NOTE 10: INCOME TAXES

As of June 30, 2011, the Corporation had no material unrecognized tax benefits or accrued interest and penalties. It is the Corporation’s policy to account for interest and penalties accrued relative to unrecognized tax benefits as a component of income tax expense. Federal and state tax years 2007 through 2010 were open for examination as of June 30, 2011.

NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy based on the nature of data inputs for fair value determinations, under which DNB is required to value each asset within its scope using assumptions that market participations would utilize to value that asset. When DNB uses its own assumptions, it is required to disclose additional information about the assumptions used and the effect of the measurement on earnings or the net change in assets for the period.

The three levels of the fair value hierarchy under FASB ASC Topic 820 are as follows:

Level 1—Quoted prices in active markets for identical securities.

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active and model derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3—Instruments whose significant value drivers are unobservable.

A description of the valuation methodologies used for assets measured at fair value is set forth below:

DNB’s available-for-sale investment securities, which generally include U.S. government agencies and mortgage backed securities, collateralized mortgage obligations, corporate bonds and equity securities are reported at fair value. These securities are valued by an independent third party (“preparer”). The preparer’s evaluations are based on market data. They utilize evaluated pricing models that vary by asset and incorporate available trade, bid and other market information. For securities that do not trade on a daily basis, their evaluated pricing applications apply available information such as benchmarking and matrix pricing. The market inputs normally sought in the evaluation of securities include benchmark yields, reported trades, broker/dealer quotes (only obtained from market makers or broker/dealers recognized as market participants), issuer spreads, two-sided markets, benchmark securities, bid, offers and reference data. For certain securities additional inputs may be used or some market inputs may not be applicable. Inputs are prioritized differently on any given day based on market conditions.

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

U.S. Government agencies are evaluated and priced using multi-dimensional relational models and option adjusted spreads. State and municipal securities are evaluated on a series of matrices including reported trades and material event notices. Mortgage backed securities are evaluated using matrix correlation to treasury or floating index benchmarks, prepayment speeds, monthly payment information and other benchmarks. Other investments are evaluated using a broker-quote based application, including quotes from issuers.

Impaired loans are those loans that the Bank has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

OREO assets are adjusted to fair value less estimated selling costs upon transfer of the loans to OREO. Subsequently, OREO assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. There assets are included as level 3 fair values.

The following table summarizes the assets at June 30, 2011 and December 31, 2010 that are recognized on DNB’s balance sheet using fair value measurement determined based on the differing levels of input.

	June 30, 2011
(Dollars in thousands)	Level 1		Level 2		Level 3		Assets at Fair Value
Assets Measured at Fair Value on a Recurring Basis
AFS Investment Securities: US Government agency obligations	$	—	$	49,665	$	—	$	49,665
GSE mortgage-backed securities		—		34,683		—		34,683
Collateralized mortgage obligations GSE		—		6,743		—		6,743
Corporate bonds		—		24,745		—		24,745
Equity securities		13		—		—		13
Total assets measured at fair value on a recurring basis	$	13	$	115,836	$	—	$	115,849


Assets Measured at Fair Value on a Nonrecurring Basis
Impaired loans	$	—	$	—	$	3,393	$	3,393
Total assets measured at fair value on a nonrecurring basis	$	—	$	—	$	3,393	$	3,393

	December 31, 2010
(Dollars in thousands)	Level 1		Level 2		Level 3		Assets at Fair Value
Assets Measured at Fair Value on a Recurring Basis
AFS Investment Securities: US Government agency obligations	$	—	$	44,244	$	—	$	44,244
GSE mortgage-backed securities		—		63,998		—		63,998
Collateralized mortgage obligations GSE		—		16,618		—		16,618
Corporate bonds		—		17,288		—		17,288
Equity securities		13		—		—		13
Total assets measured at fair value on a recurring basis	$	13	$	142,148	$	—	$	142,161
Assets Measured at Fair Value on a Nonrecurring Basis
Impaired loans	$	—	$	—	$	4,320	$	4,320
Total assets measured at fair value on a nonrecurring basis	$	—	$	—	$	4,320	$	4,320

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Impaired loans. Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $7.0 million at June 30, 2011. Of this, $4.0 million had a valuation allowance of $578,000 and $3.0 million had no valuation allowance as of June 30, 2011. Impaired loans had a carrying amount of $7.2 million at December 31, 2010. Of this, $4.8 million had a valuation allowance of $493,000 and $2.4 million had no valuation allowance as of December 31, 2010.

Other Real Estate Owned & other repossessed property. Other real estate owned (“OREO”) consists of properties acquired as a result of, or in-lieu-of, foreclosure. Properties or other assets (primarily repossessed assets formerly leased) are classified as OREO and other repossessed property are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying value or fair value, less estimated costs to sell. Costs relating to the development or improvement of the assets are capitalized and costs relating to holding the assets are charged to expense. DNB had $4.0 million of such assets at June 30, 2011, which consisted of $3.8 million in OREO and $181,000 in other repossessed property. DNB had $4.3 million of such assets at December 31, 2010, which consisted of $4.1 million in OREO and $220,000 in other repossessed property. Subsequent to the repossession of these assets, DNB did not write down their carrying values during the three month period ending June 30, 2011, based on appraisals.

Below is management’s estimate of the fair value of all financial instruments, whether carried at cost or fair value on the Company’s consolidated balance sheet. The carrying amounts and estimated fair values of financial instruments at June 30, 2011 and December 31, 2010 are as follows:

	June 30, 2011				December 31, 2010
(Dollars in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets
Cash and cash equivalents	$	30,479	$	30,479	$	26,360	$	26,360
AFS investment securities		115,849		115,849		142,161		142,161
HTM investment securities		39,780		40,008		8,431		8,723
Restricted stock		3,898		3,898		4,201		4,201
Loans and leases, net of allowance		411,030		411,827		390,287		391,091
Accrued interest receivable		2,392		2,392		2,283		2,283
Financial liabilities
Deposits		518,620		521,552		492,746		494,673
Borrowings		49,806		52,373		50,951		53,608
Junior subordinated debentures		9,279		9,376		9,279		9,132
Accrued interest payable		468		468		527		527
Off-balance sheet instruments		—		—		—		—

The specific estimation methods and assumptions used can have a substantial impact on the resulting fair values of financial instruments. Following is a brief summary of the significant assumptions, methods, and estimates used in estimating fair value.

Limitations Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time DNB’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of DNB’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Cash and Cash Equivalents, Investment Securities, Accrued Interest Receivable and Accrued Interest Payable The carrying amounts for short-term investments (cash and cash equivalents) and accrued interest receivable and payable approximate fair value. The fair value of investment securities are determined by an independent third party (“preparer”). The preparer’s evaluations are based on market data. They utilize evaluated pricing models that vary by asset and incorporate available trade, bid and other market information. For securities that do not trade on a daily basis, their evaluated pricing applications apply available information such as benchmarking and matrix pricing. The market inputs normally sought in the evaluation of securities include benchmark yields, reported trades, broker/dealer quotes (only obtained from market makers or broker/dealers recognized as market participants), issuer spreads, two-sided markets, benchmark securities, bid, offers and reference data. For certain securities additional inputs may be used or some market inputs may not be applicable. Inputs are prioritized differently on any given day based on market conditions.

U.S. Government agencies are evaluated and priced using multi-dimensional relational models and option adjusted spreads. State and municipal securities are evaluated on a series of matrices including reported trades and material event notices. Mortgage backed securities are evaluated using matrix correlation to treasury or floating index benchmarks, prepayment speeds, monthly payment information and other benchmarks. Other investments are evaluated using a broker- quote based application, including quotes from issuers. The carrying amount of non-readily marketable equity securities approximates liquidation value.

Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial mortgages, residential mortgages, consumer and non-accrual loans. The fair value of performing loans is calculated by discounting expected cash flows using an estimated market discount rate. Expected cash flows include both contractual cash flows and prepayments of loan balances. Prepayments on consumer loans were determined using the median of estimates of securities dealers for mortgage-backed investment pools.

The estimated discount rate considers credit and interest rate risk inherent in the loan portfolios and other factors such as liquidity premiums and incremental servicing costs to an investor. Management has made estimates of fair value discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, management has no basis to determine whether the fair value presented would be indicative of the value negotiated in an actual sale.

The fair value for non-accrual loans not based on fair value of collateral is derived through a discounted cash flow analysis, which includes the opportunity costs of carrying a non-performing asset. An estimated discount rate was used for these non-accrual loans, based on the probability of loss and the expected time to recovery.

Deposits and Borrowings The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate money market accounts, savings accounts, and interest checking accounts approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Off-balance-sheet Instruments (Disclosed at Cost) Off-balance- sheet instruments are primarily comprised of loan commitments, which are generally priced at market at the time of funding. Fees on commitments to extend credit and stand-by letters of credit are deemed to be immaterial and these instruments are expected to be settled at face value or expire unused. It is impractical to assign any fair value to these instruments. At June 30, 2011, un-funded loan commitments totaled $54.7 million and stand-by letters of credit totaled $2.4 million. At December 31, 2010, un-funded loan commitments totaled $65.7 million and stand-by letters of credit totaled $2.4 million.

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 12: STOCKHOLDERS’ EQUITY

On January 30, 2009, as part of the CPP administered by the United States Department of the Treasury, DNB Financial Corporation entered into a Letter Agreement and a Securities Purchase Agreement with the U.S. Treasury, pursuant to which the DNB issued and sold on January 30, 2009, and the U.S. Treasury purchased for cash on that date (i) 11,750 shares of the Corporation’s Fixed Rate Cumulative Perpetual Preferred Stock, Series 2008A, par value $10.00 per share, having a liquidation preference of $1,000 per share, and (ii) a ten-year warrant to purchase up to 186,311 shares of the DNB’s common stock, $1.00 par value, at an exercise price of $9.46 per share, for an aggregate purchase price of $11,750,000 in cash. This transaction closed on January 30, 2009. The issuance and sale of these securities was a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. The Bank will need to provide dividends to the Corporation in connection with the $11,750,000 of Fixed Rate Cumulative Perpetual Preferred Stock sold on January 30, 2009 as part of the CPP administered by the United States Department of the Treasury.

On August 4, 2011, DNB Financial Corporation entered into a letter agreement with Treasury, pursuant to which DNB repurchased from the Treasury 11,750 shares, constituting all of the issued and outstanding shares, of DNB'S Series 2008A Preferred Stock, at a repurchase price equal to the liquidation value of $1,000 per share, or a total of $11,750,000, plus accrued, unpaid dividends on such shares equal to $128,923.61, for a total repurchase price of $11,878,923.61.

On August 4, 2011, DNB Financial Corporation entered into a Securities Purchase Agreement with the Secretary of the Treasury (the “Treasury”), pursuant to which the Company issued and sold to the Treasury 13,000 shares of its Non-Cumulative Perpetual Preferred Stock, Series 2011A (“Series 2011A Preferred Stock”), having a liquidation preference of $1,000 per share for aggregate proceeds of $13,000,000. The Securities Purchase Agreement was entered into, and the Series 2011A Preferred Stock was issued, pursuant to the Treasury’s Small Business Lending Fund program (“SBLF”), a $30 billion fund established under the Small Business Jobs Act of 2010, that encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion.

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

DESCRIPTION OF DNB'S BUSINESS AND BUSINESS STRATEGY

DNB Financial Corporation is a bank holding company whose bank subsidiary, DNB First, National Association (the “Bank”) is a nationally chartered commercial bank with trust powers, and a member of the FDIC. DNB provides a broad range of banking services to individual and corporate customers through its thirteen community offices located throughout Chester and Delaware Counties, Pennsylvania. DNB is a community banking organization that focuses its lending and other services on businesses and consumers in the local market area. DNB funds all these activities with retail and business deposits and borrowings. Through its Wealth Management division, the Bank provides wealth management and trust services to individuals and businesses. The Bank and its subsidiary, DNB Financial Services, Inc., make available certain non-depository products and services, such as securities brokerage, mutual funds, life insurance and annuities.

DNB earns revenues and generates cash flows by lending funds to commercial and consumer customers in its marketplace. DNB generates its largest source of interest income through its lending function. A secondary source of interest income is DNB’s investment portfolio, which provides liquidity and cash flows for future lending needs.

In addition to interest earned on loans and investments, DNB earns revenues from fees it charges customers for non-lending services. These services include wealth management and trust services; brokerage and investment services; cash management services; banking and ATM services; as well as safekeeping and other depository services.

To ensure we remain well positioned to meet the growing needs of our customers and communities and to meet the challenges of the 21st century, we've worked to build awareness of our full-service capabilities and ability to meet the needs of a wide range of customers. This served to not only retain our existing, customer base, but to position ourselves as an attractive financial institution on which younger individuals and families can build their dreams. To that end, DNB continues to make appropriate investments in all areas of our business, including people, technology, facilities and marketing.

Comprehensive 5-Year Plan. During the second quarter of 2011, management updated the 5-year strategic plan that was designed to reposition its balance sheet and improve core earnings. Through the plan, management will endeavor to expand its loan portfolio through new originations, increased loan participations, as well as strategic loan and lease receivable purchases. Management also plans to reduce the absolute level of borrowings with cash flows from existing loans and investments as well as from new deposit growth. A discussion on DNB’s Key Strategies follows below:

•

Focus on penetrating existing markets to maximize profitability

•

Grow loans and diversify the mix

•

Improve asset quality

•

Reduce long-term borrowings

•

Focus on profitable customer segments

•

Grow and diversify non-interest income, primarily in the wealth management area

•

Focus on reducing DNB’s cost of funds by changing DNB’s mix of deposits

•

Focus on cost containment and improving operational efficiencies

Strategic Plan Update. During the quarter ended June 30, 2011, management focused on reducing our composite cost of funds as well as strengthening DNB's net interest margin and capital ratios. The composite cost of funds for the three months ended June 30, 2011 was 0.86% compared to 1.26% for the same period in 2010. The net interest margin for the three-month period ended June 30, 2011 was 3.65% compared to 3.23% for the same period in 2010. In addition to the lower cost of funds, DNB’s margin improved as interest on loans and leases increased to $5.7 million for the three-month period ended June 30, 2011, compared to $5.2 million for the same period in 2010. The increase was primarily the result of higher average balances and higher yields on the portfolio. Management continued to actively manage deposits during the quarter to reduce DNB’s cost of funds. Time deposits declined $11.0 million to $127.2 million at June 30, 2011 compared to $138.2 million at December 31, 2010. Transaction and savings accounts increased $36.9 million during the six months ended June 30, 2011. The Total Risk Based Capital ratio increased to 14.77% at June 30, 2011, up from 14.28% at December 31, 2010.

Management has made a concerted effort to improve the measurement and tracking of business lines and overall corporate performance levels. Improved information systems have increased DNB's ability to track key indicators and enhance corporate performance levels. Better measurement against goals and objectives and increased accountability will be integral in attaining desired loan, deposit and fee income production.

MATERIAL CHALLENGES, RISKS AND OPPORTUNITIES

The following is a summary of material challenges, risks and opportunities DNB has faced during the three-month period ended June 30, 2011.

Downgrade of the U.S. Government and Federal Agencies. On August 5, 2011, Standard & Poor's rating agency lowered the long-term rating of the U.S. government and federal agencies from AAA to AA+. With regard to this action, the federal banking agencies issued a joint press release providing the following guidance to banking organizations: for risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities will not change. The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board's Regulation W, will also be unaffected. At this time it is not possible to predict the various impacts, if any, that the downgrade may have on the Corporation and the Bank. Please see "Item 1A - Risk Factors" later in this quarterly report on Form 10-Q for further discussion regarding the potential risks that the downgrade poses.

Interest Rate Risk Management. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. DNB considers interest rate risk the predominant risk in terms of its potential impact on earnings. Interest rate risk can occur for any one or more of the following reasons: (a) assets and liabilities may mature or re-price at different times; (b) short-term or long-term market rates may change by different amounts; or (c) the remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change.

The principal objective of the Bank’s interest rate risk management is to evaluate the interest rate risk included in certain on and off-balance sheet accounts, determine the level of risk appropriate given the Bank’s business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with management’s approved guidelines. Through such management, DNB seeks to reduce the vulnerability of its operations to changes in interest rates. The Bank’s Asset Liability Committee (the “ALCO”) is responsible for reviewing the Bank’s asset/liability policies and interest rate risk position and making decisions involving asset liability considerations. The ALCO meets on a monthly basis and reports trends and the Bank’s interest rate risk position to the Board of Directors. The extent of the movement of interest rates is an uncertainty that could have a negative impact on the earnings of the Bank.

The largest component of DNB’s total income is net interest income, and the majority of DNB’s financial instruments are comprised of interest rate-sensitive assets and liabilities with various terms and maturities. The primary objective of management is to maximize net interest income while minimizing interest rate risk. Interest rate risk is derived from timing differences in the re-pricing of assets and liabilities, loan prepayments, deposit withdrawals, and differences in lending and funding rates. The ALCO actively seeks to monitor and control the mix of interest rate-sensitive assets and interest rate-sensitive liabilities. One measure of interest rate risk is net interest income simulation analysis. The ALCO utilizes simulation analysis, whereby the model estimates the variance in net interest income with a change in interest rates of plus or minus 200 and 300 basis points in addition to four yield curve twists over a twelve-month period.

Liquidity and Market Risk Management Liquidity is the ability to meet current and future financial obligations. The Bank further defines liquidity as the ability to respond to deposit outflows as well as maintain flexibility to take advantage of lending and investment opportunities. The Bank’s primary sources of funds are operating earnings, deposits, repurchase agreements, principal and interest payments on loans, proceeds from loan sales, principal and interest payments on mortgage backed securities, sales of investment securities, and advances from the FHLB. The Bank uses the funds generated to support its lending and investment activities as well as any other demands for liquidity such as deposit outflows. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, mortgage prepayments, loan and security sales and the exercise of call features are greatly influenced by general interest rates, economic conditions and competition.

The objective of DNB’s asset/liability management function is to maintain consistent growth in net interest income within DNB’s policy limits. This objective is accomplished through the management of liquidity and interest rate risk, as well as customer offerings of various loan and deposit products. DNB maintains adequate liquidity to meet daily funding requirements, anticipated deposit withdrawals, or asset opportunities in a timely manner. Liquidity is also necessary to meet obligations during unusual, extraordinary or adverse operating circumstances, while avoiding a significant loss or cost. DNB’s foundation for liquidity is a stable deposit base as well as a marketable investment portfolio that provides cash flow through regular maturities or that can be used for collateral to secure funding in an emergency. As part of its liquidity management, DNB maintains assets, which comprise its primary liquidity (Federal funds sold, investments and cash and due from banks, less pledged securities).

Credit Risk Management. DNB defines credit risk as the risk of default by a customer or counter-party. The objective of DNB’s credit risk management strategy is to quantify and manage credit risk on an aggregate portfolio basis as well as to limit the risk of loss resulting from an individual customer default. Credit risk is managed through a combination of underwriting, documentation and collection standards. DNB’s credit risk management strategy calls for regular credit examinations and quarterly management reviews of large credit exposures and credits that are experiencing credit quality deterioration. DNB’s loan review procedures provide assessments of the quality of underwriting, documentation, risk grading and charge-off procedures, as well as an assessment of the allowance for credit loss reserve analysis process.

Competition In addition to the challenges related to the interest rate environment, community banks in Chester and Delaware Counties have been experiencing increased competition from large regional and international banks entering DNB’s marketplace through mergers and acquisitions. Competition for loans and deposits may negatively affected DNB’s net interest margin. To compensate for the increased competition, DNB, along with other area community banks, has aggressively sought and marketed customers who have been disenfranchised by these mergers. To attract these customers, DNB has introduced new deposit products, such as Mobile Banking, Choice Checking, Credit Cards as well as Executive and employee packages. In addition, DNB has introduced Remote Capture to our commercial customers to expedite their collection of funds.

Deposit Insurance Assessments. The deposits of the Bank are insured by the FDIC up to the limits set forth under applicable law and are subject to deposit insurance premium assessments. The FDIC imposes a risk based deposit premium assessment system, under which the amount of FDIC assessments paid by an individual insured depository institution, such as the Bank, is based on the level of risk incurred in its activities. The FDIC places a depository institution in one of four risk categories determined by reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC further determines its assessment rates based on certain specified financial ratios. Pursuant to the Federal Deposit Insurance Act, the FDIC has authority and the responsibility to establish deposit insurance assessments at rates sufficient to maintain the designated reserve ratio of the Deposit Insurance Fund at a level between 1.15% and 1.5% of estimated insured deposits, and to take action to restore the designated reserve ratio to at least 1.15% of estimated insured deposits when it falls below that level. As of June 30, 2008, the designated reserve ratio fell below 1.15%, to 1.01%. On October 7, 2008, the FDIC established a restoration plan which is has updated periodically since then to respond to deteriorating economic conditions. Conditions in the banking industry have continued to deteriorate through 2008 and 2009. According to the FDIC’s Quarterly Banking Profile for the Fourth Quarter 2009, as of December 30, 2009 the designated reserve ratio had fallen to (0.39%), down from (0.16%) on September 30, 2009, and 0.36% as of December 31, 2008. The FDIC reports that the December 31, 2009 reserve ratio is the lowest on record for a combined bank and thrift insurance fund. In response to the declining reserve ratio, the FDIC took a series of extraordinary deposit insurance assessment actions during 2009.

Effective as of April 1, 2011, the FDIC adopted changes to its base and risk-based deposit insurance rates. Pursuant to the new rules, a bank’s annual assessment base rates were as follows, depending on the bank’s risk category:

Initial and Total Base Assessment Rates*

Risk Category
	Risk Category I	Risk Category II	Risk Category III	Risk Category IV	Large and Highly Complex Institutions
Initial base assessment rate	5-9	14	23	35	5-35
Unsecured debt adjustment**	(4.5)-0	(5)-0	(5)-0	(5)-0	(5)-0
Brokered deposit adjustment	—	0-10	0-10	0-10	0-10
TOTAL BASE ASSESMENT RATE	2.5-9	9-24	18-33	30-45	2.5-45

*Total base assessment rates do not include the depository institution debt adjustment.

**The unsecured debt adjustment cannot exceed the lesser of 5 basis points or 50 percent of an insured depository institution's initial base assessment rate; thus for example, an insured depository institution with an initial base assessment rate of 5 basis points will have a maximum unsecured debt adjustment of 2.5 basis points and cannot have a total base assessment rate lower than 2.5 basis points.

On November 12, 2009, the FDIC adopted a final rule to require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. The prepaid assessment was collected on December 30, 2009, along with the institution’s regular quarterly risk-based deposit insurance assessment for the third quarter of 2009. For purposes of calculating the prepaid assessment, each institution’s assessment rate was its total base assessment rate in effect on September 30, 2009. In calculating the prepayment attributable to 2011 and thereafter, it is calculated using the September 29, 2009 increase in 2011 base assessment rates. In addition, future deposit growth was reflected in the prepayment by assuming that an institution’s third quarter 2009 assessment base would be increased quarterly at a 5 percent annual growth rate through the end of 2012. The FDIC began to draw down institutions’ prepaid assessments on March 30, 2010, representing payment for the regular quarterly risk-based assessment for the fourth quarter of 2009. In announcing these initiatives, the FDIC stated that, while the prepaid assessment would not immediately affect bank earnings, each institution would record the entire amount of its prepaid assessment as a prepaid expense asset as of December 30, 2009, the date the payment was made and, as of December 31, 2009 and each quarter thereafter, record an expense or charge to earnings for its regular quarterly assessment and an offsetting credit to the prepaid assessment until the asset is exhausted. Once the asset is exhausted, institutions would resume paying and accounting for quarterly deposit insurance assessments as they currently do. The total amount of the Bank’s deposit insurance assessment prepayment was $3.1 million.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, that was enacted by Congress on July 15, 2010, and was signed into law by President Obama on July 21, 2010, enacted a number of changes to the federal deposit insurance regime that will affect the deposit insurance assessments the Bank will be obligated to pay in the future. For example:

The law permanently raises the federal deposit insurance limit to $250,000 per account ownership. This change may have the effect of increasing losses to the FDIC insurance fund on future failures of other insured depository institutions.

The new law makes deposit insurance coverage unlimited in amount for non-interest bearing transaction accounts until December 31, 2012. This change may also have the effect of increasing losses to the FDIC insurance fund on future failures of other insured depository institutions.

The law increases the insurance fund’s minimum designated reserve ratio from 1.15 to 1.35, and removes the current 1.50 cap on the reserve ratio. The law gives the FDIC discretion to suspend or limit the declaration or payment of dividends even when the reserve ratio exceeds the minimum designated reserve ratio.

The Dodd-Frank Act expands the base for FDIC insurance assessments, requiring that assessments be based on the average consolidated total assets less tangible equity capital of a financial institution. On February 7, 2011, the FDIC approved a final rule to implement the foregoing provision of the Dodd-Frank Act and to make other changes to the deposit insurance assessment system applicable to insured depository institutions with over $10 billion in assets. Among other things, the final rule eliminates risk categories and the use of long-term debt issuer ratings in calculating risk-based assessments, and instead implements a scorecard method, combining CAMELS ratings and certain forward-looking financial measures to assess the risk an institution poses to the Deposit Insurance Fund. The final rule also revises the assessment rate schedule for large institutions and highly complex institutions to provide assessments ranging from 2.5 to 45 basis points. Except as specifically provided, the final rule took effect for the quarter beginning April 1, 2011, and will be reflected in the June 30, 2011 fund balance and the invoices for assessments due September 30, 2011.

Each of these changes may increase the rate of FDIC insurance assessments to maintain or replenish the FDIC’s deposit insurance fund. This could, in turn, raise the Bank’s future deposit insurance assessment costs. On the other hand, the law changes the deposit insurance assessment base so that it will generally be equal to consolidated assets less tangible equity. This change of the assessment base from an emphasis on deposits to an emphasis on assets is generally considered likely to cause larger banking organizations to pay a disproportionately higher portion of future deposit insurance assessments, which may, correspondingly, lower the level of deposit insurance assessments that smaller community banks such as the Bank may otherwise have to pay in the future. On December 14, 2010, the FDIC issued a final rule setting the insurance fund’s designated reserve ratio at 2, which is in excess of the 1.35 minimum designated reserve ratio established by the Dodd-Frank Act. While it is likely that the new law will increase the Bank’s future deposit insurance assessment costs, the specific amount by which the new law’s combined changes will affect the Bank’s deposit insurance assessment costs is hard to predict, particularly because the new law gives the FDIC enhanced discretion to set assessment rate levels.

In addition to deposit insurance assessments, banks are subject to assessments to pay the interest on Financing Corporation bonds. The Financing Corporation was created by Congress to issue bonds to finance the resolution of failed thrift institutions. The FDIC sets the Financing Corporation assessment rate every quarter. The current annual Financing Corporation assessment rate is $0.0100 for each $100 of deposits, which we anticipate will result in an aggregate estimated FICO assessment payment by the Bank of $51,000 in 2011.

Material Trends and Uncertainties. The global and U.S. economies are experiencing significantly reduced business activity as a result of disruptions in the financial system during the past three years. The United States, Europe and many other countries across the globe are struggling with too much debt and weaker streams of revenues as a result of recessionary pressures and high unemployment. Dramatic declines in the housing market, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. During the quarter, local residential real estate activity has picked up in most parts of the Third Federal Reserve District. The sales pace has been relatively stronger for middle and low-price homes and weaker for higher priced homes. Real estate agents attributed the improved sales pace to the usual seasonal gain and buyers' concern that mortgage loan rates are likely to increase in the future.

As a result of the recession, retail customers may delay borrowing from DNB as unemployment remains high and availability to borrow against equity in primary residences diminishes. In addition, many commercial customers have postponed their capital purchases until they see signs of an improving economy and clear direction from the legislative branch of the government. Locally, Third District banks that were contacted for the Beige Book in May of 2011, gave mixed reports on loan volume outstanding. Some posted increases in consumer and business loans, but others reported drops in these categories since the last Beige Book. On balance, total credit extended by banks in the region has been fairly flat.

Although DNB’s earnings have been impacted by the general economic conditions, the impact has not been as severe as it has been in many parts of the nation, due to a relatively healthier economic climate in the Third Federal Reserve District and specifically Chester County. DNB's franchise spans both Chester and Delaware counties in southeastern Pennsylvania. The majority of loans have been made to businesses and individuals in Chester County and the majority of deposits are from businesses and individuals within the County. According to available census data, Chester County's population has grown at approximately 15%, compared to 13% for the nation and 3% for the Commonwealth of Pennsylvania. The median household income in Chester County is $72,288 and the County's ranks 14th nationally in disposable income. The unemployment rate stood at 5.8% as of December 2010, compared to a Pennsylvania unemployment rate of 8.1%. Traditionally, the unemployment rate has been the lowest in the surrounding five-county area and it ranks among the lowest unemployment rates in the Commonwealth. Chester County has a civilian labor force of 266,100, with manufacturing jobs representing 23.1% of the workforce and retail shopping comprising 13.8% of the total employment. During the last few years, the County has been able to keep most of its major employers, however some of them have downsized in order to remain competitive. Chester County is home to several Fortune 500 companies. Thirteen Chester County employers have 1,000 employees or more. Of these 13 companies, two companies have more than 5,000 employees.

As the U.S. and local economy moves through a period of reduced business activity and historically high unemployment rates, delinquencies will rise as the value of homes decline and DNB’s borrowers experience financial difficulty due to corporate downsizing, reduced sales, or other negative events which may impact their ability to meet their contractual loan payments. As a result growth in the loan portfolio and continued negative trends in the economy and their impact on our borrowers’ ability to repay their loans, DNB made a $852,000 provision for credit losses during the six months ending June 30, 2011.

Regulatory Initiatives Related to Our Industry. The federal government is considering a variety of reforms related to banking and the financial industry including, without limitation, the newly adopted Dodd-Frank Act. The Dodd-Frank Act is intended to promote financial stability in the U.S., reduce the risk of bailouts and protect against abusive financial services practices by improving accountability and transparency in the financial system and ending “to big to fail” institutions. It is the broadest overhaul of the U.S. financial system since the Great Depression, and much of its impact will be determined by the scope and substance of many regulations that will need to be adopted by various regulatory agencies to implement its provisions. For these reasons, the overall impact on DNB and its subsidiaries is unknown at this time.

The Dodd-Frank Act delegates to various federal agencies the task of implementing its many provisions through regulation. Hundreds of new federal regulations, studies and reports addressing all of the major areas of the new law, including the regulation of banks and their holding companies, will be required, ensuring that federal rules and policies in this area will be further developing for months and years to come. Based on the provisions of the Dodd-Frank Act and anticipated implementing regulations, it is highly likely that banks and thrifts as well as their holding companies will be subject to significantly increased regulation and compliance obligations.

The Dodd-Frank Act could require us to make material expenditures, in particular personnel training costs and additional compliance expenses, or otherwise adversely affect our business or financial results. It could also require us to change certain of our business practices, adversely affect our ability to pursue business opportunities we might otherwise consider engaging in, cause business disruptions and/or have other impacts that are as-of-yet unknown to DNB and the Bank. Failure to comply with these laws or regulations, even if inadvertent, could result in negative publicity, fines or additional licensing expenses, any of which could have an adverse effect on our cash flow and results of operations. For example, a provision of the Dodd-Frank Act is intended to preclude bank holding companies from treating future trust preferred securities issuances as Tier 1 capital for regulatory capital adequacy purposes. This provision may narrow the number of possible capital raising opportunities DNB and other bank holding companies might have in the future. As another example, the new law establishes the Consumer Financial Protection Bureau, which has been given substantive rule-making authority under most of the consumer protection regulations affecting the Bank and its customers. The Bureau and new rules it will issue may materially affect the methods and costs of compliance by the Bank in connection with future consumer-related transactions.

Regulatory Initiatives Related to Capital and Liquidity. The Basel Committee on Banking Supervision (the “Basel Committee”) released a comprehensive list of proposals for changes to capital, leverage, and liquidity requirements for banks in December 2009 (commonly referred to as “Basel III”). In July 2010, the Basel Committee announced the design for its capital and liquidity reform proposals.

In September 2010, the oversight body of the Basel Committee announced minimum capital ratios and transition periods providing: (i) the minimum requirement for the Tier 1 common equity ratio will be increased from the current 2.0% level to 4.5% (to be phased in by January 1, 2015); (ii) the minimum requirement for the Tier 1 capital ratio will be increased from the current 4.0% to 6.0% (to be phased in by January 1, 2015); (iii) an additional 2.5% of Tier 1 common equity to total risk-weighted assets (to be phased in between January 1, 2016 and January 1, 2019; and (iv) a minimum leverage ratio of 3.0% (to be tested starting January 1, 2013). The proposals also narrow the definition of capital, excluding instruments that no longer qualify as Tier 1 common equity as of January 1, 2013, and phasing out other instruments over several years. It is unclear how U.S. banking regulators will define “well-capitalized” in their implementation of Basel III.

The liquidity proposals under Basel III include: (i) a liquidity coverage ratio (to become effective January 1, 2015); (ii) a net stable funding ratio (to become effective January 1, 2018); and (iii) a set of monitoring tools for banks to report minimum types of information to their regulatory supervisors.

Many of the details of the new framework related to minimum capital levels and minimum liquidity requirements in the Basel Committee’s proposals will remain uncertain until the final release is issued later this year. Implementation of the final provisions of Basel III will require implementing regulations and guidelines by U.S. banking regulators. Implementation of these new capital and liquidity requirements has created significant uncertainty with respect to the future liquidity and capital requirements for financial institutions. Therefore, we are not able to predict at this time the content of liquidity and capital guidelines or regulations that may be adopted by regulatory agencies or the impact that any changes in regulation may have on the Corporation and the Bank.

Other Material Challenges, Risks and Opportunities. As a financial institution, DNB's earnings are significantly affected by general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the United States economy and local economics in which we operate. As mentioned above in Material Trends and Uncertainties, the economic downturn, increased unemployment, and other events negatively impact household and/or corporate incomes and could decrease the demand for DNB's loan and non-loan products and services and increase the number of customers who fail to pay interest or principal on their loans. Geopolitical conditions can also affect DNB's earnings. Acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and our military conflicts including the war in Afghanistan and Iraq, could impact business conditions in the United States.

CRITICAL ACCOUNTING POLICIES

The following discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principals. Generally accepted accounting principles are complex and require management to apply significant judgment to various accounting, reporting and disclosure matters. Management must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. Actual results may differ from these estimates under different assumptions or conditions.

In management's opinion, the most critical accounting policies and estimates impacting DNB's consolidated financial statements are listed below. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. For a complete discussion of DNB's significant accounting policies, see the footnotes to the Consolidated Financial Statements included in DNB's 10-K for the year ended December 31, 2010.

Determination of the allowance for credit losses. Credit loss allowance policies involve significant judgments, estimates and assumptions by management which may have a material impact on the carrying value of net loans and leases and, potentially, on the net income recognized by DNB from period to period. The allowance for credit losses is based on management’s ongoing evaluation of the loan and lease portfolio and reflects an amount considered by management to be its best estimate of the amount necessary to absorb known and inherent losses in the portfolio. Management considers a variety of factors when establishing the allowance, such as the impact of current economic conditions, diversification of the portfolios, delinquency statistics, results of loan review and related classifications, and historic loss rates. In addition, certain individual loans which management has identified as problematic are specifically provided for, based upon an evaluation of the borrower’s perceived ability to pay, the estimated adequacy of the underlying collateral and other relevant factors. In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for credit losses. They may require additions to the allowance based upon their judgments about information available to them at the time of examination. Although provisions have been established and segmented by type of loan, based upon management’s assessment of their differing inherent loss characteristics, the entire allowance for credit losses is available to absorb further losses in any category.

Management uses significant estimates to determine the allowance for credit losses. Because the allowance for credit losses is dependent, to a great extent, on conditions that may be beyond DNB’s control, management’s estimate of the amount necessary to absorb credit losses and actual credit losses could differ. DNB’s current judgment is that the allowance for credit losses remains appropriate at June 30, 2011. For a description of DNB’s accounting policies in connection with its allowance for credit losses, see, “Allowance for Credit Losses”, in Management’s Discussion and Analysis.

Realization of deferred income tax items. Estimates of deferred tax assets and deferred tax liabilities make up the asset category titled “net deferred taxes”. These estimates involve significant judgments and assumptions by management, which may have a material impact on the carrying value of net deferred tax assets for financial reporting purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance would be established against deferred tax assets when in the judgment of management, it is more likely than not that such deferred tax assets will not become available. For a more detailed description of these items, refer to Footnote 11 (Federal Income Taxes) to DNB’s consolidated financial statements for the year ended December 31, 2010.

The Footnotes to DNB's most recent Consolidated Financial Statements as set forth in DNB's Annual Report 10-K identify other significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of DNB and its results of operations.

FINANCIAL CONDITION

DNB's total assets were $630.0 million at June 30, 2011 compared to $602.3 million at December 31, 2010. The $27.7 million increase in total assets was primarily attributable to a $21.3 million increase in loans and leases before allowance for credit losses, $5.0 million increase in investment securities and $4.1 million increase in cash and cash equivalents.

Investment Securities. Investment securities at June 30, 2011 were $155.6 million compared to $150.6 million at December 31, 2010. The $5.0 million increase in investment securities was primarily due to $38.3 million in sales, principal pay-downs and maturities, offset by the purchase of $41.9 million in investment securities and an increase in unrealized gain of $2.4 million.

As of June 16, 2011, DNB reclassified 3 mortgage backed securities and 2 collateralized mortgage obligations with book values (net carrying amount) of $12.5 million and $7.7 million, respectively, from available-for-sale (AFS) to held-to-maturity (HTM). Reclassifying these 5 securities to HTM will reduce the volatility and possible future negative effect on DNB’s capital ratios, because HTM securities are not marked-to-market through other comprehensive income, but carried at their amortized cost basis. In addition, the 5 securities that were reclassified to HTM will continue to produce strong cash flows for DNB's operating and funding needs. The fair value of the 3 mortgage backed securities and 2 collateralized mortgage obligations was $12.4 million and $7.7 million, respectively at June 16, 2011, the date of their reclassification. The $116,000 difference between their book value and their fair value will be amortized as an adjustment to the carrying value of the investment securities over the remaining lives.

Gross Loans and Leases. DNB’s loans and leases increased $21.3 million to $417.5 million at June 30, 2011 compared to $396.2 million at December 31, 2010. Total commercial loans increased $25.4 million, while residential loans, consumer loans and commercial leases declined $2.0 million, $1.5 million and $513,000, respectively.

Deposits. Deposits were $518.6 million at June 30, 2011 compared to $492.7 million at December 31, 2010. Deposits increased $25.9 million or 5.25% during the six-month period ended June 30, 2011. Core deposits, which are comprised of demand, NOW, money markets and savings accounts, increased by $36.9 million while time deposits decreased by $11.0 million.

Borrowings. Borrowings were $59.1 million at June 30, 2011 compared to $60.2 million at December 31, 2010. The decrease of $1.1 million or 1.90% was primarily due to a $5.0 million decrease in FHLB advances, offset by a $5.8 million increase in repurchase agreements.

Stockholders’ Equity.Stockholders' equity was $48.7 million at June 30, 2011 compared to $45.2 million at December 31, 2010. The increase in stockholders’ equity was primarily a result of year-to-date earnings of $2.3 million and a $1.5 million, net-of-tax other comprehensive income adjustment for unrealized gains on the securities portfolio. These additions to stockholders equity were partially offset by $160,000 of dividends paid on DNB’s common stock and $294,000 of dividends accrued on DNB’s Fixed Rate Cumulative Perpetual Preferred Stock.

RESULTS OF OPERATIONS

SUMMARY

Net income for the three and six-month periods ended June 30, 2011 was $1.3 million and $2.3 million compared to $947,000 and $1.6 million for the same periods in 2010. Diluted earnings per share for the three and six-month periods ended June 30, 2011 were $.42 and $.74 compared to $0.30 and $0.50 for the same periods in 2010. The $342,000 increase during the most recent three-month period was attributable to a $669,000 increase in net interest income before provision for credit losses and a $54,000 decrease in non-interest expense offset by a $205,000 decrease in non-interest income, a $151,000 increase in income tax expense and a $26,000 increase in provision for credit losses. The $681,000 increase during the six-month period was attributable to a $1.4 million increase in net interest income before provision for credit losses and a $402,000 decrease in non-interest expense, offset by a $813,000 decrease in non-interest income, a $325,000 increase in income tax expense and a $26,000 increase in the provision for credit losses.

NET INTEREST INCOME

DNB's earnings performance is primarily dependent upon its level of net interest income, which is the excess of interest income over interest expense. Interest income includes interest earned on loans, investments and federal funds sold and interest-earning cash, as well as loan fees and dividend income earned on investment securities. Interest expense includes interest on deposits, FHLB advances, repurchase agreements, Federal funds purchased and other borrowings.

Net interest income after provision for credit losses for the three and six-month periods ended June 30, 2011 was $5.0 million and $9.8 million, compared to $4.4 million and $8.3 million for the same periods in 2010. Interest income for the three and six-month periods ended June 30, 2011 was $6.6 million and $13.1 million compared to $6.5 million and $13.2 million for the same periods in 2010. The yield on interest-earning assets for the three and six-month periods ended June 30, 2011 was 4.47% and 4.49% compared to 4.44% and 4.43% for the same periods in 2010. Interest expense for the three and six-month periods ended June 30, 2011 was $1.2 million and $2.5 million compared to $1.8 million and $4.0 million for the same periods in 2010. The decrease in interest expense during both periods was primarily attributable to lower rates on interest-bearing liabilities and a shift out of higher cost borrowings and time deposits into lower cost core deposits (which include demand, money market, NOW and savings). The composite cost of funds for the three and six-month periods ended June 30, 2011 was .86% and .89%, compared to 1.26% and 1.41% for the same periods in 2010. The net interest margin for the three and six-month periods ended June 30, 2011 was 3.65% and 3.63%, compared to 3.23% and 3.07% for the same periods in 2010.

Interest on loans and leases was $5.7 million and $11.3 million for the three and six-month periods ended June 30, 2011, compared to $5.2 million and $10.4 million for the same periods in 2010. The increase during both periods was primarily the result of higher average balances on the portfolio. The average balance of loans and leases was $410.5 million with an average yield of 5.54% for the current quarter compared to $365.9 million with an average yield of 5.71% for the same period in 2010. The average balance of loans and leases was $407.7 million with an average yield of 5.57% for the current six months compared to $363.2 million with an average yield of 5.72% for the same period in 2010.

Interest and dividends on investment securities was $940,000 and $1.8 million for the three and six-month periods ended June 30, 2011, compared to $1.3 million and $2.8 million for the same periods in 2010. The average balance of investment securities was $154.6 million with an average yield of 2.44% for the current quarter compared to $178.1 million with an average yield of 2.86% for the same period in 2010. The average balance of investment securities was $152.7 million with an average yield of 2.33% for the current six months compared to $187.4 million with an average yield of 2.98% for the same period in 2010. The decrease in the yield during both periods was primarily the result of a declining interest rate environment, coupled with the sales of certain higher yielding securities.

Interest on deposits was $864,000 and $1.8 million for the three and six-month periods ended June 30, 2011, compared to $1.3 million and $2.8 million for the same periods in 2010. The average balance of deposits was $512.7 million with an average rate of 0.68% for the current quarter compared to $497.6 million with an average rate of 1.02% for the same period in 2010. The average balance of deposits was $505.1 million with an average rate of .70% for the six months ended June 30, 2011 compared to $504.4 million with an average rate of 1.11% for the same period in 2010. The decrease in rate during both periods was primarily attributable to a lower interest rate environment.

Interest on borrowings was $347,000 and $723,000 for the three and six-month periods ended June 30, 2011, compared to $503,000 and $1.2 million for the same periods in 2010. The average balance of borrowings was $54.2 million with an average rate of 2.56% for the current quarter compared to $66.9 million with an average rate of 3.02% for the same period in 2010. The average balance of borrowings was $55.0 million with an average rate of 2.65% for the six months ended June 30, 2011 compared to $71.8 million with an average rate of 3.46% for the same period in 2010. The decrease in the average balance and the average rate on borrowings during the six months ended June 30, 2011 compared to the same period in 2010 was due to pay-downs resulting from our strategy to shift out of higher cost borrowings into lower cost core deposits in 2010.

ALLOWANCE FOR CREDIT LOSSES

To provide for known and inherent losses in the loan and lease portfolios, DNB maintains an allowance for credit losses. Provisions for credit losses are charged against income to increase the allowance when necessary. Loan and lease losses are charged directly against the allowance and recoveries on previously charged-off loans and leases are added to the allowance. In establishing its allowance for credit losses, management considers the size and risk exposure of each segment of the loan and lease portfolio, past loss experience, present indicators of risk such as delinquency rates, levels of non-accruals, the potential for losses in future periods, and other relevant factors. Management’s evaluation of criticized and classified loans generally includes reviews of borrowers of $100,000 or greater. Consideration is also given to examinations performed by regulatory agencies, primarily the Office of the Comptroller of the Currency (“OCC”).

Management reviews and establishes the adequacy of the allowance for credit losses in accordance with U.S. generally accepted accounting principles, guidance provided by the Securities and Exchange Commission and as prescribed in OCC Bulletin 2006-47. Its methodology for assessing the appropriateness of the allowance consists of several key elements which include: specific allowances for identified impaired loans; and allowances by loan type for pooled homogenous loans. In considering national and local economic trends, we review a variety of information including Federal Reserve publications, general economic statistics, foreclosure rates and housing statistics published by third parties. We believe this improves the measure of inherent loss over a complete economic cycle and reduces the impact for qualitative adjustments. The unallocated portion of the allowance is intended to provide for probable losses not otherwise accounted for in management’s other elements of its overall estimate. An unallocated component is maintained to cover uncertainties such as changes in the national and local economy, concentrations of credit, expansion into new markets and other factors that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

In addition, DNB reviews historical loss experience for the commercial real estate, commercial, residential real estate, home equity and consumer installment loan pools to determine a historical loss factor. In addition, management may modify these historical loss factors by the qualitative factors discussed in this section. The historical loss factors are then applied to the current portfolio balances to determine the required reserve percentage for each loan pool based on risk rating. Historical losses are segregated into risk-similar groups and a loss ratio is determined for each group over a three year period. The three year average loss ratio by type is then used to calculate the estimated loss based on the current balance of each group. This three year time period is appropriate given the DNB’s historical level of losses and, more importantly, represents the current economic environment.

This analysis is intended to assess the potential for loss within the loan portfolio and to substantiate the adequacy of the allowance. Should the analysis indicate that the allowance is not adequate, management will recommend a provision expense be made in an amount equal to the shortfall derived. In establishing and reviewing the allowance for adequacy, emphasis has been placed on utilizing the methodology prescribed in OCC Bulletin 2006-47. Management believes that the following factors create a comprehensive system of controls in which management can monitor the quality of the loan portfolio. Consideration has been given to the following factors and variables which may influence the risk of loss within the loan portfolio:

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Changes in the nature and volume of the portfolio and in the terms of loans.

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Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans.

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The existence and effect of any concentrations of credit, and changes in the level of such concentrations.

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Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses.

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Changes in the experience, ability, and depth of lending management and other relevant staff.

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Changes in the quality of the institution’s loan review system.

•

Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments.

•

The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio.

•

Changes in the value of underlying collateral for collateral-dependent loans.

Portfolio risk includes the levels and trends in delinquencies, impaired loans, changes in the loan rating matrix and trends in volume and terms of loans. Management is satisfied with the stability of the past due and non-performing loans and believes there has been no further decline in the quality of the loan portfolio due to any trend in delinquent or adversely classified loans. In determining the adequacy of the allowance, management considered the deterioration of asset quality in DNB’s residential construction and residential first mortgage portfolios, which were factors contributing to the increase in the level of allowance during 2010 and 2009. In addition to ordering new appraisals and creating specific reserves on impaired loans, the allowance allocation rates were increased, reflective of delinquency trends which have been caused by continued weakness in the housing markets, falling home equity values, and rising unemployment. New appraisal values we have obtained for existing loans have generally been consistent with trends indicated by Case-Schiller and other indices.

Given the contraction in real estate values, DNB closely monitors the loan to value ratios of all classified assets and requires periodic current appraisals to monitor underlying collateral values. Management also reviews borrower, sponsorship and guarantor’s financial strength along with their ability and willingness to provide financial support of their obligations on an immediate and continuing basis.

There was a $426,000 provision made during the three months ended June 30, 2011, compared to $400,000 during the same period in 2010. There was an $852,000 provision made during the six months ended June 30, 2011, compared to $826,000 during the same period in 2010. DNB’s percentage of allowance for credit losses to total loans and leases was 1.54% at June 30, 2011 compared to 1.49% and 1.63% at December 31, 2010 and June 30, 2010, respectively. Management monitors DNB’s performance metrics including those ratios related to non-performing loans and leases. The allowance as a percentage of total loans and leases has been relatively flat over the last three years (1.3%-1.63%) at the same time DNB has seen some deterioration in the credit quality of the loan portfolio, as evidenced by the increase in non-performing assets since 2008 ($7.7 million, $13.7 million, $11.5 million and $10.9 million, at December 31, 2008, 2009 and 2010 and June 30, 2011, respectively). However, these increases do not directly impact DNB’s allowance for credit losses as management monitors each of its criticized and classified loans and leases on an individual basis in accordance with ASC 310. Underlying asset values which support collateral dependent loans are monitored on a periodic basis primarily through updated appraisals and reserves are established for any shortfalls in collateral values. In addition, despite the increase in the level of non-performing assets over the last 3 years, charge-offs have been low, relative to the size of the loan and lease portfolio and to the level of non-performing assets. Net charge-offs were $1.8 million in 2010 compared to $434,000 and $1.3 million in 2009 and 2008, respectively. The percentage of net charge-offs to total average loans and leases were 0.49%, 0.13% and 0.41% during the three years ending December 31, 2010. Management is not aware of any potential problem loans, which were accruing and current at June 30, 2011, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms and that would result in a significant loss to DNB.

The increase in the allowance for loan loss ratio reflects management’s estimate of the level of inherent losses in the portfolio, which continued to increase due to an increase in gross loans, a recessionary economy, continued high unemployment, a weakened housing market and deterioration in income-producing properties. The increase in the level of non-performing assets during the past two years, driven by residential homebuilder loans, commercial real estate loans and residential loans was a key determining factor in the assessment of inherent losses and, as a result, was an essential factor in determining the allowance level.

We typically establish a general valuation allowance on classified loans which are not impaired. In establishing the general valuation allowance, we segregate these loans by category. The categories used by DNB include “doubtful,” “substandard,” “special mention,” “watch list” and “pass.” For commercial and construction loans, the determination of the category for each loan is based on periodic reviews of each loan by our lending and credit officers as well as an independent, third-party consultant. The reviews include a consideration of such factors as recent payment history, current financial data, cash flow, financial projections, collateral evaluations, guarantor or sponsorship financial strength and current economic and business conditions. Categories for mortgage and consumer loans are determined through a similar review. Classification of a loan within a category is based on identified weaknesses that increase the credit risk of loss on the loan. Each category carries a loss factor for the allowance percentage to be assigned to the loans within that category. The allowance percentage, is determined based on inherent losses associated with each type of lending as determined through consideration of our loss history with each type of loan, trends in credit quality, qualitative factors and collateral values, and an evaluation of current economic and business conditions.

We establish a general allowance on non-classified loans to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem loans. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages to each category. An evaluation of each category is made to determine the need to further segregate the loans within each category by type. For our residential mortgage and consumer loan portfolios, we identify similar characteristics throughout the portfolio including credit scores, loan-to-value ratios and collateral. For our commercial real estate and construction loan portfolios, a further analysis is made in which we segregated the loans by type based on the purpose of the loan and the collateral properties securing the loan. Various risk factors for each type of loan are considered, including the impact of general economic and business conditions, collateral value trends, credit quality trends, qualitative factors and historical loss experience.

As of June 30, 2011, DNB had $10.9 million of non-performing assets, which included $6.9 million of non-performing or impaired loans and $4.0 million of OREO. Loans are reviewed for impairment in accordance with FASB ASC 310-10-35. Impaired loans can either be secured or unsecured, not including large groups of smaller balance loans that are collectively evaluated. Impairment is measured by the difference between the loan amount and the present value of the future cash flow discounted at the loan’s effective interest rate. Management measures loans for impairment by using the fair value of collateral for collateral dependent loans. In general, management reduces the amount of the appraisal by the estimated cost of acquisition and disposition of the underlying collateral and compares that adjusted value with DNB’s carrying value. As part of the general allowance, DNB reserves at the rate of approximately 6% to 10% on non-performing or impaired loans. DNB establishes a specific valuation allowance on impaired loans. Of the $7.0 million of impaired loans at June 30, 2011, $4.0 million had a valuation allowance of $578,000 and $3.0 million had no specific allowance above the general allowance. For those impaired loans that management determined that no specific valuation allowance was necessary, management has reviewed the appraisal for each loan and determined that there is no shortfall in the collateral. During the three months ended June 30, 2011, we recognized no charge-offs related to impaired loans. An impaired loan may not represent an expected loss.

We typically order new third-party appraisals or collateral valuations when a loan becomes impaired or is transferred to OREO. This is done within two weeks of a loan becoming impaired or a loan moving to OREO. It generally takes two to eight weeks to receive the appraisals, depending on the type of property being appraised. We recognize any provision or related charge-off within two weeks of receiving the appraisal after the appraisal has been reviewed by DNB. We generally order a new appraisal every twelve months, unless management determines more frequent appraisals are necessary. DNB had appraisals and valuations dated and reviewed within three months of December 31, 2010 for all impaired real estate loans having a balance of $100,000 or higher. Because appraisals utilize historical data in reaching valuation conclusions, the appraised or updated value may or may not reflect the actual sales price that we will receive at the time of sale. Management uses the qualitative factor “Changes in the value of underlying collateral for collateral-dependent loans” to establish a reserve to mitigate this risk.

Real estate appraisals typically include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property) and the cost approach. Not all appraisals utilize all three approaches to value. Depending on the nature of the collateral and market conditions, the appraiser may emphasize one approach over another in determining the fair value of collateral.

Appraisals may also contain different estimates of value based on the level of occupancy or future improvements. “As-is” valuations represent an estimate of value based on current market conditions with no changes to the collateral’s use or condition. “As-stabilized” or “as-completed” valuations assume that the collateral is improved to a stated standard or achieves its highest and best use in terms of occupancy. “As-stabilized” valuations may be subject to a present value adjustment for market conditions or the schedule for improvements.

In connection with the valuation process, we will typically develop an exit strategy for the collateral by assessing overall market conditions, the current condition and use of the asset and its highest and best use. For most income- producing real estate, investors value most highly a stable income stream from the asset; consequently, we conduct a comparative evaluation to determine whether conducting a sale on an “as-is” basis or on an “as-stabilized” basis is most likely to produce the highest net realizable value and compare these values with the costs incurred and the holding period necessary to achieve the “as stabilized” value.

Our estimates of the net realizable value of collateral include a deduction for the expected costs to sell the collateral or such other deductions as deemed appropriate. For most real estate collateral, we apply an eight to thirteen percent deduction to the value of real estate collateral to determine its expected costs to sell the asset. This estimate generally includes real estate commissions, one year of real estate taxes and miscellaneous repair and closing costs. If we receive a purchase offer that requires unbudgeted repairs, or if the expected holding period for the asset exceeds one year, then we include the additional real estate taxes and repairs or other holding costs in the expected costs to sell the collateral on a case-by-case basis.

Analysis of Allowance for Credit Losses

(Dollars in thousands)


	Six Months Ended June 30, 2011			Year Ended December 31, 2010			Six Months Ended June 30, 2010
Beginning balance	$	5,884		$	5,477		$	5,477
Provisions		852			2,216			826
Loans charged off:
Residential mortgage		(166	)		(520	)		(90	)
Commercial		(20	)		(577	)		(82	)
Lease financing		(187	)		(548	)		—
Consumer		—			(210	)		(129	)
Total charged off		(373	)		(1,855	)		(301	)
Recoveries:
Residential mortgage		62			15			6
Commercial		5			11			9
Lease financing		1			20			10
Consumer		12			—			1
Total recoveries		80			46			26
Ending balance	$	6,443		$	5,884		$	6,028

Reserve for unfunded loan commitments	$	113		$	150		$	104

The following table sets forth the composition of DNB’s allowance for credit losses at the dates indicated.

Composition of Allowance for Credit Losses

(Dollars in thousands)

Six Months Ended

June 30, 2011

Year Ended

December 31, 2010

Six Months Ended

June 30, 2010

	Amount		Percent of Loan Type to Total Loans			Amount		Percent of Loan Type to Total Loans			Amount		Percent of Loan Type to Total Loans
Residential mortgage	$	386		7	%	$	454		8	%	$	586		10	%
Commercial		4,685		81			4,387		80			4,483		74
Lease financing		19		—			86		—			50		1
Consumer		482		12			482		12			495		15
Unallocated		871		—			475		—			414		—
Total	$	6,443		100	%	$	5,884		100	%	$	6,028		100	%

Reserve for unfunded loan commitments	$	113		—		$	150		—		$	104		—

NON-INTEREST INCOME

Total non-interest income includes service charges on deposit products; fees received in connection with the sale of non-depository products and services, including fiduciary and investment advisory services offered through DNB Advisors; securities brokerage products and services and insurance brokerage products and services offered through DNB Financial Services; and other sources of income such as increases in the cash surrender value of bank owned life insurance ("BOLI"), net gains on sales of investment securities, loans and other real estate owned ("OREO") properties. In addition, DNB receives fees for cash management, merchant services, debit cards, safe deposit box rentals, lockbox services and similar activities.

Non-interest income for the three and six-month periods ended June 30, 2011 was $947,000 and $1.9 million, compared to $1.2 million and $2.7 million for the same period in 2010. The $205,000 decrease during the three months ended June 30, 2011 was mainly attributable to a $278,000 decrease in gains on sales of securities and a decrease of $64,000 in services charges on deposits (primarily non-sufficient funds and ATM fees), offset by a $93,000 gain on the sale of an SBA loan originated for that purpose, an increase of $25,000 in other income and an increase of $21,000 in wealth management fees. Gains on sales of securities were $1,000 for the three month period ended June 30, 2011 compared to $279,000 for the same period in 2010. Absent the gains on sales of investment securities for the three month periods, total non-interest income was up $73,000 quarter over quarter. During the six months ended June 30, 2011, non-interest income decreased $813,000 over the same period in 2010. This decrease was primarily due to prior period gains on sales of securities of $975,000 and a decrease in service charges on deposits of $131,000, offset by a $225,000 gain on the sale of SBA loans originated for that purpose, an increase of $56,000 in other income and an increase of $13,000 in wealth management. Gains on sales of securities were $2,000 for the six month period ended June 30, 2011 compared to $975,000 for the same period in 2010. Absent the gains on sales of investment securities for the six month periods, total non-interest income was up $160,000 over the same period in 2010.

NON-INTEREST EXPENSE

Non-interest expense includes salaries and employee benefits, furniture and equipment, occupancy, professional and consulting fees as well as printing and supplies, advertising & marketing, FDIC insurance, FHLB prepayment penalties and other less significant expense items. Non-interest expense for the three and six-month periods ended June 30, 2011 was $4.1 million and $8.3 million compared to $4.1 million and $8.7 million for the same periods in 2010. During the three months ended June 30, 2011, total non-interest expense decreased by $54,000. This decrease was primarily due to a $92,000 decrease in FDIC insurance expense, a $55,000 decrease in professional and consulting, a $44,000 decrease in other non-interest expense and a $44,000 decrease in furniture and equipment. This was offset by a $48,000 increase in occupancy expense (primarily rental expense), a $30,000 increase in salary and employee benefits, and a $14,000 increase in advertising & marketing. During the six months ended June 30, 2011, total non-interest expense decreased $402,000 or 4.59%. The decrease was attributable to a $560,000 prepayment penalty paid to the FHLB in the first quarter of 2010, a decrease in furniture and equipment of $72,000 (mainly due to lower depreciation) and a decrease in professional and consulting of $22,000. These were offset by increases in salary and employee benefits of $127,000, occupancy of $118,000 and advertising and marketing of $66,000. DNB’s non-interest expense to average assets ratio for the three and six-month periods ended June 30, 2011 was 2.65% and 2.76%, compared to 3.01% and 2.82% for the same period in 2010.

INCOME TAXES

Income tax expense for the three and six-month periods ended June 30, 2011 was $564,000 and $1.0 million compared to $413,000 and $684,000 for the same periods in 2010. The effective tax rate for the three and six-month periods ended June 30, 2011 was 30.5% and 30.5% compared to 30.4% and 29.7% for the same periods in 2010. Income tax expense for each period differs from the amount determined at the statutory rate of 34.0% due to tax-exempt income on loans and investment securities, DNB's ownership of BOLI policies, and tax credits recognized on a low-income housing limited partnership.

ASSET QUALITY

Non-performing assets totaled $10.9 million at June 30, 2011, compared to $11.1 million at March 31, 2011, $11.5 million at December 31, 2010 and $12.6 million at June 30, 2010. Total non-performing assets decreased $320,000 and $692,000 during the three and six-months ended June 30, 2011. The $320,000 decrease during the most recent quarter was primarily due to the sale of a residential OREO property combined with two partially charged off residential properties, one fully charged off residential property and multiple charged off commercial leases. This decrease was offset by the addition of one non-accrual residential property. Total non-performing assets decreased $1.7 million from June 30, 2010. As a result of the decrease in non-performing loans, the non-performing loans to total loans ratio decreased to 1.65% at June 30, 2011, down from 2.41% at June 30, 2010. The non-performing assets to total assets ratio decreased to 1.72% at June 30, 2011 from 2.04% at June 30, 2010. The allowance to non-performing loans and leases ratio increased from 67.7% at June 30, 2010 to 93.5% at June 30, 2011. DNB continues to work diligently to improve asset quality by adhering to strict underwriting standards and improving lending policies and procedures. Non-performing assets have, and will continue to have, an impact on earnings; therefore management intends to continue working aggressively to reduce the level of such assets.

Non-performing assets are comprised of non-accrual loans and leases, loans and leases delinquent over ninety days and still accruing, troubled debt restructurings (“TDRs”) as well as Other Real Estate Owned (“OREO”) and other repossessed assets. Non-accrual loans and leases are loans and leases for which the accrual of interest ceases when the collection of principal or interest payments is determined to be doubtful by management. It is the policy of DNB to discontinue the accrual of interest when principal or interest payments are delinquent 90 days or more (unless the loan principal and interest are determined by management to be fully secured and in the process of collection), or earlier if considered prudent. Interest received on such loans is applied to the principal balance, or may, in some instances, be recognized as income on a cash basis. A non-accrual loan or lease may be restored to accrual status when management expects to collect all contractual principal and interest due and the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms. OREO consists of real estate acquired by foreclosure. Other repossessed assets are primarily assets from DNB’s commercial lease portfolio that were repossessed. OREO and other repossessed assets are carried at the lower of cost or estimated fair value, less estimated disposition costs. Any significant change in the level of non-performing assets is dependent, to a large extent, on the economic climate within DNB’s market area.

DNB’s Credit Policy Committee monitors the performance of the loan and lease portfolio to identify potential problem assets on a timely basis. Committee members meet to design, implement and review asset recovery strategies, which serve to maximize the recovery of each troubled asset. As of June 30, 2011, DNB had $14.7 million of loans, which, although performing at that date, are believed to require increased supervision and review; and may, depending on the economic environment and other factors, become non-performing assets in future periods. The amount of such loans at December 31, 2010 was $11.3 million. The majority of the loans are secured by commercial real estate, with lesser amounts being secured by residential real estate, inventory and receivables.

Non-Performing Assets

(Dollars in thousands)


	June 30, 2011			December 31, 2010			June 30, 2010
Non-accrual loans:
Residential mortgage	$	1,918		$	2,334		$	2,766
Commercial mortgage		733			834			803
Commercial		4,076			3,722			4,853
Lease financing		76			273			143
Consumer		63			60			3
Total non-accrual loans		6,866			7,223			8,568
Loans 90 days past due and still accruing		23			—			335
Troubled debt restructurings		—			—			—
Total non-performing loans		6,889			7,223			8,903
Other real estate owned & other repossessed property		3,966			4,324			3,700
Total non-performing assets	$	10,855		$	11,547		$	12,603
Asset quality ratios:
Non-performing loans to total loans		1.65	%		1.82	%		2.41	%
Non-performing assets to total assets		1.72			1.92			2.04
Allowance for credit losses to:
Total loans and leases		1.54			1.49			1.63
Non-performing loans and leases		93.5			81.5			67.71

Included in the loan and lease portfolio are loans for which DNB has ceased the accrual of interest. If contractual interest income had been recorded on non-accrual loans, interest would have been increased as shown in the following table:

	Six Months Ended		Year Ended			Six Months Ended
(Dollars in thousands)	June 30, 2011		December 31, 2010			June 30, 2010
Interest income which would have been
recorded under original terms	$	165	$	452		$	217
Interest income recorded during the period		—		(42	)		(8	)
Net impact on interest income	$	165	$	410		$	209

Impaired loans are measured for impairment using the fair value of the collateral for collateral dependent loans. Information regarding impaired loans is presented as follows:

	Six Months Ended		Year Ended		Six Months Ended
(Dollars in thousands)	June 30, 2011		December 31, 2010		June 30, 2010
Total recorded investment	$	6,976	$	7,223	$	8,998
Impaired loans with a specific allowance		3,971		4,813		7,397
Impaired loans without a specific allowance		3,005		2,410		1,601
Average recorded investment		7,073		8,563		9,113
Specific allowance allocation		578		493		922
Total cash collected		823		2,457		1,386
Interest income recorded		6		113		56

LIQUIDITY AND CAPITAL RESOURCES

Management maintains liquidity to meet depositors’ needs for funds, to satisfy or fund loan commitments, and for other operating purposes. DNB’s foundation for liquidity is a stable and loyal customer deposit base, cash and cash equivalents, and a marketable investment portfolio that provides periodic cash flow through regular maturities and amortization, or that can be used as collateral to secure funding. As part of its liquidity management, DNB maintains assets that comprise its primary liquidity, which totaled $67.1 million at June 30, 2011. Primary liquidity includes investments, Federal funds sold and cash and due from banks, less pledged securities. DNB also anticipates scheduled payments and prepayments on its loan and mortgage-backed securities portfolios.

In addition, DNB maintains borrowing arrangements with various correspondent banks, the Federal Home Loan Bank of Pittsburgh and the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs. Through these relationships, DNB has available credit of approximately $181.5 million. As a member of the FHLB, we are eligible to borrow up to a specific credit limit which is determined by the amount of our residential mortgages, commercial mortgages and other loans that have been pledged as collateral. As of June 30, 2011, our Maximum Borrowing Capacity with the FHLB was $164.5 million. The total of our outstanding borrowings from the FHLB on that date was $20.0 million. At June 30, 2011, we also had available $17.0 million of unsecured federal funds lines of credit with other financial institutions as well as $30.0 million of available short or long term funding through the Certificate of Deposit Account Registry Service (CDARS) program. Management believes that DNB has adequate resources to meet its short-term and long-term funding requirements

On August 5, 2011, Standard & Poor's downgraded the credit rating of the U.S. Government and federal agencies, including the FHLB, from AAA to AA+ , with a negative outlook. These recent downgrades, and any future downgrades, in the credit ratings of the U.S. Government and the FHLB could likely increase the borrowing costs of the FHLB and possibly have a negative impact on its operations and long-term performance. It is possible this could have an adverse effect on the value of the Corporation's investment in FHLB stock. Please see "Item 1A - Risk Factors" later in this quarterly report on Form 10-Q for further discussion regarding the potential risks of such downgrades.

At June 30, 2011, DNB had $59.0 million in un-funded loan commitments. Management anticipates these commitments will be funded by means of normal cash flows. Certificates of deposit greater than or equal to $100,000 scheduled to mature in one year or less from June 30, 2011 totaled $40.2 million. Management believes that the majority of such deposits will be reinvested with DNB and that certificates that are not renewed will be funded by a reduction in Federal funds sold or by pay-downs and maturities of loans and investments.

The Corporation and the Bank have each met the definition of “well capitalized” for regulatory purposes on June 30, 2011. The Bank’s capital category is determined for the purposes of applying the bank regulators’ “prompt corrective action” regulations and for determining levels of deposit insurance assessments and may not constitute an accurate representation of the Corporation’s or the Bank’s overall financial condition or prospects. The Corporation’s capital exceeds the FRB’s minimum leverage ratio requirements for bank holding companies (see additional discussion included in Footnote 17 of DNB’s 10-K).

Under federal banking laws and regulations, DNB and the Bank are required to maintain minimum capital as determined by certain regulatory ratios. Capital adequacy for regulatory purposes, and the capital category assigned to an institution by its regulators, may be determinative of an institution’s overall financial condition.

The following table summarizes data and ratios pertaining to the Corporation and the Bank's capital structure.

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
DNB Financial Corporation
June 30, 2011:
Total risk-based capital	$	63,628		14.77	%	$	34,467		8.00	%		N/A		N/A
Tier 1 risk-based capital		58,233		13. 52			17,234		4.00			N/A		N/A
Tier 1 (leverage) capital		58,233		9.42			24,732		4.00			N/A		N/A
December 31, 2010:
Total risk-based capital	$	61,653		14.28	%	$	34,531		8.00	%		N/A		N/A
Tier 1 risk-based capital		56,255		13.03			17,265		4.00			N/A		N/A
Tier 1 (leverage) capital		56,255		9.25			24,324		4.00			N/A		N/A
DNB First, N.A.
June 30, 2011:
Total risk-based capital	$	63,718		14.80	%	$	34,434		8.00	%	$	43,042		10.00	%
Tier 1 risk-based capital		58,323		13. 55			17,217		4.00			25,825		6.00
Tier 1 (leverage) capital		58,323		9.44			24,714		4.00			30,893		5.00
December 31, 2010:
Total risk-based capital	$	61,288		14.21	%	$	34,497		8.00	%	$	43,121		10.00	%
Tier 1 risk-based capital		55,890		12.96			17,248		4.00			25,872		6.00
Tier 1 (leverage) capital		55,890		9.20			24,306		4.00			30,383		5.00

In addition, the Federal Reserve Bank (the "FRB") leverage ratio rules require bank holding companies to maintain a minimum level of "primary capital" to total assets of 5.5% and a minimum level of "total capital" to total assets of 6%. For this purpose, (i) "primary capital" includes, among other items, common stock, certain perpetual debt instruments such as eligible Trust preferred securities, contingency and other capital reserves, and the allowance for loan losses, (ii) "total capital" includes, among other things, certain subordinated debt, and "total assets" is increased by the allowance for loan losses. DNB's primary capital ratio and its total capital ratio are both well in excess of FRB requirements.

REGULATORY MATTERS

Dividends payable to the Corporation by the Bank are subject to certain regulatory limitations. Under normal circumstances, the payment of dividends in any year without regulatory permission is limited to the net profits (as defined for regulatory purposes) for that year, plus the retained net profits for the preceding two calendar years.

FORWARD-LOOKING STATEMENTS

DNB Financial Corp. (the “Corporation”), may from time to time make written or oral “forward-looking statements,” including statements contained in the Corporation’s filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q and the exhibits hereto and thereto), in its reports to shareholders and in other communications by the Corporation, which are made in good faith by the Corporation pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements with respect to the Corporation’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Corporation’s control). The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause the Corporation’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Corporation conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; the recent downgrade, and any future downgrades, in the credit rating of the U.S. Government and federal agencies; inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Corporation and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services; the willingness of users to substitute competitors’ products and services for the Corporation’s products and services; the success of the Corporation in gaining regulatory approval of its products and services, when required; the impact of changes in laws and regulations applicable to financial institutions (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and saving habits; the nature, extent, and timing of governmental actions and reforms, including the rules of participation for the Trouble Asset Relief Program voluntary Capital Purchase Program under the Emergency Economic Stabilization Act of 2008, which may be changed unilaterally and retroactively by legislative or regulatory actions; and the success of the Corporation at managing the risks involved in the foregoing.

The Corporation cautions that the foregoing list of important factors is not exclusive. Readers are also cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this report, even if subsequently made available by the Corporation on its website or otherwise. The Corporation does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Corporation to reflect events or circumstances occurring after the date of this report.

For a complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review our filings with the Securities and Exchange Commission, including this Form 10-Q, as well as any changes in risk factors that we may identify in our quarterly or other reports filed with the SEC.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

To measure the impacts of longer-term asset and liability mismatches beyond two years, DNB utilizes an Economic Value of Equity ("EVE") model. The EVE model measures the potential price risk of equity to changes in interest rates and factors in the optionality included on the balance sheet. EVE analysis is used to dynamically model the present value of asset and liability cash flows, with rates ranging up or down 200 basis points. The EVE is likely to be different if rates change. Results falling outside prescribed ranges may require action by management. At June 30, 2011 and December 31, 2010, DNB's variance in the EVE as a percentage of assets with an instantaneous and sustained parallel shift of 200 basis points was within its negative 3% guideline, as shown in the table below. The change as a percentage of the present value of equity with a 200 basis point increase at June 30, 2011 was slightly above DNB's negative 25% guideline. Possible actions by management to reduce this variance in a +200 basis point

scenario include the reduction of longer term assets, shorten the duration of the investment portfolio to reduce interest rate risk and price volatility, shorten the term of fixed rate loans or originate variable rate loans, increase longer term certificates and increase capital levels through increased earnings. The change as a percentage of the present value of equity with a 200 basis point increase at December 31, 2010 was within DNB’s negative 25% guideline.

(Dollars in thousands)	June 30, 2011								December 31, 2010

Change in rates	Flat			-200	bp		+200	bp	Flat			-200	bp		+200	bp
EVE	$	44,124	$	48,001		$	32,444		$	41,867	$	44,026		$	33,395
Change				3,877			(11,681	)				2,159			(8,472	)
Change as % of assets				0.62	%		(1.9	%)				0.4	%		(1.4	%)
Change as % of PV equity				8.79	%		(26.5	%)				5.2	%		(20.2	%)

ITEM 4T- CONTROLS AND PROCEDURES

DNB’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of June 30, 2011, the end of the period covered by this report, in accordance with the requirements of Exchange Act Rule 240.13a-15(b). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that DNB’s current disclosure controls and procedures are effective and timely, providing them with material information relating to DNB and its subsidiaries required to be disclosed in the report DNB files under the Exchange Act.

Management of DNB is responsible for establishing and maintaining adequate internal control over financial reporting for DNB, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. There was no change in the DNB’s “internal control over financial reporting” (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fiscal quarter ended June 30, 2011, that has materially affected, or is reasonably likely to materially affect, DNB’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed under “Part I – Item 1A – Risk Factors” in the Corporation’s 2010 Annual Report, as supplemented and updated by the discussion below.

Downgrades in U.S. Government and federal agency securities could adversely affect the Corporation--The full impact of the recent downgrade of the U.S. Government and federal agency from an AAA to an AA+ credit rating is currently unknown. However, in addition to causing economic and financial market disruptions, the recent downgrade, and any future downgrades and/or failures to raise the U.S. debt limit if necessary in the future, could, among other things, materially adversely affect the market value of the U.S. and other government and governmental agency securities that we hold, the availability of those securities as collateral for borrowing, and our ability to access capital markets on favorable terms, as well as have other material adverse effects on the operation of our business and our financial results and condition.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no unregistered sales of equity securities during the quarter ended June 30, 2011. The following table provides information on repurchases by DNB of its common stock in each month of the quarter ended June 30, 2011:

Period	Total Number Of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (a)
April 1, 2011 – April 30, 2011		—	$	—		—		63,016
May 1, 2011 – May 31, 2011		—		—		—		63,016
June 1, 2011 – June 30, 2011		—		—		—		63,016
Total		—	$	—		—

On July 25, 2001, DNB authorized the buyback of up to 175,000 shares of its common stock over an indefinite period. On August 27, 2004, DNB increased the buyback from 175,000 to 325,000 shares of its common stock over an indefinite period.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4. (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

Not Applicable

ITEM 6. EXHIBITS

Exhibits required by Item 601 of Regulation S-K.

The exhibits listed on the Index to Exhibits on pages 44-47 of this report are incorporated by reference or filed or furnished herewith in response to this Item.

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.

		DNB FINANCIAL CORPORATION

August 12, 2011	BY:	/s/ William S. Latoff
		William S. Latoff, Chairman of the Board and Chief Executive Officer



August 12, 2011	BY:	/s/ Gerald F. Sopp
		Gerald F. Sopp, Chief Financial Officer and Executive Vice President

Index to Exhibits

Exhibit No. Under Item 601 of Regulation S-K
3	(i)	Amended and Restated Articles of Incorporation, as amended effective December 8, 2008, filed March 31, 2009 as item 3(i) to Form 10-K for the fiscal year-ended December 31, 2008 (No. 1-34242) and incorporated herein by reference.

	(ii)	Bylaws of the Registrant as amended December 8, 2008, filed March 31, 2009 as item 3(ii) to Form 10-K for the fiscal year-ended December 31, 2008 (No. 1-34242) and incorporated herein by reference.

	(iii)	Certificate of Designations of Fixed Rate Cumulative Preferred Stock, Series 2008A of DNB Financial Corporation, filed as Exhibit 4.3 to Form 8-K (No. 1-34242) on January 26, 2009 and incorporated herein by reference.

4	(a)	Registrant has certain debt obligations outstanding, for none of which do the instruments defining holders rights authorize an amount of securities in excess of 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. Registrant agrees to furnish copies of such agreements to the Commission on request.

	(b)	Form of Preferred Stock Certificate to the United States Department of the Treasury, filed as Exhibit 4.4 to Form 8-K (No. 1-34242) on January 30, 2009 and incorporated herein by reference.

	(c)	Form of Warrant to Purchase Common Stock to the United States Department of the Treasury, filed as Exhibit 4.5 to Form 8-K (No. 1-34242) on January 30, 2009 and incorporated herein by reference.

	(d)	Form of Certificate for 13,000 shares of Non-Cumulative Perpetual Preferred Stock, Series 2011A, $10.00 par value per share of DNB Financial Corporation, filed as Exhibit 99.2 to Form 8-K (No. 1-34242) on August 8, 2011 and incorporated herein by reference.

	(e)	Certificate of Designation of Non-Cumulative Perpetual Preferred Stock, Series 2011A, $10.00 par value per share, filed as Exhibit 99.3 to Form 8-K (No. 1-34242) on August 8, 2011 and incorporated herein by reference.

10	(a)*	Amended and Restated Change of Control Agreements dated December 20, 2006 between DNB Financial Corporation and DNB First, N.A. and the following executive officers, each in the form filed March 26, 2007 as item 10(a) to Form 10-K for the fiscal year-ended December 31, 2006 (No. 1-34242) and incorporated herein by reference: Bruce E. Moroney, C. Tomlinson Kline III, and Richard J. Hartmann.

	(b)**	1995 Stock Option Plan of DNB Financial Corporation (as amended and restated, effective as of April 27, 2004), filed on March 29, 2004 as Appendix A to Registrant’s Proxy Statement for its Annual Meeting of Stockholders held April 27, 2004, and incorporated herein by reference.

	(c)*	Form of waiver signed by William S. Latoff, William J. Hieb, Gerald F. Sopp, Bruce E. Moroney and Albert J. Melfi, Jr., each dated January 30, 2009, with respect to U.S. Treasury TARP Capital Purchase Program, filed as Exhibit 4.6 to Form 8-K (No. 1-34242) on January 30, 2009 and incorporated herein by reference.

	(d)**	DNB Financial Corporation Incentive Equity and Deferred Compensation Plan (As Amended and Restated Effective May 5, 2009), filed March 31, 2009 as Appendix A to Registrant’s definitive proxy statement on Schedule 14-A (No. 1-34242) and incorporated herein by reference.

	(e)*	Amended and Restated Change of Control Agreement among DNB Financial Corporation, DNB First, N.A. and William S. Latoff, dated December 20, 2006, filed March 26, 2007 as item 10(e) to Form 10-K for the fiscal year-ended December 31, 2006 (No. 1-34242) and incorporated herein by reference.

	(f)*	Agreement of Lease dated February 10, 2005 between Headwaters Associates, a Pennsylvania general partnership, as Lessor, and DNB First, National Association as Lessee for a portion of premises at 2 North Church Street, West Chester, Pennsylvania, filed March 10, 2005 as Item 10(l) to Form 10-K for the fiscal year ended December 31, 2004 (No. 1-34242) and incorporated herein by reference, as amended by Addendum to Agreement of Lease dated as of November 15, 2005, filed March 23, 2006 as Item 10(l) to Form 10-K for the fiscal year ended December 31, 2005 (No. 1-34242) and incorporated herein by reference, and as further amended by Second Addendum to Agreement of Lease dated as of May 25, 2006, filed August 14, 2006 as Item 10(l) to Form 10-Q for the fiscal quarter ended June 30, 2006 (No. 1-34242) and incorporated herein by reference, and as further amended by Third Addendum to Agreement of Lease dated as of June 9, 2010, filed August 13, 2010 as Item 10(f) to Form 10-Q for the fiscal quarter ended June 30, 2010 (No. 1-34242) and incorporated herein by reference.

	(g)**	Form of Stock Option Agreement for grants prior to 2005 under the Registrant’s Stock Option Plan, filed May 11, 2005 as Item 10(n) to Form 10-Q for the fiscal quarter ended March 31, 2005 (No. 1-34242) and incorporated herein by reference.

	(h)**	Form of Nonqualified Stock Option Agreement for April 18, 2005 and subsequent grants prior to April 23, 2010 under the Stock Option Plan, filed May 11, 2005 as Item 10(o) to Form 10-Q for the fiscal quarter ended March 31, 2005 (No. 1-34242) and incorporated herein by reference.

	(i)	Agreement of Sale dated June 1, 2005 between DNB First, National Association (the “Bank”), as seller, and Papermill Brandywine Company, LLC, a Pennsylvania limited liability company, as buyer (“Buyer”) with respect to the sale of the Bank’s operations center and an adjunct administrative office (the “Property”) and accompanying (i) Agreement of Lease between the Buyer as landlord and the Bank as tenant, pursuant to which the Property will be leased back to the Bank, and (ii) Parking Easement Agreement to provide cross easements with respect to the Property, the Buyer’s other adjoining property and the Bank’s other adjoining property, filed August 15, 2005 as Item 10(p) to Form 10-Q for the fiscal quarter ended June 30, 2005 (No. 1-34242) and incorporated herein by reference.

	(j)	Agreement of Lease dated November 18, 2005 between Papermill Brandywine Company, LLC, a Pennsylvania limited liability company (“Papermill”), as Lessor, and DNB First, National Association as Lessee for the banks operations center and adjunct administrative office, filed March 23, 2006 as Item 10(q) to Form 10-K for the fiscal year ended December 31, 2005 (No. 1-34242) and incorporated herein by reference.

	(k)*	Amended and Restated Change of Control Agreement among DNB Financial Corporation, DNB First, N.A. and William J. Hieb, filed May 15, 2007 as Item 10(l) to Form 10-Q for the fiscal quarter ended March 31, 2007 (No. 1-34242) and incorporated herein by reference.

	(l)**	Form of Nonqualified Stock Option Agreement for grants on and after December 22, 2005 and prior to April 23, 2010 under the Stock Option Plan, filed March 23, 2006 as Item 10(s) to Form 10-K for the fiscal year ended December 31, 2005 (No. 1-34242) and incorporated herein by reference.

	(m)*	Deferred Compensation Plan For Directors of DNB Financial Corporation (adopted effective October 1, 2006), filed November 14, 2006 as Item 10(s) to Form 10-Q for the fiscal quarter ended September 30, 2006 (No. 1-34242) and incorporated herein by reference.

	(n)*	DNB Financial Corporation Deferred Compensation Plan (adopted effective October 1, 2006), filed November 14, 2006 as Item 10(t) to Form 10-Q for the fiscal quarter ended September 30, 2006 (No. 1-34242) and incorporated herein by reference.

	(o)*	Trust Agreement, effective as of October 1, 2006, between DNB Financial Corporation and DNB First, National Association (Deferred Compensation Plan), filed November 14, 2006 as Item 10(u) to Form 10-Q for the fiscal quarter ended September 30, 2006 (No. 1-34242) and incorporated herein by reference.

	(p)*	Change of Control Agreements among DNB Financial Corporation, DNB First, N.A. and each of the following executive officers, each in the form filed March 26, 2007 as item 10(q) to Form 10-K for the fiscal year-ended December 31, 2006 (No. 1-34242) and incorporated herein by reference: Albert J. Melfi, Jr. and Gerald F. Sopp.

	(q)*	DNB Financial Corporation Supplemental Executive Retirement Plan for William S. Latoff as amended and restated effective April 1, 2007, filed May 15, 2007 as Item 10(r) to Form 10-Q for the fiscal quarter ended March 31, 2007 (No. 1-34242) and incorporated herein by reference, as further amended by Amendment dated December 8, 2008, filed March 31, 2009 as item 3(r) to Form 10-K for the fiscal year-ended December 31, 2008 (No. 1-34242) and incorporated herein by reference.

	(r)*	Trust Agreement effective as of December 20, 2006 between DNB Financial Corporation and DNB First, N.A. (William S. Latoff SERP), filed March 26, 2007 as item 10(s) to Form 10-K for the fiscal year-ended December 31, 2006 (No. 1-34242) and incorporated herein by reference, as modified by Agreement to Terminate Trust dated as of April 1, 2007, filed May 15, 2007 as Item 10(s) to Form 10-Q for the fiscal quarter ended March 31, 2007 (No. 1-34242) and incorporated herein by reference.

	(s)*	DNB Offer Letter to Albert J. Melfi, Jr., dated November 10, 2006, filed March 26, 2005 as item 10(t) to Form 10-K for the fiscal year-ended December 31, 2006 (No. 1-34242) and incorporated herein by reference.

	(t)*	DNB Offer Letter to Gerald F. Sopp, dated December 20, 2006, filed March 26, 2007 as item 10(u) to Form 10-K for the fiscal year-ended December 31, 2006 (No. 1-34242) and incorporated herein by reference.
	(u)**	Form of Restricted Stock Award Agreement dated November, 28, 2007, filed March 28, 2008 as item 10(v) to Form 10-K for the fiscal year-ended December 31, 2007 (No. 1-34242) and incorporated herein by reference.
	(v)*	Amendments dated December 16, 2009 to Change of Control Agreements among DNB Financial Corporation, DNB First, N.A. and William S. Latoff, William J. Hieb, Albert J. Melfi, Richard J. Hartman, Gerald F. Sopp and Bruce E. Moroney with respect to compliance with certain provisions of the Emergency Economic Stabilization Act of 2008 (“EESA”), the American Recovery Reinvestment Act of 2009 (“ARRA”) and the provisions of the Interim Final Rule on “TARP Standards for Compensation and Corporate Governance” published by the United States Treasury Department (“UST”) on June 15, 2009, filed March 26, 2010 as item 10(w) to Form 10-K for the fiscal year ended December 31, 2009 (No. 1-34242) and incorporated herein by reference.
	(w)**	Restricted Stock Award Agreement dated April 23, 2010 between DNB Financial Corporation and William S. Latoff, filed August 13, 2010 as Item 10(x) to Form 10-Q for the fiscal quarter ended June 30, 2010 (No. 1-34242) and incorporated herein by reference.
	(x)**	Form of Restricted Stock Option Agreement for non-employee directors for awards made on and after April 23, 2010 pursuant to the 1995 Stock Option Plan of DNB Financial Corporation (as amended and restated, effective as of April 27, 2004), filed August 13, 2010 as Item 10(y) to Form 10-Q for the fiscal quarter ended June 30, 2010 (No. 1-34242) and incorporated herein by reference.
	(y)**	Form of Restricted Stock Option Agreement for employees for awards made on and after April 23, 2010 pursuant to the 1995 Stock Option Plan of DNB Financial Corporation (as amended and restated, effective as of April 27, 2004), filed August 13, 2010 as Item 10(z) to Form 10-Q for the fiscal quarter ended June 30, 2010 (No. 1-34242) and incorporated herein by reference.
	(z)**	Form of Amendment effective April 23, 2010, to the Restricted Stock Award agreements made between James H. Thornton, James J. Koegel, Mildred C. Joyner and Thomas A. Fillippo, non-employee Directors of the registrant, and the registrant on November 28, 2007 and December 17, 2008, filed August 13, 2010 as Item 10(aa) to Form 10-Q for the fiscal quarter ended June 30, 2010 (No. 1-34242) and incorporated herein by reference.
	(aa)**	Form of Amendment effective April 23, 2010, to the Restricted Stock Award agreements made between Eli Silberman, a non-employee Director of the registrant, and the registrant on November 28, 2007 and December 17, 2008, filed August 13, 2010 as Item 10(bb) to Form 10-Q for the fiscal quarter ended June 30, 2010 (No. 1-34242) and incorporated herein by reference.
	(bb)**	Form of Amendment effective April 23, 2010, to the Restricted Stock Award agreements made between William S. Latoff, William J. Hieb, Albert J. Melfi, Gerald F. Sopp and Bruce E. Moroney, officers of the registrant, and the registrant on November 28, 2007 and December 17, 2008, filed August 13, 2010 as Item 10(cc) to Form 10-Q for the fiscal quarter ended June 30, 2010 (No. 1-34242) and incorporated herein by reference.
	(cc)	Securities Purchase Agreement dated as of August 4, 2011, between the Secretary of the Treasury and DNB Financial Corporation, filed as Exhibit 99.1 to Form 8-K (No. 1-34242) on August 8, 2011 and incorporated herein by reference.
	(dd)	Letter Agreement dated August 4, 2011 between the Secretary of the Treasury and DNB Financial Corporation, filed as Exhibit 99.4 to Form 8-K (No. 1-34242) on August 8, 2011 and incorporated herein by reference.
11		Registrant’s Statement of Computation of Earnings Per Share is set forth in Footnote 5 to Registrant's consolidated financial statements at page 14 of this Form 10-Q and is incorporated herein by reference.

14		Code of Ethics as amended and restated effective February 23, 2005, filed March 10, 2005 as Item 10(m) to Form 10-K for the fiscal year ended December 31, 2004 (No. 1-34242) and incorporated herein by reference.
31.1		Rule 13a-14(a)/15d-14 (a) Certification of Chief Executive Officer, filed herewith.
31.2		Rule 13a-14(a)/15d-14 (a) Certification of Chief Financial Officer, filed herewith.
32.1		Section 1350 Certification of Chief Executive Officer, filed herewith.
32.2		Section 1350 Certification of Chief Financial Officer, filed herewith.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
	*	Management contract or compensatory plan arrangement.
	**	Shareholder approved compensatory plan pursuant to which the Registrant’s Common Stock may be issued to employees of the Corporation.