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

FORM 10-Q

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended: September 30, 2006
or

[  ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from ________________ to _____________

Commission File Number: 0-16667
DNB Financial Corporation
(Exact name of registrant as specified in its charter)

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

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer o
Accelerated filer o
Non-accelerated filer 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)
2,392,285
(Shares Outstanding as of
November 14, 2006)



DNB FINANCIAL CORPORATION AND SUBSIDIARY
 
INDEX
 
   
PART I - FINANCIAL INFORMATION
PAGE NO.
       
ITEM 1.
 
FINANCIAL STATEMENTS (Unaudited):
 
       
   
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
   
September 30, 2006 and December 31, 2005
       
   
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
Three and Nine Months Ended September 30, 2006 and 2005
       
   
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
 
   
Nine Months Ended September 30, 2006 and Year Ended December 31, 2005
       
   
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Nine Months Ended September 30, 2006 and 2005
       
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   
September 30, 2006 and December 31, 2005
       
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
       
       
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
       
ITEM 4.
 
CONTROLS AND PROCEDURES
       
   
PART II - OTHER INFORMATION
 
       
ITEM 1.
 
LEGAL PROCEEDINGS
       
ITEM 1A.
 
RISK FACTORS
       
ITEM 2.
 
CHANGES IN SECURITIES AND USE OF PROCEEDS
       
ITEM 3.
 
DEFAULTS UPON SENIOR SECURITIES
       
ITEM 4.
 
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
       
ITEM 5.
 
OTHER INFORMATION
       
ITEM 6.
 
EXHIBITS
       
SIGNATURES
       
EXHIBIT INDEX
 
       

 
2
PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS
 
DNB Financial Corporation and Subsidiary
Consolidated Statements of Financial Condition (Unaudited)
   
September 30
 
December 31
 
(Dollars in thousands except share data)
 
2006
 
2005
 
Assets
         
Cash and due from banks
 
$
12,484
 
$
14,421
 
Federal funds sold
   
6,913
   
7,762
 
Cash and cash equivalents
   
19,397
   
22,183
 
AFS investment securities, at fair value (amortized cost of $113,660
and $117,580)
   
112,130
   
116,074
 
HTM investment securities (fair value of $18,720 and $26,214)
   
19,383
   
26,933
 
Other investment securities
   
3,402
   
3,367
 
Total investment securities
   
134,915
   
146,374
 
Loans and leases
   
334,784
   
288,130
 
Allowance for credit losses
   
(4,287
)
 
(4,420
)
Net loans and leases
   
330,497
   
283,710
 
Office property and equipment
   
7,296
   
6,733
 
Accrued interest receivable
   
2,547
   
2,134
 
Bank owned life insurance
   
6,830
   
6,642
 
Net deferred taxes
   
2,390
   
2,326
 
Other assets
   
2,877
   
2,944
 
Total assets  
 
$
506,749
 
$
473,046
 
Liabilities and Stockholders’ Equity
             
Liabilities
             
Non-interest-bearing deposits
 
$
52,434
 
$
51,407
 
Interest-bearing deposits:
             
NOW
   
80,515
   
78,664
 
Money market
   
67,431
   
45,390
 
Savings
   
57,884
   
77,216
 
Time
   
111,664
   
86,950
 
Total deposits  
   
369,928
   
339,627
 
FHLB advances
   
49,550
   
53,850
 
Repurchase agreements
   
42,864
   
36,050
 
Junior subordinated debentures
   
9,279
   
9,279
 
Other borrowings
   
692
   
701
 
Total borrowings
   
102,385
   
99,880
 
Accrued interest payable
   
922
   
939
 
Other liabilities
   
2,596
   
2,414
 
Total liabilities  
   
475,831
   
442,860
 
Stockholders’ Equity
             
Preferred stock, $10.00 par value;
             
1,000,000 shares authorized; none issued
   
—
   
—
 
Common stock, $1.00 par value;
             
10,000,000 shares authorized; 2,582,379 and 2,572,419 issued
   
2,582
   
2,572
 
Treasury stock, at cost; 194,960 and 201,865 shares, respectively
   
(4,109
)
 
(4,253
)
Surplus
   
34,954
   
34,802
 
Accumulated deficit
   
(754
)
 
(1,196
)
Accumulated other comprehensive loss, net
   
(1,755
)
 
(1,739
)
Total stockholders’ equity  
   
30,918
   
30,186
 
Total liabilities and stockholders’ equity  
 
$
506,749
 
$
473,046
 
               
See accompanying notes to consolidated financial statements.  

3
Consolidated Statements of Operations (Unaudited)
   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
(Dollars in thousands except share data)
 
2006
 
2005
 
2006
 
2005
 
Interest Income:
                 
Interest and fees on loans
 
$
5,765
 
$
4,540
 
$
16,011
 
$
12,218
 
Interest and dividends on investment securities:
                         
Taxable
   
1,161
   
1,283
   
3,544
   
3,857
 
Exempt from federal taxes
   
311
   
302
   
932
   
793
 
Tax-preferred DRD
   
—
   
—
   
—
   
57
 
Interest on cash and cash equivalents
   
71
   
55
   
309
   
177
 
Total interest income
   
7,308
   
6,180
   
20,796
   
17,102
 
Interest Expense:
                         
Interest on NOW, money market and savings
   
1,171
   
716
   
3,219
   
1,695
 
Interest on time deposits
   
983
   
549
   
2,491
   
1,451
 
Interest on FHLB advances
   
796
   
815
   
2,211
   
2,479
 
Interest on repurchase agreements
   
390
   
227
   
1,131
   
525
 
Interest on junior subordinated debentures
   
177
   
154
   
523
   
388
 
Interest on other borrowings
   
40
   
26
   
102
   
85
 
Total interest expense
   
3,557
   
2,487
   
9,677
   
6,623
 
Net interest income
   
3,751
   
3,693
   
11,119
   
10,479
 
Provision for credit losses
   
—
   
75
   
—
   
120
 
Net interest income after provision for credit losses
   
3,751
   
3,618
   
11,119
   
10,359
 
Non-interest Income:
                         
Service charges on deposits
   
418
   
365
   
1,253
   
966
 
Wealth management fees
   
174
   
159
   
553
   
559
 
Increase in cash surrender value of BOLI
   
87
   
47
   
188
   
161
 
Net (losses) gains on sales of available for sale securities
   
—
   
(2
)
 
13
   
(662
)
Other fees
   
192
   
192
   
578
   
552
 
Total non-interest income
   
871
   
761
   
2,585
   
1,576
 
Non-interest Expense:
                         
Salaries and employee benefits
   
2,345
   
2,125
   
6,843
   
6,035
 
Furniture and equipment
   
341
   
320
   
1,010
   
923
 
Occupancy
   
335
   
241
   
927
   
701
 
Professional and consulting
   
447
   
310
   
1,082
   
885
 
Advertising and marketing
   
82
   
76
   
365
   
371
 
Printing and supplies
   
75
   
68
   
306
   
228
 
Other expenses
   
562
   
538
   
1,665
   
1,514
 
Total non-interest expense
   
4,187
   
3,678
   
12,198
   
10,657
 
Income before income taxes
   
435
   
701
   
1,506
   
1,278
 
Income tax expense (benefit)
   
18
   
114
   
139
   
(25
)
Net Income  
 
$
417
 
$
587
 
$
1,367
 
$
1,303
 
Earnings per share:
                         
Basic
 
$
0.18
 
$
0.28
 
$
0.57
 
$
0.63
 
Diluted
 
$
0.17
 
$
0.28
 
$
0.57
 
$
0.62
 
Cash dividends per share
 
$
0.13
 
$
0.12
 
$
0.39
 
$
0.37
 
Weighted average common shares outstanding:
                         
  Basic
   
2,385,292
   
2,080,690
   
2,378,125
   
2,075,289
 
  Diluted
   
2,401,773
   
2,101,438
   
2,395,197
   
2,106,455
 
 
See accompanying notes to consolidated financial statements.

4
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Unaudited)
 
 
 
(Dollars in thousands)
 
Common
Stock
 
Treasury
Stock
 
Surplus
 
  Retained Earnings (Accumulated deficit)
 
Accumulated Other Compre-
hensive Loss
 
Total
 
Balance at January 1, 2005
 
$
2,170
 
$
(4,488
)
$
29,388
 
$
(2,273
)
$
(59
)
$
24,738
 
Net income
   
—
   
—
   
—
   
2,148
   
—
   
2,148
 
Other comprehensive loss, net of tax:
                                     
Unrealized losses on investments
   
—
   
—
   
—
   
—
   
(935
)
 
(935
)
Unrealized actuarial losses - pension
   
—
   
—
   
—
 
—
   
(745
)
 
(745
)
Release of restricted stock
   
3
   
—
   
88
   
—
   
—
   
91
 
Common stock issued
   
266
   
—
   
5,259
   
—
   
—
   
5,525
 
Cash dividends
   
—
   
—
   
—
   
(1,064
)
 
—
   
(1,064
)
Issuance of stock dividends
   
122
   
—
   
(122
)    
—
   
—
   
—
 
Purchase of treasury shares
   
—
   
(5
)
 
—
   
—
   
—
   
(5
)
Issuance of treasury shares to 401(k) plan
   
—
   
240
   
9
   
—
   
—
   
249
 
Cash payment for fractional shares
   
—
   
—
   
—
   
(7
)
 
—
   
(7
)
Exercise of stock options
   
11
   
—
   
180
   
—
   
—
   
191
 
Balance at December 31, 2005
   
2,572
   
(4,253
)
 
34,802
   
(1,196
)
 
(1,739
)
 
30,186
 
Net income
   
—
   
—
   
—
   
1,367
   
—
   
1,367
 
Other comprehensive loss, net of tax:
                                     
Unrealized losses on investments
   
—
   
—
   
—
   
—
   
(16
)
 
(16
)
Release of restricted stock
   
3
   
—
   
98
   
—
   
—
   
101
 
Cash dividends
   
—
   
—
   
—
   
(925
)
 
—
   
(925
)
Purchase of treasury shares
   
—
   
(128
)
 
—
   
—
   
—
   
(128
)
Issuance of treasury shares to 401(k) plan
   
—
   
272
   
(7
)    
—
   
—
   
265
 
Exercise of stock options
   
7
   
—
   
61
   
—
   
—
   
68
 
Balance at September 30, 2006
 
$
2,582
 
$
(4,109
)
$
34,954
 
$
(754
)
$
(1,755
)
$
30,918
 
 
See accompanying notes to consolidated financial statements.  

5

Consolidated Statements of Cash Flows (Unaudited)
   
Nine Months Ended September 30,
 
(Dollars in thousands)
 
2006
 
2005
 
Cash Flows From Operating Activities:
         
Net income
 
$
1,367
 
$
1,303
 
Adjustments to reconcile net income to net cash
             
provided by operating activities:
             
Depreciation, amortization and accretion
   
889
   
933
 
Restricted stock amortization
   
101
   
-
 
Provision for credit losses
   
-
   
120
 
Net (gain) loss on sale of securities
   
(13
)
 
662
 
Increase in interest receivable
   
(413
)
 
(349
)
Decrease (increase) in other assets
   
67
   
(494
)
Increase in investment in BOLI
   
(188
)
 
(144
)
Decrease in interest payable
   
(17
)
 
(102
)
Increase in deferred tax benefit
   
(56
)
 
(41
)
Increase (decrease) in other liabilities
   
182
   
(14
)
Net Cash Provided By Operating Activities
   
1,919
   
1,874
 
Cash Flows From Investing Activities:
             
Activity in available-for-sale securities:
             
Sales
   
-
   
95,780
 
Maturities, repayments and calls
   
9,652
   
17,399
 
Purchases
   
(5,856
)
 
(103,847
)
Activity in held-to-maturity securities:
             
Maturities, repayments and calls
   
7,512
   
5,078
 
Net (increase) decrease in other investments
   
(35
)
 
439
 
Net increase in loans and leases
   
(46,787
)
 
(43,995
)
Purchase of bank property and equipment, net
   
(1,277
)
 
(495
)
Net Cash Used By Investing Activities
   
(36,791
)
 
(29,641
)
Cash Flows From Financing Activities:
             
Net increase (decrease) in deposits
   
30,301
   
(1,094
)
Decrease in FHLB advances
   
(4,300
)
 
(3,500
)
Increase in junior subordinated debentures
   
-
   
4,124
 
Increase in short term repurchase agreements
   
6,814
   
16,064
 
Decrease in lease obligations
   
(9
)
 
(7
)
Dividends paid
   
(925
)
 
(771
)
Proceeds from issuance of stock under stock option plan
   
68
   
160
 
Issuance of treasury stock, net
   
137
   
139
 
Net Cash Provided By Financing Activities
   
32,086
   
15,115
 
Net Change in Cash and Cash Equivalents 
   
(2,786
)
 
(12,652
)
Cash and Cash Equivalents at Beginning of Period 
   
22,183
   
24,121
 
Cash and Cash Equivalents at End of Period  
 
$
19,397
 
$
11,469
 
Supplemental Disclosure of Cash Flow Information:
             
Cash paid during the period for:
             
Interest
 
$
9,694
 
$
6,725
 
Income taxes
   
1
   
101
 
Supplemental Disclosure of Non-cash Flow Information:
             
Change in unrealized losses on AFS securities
 
$
(24
)
$
(171
)
Change in deferred taxes due to change in unrealized
             
losses on AFS securities
   
8
   
54
 
               
See accompanying notes to consolidated financial statements.
             

6
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 with current period classifications. The results of operations for the nine-month period ended September 30, 2006, 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, 2005. Included among such items was the reclassification of certain investments from held-to-maturity securities to other investment securities.

Stock-based compensation

Prior to January 1, 2006, SFAS Statement No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation , permitted entities to recognize as expense over the vesting period, the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 also allowed entities to continue to apply the provisions of the Accounting Principles Board Opinion No. 25 (“APB Opinion No. 25”), Accounting for Stock Issued to Employees , and related interpretations and provide pro-forma net income and pro-forma earnings per share disclosures for employee stock option grants made in 1995 and subsequent years as if the fair-value-based method defined in SFAS 123 had been applied. DNB elected to apply the provisions of APB Opinion No. 25 and provide the pro-forma disclosure provisions of SFAS 123. As such, there was no compensation expense recorded prior to 2006. Additionally, all options were granted at the then current market price.

Effective January 1, 2006, DNB adopted SFAS 123 (revised 2004), Share-Based Payment (“SFAS 123R”), which requires DNB to measure the cost of employee services received in exchange for all equity awards granted including stock options based on the fair market value of the award as of the grant date. SFAS 123R supersedes SFAS 123 and APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires DNB to record compensation expense related to unvested stock awards as of December 31, 2005 by recognizing the unamortized grant date fair value of these awards over the remaining service periods of those awards. DNB had no unamortized stock option awards at December 31, 2005 as all stock options issued prior to December 31, 2005 were fully vested. Additionally, DNB did not issue any stock awards during the nine-month period ended September 30, 2006. As a result, there was no compensation expense recorded during the three-month or nine-month periods ended September 30, 2006. DNB issued 5,250 and 48,825 stock option awards for the three and nine-month periods ended September 30, 2005. The pro-forma disclosure of stock- based compensation expense related to 2005 is presented below:

   
Three Months
Ended
 
Nine Months
Ended
 
(Dollars in thousands, except per-share data)
 
September 30, 2005
 
September 30, 2005
 
Net income as reported
 
$
587
 
$
1,303
 
Add: Stock-based compensation recorded as expense, net of tax
   
—
   
—
 
Deduct: Total stock-based employee compensation expense, net of tax
   
27
   
282
 
Net income - pro-forma
 
$
560
 
$
1,021
 
               
Earnings per share:
             
Basic - as reported
 
$
0.28
 
$
0.63
 
Basic - pro-forma
 
$
0.27
 
$
0.48
 
               
Diluted - as reported
 
$
0.28
 
$
0.62
 
Diluted - pro-forma
 
$
0.27
 
$
0.48
 
               

For additional information on stock-based compensation, refer to Footnote 7 on page 11.

7
DNB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 2: 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 reflects the potential dilution that could occur from the conversion of common stock equivalents and is computed using the treasury stock method. The difference between basic and diluted EPS, for DNB, is attributable to stock options and restricted stock awards. Stock options and restricted stock awards for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation. At September 30, 2006, there were 119,182   anti-dilutive stock options outstanding as well as 15,089   anti-dilutive stock awards. At September 30, 2005,   there were 120,000   anti-dilutive stock options outstanding as well as 17,000   anti-dilutive stock awards.   EPS, dividends per share, and weighted average shares outstanding have been adjusted to reflect the effect of the 5% stock dividend in 2005.   The dilutive effect of stock options on basic earnings per share is presented below.
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2006
 
September 30, 2006
 
(In thousands, except per-share data)
Income
 
Shares
 
Amount
 
Income
 
Shares
 
Amount
 
Basic EPS
                       
Income available to common stockholders
$ 417
 
2,385
 
$0.18
 
$ 1,367
 
2,378
 
$0.57
 
Effect of dilutive common stock equivalents - stock options
—
 
17
 
(.01
)
—
 
17
 
—
 
Diluted EPS
                       
Income available to common stockholders after assumed conversions
$ 417
 
2,402
 
$0.17
 
$ 1,367
 
2,395
 
$0.57
 
         
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2005
 
September 30, 2005
 
(In thousands, except per-share data)
Income
 
Shares
 
Amount
 
Income
 
Shares
 
Amount
 
Basic EPS
                       
Income available to common stockholders
$ 587
 
2,081
 
$0.28
 
$ 1,303
 
2,075
 
$0.63
 
Effect of dilutive common stock equivalents - stock options
—
 
20
 
—
 
—
 
31
 
(.01
)
Diluted EPS
                       
Income available to common stockholders after assumed conversions
$ 587
2,101
$0.28
$ 1,303
2,106
$0.62

NOTE 3: COMPREHENSIVE INCOME (LOSS)

Comprehensive income includes all changes in stockholders' equity during the period, except those resulting from investments by owners and distributions to owners. Comprehensive income for all periods consisted of net income 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.
   
Three Months Ended
 
Three Months Ended
 
   
September 30, 2006
 
September 30, 2005
 
(Dollars in thousands)
 
Net-of-Tax Amount
 
Net-of-Tax Amount
 
Net Income
 
$
417
 
$
587
 
Other Comprehensive Income:
             
Unrealized holding gains (losses) arising during the period
   
1,129
   
(476
)
Reclassification for losses included in net income
   
—
   
1
 
Total Comprehensive Income
 
$
1,546
 
$
112
 
 
   
Nine Months Ended
 
Nine Months Ended
 
   
September 30, 2006
 
September 30, 2005
 
(Dollars in thousands)
 
Net-of-Tax Amount
 
Net-of-Tax Amount
 
Net Income
 
$
1,367
 
$
1,303
 
Other Comprehensive Income:
             
Unrealized holding losses arising during the period
   
(7
)
 
(555
)
Reclassification for (gains) losses included in net income
   
(9
)
 
437
 
Total Comprehensive Income
 
$
1,351
 
$
1,185
 
 
8
DNB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 4: COMPOSITION OF LOAN AND LEASE PORTFOLIO

The following table sets forth information concerning the composition of total loans and leases outstanding, as of the dates indicated.
 
   
September 30,
 
December 31,
 
(Dollars in thousands)
 
2006
 
2005
 
Commercial mortgage
 
$
94,455
 
$
88,921
 
Commercial term and lines of credit
   
103,357
   
83,156
 
Consumer
   
56,120
   
48,381
 
Residential mortgage
   
56,786
   
43,738
 
Commercial leases
   
24,066
   
23,934
 
Gross loans and leases
   
334,784
   
288,130
 
Allowance for credit losses
   
(4,287
)
 
(4,420
)
Net loans and leases
 
$
330,497
 
$
283,710
 
 
NOTE 5: 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

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 $5.0 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 are redeemable by DNB on or after July 25, 2006, or earlier in the event of certain adverse tax or bank regulatory developments. The preferred securities 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 is fixed at 6.56% for the first 5 years and will adjust at a rate of 3-month LIBOR plus 1.77% thereafter) 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 are redeemable by DNB on or after May 23, 2010, or earlier in the event of certain adverse tax or bank regulatory developments. The preferred securities must be redeemed upon maturity of the debentures on May 23, 2035.


NOTE 6: RECENT ACCOUNTING PRONOUNCEMENTS

In February 2006, the FASB issued SFAS No. 155, “ Accounting for Certain Hybrid Financial Instruments.” This Statement amends FASB Statements No. 133 and No. 140. This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” This Statement: a) permits fair value

9

DNB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133; c) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and e) amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The fair value election provided for in paragraph 4(c) of this Statement may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated under paragraph 12 of Statement 133 prior to the adoption of this Statement. Earlier adoption is permitted as of the beginning of an entity's fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. Provisions of this Statement may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. The Company has not yet determined whether this Statement will have a material impact on their consolidated financial statements upon adoption.
 
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” - an interpretation of FASB Statement No. 109 (FIN 48) .  This interpretation of SFAS No. 109 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  This interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The interpretation is effective for fiscal   years beginning after December 15, 2006.  The Corporation has reserves related to certain of its tax positions, which would be subject to analysis under FIN 48.  The Corporation has not yet determined the impact on its Consolidated Financial Statements, if any, that would result as a consequence of adopting this interpretation in 2007.
 
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. The statement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The statement also establishes a framework for measuring fair value by creating a three-level fair value hierarchy that ranks the quality and reliability of information used to determine fair value, and requires new disclosures of assets and liabilities measured at fair value based on their level in the hierarchy. The statement is effective for the Bank on January 1, 2008. The Corporation does not expect the adoption of this statement to have a material impact on its financial position or results of operations.
 
 
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plan” (“SFAS 158”). SFAS 158 requires an employer to recognize on their balance sheet the funded status of its defined pension plans and other post-retirement plans as of December 31, 2006. An under-funded position would create a liability and an over-funded position would create an asset, with a correlating deferred tax asset or liability. The net impact would be an adjustment to equity as accumulated other comprehensive income (loss.) Employers must also recognize as a component of other comprehensive income (loss), net of tax, the actuarial gains and losses and the prior service costs and credits that arise during the period. The Corporation has not completed its assessment of SFAS 158 but anticipates recording a reduction to Shareholders’ Equity in Net Other Comprehensive Loss during the fourth quarter of 2006.
 
 
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). This guidance was issued to resolve diversity in current practice among registrants. The bulletin establishes that registrants must quantify the impact of correcting all misstatements on the financial statements by using both the rollover and iron curtain approaches to evaluate the errors. The rollover approach quantifies the misstatement based on the amount of the error originating in the current year income statement and the iron curtain approach quantifies a misstatement based on the amount of the error existing in the balance sheet at the end of the fiscal year. The bulletin contains guidance on correcting errors under the dual approach and transition guidance. SAB 108 is effective for the Company’s December 31, 2006 annual financial statements. The Corporation does not expect the adoption of SAB 108 to have a material impact on its financial position or results of operations.
 
10
DNB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 7: 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 583,554 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 90,187 and 82,406 options available for grant at September 30, 2006 and December 31, 2005, respectively.

Prior to January 1, 2006, DNB applied APB Opinion No. 25 in accounting for its Stock Option Plan, and accordingly, no compensation cost has been recognized for its stock options in the financial statements. All stock options issued by DNB prior to January 1, 2006 vested immediately and the related expense was reported in the period issued as a pro-forma disclosure of stock-based compensation expense. Because all options issued prior to January 1, 2006 vested immediately, DNB had no unamortized stock option awards at December 31, 2005. Additionally, DNB did not issue any stock awards during the nine-month period ended September 30, 2006. As a result, there was no compensation expense recorded during the period. DNB issued 5,250 and 48,825 stock option awards for the three and nine-month periods ended September 30, 2005. For periods where stock options have been issued, DNB utilizes a Black-Scholes option valuation model.

Stock option activity for the nine-month period ended September 30, 2006 is indicated below.

   
Number
 
Weighted Average
 
   
Outstanding
 
Exercise Price
 
Outstanding January 1, 2006
   
289,046
 
$
20.96
 
Granted
   
-
   
-
 
Exercised
   
(6,671
)
 
(10.07
)
Expired
   
-
   
-
 
Forfeited
   
(7,781
)
 
(23.93
)
Outstanding September 30, 2006
   
274,594
 
$
21.14
 

For the nine-month period ended September 30, 2006, there were 6,671 stock options exercised. The total amount of proceeds received on these stock option exercises was $68,000. The fair market value of the stock options on the date of exercise was $141,000 and the related tax benefit to DNB was $25,000.

The weighted-average price and weighted average remaining contractual life for the outstanding options are listed below for the dates indicated. The aggregate intrinsic value of outstanding options is $546,000 as of September 30, 2006. All outstanding options are exercisable.

 
September 30, 2006
Range of
Exercise Prices
Number
Outstanding
Weighted Average
Exercise Price
Remaining Contractual
Life
$ 8.44-10.99
    10,252
   $10.17
3.75 years
 11.00-13.99
    15,607
    12.56
3.38 years
 14.00-19.99
  122,117
    19.12
7.11 years
 20.00-23.99
    40,780
    23.26
2.66 years
 24.00-26.76
    85,838
    25.89
8.43 years
Total
274,594
$21.14
6.52 years

11
DNB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Restricted Stock Awards

DNB maintains an Incentive Equity and Deferred Compensation Plan. The plan provides that up to 220,500 (as adjusted for subsequent stock dividends) shares of common stock may be granted, at the discretion of the Board, to individuals of the Company. DNB did not grant any shares of restricted stock during the nine-month period ended September 30, 2006. 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 two years, 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 nine-month periods ended September 30, 2006, $33,000 and $101,000 was amortized to expense. As of September 30, 2006 the $218,000 unrecognized compensation expense related to restricted stock awards and the expense is expected to be recognized over 1.67 years. There were 17,514 stock awards granted in May 2005. At September 30, 2006, 205,412 shares were reserved for future grants under the plan.

The table below summarizes the activity for the nine-month period ended September 30, 2006:

   
Shares
 
Weighted-Average Grant Date Fair Value
 
Outstanding - January 1, 2006
   
16,884
 
$
26.26
 
Granted
   
-
   
-
 
Forfeited
   
(1,796
)
 
(26.26
)
Vested
   
-
   
-
 
Outstanding - September 30, 2006
   
15,088
 
$
26.26
 

NOTE 8: SUBSEQUENT EVENTS

As discussed in the Company’s S-8 filed on October 25, 2006, the Company established, the Deferred Compensation Plan for Directors of DNB Financial Corporation adopted effective October 1, 2006 (the “Directors Plan”) and the DNB Financial Corporation Deferred Compensation Plan adopted effective October 1, 2006 (the “Officers Plan”) (individually, a “Plan” and collectively, “Plans”).

The Directors Plan permits a non-employee director of DNB or any of its direct or indirect subsidiaries to defer all or a portion of the compensation payable to the director for his or her services as a member of the board of DNB or a subsidiary and committees thereof. The Officers Plan permits an eligible officer to elect to defer up to fifty percent (50%) of the regular salary otherwise payable to the eligible officer and all or a portion of any annual or other periodic bonus otherwise payable to the eligible officer. Upon receiving a director’s or officer’s qualifying election to defer compensation, DNB will allocate to a deferred compensation account for the participant that number of shares of DNB common stock having a fair market value, on the last day of the month in which such compensation would have been paid in absence of the deferral election, equal to 110% of the amount of compensation the participant has elected to defer.

12
 
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 Federal Reserve System. Its deposits are insured by the FDIC. DNB provides a broad range of banking services to individual and corporate customers through its twelve 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 DNB Advisors division, the Bank provides wealth management and trust services to individuals and businesses. The Bank and its subsidiary, DNB Financial Services, Inc. through the name “DNB Financial Services,” 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. Another source of interest income is derived from 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 implement the culture changes necessary at DNB First to become an innovative community bank capable of meeting challenges of the 21st century, we embarked on a strategy called "Loyalty, Bank On It." In recognizing the importance of loyalty in our everyday lives, we have embraced this concept as the cornerstone of DNB First's new culture. 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 2003, management developed a strategic 5-year plan designed to reposition its balance sheet and improve core earnings. As part of the plan, management announced its intentions to substantially reduce the size of its investment portfolio and expand its loan portfolio through new originations, increased loan participations, as well as strategic loan and lease receivable purchases. Management also planned a reduction in the absolute level of borrowings with cash flows from existing loans and investments as well as from new core deposit growth. A detailed discussion on DNB’s progress follows below.

Investment Portfolio Restructure.   As part of its previously announced balance sheet repositioning, DNB took advantage of the rate environment to restructure a significant portion of its investment securities portfolio. In March 2005, DNB sold $73.3 million of structured securities, government agency preferred stock, longer-term municipal securities, as well as corporate securities. The majority of the proceeds received on the sale of these investments were re-invested into higher yielding agency mortgage-backed securities, agency bonds and municipal securities. Management believed that the restructured portfolio would result in more stable earnings and cash flow, as well as improved value metrics.

Continued Progress in Balance Sheet Repositioning.   DNB decreased its investment portfolio, grew its loan portfolio and increased deposits in a continuing effort to strengthen its balance sheet during the first nine months in 2006. During this time, the investment portfolio decreased $11.5 million or by 8.0% and loans increased $46.7 million or by 16.2%. Commercial loans increased $25.7 million, residential loans increased $13.1 million, and consumer loans increases $7.7 million. In addition, DNB increased its deposit base by $30.3 million and added $6.8 million in customer repurchase agreements.

DNB’s financial objectives are focused on earnings per diluted share growth and return on average equity. In order to achieve its financial objectives, DNB defined the following strategies as part of the 5-Year Plan:

• Grow loans and diversify the mix
• Reduce the size of the investment portfolio
• Reduce long-term borrowings
• Enhance the branch network and alternative delivery options
• Focus on profitable customer segments
• Grow and diversify non-interest income

Management’s strategies are designed to direct DNB’s tactical investment decisions and support financial objectives. DNB’s most significant revenue source continues to be net interest income, defined as total interest income less interest expense, which through the nine months ended September 30, 2006 accounted for approximately 81% of total revenue. To produce net interest income and consistent earnings growth over the long-term, DNB must generate loan and deposit growth at acceptable economic spreads within its market area. To generate and grow loans and deposits, DNB must focus on a number of areas including, but not limited to, the
 
13
economy, branch expansion, sales practices, customer satisfaction and retention, competition, customer behavior, technology, product innovation and credit performance of its customers.

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.


RECENT ECONOMIC DEVELOPMENTS

There are at least three widely acknowledged areas of near-term concern that could pose risks to the local and national economies going forward: a spike in energy prices, a decline in home prices, and a retrenchment in consumer spending arising from record consumer indebtedness. The consequences that any of these developments might have for economic growth could range from modest to severe, depending on how events transpire over the next few years.

Energy Prices.   With time the economy should be able to adjust to higher energy prices, but in the short run, any supply-disrupting events, including labor strikes, severe weather, or terrorism, may cause energy prices to jump. By varying degrees, these spikes would be likely to weigh on overall economic growth while adding volatility to the outlook. Moreover, this risk is likely to continue for several more years, given the long lags required to add new energy production capacity and expectations for continued global growth in energy demand.

Home Prices. The risk of a housing slowdown is another area of concern going forward. The recent housing boom has been unprecedented in modern U.S. history. It has been suggested by many analysts that the housing boom has been a significant contributor to gains in consumer spending in recent years. Because consumer spending accounts for over two-thirds of U.S. economic activity, any shock to consumer spending, such as that which might be caused by a housing slowdown, is a concern to overall economic growth.

Consumer Spending. A large, long-term increase in consumer indebtedness has raised concerns that the next U.S. recession could originate in the household sector. The housing boom of recent years has resulted in a surge in new consumer debt, most of it in the form of mortgages. Consumers have gradually become more indebted over time - so much so that they are now spending more in aggregate than they earn. Home prices will not boom forever. Even a moderation in home-price growth would reduce the amount of new home equity added to the economy each year. This slower accumulation of wealth, coupled with rising interest rates that increase the cost of tapping that wealth, could soon begin to curtail the pace of U.S. consumer spending growth. Just as there has been a positive wealth effect from soaring home prices in recent years, the concern is that an end to the housing boom could result in a slowdown in consumer spending growth.


MATERIAL CHALLENGES, RISKS AND OPPORTUNITIES

The following is a summary of changes to material challenges, risks and opportunities DNB has faced during the nine-month period ended September 30, 2006.

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 approved guidelines. 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
 
14
and liabilities, loan prepayments, deposit withdrawals, and differences in lending and funding rates. The Asset/Liability Committee (“ALCO”) actively seeks to monitor and control the mix of in-terest 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 300 basis points over a twelve-month period. Given today’s rising interest rate environment, our simulation model measures the effect that a 100 through 300 basis point increase in rates or the effect a 100 basis point decline would have on earnings. As of September 30, 2006, simulations indicate that net interest income would be within policy guidelines regardless of the direction of market rates.

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, principal and interest payments on loans, proceeds from loan sales, sales and maturities of mortgage-backed and investment securities, and FHLB advances. 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.

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 experiencing credit quality deterioration. DNB’s loan review procedures provide objective 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 County have been experiencing increased competition from large regional and international banks entering DNB’s marketplace through mergers and acquisitions. Competition for loans and deposits has negatively affected DNB’s net interest margin. To compensate for the increased competition, DNB, like 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 the Partnership Banking Program, the “Platinum” Account, the Executive and employee package as well as the Business Package. In addition, DNB has introduced Market Managers and Personal Bankers to serve the special banking needs of its clients. DNB is dedicated to implementing the culture changes necessary to become an innovative community bank capable of meeting challenges of the 21st century. As such, we embarked on a strategy called "Loyalty, Bank On It." To recognize the importance of loyalty in our everyday lives, we have embraced this concept as the cornerstone of DNB First's new culture. To that end, DNB continues to make appropriate investments in all areas of our business, including people, technology, facilities and marketing.

Bank Secrecy Act/OFAC/Patriot Act Implementation. Management of the Bank had previously determined that its BSA compliance program needed to be improved to a level commensurate with BSA, OFAC and Patriot Act related risks to which the Bank is exposed. An action plan was developed to strengthen the Bank’s compliance with the goal of completing it by the end of the third quarter of 2006. The action plan includes assessing the Bank’s customer base for high-risk activity, and expanding and augmenting policies and procedures to establish protocols with respect to identification, evaluation and compliance responses to certain types of potentially high-risk individuals. Additionally, the Bank has strengthened training and now further involves its front-line personnel in this process. The Bank’s management has increased the frequency with which it reports BSA compliance program activity to its board of directors and continues to focus its board of directors more frequently and more thoroughly on BSA compliance program requirements, including the identification of high-risk customers and the processes the Bank uses to evaluate and monitor them. The Bank has and will continue to formalize, structure and document compliance in a more disciplined way, including more stringent policies and formal periodic review. The Bank has taken a more aggressive posture in identifying customers and transactions that are potentially subject to the filing of Suspicious Activity Reports (“SARs”) and in appropriate cases expects to file SARs. The Bank has and will continue to improve its management information systems to improve identification, evaluation and reporting of certain types of high risk or suspicious transactions and activities. The Bank will be augmenting its BSA compliance staff. Management has and
 
15
will continue to strengthen its day-to-day audit processes to more effectively validate and test the Bank’s BSA compliance program procedures and records. It is management’s goal that the planned improvements to the BSA compliance program will be completed in 2006 and will address the Bank’s BSA compliance needs, in order to establish the Bank as an institution that will not pose a target to those who would use the U.S. financial system to further criminal or terroristic ends.

Deposit Insurance Reform Act of 2005. Pursuant to the Federal Deposit Insurance Reform Act of 2005, the FDIC merged the Bank Insurance Fund (BIF) and Savings Insurance Fund (SAIF) to form the Deposit Insurance Fund (DIF) effective March 31, 2006.

On April 1, 2006, the FDIC issued an interim rule, made final in September 2006, to implement the deposit insurance coverage changes of the Federal Deposit Insurance Reform Act of 2005. The rule: (1) increases the deposit insurance limit for certain retirement plan deposits to $250,000 effective April 1, 2006 (the basic insurance limit for other depositors such as individuals, joint accountholders, businesses, government entities and trusts remains at $100,000), (2) provides per-participant insurance coverage to employee benefit plan accounts, even if the depository institution at which the deposits are placed is not authorized to accept employee benefit plan deposits and (3) allows the FDIC to consider inflation adjustments to increase the insurance limits for all deposit accounts every five years, beginning in 2010.

On November 2, 2006, the FDIC set the designated reserve ratio for the deposit insurance fund at 1.25% of estimated insured deposits, and adopted final regulations to implement the risk-based deposit insurance assessment system mandated by the Deposit Insurance Reform Act of 2005, which is intended to more closely tie each bank's deposit insurance assessments to the risk it poses to the deposit insurance fund. Under the new risk-based assessment system, the FDIC will evaluate each institution's risk based on three primary factors -- supervisory ratings for all insured institution, financial ratios for most institutions, and long-term debt issuer ratings for large institutions that have them. An institution’s assessment rate will depend upon the level of risk it poses to the deposit insurance system as measured by these factors. The new rates for most institutions will vary between 5 and 7 cents for every $100 of domestic insurable deposits.

The new assessment rates will take effect at the beginning of 2007. However, the Deposit Insurance Reform Act of 2005 provides credits to institutions that paid high premiums in the past to bolster the FDIC's insurance reserves, as a result of which the FDIC has announced that a majority of banks will have assessment credits to initially offset all of their premiums in 2007. Management does not believe it is possible at this time to reliably estimate the net assessment cost, if any that may be imposed on the Bank. There are a number of uncertain factors that could affect the assessment rate that the FDIC will decide to apply to the Bank and the actual assessment credit that will be available to the Bank in 2007.  

Material Trends and Uncertainties. The industry is experiencing an on-going and widespread trend of consolidation in response to shrinking margins, as well as competitive and economic challenges. In an effort to broaden market share by capitalizing on operational efficiencies, larger institutions have been acquiring smaller regional and community banks and thrifts. Chester County has witnessed many recent mergers due to attractive demographics, commercial expansion and other growth indicators. As a result of these factors, the operating environment is very competitive as Chester County hosts over 45 banks, thrifts and credit unions. In addition, brokerage firms, mutual fund companies and boutique investment firms are prevalent, given the county’s attractive demographics. This intense competition continually puts pressures on DNB’s margins and operating results as competitors offer a full range of loan, deposit and investment products and services. In addition, many of these competitors are much larger than DNB and consistently outspend the Bank in marketing to attract new customers and buy market share. DNB anticipates these pressures will continue and management will continue to work to mitigate adverse effects on operating results.

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. For example, an economic downturn, increase in unemployment, or other events that negatively impact household and/or corporate incomes 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 aftermath of the war with Iraq, could impact business conditions in the United States.

16

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 accounting principals generally accepted in the United States of America. 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 for the fiscal year ended December 31, 2005, included in DNB's 10-K for the year ended December 31, 2005.

Determination of the allowance for credit losses . Credit loss allowance policies involve significant judgments 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 valuation of the allowance for credit losses remains adequate at September 30, 2006. 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 audited consolidated financial statements for the fiscal year ended December 31, 2005.

Other-than temporary impairment of investment securities.   FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities states, in part: for individual securities classified as either available-for-sale or held-to-maturity, an enterprise shall determine whether a decline in fair value below the amortized cost basis is other than temporary. For example, if it is probable that the investor will be unable to collect all amounts due according to the contractual terms of a debt security not impaired at acquisition, an other-than-temporary impairment shall be considered to have occurred. If the decline in fair value is judged to be other than temporary, the cost basis of the individual security shall be written down to fair value as a new cost basis and the amount of the write-down shall be included in earnings (that is, accounted for as a realized loss). While FASB Statement No. 115 uses a debt security as an example, similar considerations exist for investments in marketable equity securities. Accordingly, judgment is required in determining whether factors exist that indicate that an impairment loss has been incurred at the end of the reporting period. These judgments are based on subjective as well as objective factors, including knowledge and experience about past and current events and assumptions about future events. The following are examples of such factors.
 
 
•
Fair value is significantly below cost and the decline is attributable to adverse conditions specifically related to the security or to specific conditions in an industry or in a geographic area, the decline has existed for an extended period of time or Management does not possess both the intent and the ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.
 
•
The security has been downgraded by a rating agency.
 
17
 
•
The financial condition of the issuer has deteriorated.
 
•
Dividends have been reduced or eliminated, or scheduled interest payments have not been made.
 
•
The entity recorded losses from the security subsequent to the end of the reporting period.

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 $506.7 million at September 30, 2006 compared to $473.0 million at December 31, 2005. The growth in total assets was primarily attributable to strong loan growth offset by a decrease in investment securities as discussed below.

Investment Securities. Investment securities at September 30, 2006 were $134.9 million compared to $146.4 million at December 31, 2005. The decrease in investment securities was primarily due to $17.1 million in principal pay-downs and maturities offset by the purchase of $5.9 million in investment securities.
 
Gross Loans and Leases . Loans and leases were $334.8 million at September 30, 2006 compared to $288.1 million at December 31, 2005. DNB continued to grow its loan portfolio, which increased by $46.7 million or 16.2%. Commercial loans grew $25.7 million, residential real estate loans, primarily hybrid adjustable rate mortgages, grew $13.1 million, consumer loans grew $7.7 million, and commercial leases grew $132,000. The increase in the commercial loans and residential mortgages continues to reflect DNB’s commitment to commercial and residential development in Chester and Delaware counties in Pennsylvania as well as northern Delaware.
 
Deposits . Deposits were $369.9 million at September 30, 2006 compared to $339.6 million at December 31, 2005. Deposits increased $30.3 million or 8.9% during the nine-month period ended September 30, 2006. A significant portion of this increase was attributable to the opening of a new branch in West Chester, Pennsylvania during the fourth quarter of 2005. At September 30, 2006 the West   Chester branch had approximately $25 million in deposits.

Borrowings. Borrowings were $102.4 million at September 30, 2006 compared to $99.9 million at December 31, 2005. The increase of $2.5 million, or 2.5% was primarily due to growth in repurchase agreements offset by a decrease in FHLB borrowings. The increase in repurchase agreements was the result of expanding DNB’s cash management services by focusing on commercial customers and providing them with the ability to sell excess funds to DNB through repurchase agreements. Repurchase agreements have helped to compliment DNB’s existing funding sources.
 
Stockholders’ Equity. Stockholders' equity was $30.9 million at September 30, 2006 compared to $30.2 million at December 31, 2005. The increase in stockholders’ equity was primarily a result of year-to-date earnings offset by cash dividends paid.  

RESULTS OF OPERATIONS
 
SUMMARY    

Net income for the three and nine-month periods ended September 30, 2006 was $417,000 and $1.4 million compared to $587,000 and $1.3 million for the same periods in 2005. Diluted earnings per share for the three and nine-month periods ended September 30, 2006 was $0.17 and $0.57 compared to $0.28 and $0.62 for the same periods in 2005. Earnings per share in 2005 have been adjusted to reflect the effect of the 5% stock dividend paid in December 2005. The decrease in net income for the latest three-month period compared to the same period in 2005 was primarily attributable to a a $509,000 increase in non-interest expense offset by a $133,000 increase in net interest income and a $110,000 increase in non-interest income. The increases in non-interest income and non-interest expense are discussed in detail below on page 20.   The increase in net interest income was a result of growth in interest-earning assets offset by net interest margin compression. The net interest margin compression was a result of a rising interest rate environment, a flat yield curve, and intense competition in DNB’s marketplace. The increase in net income for the latest nine-month period compared to the same period in 2005 was primarily attributable to a $1.0 million increase in non-interest income and a $760,000 increase in net interest income, offset by a $1.5 million increase in non-interest expense. The increases in non-interest income and non-interest expense are discussed in detail below on page 20. The increase in net interest income was a result of growth of interest-earning assets offset by net interest margin compression. The compression in DNB’s net interest margin was a result of a rising interest rate environment, which is discussed in more detail below.

18
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 for the three and nine-month periods ended September 30, 2006 was $3.8 million and $11.1 million, compared to $3.7 million and $10.5 million for the same periods in 2005. Interest income for the three and nine-month periods ended September   30, 2006 was $7.3 million and $20.8 million compared to $6.2 million and $17.1 million for the same periods in 2005. The increase in interest income was primarily attributable to an increase of interest on loans and leases, which was a result of strong growth in the loan and lease portfolio. The yield on interest-earning assets for the third quarter in 2006 was 6.1%, compared to 5.7% for the same period in 2005. Interest expense for the three and nine-month periods ended September 30, 2006 was $3.6 million and $9.7 million compared to $2.5 million and $6.6 million for the same periods in 2005. The increase in interest expense was primarily attributable to deposit and repurchase agreement account growth as well as higher rates on interest-bearing liabilities.   The costs of deposits increased to 2.36% for the third quarter in 2006, compared to 1.52% for the same period in 2005. The net interest margin for the three-month period ended September 30, 2006 was 3.20%, compared to 3.49% for the same period in 2005.

Interest on loans and leases was $5.8 million and $16.0 million for the three and nine-month periods ended September 30, 2006, compared to $4.5 million and $12.2 million for the same periods in 2005.   The average balance of loans and leases was $317.1 million with an average yield of 6.71% for the nine-month period ended September 30, 2006 compared to an average balance of $251.3 million with an average yield of 6.49% for the same period in 2005. The increase in the average balance is the result of management’s increased efforts towards growing DNB’s loan and lease portfolio as DNB has added additional commercial loan officers and business bankers to accomplish this growth. The increase in yield was primarily the result of a rising interest rate environment.

Interest and dividends on investment securities was $1.5 million and $4.5 million for the three and nine-month periods ended September 30, 2006, compared to $1.6 million and $4.7 million for the same periods in 2005. The average balance on investment securities was $142.0 million with an average yield of 4.65% for the nine-month period ended September 30, 2006 compared to   $161.2 million with an average yield of 4.25% for the same period in 2005. The decrease in the average balance was part of DNB’s strategic plan to reduce the size of its investment portfolio. The increase in yield was primarily due to the investment portfolio restructuring which occurred during the first quarter of 2005, which is discussed in more detail on page 13 under “Investment Portfolio Restructure”.

Interest on deposits was $2.2 million and $5.7 million for the three and nine-month periods ended September 30, 2006, compared to $1.3 million and $3.1 million for the same periods in 2005. The average balance on interest-bearing deposits was $355.5 million with an average rate of 2.15% for the nine-month period ended September 30, 2006 compared to $317.6 million with an average rate of 1.32% for the same period in 2005. The increase in the average balance was primarily the result of year-over-year increased deposit relationships through aggressive marketing efforts and the opening of a new branch in West Chester, which had approximately $25 million in deposits at September 30, 2006. The increase in rate was primarily attributable to an increase in market rates resulting from a 150 basis point increase in the federal funds rate over the last twelve months in addition to intense competition for deposits in the Chester County marketplace.

Interest on borrowings was $1.4 million and $4.0 million for the three and nine-month periods ended September 30, 2006, compared to $1.2 million and $3.5 million for the same periods in 2005. The average balance on borrowings was $102.4 million with an average rate of 5.18% for the nine-month period ended September 30, 2006 compared to $98.6 million with an average rate of 4.71% for the same period in 2005. The increase in the average balance was attributable to growth in customer repurchase agreements and FHLB borrowings. The increase in rate was attributable to an increase in market rates resulting from a 150 basis point increase in the federal funds rate over the last twelve months.

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 the loan and lease portfolio generally includes reviews of problem 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).

In establishing and reviewing the allowance for adequacy, management establishes the allowance for credit losses in accordance with generally accepted accounting principles in the United States and the guidance provided in the Securities and Exchange Commission’s
 
19
Staff Accounting Bulletin 102 (SAB 102). Its methodology for assessing the appropriateness of the allowance consists of several key elements which include: specific allowances for identified problem loans; formula based allowances for commercial and commercial real estate loans; and allowances for pooled, homogenous loans. As a result, management has taken into consideration factors and variables which may influence the risk of loss within the loan portfolio, including: (i) trends in delinquency and non-accrual loans; (ii) changes in the nature and volume of the loan portfolio; (iii) effects of any changes in lending policies; (iv) experience, ability, and depth of management; (v) quality of loan review; (vi) national and local economic trends and conditions; (vii) concentrations of credit; and (viii) effect of external factors on estimated credit losses. 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. 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.

DNB’s percentage of allowance for credit losses to total loans and leases was 1.28% at September 30, 2006 compared to 1.53% at December 31, 2005. Management believes that the allowance for credit losses was adequate and provided for known and inherent credit losses.

The following table summarizes the changes in the allowance for credit losses for the periods indicated.
 
 
 
(Dollars in thousands)
 
 
Nine Months Ended
September 30, 2006
 
 
Year Ended
December 31, 2005
 
 
Nine Months Ended
September 30, 2005
 
Beginning balance
 
$
4,420
 
$
4,436
 
$
4,436
 
Provisions
   
¾
   
—
   
120
 
Charge-offs
   
(196
)
 
(46
)
 
(10
)
Recoveries
   
63
   
30
   
17
 
Ending balance
 
$
4,287
 
$
4,420
 
$
4,563
 
 
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 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 nine-month periods ended September 30, 2006 was $871,000 and $2.6 million, compared to $761,000 and $1.6 million for the same periods in 2005. The $110,000 increase for the three-month period was primarily attributable to an increase in service charges on deposits of $53,000 and an increase in the cash surrender value of BOLI of $40,000. The $1.0 million increase for the nine-month period was primarily attributable to a $699,000 loss recognized on the sale of investment securities during 2005 in addition to a $287,000 increase for the nine-month period ended September 30, 2006 related to service charges on deposits.

NON-INTEREST EXPENSE

Non-interest expense includes salaries & employee benefits, furniture & equipment, occupancy, professional & consulting fees as well as printing & supplies, marketing and other less significant expense items. Non-interest expense for the three and nine-month periods ended September 30, 2006 was $4.2 million and $12.2 million compared to $3.7 million and $10.7 million for the same periods in 2005. The increases in both periods were primarily attributable to an increase in salaries and employee benefits, which is related to DNB’s substantial investment during 2005 in hiring experienced personnel in revenue producing lines of business. There were additional increases in occupancy costs as well as furniture and equipment expenses as a result of adding a new loan origination office in Newtown Square, Pennsylvania and a new retail branch in West Chester, Pennsylvania during 2005 along with additional expenses during the third quarter of 2006 related to a new retail branch in Chadds Ford, Pennsylvania that is scheduled to open in 2007. Professional and consulting expense also increased during the second and third quarters relating to the efficiency project started in the second quarter. This project has helped to streamline many processes throughout the bank, which will help to decrease non-interest expense in the future along with a reduction of 14 full time equivalent employees.

20
INCOME TAXES

Income tax expense (benefit) for the three and nine-month periods ended September 30, 2006 was $18,000 and $139,000 compared to $114,000 and ($25,000) for the same periods in 2005. Income tax expense (benefit) for each period differs from the amount determined at the statutory rate of 34% 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. An additional reason for the change in income tax expense (benefit) in 2006 as compared to comparable periods in 2005 is due to the fact that during the period ended September 30, 2005 DNB reversed a portion of a previously recorded valuation allowance for deferred tax assets and recognized related income tax benefits in the amounts of $0 and $102,000 for the three and nine-month periods ended September 30, 2005, respectively, in connection with the sale of agency preferred securities.

ASSET QUALITY

Non-performing assets are comprised of non-accrual loans and leases, loans and leases delinquent over ninety days and still accruing and Other Real Estate Owned ("OREO"). 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. OREO is 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.

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. DNB did not have any OREO at the end of all reported periods.

Non-Performing Assets
             
 
(Dollars in thousands)
 
September 30,
2006
 
December 31,
 2 005
 
September 30,
2005
 
Loans and leases:
             
Non-accrual
 
$
1,465
 
$
1,105
 
$
1,387
 
90 days past due and still accruing
   
689
   
245
   
140
 
Troubled debt restructurings
   
—
   
—
   
—
 
Total non-performing loans and leases
   
2,154
   
1,350
   
1,527
 
Other real estate owned
   
—
   
—
   
—
 
Total non-performing assets
 
$
2,154
 
$
1,350
 
$
1,527
 

The following table sets forth DNB's asset quality and allowance coverage ratios at the dates indicated:

   
September 30,
2006
 
December 31,
2005
 
September 30,
2005
 
Asset quality ratios:
             
Non-performing loans to total loans
   
0.6
%
 
0.5
%
 
0.6
%
Non-performing assets to total assets
   
0.4
   
0.3
   
0.3
 
Allowance for credit losses to:
                   
Total loans and leases
   
1.3
   
1.5
   
1.7
 
Non-performing loans and leases
   
199.1
   
327.3
   
298.8
 
 
21
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:

   
Nine Months Ended
 
Year Ended
 
Nine Months Ended
 
 
(Dollars in thousands)
 
September 30,
2006
 
December 31,
2005
 
September 30,
2005
 
Interest income which would have been
             
recorded under original terms
 
$
86
 
$
87
 
$
87
 
Interest income recorded during the period
   
(28
)
 
(8
)
 
(7
)
Net impact on interest income
 
$
58
 
$
79
 
$
80
 

Impaired loans are those for which the Company has recorded a specific reserve. Information regarding impaired loans is presented as follows:

               
 
(Dollars in thousands)
 
September 30,
2006
 
December 31,
2005
 
September 30,
2005
 
Total recorded investment
 
$
1,353
 
$
916
 
$
1,110
 
Average recorded investment
   
1,070
   
1,118
   
1,185
 
Specific allowance allocation
   
497
   
442
   
488
 
 
   
Nine Months Ended
 
Year Ended
 
Nine Months Ended
 
 
(Dollars in thousands)
 
September 30,
2006
 
December 31,
2005
 
September 30,
2005
 
Total cash collected
 
$
257
 
$
564
 
$
280
 
Interest income recorded
   
4
   
18
   
6
 


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 $51.4 million at September 30, 2006. Primary liquidity includes investments, Federal funds sold, and interest-bearing cash balances, 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 $138.4 million.   Management believes that DNB has adequate resources to meet its short-term and long-term funding requirements.

At September 30, 2006, DNB had $73.2 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 September 30, 2006 totaled $36.1 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.

In March of 2005, DNB completed a private offering of $4 million Trust Preferred Securities, and in November 2005, DNB completed a private offering of 265,730 shares of its common stock to 53 accredited investors at a price of $21.00 per share, realizing total offering proceeds of $5.6 million. DNB invested the majority of the proceeds of each of these securities issuances into the Bank to increase the Bank’s capital levels and legal lending limit.

Management believes that the Corporation and the Bank have each met the definition of “well capitalized” for regulatory purposes on September 30, 2006. 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 lever-age ratio requirements for bank holding companies (see additional discussion included in Footnote 17 of DNB’s 10-K).

22

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.
 
       
For Capital
 
To Be Well Capitalized Under Prompt Corrective
 
   
Actual
 
Adequacy Purposes
 
Action Provisions
 
(Dollars in thousands)
 
Amount
 
Ratio
 
  Amount
 
  Ratio
 
Amount
 
Ratio
 
DNB Financial Corporation
                          
                            
September 30, 2006:
                                     
Total risk-based capital
 
$
44,764
   
13.31
%
$
26,909
   
8.00
%
$
33,636
   
10.00
%
Tier 1 capital
   
40,558
   
12.06
    13,454    
4.00
   
20,182
   
6.00
 
Tier 1 (leverage) capital
   
40,558
   
8.11
    20,003    
4.00
   
25,004
   
5.00
 
December 31, 2005:
                                     
Total risk-based capital
 
$
43,752
   
13.77
%
$
25,422
   
8.00
%
$
31,778
   
10.00
%
Tier 1 capital
   
39,773
   
12.52
    12,711    
4.00
   
19,067
   
6.00
 
Tier 1 (leverage) capital
   
39,773
   
8.61
    18,468    
4.00
   
23,085
   
5.00
 
                                       
DNB First, N.A.
                                     
                                       
September 30, 2006:
                                     
Total risk-based capital
 
$
44,621
   
13.21
%
$
27,016
   
8.00
%
$
33,770
   
10.00
%
Tier 1 capital
   
40,399
   
11.96
    13,508    
4.00
   
20,262
   
6.00
 
Tier 1 (leverage) capital
   
40,399
   
8.09
    19,983    
4.00
   
24,979
   
5.00
 
December 31, 2005:
                                     
Total risk-based capital
 
$
43,770
   
13.79
%
$
25,389
   
8.00
%
$
31,736
   
10.00
%
Tier 1 capital
   
39,797
   
12.54
    12,695    
4.00
   
19,042
   
6.00
 
Tier 1 (leverage) capital
   
39,797
   
8.63
    18,450    
4.00
   
23,063
   
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

This report may contain statements that are not of historical facts and may pertain to future operating results or events or management's expectations regarding those results or events. These are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements may include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements contained in this report that are not historical facts. When used in this report, the words "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", or words of similar meaning, or future or conditional verbs, such as "will", "would", "should", "could", or "may" are generally intended to identify forward-looking statements. Forward-looking statements involve certain risks and uncertainties, and actual results may differ materially from those contemplated by such statements. For example, actual results may be adversely affected by the following possibilities: (1) competitive pressures among financial institutions may increase; (2) changes in interest rates may reduce banking interest margins; (3) general economic conditions and real estate values may be less favorable than contemplated; (4)
 
23
adverse legislation or regulatory requirements may be adopted; (5) other unexpected contingencies may arise; (6) DNB may change one or more strategies described in this document; or (7) management's evaluation of certain facts, circumstances or trends and the appropriate responses to them may change. These forward-looking statements are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are either beyond our control or not reasonably capable of predicting at this time. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Actual results may differ materially from the results discussed in these forward-looking statements. Readers of this report are accordingly cautioned not to place undue reliance on forward-looking statements. DNB disclaims any intent or obligation to update publicly any of the forward-looking statements herein, whether in response to new information, future events or otherwise.

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 Modified Duration of Equity and Economic Value of Equity ("EVE") models. The modified duration of equity measures the potential price risk of equity to changes in interest rates. A longer modified duration of equity indicates a greater degree of risk to rising interest rates. Because of balance sheet optionality, an EVE analysis is also used to dynamically model the present value of asset and liability cash flows, with rates ranging up or down 200 basis points. The economic value of equity is likely to be different if rates change. Results falling outside prescribed ranges require action by management. At September 30, 2006 and December 31, 2005, DNB's variance in the economic value of equity 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 or decrease at September 30, 2006 and December 31, 2005, was within DNB's negative 25% guideline. DNB’s EVE has decreased by $15.2 million during 2006. This decrease is mostly attributable to a decrease in the EVE on deposits resulting from an increase in DNB’s cost of funds during the year. DNB’s cost of deposits increased to 2.50% at September 30, 2006 compared to 1.75% at December 31, 2005.

 
September 30, 2006
 
December 31, 2005
 
Change in rates
Flat
 
-200bp
 
+200bp
 
Flat
 
-200bp
 
+200bp
 
EVE
$45,343
 
$43,498
 
$38,852
 
$60,579
 
$55,559
 
$54,967
 
Change
   
(1,845
)
(6,491
)
   
(5,020
)
(5,612
)
Change as a % of assets
   
(0.4%
)
(1.3%
)
   
(1.1%
)
(1.2%
)
Change as a % of PV equity
   
(4.1%
)
(14.3%
)
   
(8.3%
)
(9.3%
)
 
ITEM 4 - 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 September 30, 2006, 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 quarter ended September 30, 2006, that has materially affected, or is reasonably likely to materially affect, DNB’s internal control over financial reporting.


24

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not Applicable

ITEM 1A. RISK FACTORS

There have been no material changes to the Risk Factors previously disclosed in Registrant's Annual Report on Form 10-K for its fiscal year ended December 31, 2005, filed with the Commission on March 23, 2006 (File No. 000-16667).

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

The following table provides information on repurchases by DNB of its common stock in each month of the quarter ended September 30, 2006:
                 
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)
 
July 1, 2006 - July 31, 2006
 
500
 
$21.25
 
 
500
 
 
139,570
 
August 1, 2006 - August 31, 2006
 
 
500
 
 
21.15
 
 
500
 
 
139,070
September 1, 2006 - September 30, 2006
 
 
—
 
 
—
 
 
—
 
 
—
 
Total
 
1,000
 
$21.20
 
1,000
 
139,070
 
 
(a)
On July 25, 2001, DNB authorized the buyback of up to 183,750 shares of its common stock over an indefinite period. On August 27, 2004, DNB increased the buyback from 183,750 to 358,313 shares of its common stock over an indefinite period. This number has been adjusted to reflect the 5% stock dividend issued in December 2005.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable

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 27 - 29 of this report are incorporated by reference or filed or furnished herewith in response to this Item.

25

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
     
November 14, 2006
BY:
/s/ William S. Latoff
   
William S. Latoff, Chairman of the
Board and Chief Executive Officer
     
     
     
November 14, 2006
BY:
/s/ Bruce E. Moroney
   
Bruce E. Moroney, Chief Financial Officer and Executive Vice President
     
     



26


Index to Exhibits

 
Exhibit No. Description of Exhibit and Filing Information
   
3
(i)
Amended and Restated Articles of Incorporation, as amended effective June 15, 2001, filed on August 14, 2001, as Item 6(a) to Form 10Q (No. 0-16667) and incorporated herein by reference.
     
 
(ii)
By-laws of the Registrant as amended December 19, 2001, filed on March 24, 2002 at Item 3b to Form 10-K for the fiscal year ended December 31, 2001 (No. 0-16667) and incorporated herein by reference.
     
4
 
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.
     
10
(a)*
Employment Agreement between DNB First, N.A. and Henry F. Thorne dated December 31, 1996 filed on March 26, 1999 at Item 10.1 to Form 10-K for the fiscal year ended December 31, 1998 (No. 0-16667) and incorporated herein by reference.
     
 
(b)*
Change of Control Agreements between DNB Financial Corporation and DNB First, N.A. and the following executive officers each in the form filed on March 29, 1999 at Item 10.2 to Form 10-K for the fiscal year ended December 31, 1998 (No. 0-16667), and incorporated herein by reference: (i) dated May 5, 1998 with Ronald K. Dankanich; and Bruce E. Moroney, (ii) dated April 28, 2003 with William J. Hieb, and (iii) dated October 18, 2004 with C. Tomlinson Kline III, (iv) dated December 3, 2004 with Thomas M. Miller, (v) dated January 26, 2006 with Richard J. Hartmann.
     
 
(c)**
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.
     
 
(d)*
Death Benefit Agreement between DNB First, N.A. and Henry F. Thorne dated November 24, 1999, filed March 20, 2002 as Item 10(d) to Form 10-K for the fiscal year ended December 31, 2001 (No. 0-16667) and incorporated herein by reference.
     
 
(e)*
Form of Change of Control Agreements, as amended November 10, 2003, filed on November 14, 2003 as Item 10(e) to Form 8-K (No. 0-16667) and incorporated herein by reference between DNB Financial Corporation and DNB First, N.A. and each of the following Directors: (i) dated November 10, 2005 with James H. Thornton, James J. Koegel and Eli Silberman, and (ii) dated February 23, 2005 with Mildred C. Joyner, and dated February 22, 2006 with Thomas Fillippo.
     
 
(f)*
First Amendment to Employment Agreement of Henry F. Thorne dated December 23, 2003 filed March 29, 2004 as Item 10(g) to Form 10-K for the fiscal year ended December 31, 2003 (No. 0-16667) and incorporated herein by reference.
 
27
 
(g)*
Retirement and Death Benefit Agreement between DNB First, N.A. and Henry F. Thorne dated December 23, 2003 filed March 29, 2004 as Item 10(h) to Form 10-K for the fiscal year ended December 31, 2003 (No. 0-16667) and incorporated herein by reference.
     
 
(h)***
DNB Financial Corp. Incentive Equity and Deferred Compensation Plan, filed March 10, 2005 as item 10(i) to Form 10-K for the fiscal year-ended December 31, 2004 (No. 0-16667) and incorporated herein by reference.
     
 
(i)*
Retirement Agreement among DNB Financial Corporation, DNB First, N.A. and Henry F. Thorne, dated December 17, 2004, filed March 10, 2005 as Item 10(i) to Form 10-K for the fiscal year ended December 31, 2004 (No. 0-16667) and incorporated herein by reference.
     
 
(j)*
Change of Control Agreement among DNB Financial Corporation, DNB First, N.A. and William S. Latoff, dated December 17, 2004, filed March 10, 2005 as Item 10(i) to Form 10-K for the fiscal year ended December 31, 2004 (No. 0-16667) and incorporated herein by reference.
     
 
(k)
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. 0-16667) 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. 0-16667) 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-K for the fiscal quarter ended June 30, 2006 (No. 0-16667) and incorporated herein by reference.
     
 
(l)
Marketing Services Agreement between TSG, INC., a Pennsylvania business corporation (the "Service Provider") for which Eli Silberman, a Director of Registrant, is the President and owner dated March 14, 2006, filed May 10, 2006 as Item 10(m) to Form 10-Q for the fiscal quarter ended March 31, 2006 (No. 0-16667) and incorporated herein by reference.
     
 
(m)**
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. 0-16667) and incorporated herein by reference.
     
 
(n)**
Form of Nonqualified Stock Option Agreement for April 18, 2005 and subsequent grants 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. 0-16667) and incorporated herein by reference.
     
 
(o)
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. 0-16667) and incorporated herein by reference.
 
28
 
(p)
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. 0-16667) and incorporated herein by reference.
     
 
(q)*
Form of First Amendments dated January 26, 2006 to Change of Control Agreements with William J. Hieb, the Company’s President and COO, and Thomas M. Miller, the Company’s First Executive Vice President and Chief Lending Officer, filed March 23, 2006 as Item 10(r) to Form 10-K for the fiscal year ended December 31, 2005 (No. 0-16667) and incorporated herein by reference.
     
 
(r)**
Form of Nonqualified Stock Option Agreement for grants on and after December 22, 2005 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. 0-16667) and incorporated herein by reference.
     
 
(s)***
Deferred Compensation Plan For Directors of DNB Financial Corporation (adopted effective October 1, 2006), filed herewith .
     
 
(t)***
DNB Financial Corporation Deferred Compensation Plan (adopted effective October 1, 2006), filed herewith .
     
 
(u)***
Trust Agreement, effective as of October 1, 2006, between DNB Financial Corporation and DNB First, National Association, filed herewith .
     
11
 
Registrant’s Statement of Computation of Earnings Per Share. The information for this Exhibit is incorporated by reference to page 8 of this Form 10-Q.
     
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. 0-16667) and incorporated herein by reference.
     
31.1
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Chief Executive Officer, and filed herewith .
     
31.2
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Chief Financial Officer, and filed herewith .
     
32.1
 
Certification of Chief Executive Officer pursuant to Section 906, and filed herewith .
     
32.2
 
Certification of Chief Financial Officer pursuant to Section 906, and filed herewith .
     
 
*
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.
     
 
***
Non-shareholder approved compensatory plan pursuant to which the Registrant’s Common Stock may be issued to employees of the Corporation.
 
29





Exhibit 10(s)
DEFERRED COMPENSATION PLAN
FOR DIRECTORS OF
DNB FINANCIAL CORPORATION

(Effective October 1, 2006)

1.    Purpose .
 
The purpose of this DCP is to provide each Eligible Director with the opportunity to select the timing of receipt of his or her Compensation. This DCP has been adopted by the Board pursuant to the DNB Financial Corporation Incentive Equity and Deferred Compensation Plan to partially implement Article IX thereof, and shall be considered a part of such Plan and subject to the pertinent terms and provisions thereof.
 
2.    Eligibility .
 
Each Eligible Director shall be eligible to participate in this DCP.
 
3.    Definitions .
 
The words and phrases set forth below shall have the meanings indicated, unless the context requires a different meaning. Each capitalized term or phrase used in this DCP but not defined in this Section 3 shall have the same meaning as the definition of such term or phrase set forth in the DNB Financial Corporation Incentive Equity and Deferred Compensation Plan.
 
(a)    “Beneficiary” shall mean the person(s) designated to receive the balance of an Eligible Director’s Deferred Account upon the death of the Eligible Director. A Beneficiary may only be a natural person, a trust, or an entity that is tax-exempt under Section 501(c)(3) of the Code.
 
(b)    “Company” shall mean DNB Financial Corporation.
 
(c)    “Compensation” shall mean the compensation payable by the Company, either in cash or pursuant to an Award of Shares, to an Eligible Director for his or her services as a member of the Board and committees thereof.
 
(d)    “DCP” shall mean the Deferred Compensation Plan for Directors of DNB Financial Corporation, as set forth herein and as may be amended from time to time.
 
(e)    “Effective Date” shall mean October 1, 2006, the effective date of this DCP.
 
(f)    “Election” shall mean the written election by an Eligible Director, pursuant to Section 4, below, to defer the receipt of all or a portion of his Compensation pursuant to this DCP.
 
 
 
 
(g)    “Eligible Director” shall mean any member of the Board, or of the board of directors of a direct or indirect subsidiary of the Company, who is entitled to Compensation for his services as a member of the Board or such other board.
 
(h)    “Share” or “Shares” shall mean one or more shares of Stock, including fractional shares.
 
4.    Election .
 
(a)    Prior to the commencement of a calendar year, but not later than the preceding December 15, an Eligible Director may make an Election, pursuant to which payment of a specified percentage or flat dollar amount of his Compensation earned and otherwise payable in cash during such year and thereafter, or a specified percentage or number of Shares subject to an Award granted in such year, shall be deferred until a future date established pursuant to Section 6(b), below. Notwithstanding the preceding sentence, however, in the case of any individual who will be an Eligible Director as of the Effective Date, or in the case of an individual who first becomes an Eligible Director after the Effective Date, the Eligible Director may make an Election at any time prior to the Effective Date or during the period ending on the 30 th day following the Effective Date, or at any time prior to the date on which he or she becomes an Eligible Director or during the period ending on the 30 th day following the date he or she first becomes an Eligible Director, as the case may be, provided that in no event shall such Election apply with respect to any Compensation earned by the Eligible Director prior to the date of the Election.
 
(b)    An Eligible Director’s Election must be in writing, and in such form as the Committee shall prescribe. No Election with respect to Compensation otherwise payable in cash shall be effective with respect to any calendar year unless the amount projected to be deferred for such year is at least five thousand dollars ($5,000).
 
(c)    An Eligible Director may modify or revoke his or her Election effective as of the commencement of any calendar year, provided such modification or revocation is in writing in such form as the Committee shall prescribe, and is delivered to the Company in advance of such year.
 
(d)    An Eligible Director’s Election with respect to Compensation otherwise payable in cash, or subsequent modification or revocation thereof, shall remain in effect through subsequent calendar years, unless and until modified or revoked, or a new Election is made, in accordance with the foregoing provisions of this Section 4. An Eligible Director’s Election with respect to Awards of Shares shall apply solely with respect to Awards granted in the calendar year to which the Election relates, and no Shares payable pursuant to another Award shall be deferred pursuant to this DCP or otherwise unless a new Election is made with respect to such Award pursuant to the foregoing provisions of this Section 4.
 
5.    Allocations to Deferred Compensation Account .
 
(a)    That number of Shares having a Fair Market Value equal to one hundred and ten percent (110%) of the amount of Compensation otherwise payable in cash which an
 
 
 
 
Eligible Director has deferred pursuant to an Election shall be allocated to the Eligible Director’s Deferred Compensation Account. The determination of the number of Shares to be allocated shall be based on the Fair Market Value of the Stock on the last day of the month in which such Compensation would have been paid to the Eligible Director but for his or her Election.
 
(b)    That number of Shares equal to the number of Shares subject to an Award which an Eligible Director has deferred pursuant to an Election shall be allocated to the Eligible Director’s Deferred Compensation Account as of the last day of the month in which such Shares would otherwise have been paid to the Eligible Director or become vested, whichever is later.
 
(c)    The amount of a cash dividend paid with respect to the Stock shall be deemed to be paid with respect to the Shares allocated to an Eligible Director’s Deferred Compensation Account and immediately reinvested in additional Shares in accordance with the same procedures and valuation provisions as are applicable under the Company’s Dividend Reinvestment Plan from time to time.
 
(d)    All Shares allocated to an Eligible Director’s Deferred Compensation Account shall thereafter be fully vested and shall not be forfeitable for any reason.
 
6.    Distributions from Deferred Compensation Account .
 
(a)    All distributions from an Eligible Director’s Deferred Account shall be in Shares, except that the Fair Market Value of any fraction of a Share as of the date of distribution shall be paid in cash. All Shares distributed to an Eligible Director or Beneficiary shall be subject to a restriction whereby they may not be sold, hypothecated or otherwise transferred for a period of one (1) year from the date of distribution without the express, written consent of the Committee. Certificates representing distributed Shares shall bear a legend reflecting such restriction.
 
(b)    Distribution of an Eligible Director’s Deferred Compensation Account shall commence upon the earlier of the following:
 
(i)   the date as of which he or she separates from service with the Company, within the meaning of Section 409A of the Code;
 
(ii)   the Eligible Director’s attainment of age 75; or
 
(iii)   the Eligible Director’s attainment of an attained age or a specified date designated by his or her Election, or as revised pursuant to Section 6(d), below.
 
If the Eligible Director does not designate an age in his or her Election pursuant to clause (iii), distribution of the Eligible Director’s Deferred Compensation Account shall commence upon the occurrence of the earlier of the events specified in clause (i) and (ii). A single designation shall apply to the entire balance of the Eligible Director’s Deferred Compensation Account.
 
 
 
 
(c)    Upon the occurrence of the distribution event set forth in Section 6(b), above, the balance of the Eligible Director’s Deferred Compensation Account shall be distributed in one of the following optional forms of distribution, as he or she may designate in his or her Election:
 
(i)    A single lump sum distribution on or about January 15 of the calendar year following the calendar year in which such distribution event occurs; or
 
(ii)    Annual installments payable for a number of whole years designated by the Eligible Director in his or her Election, which number shall not exceed ten (10), commencing on or about January 15 of the calendar year following the calendar year in which such distribution event occurs, and each January 15 thereafter during the installment period.
 
In the absence of a designation by the Eligible Director pursuant to this Section 6(c), the Eligible Director shall be deemed to have designated the distribution method set forth in clause (i). A single designation shall apply to the entire balance of the Eligible Director’s Deferred Compensation Account.
 
If distributions are to be made in installments, the amount of each installment shall be equal to the balance of the Deferred Compensation Account as of the close of the calendar year preceding the date of distribution of the installment, divided by the number of installment payments remaining (including that installment).
 
(d)   An Eligible Director may elect to change the timing or method of distribution (or both) previously designated (or deemed designated) pursuant to Section 6(b) or (c), above, by submission of a new designation to the Company, subject to the following limitations and any further limitations prescribed by Section 409A of the Code:
 
(i)   no such new designation shall take effect until at least 12 months after the date on which it is made;
 
(ii)   the first payment as a result of such new designation shall be made no earlier than five (5) years after the date such payment would have been made absent such new Election; and
 
(iii)   in the case of a payment scheduled to be made or payments scheduled to commence upon the attainment of a specified age, the new designation must be made at least 12 months prior to the attainment of such age.
 
(e)   Notwithstanding an Eligible Director’s Election or any provision of this DCP to the contrary, upon an Eligible Director’s separation from service with the Company, within the meaning of Section 409A of the Code, the Eligible Director’s entire Deferred Compensation Account shall be distributed in a single lump sum on or about January 15 of the calendar year following his or her separation from service if the Fair Market Value of the Deferred Compensation Account as of the close of such calendar year is not in excess of ten thousand dollars ($10,000).
 
 
 
 
(f)   Distribution of all or a portion of an Eligible Director’s Deferred Compensation Account shall be accelerated upon request of the Eligible Director if the Committee determines that the Eligible Director has experienced an unforeseeable emergency, within the meaning of Section 409A of the Code. The amount to be distributed shall not exceed the amount necessary to satisfy such unforeseeable emergency plus amounts necessary to pay taxes reasonably anticipated as a result of such distribution, after taking into account the extent to which such emergency may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Eligible Director’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship). In the event the requesting Eligible Director is a member of the Committee, the Eligible Director shall not participate in the decision by the Committee.
 
(g)   In the event of an Eligible Director’s death prior to the distribution in full of his or her Deferred Compensation Account, the Beneficiary shall receive the balance of the Eligible Director’s Deferred Compensation Account in a single lump sum as soon as practicable following the Eligible Director’s death.
 
(h)   Any amount distributed to an Eligible Director or Beneficiary under this DCP shall be subject to all applicable tax withholdings mandated by law. To the extent necessary, the number of Shares otherwise distributable at any time shall be reduced by that number of Shares having a Fair Market Value equal to the amount of tax required to be withheld in connection with such distribution.
 
7.    Designation of Beneficiary .
 
(a)    Each Eligible Director shall file with the Company a written designation, in the form prescribed by the Company, of one or more persons as Beneficiary to receive the balance of the Eligible Director’s Deferred Compensation Account upon his or her death. The Eligible Director may, from time to time, revoke or change his or her Beneficiary designation by filing a new designation with the Company. The last such designation received by the Company shall be controlling; provided, however, that no designation, change or revocation thereof, shall be effective unless received by the Company prior to the Eligible Director’s death.
 
(b)    If no such Beneficiary designation is in effect at the time of the Eligible Director’s death, or if no designated Beneficiary survives the Eligible Director, the payment of the amount, if any, payable under this DCP upon his or her death shall be made to the Eligible Director’s estate.
 
8.    Claims Procedures .
 
(a)   An Eligible Director or, in the event of the Eligible Director’s death, his or her Beneficiary, may file a written claim for payment hereunder with the Committee. In the event of a denial of any payment due to or requested by the Eligible Employee or Beneficiary (the “claimant”), the Committee will give the claimant written notification containing specific reasons for the denial. The written notification will contain specific reference to the pertinent provisions of this DCP on which the denial of the claim is based. In addition, it will contain a description of any other material or information necessary for the claimant to perfect a claim, and
 
 
 
 
an explanation of why such material or information is necessary. The notification will provide further appropriate information as to the steps to be taken if the claimant wishes to submit the claim for review and the time limits applicable thereto. This written notification will be given to a claimant within ninety (90) days after receipt of the claim by the Committee unless special circumstances require an extension of time for processing the claim, in which case the Committee shall provide written notice of the extension to the claimant and the reasons therefore, and the date by which the Company expects to make its determination with respect to the claim. In no event shall such extension exceed 90 days.
 
(b)   In the event of a denial of a claim for benefits, the claimant or a duly authorized representative will be permitted to submit issues and comments in writing to the Committee and to submit documents, records and other information relating to the claim for benefits. The claimant or a duly authorized representative shall also be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant’s claim for benefits. In addition, the claimant or a duly authorized representative may make a written request for a full and fair review of the claim and its denial by the Committee that takes into account all comments, documents, records and other information submitted by the claimant, without regard to whether such information was submitted or considered in the initial benefits determination; provided, however, that such written request is received by the Commitee (or its delegate) within sixty (60) days after receipt by the claimant of written notification of the denial. The sixty (60) day requirement may be waived by the Committee in appropriate cases.
 
(c)   A decision on review of a claim for benefits will be rendered by the Commitee within sixty (60) days after the receipt of the request. Under special circumstances, an extension (up to an additional 60 days) can be granted for processing the decision. Notice of this extension must be provided in writing to the claimant prior to the expiration of the initial sixty-day period. In no event will the decision be rendered more than one hundred twenty (120) days after the initial request for review. Any decision by the Commitee will be furnished to the claimant in writing and will set forth the specific reasons for the decision and the specific provisions on which the decision is based. The claimant or a duly authorized representative shall also be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant’s claim for benefits.
 
9.    Amendment or Termination .
 
The Board reserves the right at any time to amend this DCP in whole or in part, retroactively or prospectively, for any reason and without the consent of any Eligible Director or Beneficiary, provided that no amendment may adversely affect the rights of an Eligible Director or a Beneficiary with respect to amounts credited to the Eligible Director’s Deferred Compensation Account prior to such amendment or alter the timing of distribution of any Eligible Director’s Deferred Compensation Account. The Board reserves the right at any time to terminate this DCP. Upon termination of this DCP, (a) all Elections with respect to the deferral of future Compensation shall terminate as of the date specified by the Board, but not before the earliest time permitted under Section 409A of the Code; and (b) the Deferred Compensation Account of each Eligible Director shall be distributed at such time or times as it
 
 
 
 
would have been distributed in the absence of termination, unless the Board, in its discretion, elects to distribute the Deferred Compensation Accounts of all Eligible Directors in some other manner but in no event prior to the earliest time permitted under Section 409A of the Code.    
 
10.    Miscellaneous .
 
(a)    Nothing contained in this DCP shall give the Eligible Director the right to be retained in the service of the Company.
 
(b)    If the Company shall find that any person to whom any amount is payable under this DCP is unable to care for his affairs because of illness or accident, or is a minor, the Company may direct that any amount to which such person is entitled be paid to his or her spouse, a child, a relative, an institution maintaining or having custody of such person, or any other person deemed by the Company to be a proper recipient on behalf of such person otherwise entitled to payment. Any such payment shall be a complete discharge of the liability of the DCP and the Company therefor.
 
(c)    Except insofar as may otherwise be required by law, no amount payable at any time under this DCP shall be subject in any manner to alienation by anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge, encumbrance or garnishment by creditors of the Eligible Director or his or her Beneficiary, nor be subject in any manner to the debts or liabilities of any person, and any attempt to so alienate or subject any such amount, whether presently or thereafter payable, shall be void.
 
(d)    It is the intention of the Company that this DCP shall be unfunded for Federal income tax purposes. Accordingly, this DCP constitutes a mere promise by the Company to make payments hereunder in the future, and each Eligible Director or, if applicable, his or her Beneficiary, shall have the status of a general unsecured creditor of the Company with respect to this DCP. Except as provided by the terms of any trust established pursuant to Section 9.4 of the DNB Financial Corporation Incentive Equity and Deferred Compensation Plan, neither an Eligible Director nor his or her Beneficiary shall have any right, title, or interest in or to any assets which the Company may hold to aid it in meeting its obligations hereunder. Such assets, whether held in trust or otherwise, shall be unrestricted corporate assets.
 





Exhibit 10(t)
DNB FINANCIAL CORPORATION
DEFERRED COMPENSATION PLAN


(Effective October 1, 2006)

1.    Purpose .
 
The purpose of this DCP is to provide each Eligible Employee with the opportunity to select the timing of receipt of his or her Compensation. This DCP has been adopted by the Board pursuant to the DNB Financial Corporation Incentive Equity and Deferred Compensation Plan to partially implement Article IX thereof, and shall be considered a part of such Plan and subject to the pertinent terms and provisions thereof.
 
This DCP shall at all times be maintained by the Company and administered by the Committee for the purpose of providing deferred compensation for a select group of management and highly compensated employees of the Company and its direct and indirect subsidiaries.
 
2.    Eligibility .
 
Each Eligible Employee shall be eligible to participate in this DCP.
 
3.    Definitions .
 
The words and phrases set forth below shall have the meanings indicated, unless the context requires a different meaning. Each capitalized term or phrase used in this DCP but not defined in this Section 3 shall have the same meaning as the definition of such term or phrase set forth in the DNB Financial Corporation Incentive Equity and Deferred Compensation Plan.
 
(a)    “Beneficiary” shall mean the person(s) designated to receive the balance of an Eligible Employee’s Deferred Account upon the death of the Eligible Employee. A Beneficiary may only be a natural person, a trust, or an entity that is tax-exempt under Section 501(c)(3) of the Code.
 
(b)    “Bonus Deferral Election” shall mean the written election by an Eligible Employee, pursuant to Section 5, below, to defer the receipt of all or a portion of any annual or other periodic bonus otherwise payable to the Eligible Employee.
 
(c)    “Company” shall mean DNB Financial Corporation.
 
(d)    “Compensation” shall mean an Eligible Employee’s regular salary and annual or other periodic bonuses, and Shares payable pursuant to an Award.
 
(e)    “DCP” shall mean the DNB Financial Corporation Deferred Compensation Plan, as set forth herein and as may be amended from time to time.
 
 
 
 
(f)    “Effective Date” shall mean October 1, 2006, the effective date of this DCP.
 
(g)    “Eligible Employee” shall mean an employee of the Company or one or more of its direct or indirect subsidiaries who has been expressly designated by the Committee as eligible to participate in this DCP.
 
(h)    “Salary Deferral Election” shall mean the written election by an Eligible Employee, pursuant to Section 4, below, to defer the receipt of up to fifty percent (50%) of the regular salary otherwise payable to the Eligible Employee.
 
(i)    “Share” or “Shares” shall mean one or more shares of Stock, including fractional shares.
 
(j)    “Share Deferral Election” shall mean the written election by an Eligible Employee, pursuant to Section 6, below, to defer the receipt of Compensation otherwise payable to the Eligible Employee pursuant to an Award.
 
4.    Salary Deferral Election .
 
(a)    Prior to the commencement of a calendar year, but not later than the preceding December 15, an Eligible Employee may make a Salary Deferral Election, pursuant to which payment of a specified percentage of his or her regular salary earned during such year and thereafter and otherwise payable in cash shall be deferred until a future date established pursuant to Section 8(b), below. Notwithstanding the preceding sentence, however, in the case of any individual who will be an Eligible Employee as of the Effective Date, or in the case of an individual who first becomes an Eligible Employee after the Effective Date, the Eligible Employee may make a Salary Deferral Election at any time prior to the Effective Date or during the period ending on the 30 th day following the Effective Date, or at any time prior to the date on which he or she first becomes an Eligible Employee or during the period ending on the 30 th day following the date he or she first becomes an Eligible Employee, as the case may be, provided that in no event shall such Salary Deferral Election apply with respect to any salary earned by the Eligible Employee prior to the date of the Salary Deferral Election.
 
(b)    An Eligible Employee’s Salary Deferral Election must be in writing, and in such form as the Committee shall prescribe. No Salary Deferral Election shall be effective with respect to any calendar year unless the amount projected to be deferred for such year is at least five thousand dollars ($5,000).
 
(c)    An Eligible Employee may modify or revoke his or her Salary Deferral Election effective as of the commencement of any calendar year, provided such modification or revocation is in writing in such form as the Committee shall prescribe, and is delivered to the Company in advance of such year.
 
(d)    An Eligible Employee’s Salary Deferral Election, or subsequent modification or revocation thereof, shall remain in effect through subsequent calendar years,
 
 
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unless and until modified or revoked, or a new Salary Deferral Election is made, in accordance with the foregoing provisions of this Section 4.
 
5.    Bonus Deferral Election .
 
(a)    Prior to the commencement of a calendar year, but not later than the preceding December 15, an Eligible Employee may make a Bonus Deferral Election, pursuant to which payment of a specified percentage his or her annual or other periodic bonus earned during such year shall be deferred until a future date established pursuant to Section 8(b), below. Notwithstanding the preceding sentence, however -
 
(i)   In the case of any individual who will be an Eligible Employee as of the Effective Date, or in the case of an individual who first becomes an Eligible Employee after the Effective Date, the Eligible Employee may make a Bonus Deferral Election prior to the Effective Date or during the period ending on the 30 th day following the Effective Date, or prior to the date on which he or she first becomes an Eligible Employee or during the period ending on the 30 th day following the date he or she first becomes an Eligible Employee, as the case may be, provided that in no event shall such Bonus Deferral Election apply with respect to any bonus earned by the Eligible Employee prior to the date of the Bonus Deferral Election.
 
(ii)   In the case of any performance-based compensation, within the meaning of Section 409A of the Code, based upon a performance period of at least 12 months, an Eligible Employee may make a Bonus Deferral Election with respect to such compensation no later than the date that is six (6) months before the end of the performance period, provided that Eligible Employee performed services continuously from a date no later than the date upon which the performance criteria are established through a date no earlier than the date of the Bonus Deferral Election; and provided further that in no event shall a Bonus Deferral Election be effective with respect to such compensation if it is made after such compensation has become both substantially certain to be paid and readily ascertainable.
 
(b)    An Eligible Employee’s Bonus Deferral Election must be in writing, and in such form as the Company shall prescribe. No Bonus Deferral Election shall be effective with respect to any calendar year unless the amount projected to be deferred is at least five thousand dollars ($5,000) or one hundred percent (100%) of the Compensation to which the Bonus Deferral Election relates, whichever is less.
 
(c)    An Eligible Employee’s Bonus Deferral Election shall apply solely with respect to a single calendar year. No portion of an Eligible Employee’s bonus earned during any subsequent calendar year shall be deferred pursuant to this DCP or otherwise unless a new Bonus Deferral Election is made with respect to such calendar year pursuant to the foregoing provisions of this Section 5.
 
6.    Share Deferral Election .
 
(a)    Prior to the commencement of a calendar year, but not later than the preceding December 15 , an Eligible Employee may make a Share Deferral Election, pursuant to which payment of a specified percentage or number of Shares subject to any Award granted in
 
 
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such year shall be deferred until a future date established pursuant to Section 8(b), below. Notwithstanding the preceding sentence, however -
 
(i)   In the case of any individual who will be an Eligible Employee as of the Effective Date, or in the case of an individual who first becomes an Eligible Employee after the Effective Date, the Eligible Employee may make a Share Deferral Election prior to the Effective Date or during the period ending on the 30 th day following the Effective Date, or prior to the date on which he or she first becomes an Eligible Employee or during the period ending on the 30 th day following the date he or she first becomes an Eligible Employee, as the case may be, provided that in no event shall such Share Deferral Election apply with respect to any Award granted prior to the date of the Share Deferral Election.
 
(ii)   In the case of any Award that constitutes performance-based compensation, within the meaning of Section 409A of the Code, based upon a performance period of at least 12 months, an Eligible Employee may make a Share Deferral Election with respect to such compensation no later than the date that is six (6) months before the end of the performance period, provided that Eligible Employee performed services continuously from a date no later than the date upon which the performance criteria are established through a date no earlier than the date of the Share Deferral Election; and provided further that in no event shall a Share Deferral Election be effective with respect to any Shares if it is made after such Shares have become both substantially certain to be paid and the number thereof readily ascertainable.
 
(b)    An Eligible Employee’s Share Deferral Election must be in writing, and in such form as the Company shall prescribe.
 
(c)    An Eligible Employee’s Share Deferral Election shall apply solely with respect to a single calendar year. No Shares payable pursuant to an Award granted to an Eligible Employee during any subsequent calendar year shall be deferred pursuant to this DCP or otherwise unless a new Share Deferral Election is made with respect to such calendar year pursuant to the foregoing provisions of this Section 6.
 
7.    Allocations to Deferred Compensation Account .
 
(a)    That number of Shares having a Fair Market Value equal to one hundred and ten percent (110%) of the amount of Compensation otherwise payable in cash which an Eligible Employee has deferred pursuant to a Salary Deferral Election or a Bonus Deferral Election shall be allocated to the Eligible Employee’s Deferred Compensation Account. The determination of the number of Shares to be allocated shall be based on the Fair Market Value of the Stock on the last day of the month in which such Compensation would have been paid to the Eligible Employee but for his or her Salary Deferral Election or Bonus Deferral Election.
 
(b)    That number of Shares equal to the number of Shares subject to an Award which an Eligible Employee has deferred pursuant to a Share Deferral Election shall be allocated to the Eligible Employee’s Deferred Compensation Account as of the last day of the month in which such Shares would otherwise have been paid to the Eligible Employee, or the last day of the month in which the Eligible Employee becomes vested in such Shares, whichever is later.
 
 
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(c)    The amount of a cash dividend paid with respect to the Stock shall be deemed to be paid with respect to the Shares allocated to an Eligible Employee’s Deferred Compensation Account and immediately reinvested in additional Shares in accordance with the same procedures and valuation provisions as are applicable under the Company’s Dividend Reinvestment Plan from time to time.
 
(d)    All Shares allocated to an Eligible Employee’s Deferred Compensation Account shall be fully vested and shall not be forfeitable for any reason.
 
8.    Distributions from Deferred Compensation Account .
 
(a)    All distributions from an Eligible Employee’s Deferred Compensation Account shall be in Shares, except that the Fair Market Value of any fraction of a Share as of the date of distribution shall be paid in cash. All Shares distributed to an Eligible Employee or Beneficiary shall be subject to a restriction whereby they may not be sold, hypothecated or otherwise transferred for a period of one (1) year from the date of distribution without the express, written consent of the Committee. Certificates representing distributed Shares shall bear a legend reflecting such restriction.
 
(b)   Distribution of an Eligible Employee’s Deferred Compensation Account shall commence upon the earlier of the following:
 
(i)   the date as of which he or she separates from service with the Company, within the meaning of Section 409A of the Code, or
 
(ii)   the attained age of the Eligible Employee or a specified date, in either case as designated by the Eligible Employee in his or her first Salary Deferral Election, first Bonus Deferral Election, or first Share Deferral Election, whichever was made first, or as revised pursuant to Section 8(d), below.
 
If the Eligible Employee does not designate an age or date pursuant to clause (ii), above, distribution of the Eligible Employee’s Deferred Compensation Account shall commence upon the occurrence of the event specified in clause (i). A single designation shall apply to the entire balance of the Eligible Employee’s Deferred Compensation Account.    
 
(c)   Upon the occurrence of the distribution event set forth in Section 8(b), above, the balance of the Eligible Employee’s Deferred Compensation Account shall be distributed in one of the following optional forms of distribution, as he or she may designate in his or her Salary Deferral Election, his or her first Bonus Deferral Election, or his or her first Share Deferral Election, whichever was made first:
 
(i)    A single lump sum distribution on or about January 15 of the calendar year following the calendar year in which such distribution event occurs; or
 
(ii)    Annual installments payable for a number of whole years designated by the Eligible Employee in such Salary Deferral Election, Bonus Deferral Election, or Share Deferral Election, as the case may be, which number shall not exceed ten (10),
 
 
5
 
commencing on or about January 15 of the calendar year following the calendar year in which such distribution event occurs, and each January 15 thereafter during the installment period.
 
However, in the case of any specified employee, no distribution shall be made as a result of his or her separation from service with the Company, within the meaning of Section 409A of the Code, before the date which is six months after the date of such separation from service (or, if earlier, the date of death of the specified employee). For purposes of the preceding sentence, a “specified employee” is a key employee (as defined in Section 416(i) of the Code without regard to paragraph (5) thereof) of the Company or any entity which, along with the Company, would be considered a single employer under Section 414(b) or (c) of the Code.
 
In the absence of a designation by the Eligible Employee pursuant to this Section 8(c), the Eligible Employee shall be deemed to have designated the distribution method set forth in clause (i). A single designation shall apply to the entire balance of the Eligible Employee’s Deferred Compensation Account.
 
If distributions are to be made in installments, the amount of each installment shall be equal to the balance of the Deferred Compensation Account as of the close of the calendar year preceding the date of distribution of the installment, divided by the number of installment payments remaining (including that installment).
 
(d)   An Eligible Employee may elect to change the timing or method of distribution (or both) previously designated (or deemed designated) pursuant to Section 8(b) or 8(c), above, by submission of a new designation to the Committee, subject to the following limitations and any further limitations prescribed by Section 409A of the Code:
 
(i)   no such new designation shall take effect until at least 12 months after the date on which it is made;
 
(ii)   the first payment as a result of such new designation shall be made no earlier than five (5) years after the date such payment would have been made absent such new designation.
 
(e)   Notwithstanding an Eligible Employee’s Salary Deferral Election, Bonus Deferral Election or Share Deferral Election, or any provision of this DCP to the contrary, upon an Eligible Employee’s separation from service with the Company, within the meaning of Section 409A of the Code, the Eligible Employee’s entire Deferred Compensation Account shall be distributed in a single lump sum on or about January 15 of the calendar year following his or her separation from service if the Fair Market Value of the Deferred Compensation Account as of the close of such calendar year is not in excess of ten thousand dollars ($10,000).
 
(f)   Distribution of all or a portion of an Eligible Employee’s Deferred Compensation Account shall be accelerated upon request of the Eligible Employee if the Committee determines that the Eligible Employee has experienced an unforeseeable emergency, within the meaning of Section 409A of the Code. The amount to be distributed shall not exceed the amount necessary to satisfy such unforeseeable emergency plus amounts necessary to pay taxes reasonably anticipated as a result of such distribution, after taking into account the extent to
 
 
6
 
which such emergency may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Eligible Employee’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship).
 
(g)   In the event of an Eligible Employee’s death prior to the distribution in full of his or her Deferred Compensation Account, the Beneficiary shall receive the balance of the Eligible Employee’s Deferred Compensation Account in a single lump sum as soon as practicable following the Eligible Employee’s death.
 
(h)   Any amount distributed to an Eligible Employee or Beneficiary under this DCP shall be subject to all applicable tax withholdings mandated by law. To the extent necessary, the number of Shares otherwise distributable at any time shall be reduced by that number of Shares having a Fair Market Value equal to the amount of tax required to be withheld in connection with such distribution.
 
9.    Designation of Beneficiary .
 
(a)    Each Eligible Employee shall file with the Company a written designation, in the form prescribed by the Company, of one or more persons as Beneficiary to receive the balance of the Eligible Employee’s Deferred Compensation Account upon his or her death. The Eligible Employee may, from time to time, revoke or change his or her Beneficiary designation by filing a new designation with the Company. The last such designation received by the Company shall be controlling; provided, however, that no designation, change or revocation thereof, shall be effective unless received by the Company prior to the Eligible Employee’s death.
 
(b)    If no such Beneficiary designation is in effect at the time of the Eligible Employee’s death, or if no designated Beneficiary survives the Eligible Employee, the payment of the amount, if any, payable under this DCP upon his or her death shall be made to the Eligible Employee’s estate.

10.    Claims Procedures .
 
(a)   An Eligible Employee or, in the event of the Eligible Employee’s death, his or her Beneficiary, may file a written claim for payment hereunder with the Committee. In the event of a denial of any payment due to or requested by the Eligible Employee or Beneficiary (the “claimant”), the Committee will give the claimant written notification containing specific reasons for the denial. The written notification will contain specific reference to the pertinent provisions of this DCP on which the denial of the claim is based. In addition, it will contain a description of any other material or information necessary for the claimant to perfect a claim, and an explanation of why such material or information is necessary. The notification will provide further appropriate information as to the steps to be taken if the claimant wishes to submit the claim for review and the time limits applicable thereto, and a statement of the claimant’s right to bring a civil action under Section 502(a) of the Employee Retirement Income Security Act of 1974, as amended, if applicable. This written notification will be given to a claimant within ninety (90) days after receipt of the claim by the Committee unless special circumstances require an extension of time for processing the claim, in which case the Committee shall provide written
 
 
7
 
notice of the extension to the claimant and the reasons therefore, and the date by which the Company expects to make its determination with respect to the claim. In no event shall such extension exceed 90 days.
 
(b)   In the event of a denial of a claim for benefits, the claimant or a duly authorized representative will be permitted to submit issues and comments in writing to the Committee and to submit documents, records and other information relating to the claim for benefits. The claimant or a duly authorized representative shall also be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant’s claim for benefits. In addition, the claimant or a duly authorized representative may make a written request for a full and fair review of the claim and its denial by the Committee that takes into account all comments, documents, records and other information submitted by the claimant, without regard to whether such information was submitted or considered in the initial benefits determination; provided, however, that such written request is received by the Commitee (or its delegate) within sixty (60) days after receipt by the claimant of written notification of the denial. The sixty (60) day requirement may be waived by the Committee in appropriate cases.
 
(c)   A decision on review of a claim for benefits will be rendered by the Commitee within sixty (60) days after the receipt of the request. Under special circumstances, an extension (up to an additional 60 days) can be granted for processing the decision. Notice of this extension must be provided in writing to the claimant prior to the expiration of the initial sixty-day period. In no event will the decision be rendered more than one hundred twenty (120) days after the initial request for review. Any decision by the Commitee will be furnished to the claimant in writing and will set forth the specific reasons for the decision and the specific provisions on which the decision is based. The claimant or a duly authorized representative shall also be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant’s claim for benefits.
 
11.    Amendment or Termination .
 
The Board reserves the right at any time to amend this DCP in whole or in part, retroactively or prospectively, for any reason and without the consent of any Eligible Employee or Beneficiary, provided that no amendment may adversely affect the rights of an Eligible Employee or a Beneficiary with respect to amounts credited to the Eligible Employee’s Deferred Compensation Account prior to such amendment or alter the timing of distribution of any Eligible Employee’s Deferred Compensation Account. The Board reserves the right at any time to terminate this DCP. Upon termination of this DCP, (a) all Elections with respect to the deferral of future Compensation shall terminate as of the date specified by the Board, but not before the earliest time permitted under Section 409A of the Code; and (b) the Deferred Compensation Account of each Eligible Employee shall be distributed at such time or times as it would have been distributed in the absence of termination, unless the Board, in its discretion, elects to distribute the Deferred Compensation Accounts of all Eligible Employees in some other manner but in no event prior to the earliest time permitted under Section 409A of the Code.

 
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12.    Miscellaneous .
 
(a)    Nothing contained in this DCP shall give the Eligible Employee the right to be retained in the employ or other service of the Company.
 
(b)    If the Company shall find that any person to whom any amount is payable under this DCP is unable to care for his affairs because of illness or accident, or is a minor, the Company may direct that any amount to which such person is entitled be paid to his or her spouse, a child, a relative, an institution maintaining or having custody of such person, or any other person deemed by the Company to be a proper recipient on behalf of such person otherwise entitled to payment. Any such payment shall be a complete discharge of the liability of the DCP and the Company therefor.
 
(c)    Except insofar as may otherwise be required by law, no amount payable at any time under this DCP shall be subject in any manner to alienation by anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge, encumbrance or garnishment by creditors of the Eligible Employee or his or her Beneficiary, nor be subject in any manner to the debts or liabilities of any person, and any attempt to so alienate or subject any such amount, whether presently or thereafter payable, shall be void.
 
(d)    It is the intention of the Company that this DCP shall be unfunded for Federal income tax purposes and for purposes of the Employee Retirement Income Security Act of 1974, as amended. Accordingly, this DCP constitutes a mere promise by the Company to make payments hereunder in the future, and each Eligible Employee or, if applicable, his or her Beneficiary, shall have the status of a general unsecured creditor of the Company with respect to this DCP. Except as provided by the terms of any trust established pursuant to Section 9.4 of the DNB Financial Corporation Incentive Equity and Deferred Compensation Plan, neither an Eligible Employee nor his or her Beneficiary shall have any right, title, or interest in or to any assets which the Company may hold to aid it in meeting its obligations hereunder. Such assets, whether held in trust or otherwise, shall be unrestricted corporate assets.
 
  9

Exhibit 10(u)
TRUST AGREEMENT

THIS TRUST AGREEMENT, effective as of October 1, 2006, is made by and between DNB FINANCIAL CORPORATION ("Company") and DNB FIRST, NATIONAL ASSOCIATION ("Trustee").

WHEREAS, the Company has adopted the nonqualified deferred compensation Plans listed in Appendix A (individually, a “Plan” and collectively, the "Plans");

WHEREAS, the Company has incurred or expects to incur liability under the terms of the Plans with respect to the individuals participating in the Plans and their beneficiaries (individually a "Participant" and collectively the "Participants");

WHEREAS, the Company wishes to establish a trust (the "Trust") and to contribute to the Trust the assets that shall be held therein, subject to the claims of the Company's creditors in the event of the Company's Insolvency, as defined in Section 4, until paid to Participants in such manner and at such times as specified in the Plans and this Trust Agreement;

WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of any Plan subject to the Employee Retirement Income Security Act of 1974, as amended, ("ERISA") as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees, or benefits under any excess benefit plan as that term is defined in Section 3(36) of ERISA to certain employees in excess of the limitations on contributions and benefits imposed by Section 415 of the Internal Revenue Code of 1986, as amended (the “Code”); and;

WHEREAS, it is the intention of the Company to make contributions to the Trust to provide a source of funds to meet its liabilities under the Plans.

NOW THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows:

Section 1. Establishment of Trust.

(a) The Company hereby establishes the Trust with the Trustee, consisting of such sums of money and other property acceptable to the Trustee as from time to time shall be paid and delivered to and accepted by the Trustee from the Company (the "Trust Fund"). The Trustee shall have no duty to determine or collect contributions under the Plans and shall have no responsibility for any property until it is received and accepted by the Trustee. The Company shall have the sole duty and responsibility for the determination of the accuracy or sufficiency of the contributions to be made under the Plans. All such money and other property paid or delivered to and accepted by the Trustee shall become the principal of the Trust to be held, administered and disposed of by the Trustee as provided in this Trust Agreement.

 
 
 
(b) The Trust hereby established shall be irrevocable; notwithstanding the fact that the Trust is irrevocable, the Company may terminate the Plans (or any of them) at any time.

(c) The Trust is intended to be a grantor trust, of which the Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Code, as amended, and shall be construed accordingly. The Company represents and warrants to the Trustee that: (i) no Plan for which benefits are or may become payable under this Trust is or shall be subject to Part 4 of Title I of ERISA; and (ii) any Plan subject to ERISA covers, and will cover, only (x) a select group of management or highly compensated employees as contemplated by Section 401(a) of ERISA and interpretations, opinions, and rulings of the Department of Labor thereunder or (y) Participants in an excess benefit plan as defined in Section 3(36) of ERISA.

(d) The principal of the Trust and any earnings thereon shall be held separate and apart from other funds of the Company and shall be used exclusively for the purposes of paying Participants under the Plans, expenses of the Trust and, in the event of Insolvency, obligations of the Company to its general creditors as herein set forth. The Participants and their beneficiaries shall have no preferred claim on, nor any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plans and this Trust Agreement shall be unsecured contractual rights of the Participants and their beneficiaries against the Company. Any assets held by the Trust will be subject to the claims of the Company's general creditors under federal and state law in the event of Insolvency, as defined in Section 4(a) herein.

(e) In addition to the contributions necessary to meet the Trust Funding Requirement (as defined in Section 2), the Company, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in trust with the Trustee to augment the principal to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. Neither the Trustee nor any Participant or beneficiary shall have any right to compel such additional deposits.

Section 2. Trust Funding Requirement

From time to time but in no event less frequently than monthly, the Company shall contribute to the Trust (in cash, shares of Company common stock or other stock for which Company common stock has been exchanged in accordance with the applicable Plans (“Stock”) or other property as provided or permitted by the respective applicable Plans) the amounts the Company is obligated to credit to each Participant’s account under a Plan (herein, a “Deferred Compensation Account”), except that no amounts shall be contributed during any period to the extent necessary to avoid the application of Section 409A(b)(3) of the Code (as amended by the Pension Protection Act of 2006). The Deferred Compensation Account of each Participant shall be separate and segregated from the Deferred Compensation Accounts of other Participants, but the Trustee shall nevertheless be authorized to commingle cash or hold shares of Stock in a single name or in one or more aggregate certificates or in book entry, or in one or more accounts under the Company’s dividend reinvestment plan, for purposes of achieving economies or efficiencies in investments or administration or complying with the provisions of this Trust Agreement, so long as the Trustee maintains records identifying the interests of each Participant
 
 
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therein. The Trustee may commingle the cash allocable to individual Accounts that would not otherwise be sufficiently large to purchase whole shares of Stock, for purposes of investing it in Stock, but only to the extent that the Trustee maintains records showing the fractional shares thereof allocable to each Account.

Section 3. Payments to Plan Participants and Their Beneficiaries.

(a) The Company shall deliver to the Trustee a schedule (the "Payment Schedule") that indicates the amounts payable in respect of each Participant and that provides a formula or other instructions acceptable to the Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the applicable Plan), and the time of commencement for payment of such amounts. The Company shall be responsible for notifying the Trustee of any change in the information on the Payment Schedule. Except as otherwise provided herein, the Trustee shall make payments to the Participants (including beneficiaries) in accordance with such Payment Schedule.

(b) It is the intent of the Company and the Trustee that the Company shall be responsible for determining and effecting all federal, state and local tax aspects of the Plans and the Trust Fund, including without limitation income taxes payable on the Trust Fund's income, if any, any required withholding of income or other payroll taxes in connection with the payment of benefits from the Trust Fund pursuant to the Plans, and all reporting required in connection with any such taxes. To the extent that the Company is required by applicable law to pay or withhold such taxes or to file such reports, such obligation shall be a responsibility allocated to the Company, as the case may be, hereunder. To the extent the Trustee is required by applicable law to pay or withhold such taxes or to file such reports, the Company shall inform the Trustee of such obligation, shall direct the Trustee with respect to the performance of such obligations and shall provide the Trustee with all information required by the Trustee to meet such obligations. Notwithstanding the foregoing, the Company may elect to pay any applicable taxes directly. In the event the Company pays taxes directly, such amounts may be reimbursed from Trust assets by the Trustee, provided that the Company certifies the amount of taxes paid directly and instructs the Trustee to remit a reimbursement of such taxes to the Company.

(c) The entitlement of a Participant (including any beneficiaries) to benefits under a Plan shall be determined by the Company or such party as it shall designate under the applicable Plan, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plan. The Company shall notify the Trustee of such determination and shall direct commencement of payments of such benefits.

(d) The Company may make payment of benefits directly to the Participants as they become due under the terms of the Plans. The Company shall notify the Trustee of its decision to make payment of benefits directly prior to the time such amounts are payable. If requested by the Company, the Trustee shall reimburse the Company for any benefits under a Plan and Trust which are paid by the Company or otherwise satisfied. In addition, if the principal of the Trust, together with any earnings thereon, are not sufficient to make payment of benefits in accordance with the terms of the Plans, the Company shall immediately make up the balance of each such
 
 
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payment as it falls due. The Trustee shall notify the Company when principal and earnings are not sufficient.

Section 4. Trustee Responsibility regarding Payments to Trust Beneficiary When Company Is or Is Alleged to Be Insolvent.

(a) The Trustee shall cease payment of benefits to the Participants and their beneficiaries if the Company is Insolvent. The Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) the Company is unable to pay its debts as they become due, or (ii) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. A determination of Insolvency under the terms of this Trust Agreement does not constitute an admission of insolvency by the Company for any other purpose.

(b) At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the principal and income of the Trust shall be subject to claims of general creditors of the Company under federal and state law as set forth below.

(1) The Board of Directors and the Chief Executive Officer of the Company shall have the duty to inform the Trustee in writing of the Company's Insolvency. If a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, the Trustee shall determine whether the Company is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to Participants and their beneficiaries. In all cases, the Trustee shall be entitled to conclusively rely upon the written certification of the Board of Directors or the Chief Executive Officer of the Company when determining whether the Company is Insolvent.

(2) Unless the Trustee has received notice from the Company or a person claiming to be a creditor alleging that the Company is Insolvent, the Trustee shall have no duty to inquire whether the Company is Insolvent. The Trustee may in all events rely on such evidence concerning the Company's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning the Company's solvency.

(3) If at any time the Trustee has determined that the Company is Insolvent, the Trustee shall discontinue payments to the Participants or their beneficiaries and shall hold the assets of the Trust for the benefit of the Company's general creditors except that the Trustee's fees and expenses may continue to be paid pursuant to Section 11 subject to any applicable bankruptcy rules. Nothing in this Trust Agreement shall in any way diminish any rights of the Participants or their beneficiaries to pursue their rights as general creditors of the Company with respect to benefits due under the Plans or otherwise.

(4) The Trustee shall resume the payment of benefits to the Participants or their beneficiaries in accordance with Section 3 of this Trust Agreement only after the Trustee has determined that the Company is not Insolvent (or is no longer Insolvent).

 
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(c) Provided that there are sufficient assets if the Trustee discontinues the payment of benefits from the Trust pursuant to Section 4(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to the Participants or their beneficiaries under the terms of the Plans (as certified to the Trustee by the Company) for the period of such discontinuance less the aggregate amount of any payments made to the Participants or their beneficiaries by the Company in lieu of the payments provided for hereunder during any such period of discontinuance.

Section 5. Payments to Company.

Except as otherwise specifically provided in this Trust Agreement, the Company shall have no right or power to direct the Trustee to return to the Company or to divert to others any of the Trust assets before all payment of benefits has been made to the Participants and their beneficiaries pursuant to the terms of the Plans (as certified to the Trustee by the Company). Notwithstanding the above, the Company may direct the Trustee to transfer to the Company Trust Fund assets in an amount necessary to avoid triggering taxable income to a Participant or beneficiary if such Participant or beneficiary would be required to recognize income tax on such funds if they remain in the Trust. The Trustee shall be entitled to rely solely on the Company's representation that the amount directed to be returned to the Company could become taxable to a Participant or beneficiary and shall have no duty to review the Company's determination of the amount.

Section 6. Investment and Administrative Authority.

(a) Prior to a “Change of Control” (as defined in Section 12 of this Agreement) the Company shall establish and maintain written investment guidelines (the "Investment Guidelines"), which may be revised by the Company from time to time consistent with the provisions of the applicable Plans, for the investment of the assets in the Trust Fund. The Trust Fund shall at all times be managed in accordance with the Investment Guidelines then in effect. The Company may appoint and remove one or more investment managers from time to time to manage specified portions of the Trust Fund. To the extent that assets of the Trust Fund are not so managed by an investment manager appointed by the Company, the Company shall manage all such assets. The Company and each investment manager shall designate in writing the persons who are authorized to represent such party in dealing with the Trustee. Except as provided in subsection (b) below, the Trustee shall have no investment duties for the Trust Fund. The Trustee shall have no duty to inquire whether investment directions received from the Company or an investment manager are in accordance with the terms of any Plan or the Investment Guidelines, or to review the assets purchased, retained or sold.

(b) After a Change of Control, the Trustee shall have and exercise sole investment discretion with respect to all of the Trust Fund in accordance with the Investment Guidelines in effect immediately prior to a Change of Control, a copy of which shall be provided prior to a Change of Control to the Trustee by the Company. The Trustee's sole responsibility with regard to investment discretion shall be to exercise such discretion in accordance with the Investment Guidelines. Thereafter, the Investment Guidelines may be changed from time to time by mutual agreement of the Trustee and the Company. The Trustee may, in its sole discretion, appoint,
 
 
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retain or terminate an investment manager (including any affiliate of the Trustee) to manage all or a portion of the Trust Fund in accordance with the current Investment Guidelines.

(c) In addition to those powers conferred by law, the Trustee shall have the following powers:

(1) The Trustee may invest and reinvest the principal and income of the Trust and keep it invested, without distinction between principal and income, as provided in the Investment Guidelines.

(2) The Trustee may collect and receive any and all money and other property due the Trust and give full discharge therefor.

(3) The Trustee may settle, compromise or submit to arbitration any claims, debt or damages due or owing to or from the Trust; the Trustee may also commence or defend suits or legal proceedings to protect any interest of the Trust, and may represent the Trust in all suits or legal proceedings in any court or before any other body or tribunal.

(4) The Trustee may take all action necessary to pay for authorized transactions, including the temporary advancement of cash or securities to settle security purchases and/or foreign exchange or contracts for foreign exchange and any property at any time held in the Trust Fund shall be security therefore to the extent of such advancement until it is repaid.

(5) The Trustee may appoint custodians, subcustodians or subtrustees, domestic or foreign (including affiliates of the Trustee), as to part or all of the Trust. The Trustee shall not be responsible or liable for any losses or damages suffered by the Company arising as a result of the insolvency of any custodian, subcustodian or subtrustee, except to the extent the Trustee was negligent in its selection or continued retention of such custodian, subcustodian or subtrustee. In no event shall Trustee be liable for the acts or omissions of any custodian, subcustodian or subtrustee appointed pursuant to the direction of the Company or an investment manager.

(6) The Trustee may hold property in nominee name, in bearer form, or in book entry form, in a clearinghouse corporation or in a depository (including an affiliate of the Trustee), so long as the Trustee's records clearly indicate that the assets held are a part of the Trust. The Trustee shall not be responsible for any losses resulting from the deposit or maintenance of securities or other property (in accordance with market practice, custom, or regulation) with any recognized foreign or domestic clearing facility, book-entry system, centralized custodial depository, or similar organization.

(7) The Trustee may generally do all acts, whether or not expressly authorized, which the Trustee may deem necessary or desirable for the protection of the Trust.

(d) Notwithstanding any other provision of this Agreement, to the extent that a Plan or applicable Investment Guidelines permit or require investment of Trust assets in Stock, the Trustee shall be authorized to accept, hold and purchase Stock, reinvest income in Stock, and otherwise administer Stock for the benefit of Participants, without any obligation to diversify
 
 
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investments or investment risk for the benefit of any Participant, and without regard to any “prudent investor” or similar laws or rules, and notwithstanding that the Trustee may be affiliated with the Company or otherwise personally interested in the Company, the Stock or any transactions in Stock; and the Trustee shall have no obligation to refrain from self-dealing in connection with any Stock or any interests in Stock administered by the Trustee. Without limiting the foregoing, the Trustee shall not be obligated, even when requested by a Participant, to sell or otherwise dispose of any Stock prior to distribution of the Stock to the Participant in accordance with the provisions of the applicable Plan, the Participant’s applicable elections, and this Trust Agreement. The Company, and by agreeing to defer compensation subject to this Trust Agreement each Participant, for themselves and their respective successors and heirs, hereby severally release, hold harmless and indemnify the Trustee, all successors to the Trustee in such capacity, and each of their agents and the respective successors, personal representatives and heirs of each of the foregoing, from and against all liability (including without limitation due to claims of negligence), loss, cost, damages (including without limitation consequential damages, lost profits, loss of expectation and punitive or exemplary damages of all kinds) and expense (including without limitation attorneys fees and costs of litigation) which the Company or any Participant or Participant’s personal representatives, heirs or beneficiaries may now or hereafter suffer or incur by virtue of the Trustee’s acting or omitting to act based on the authority granted to the Trustee in this subsection. The provisions of this subsection shall survive the termination of this Trust Agreement.

(e) Neither the Company nor the Trustee shall have discretion to vote any shares of Stock except pursuant to instructions received from Participants. The Trustee shall be authorized, in its discretion, to take either of the following actions in connection with shareholders meetings or other circumstances where a Participant’s vote, approval or other action is requested: (i) to forward to each Participant the materials received by the Trustee for the Participant with respect to the vote, approval or other action, along with a notification to the Participant to deliver the proxy card or other voting, approval or other materials directly to the Company or elsewhere as the Company shall direct; or (ii) to forward to each Participant copies of the materials received with respect to the vote, approval or other action, along with a notification to the Participant that the Trustee will vote or withhold votes, or provide or withhold other approvals or actions, with respect to shares of Stock held in the Participant’s deferred compensation account, only according to instructions received from the Participant. In the case described in clause (ii) of this subsection: (A) the Trustee shall have no authority to take any action with respect to a vote, approval or other action requested of any Stock held in a Participant’s deferred compensation account in the absence of instructions from the Participant; and (B) the Trustee shall only be authorized to vote or give approval or take other actions with respect to fractional interests in any Stock held in a Participant’s deferred compensation account to the extent that the Participant would have such authority if such Stock were held directly by such Participant. The Company agrees, to the extent requested by the Trustee, to: (I) provide to the Trustee such numbers of copies of materials being distributed to shareholders as the Trustee may request in order to fulfill the Trustee’s obligations to Participants under this Trust Agreement with respect thereto; and (II) deliver such materials directly to Participants, along with any notification or other materials required by the Trustee, to addresses to be provided by the Trustee.

 
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Section 7. Settlement and Income; Market Practice Settlements.

(a) In accordance with the Trustee's standard operating procedure, the Trustee shall credit the Trust Fund with income, which shall include interest, dividends and return of capital, and maturity proceeds on securities on contractual payment date net of any taxes or upon actual receipt. To the extent the Trustee credits income on contractual payment date, the Trustee may reverse such accounting entries to the contractual payment date if the Trustee reasonably believes that such amount will not be received.

(b) In accordance with the Trustee's standard operating procedure, the Trustee will attend to the settlement of securities transactions on the basis of either contractual settlement date accounting or actual settlement date accounting. To the extent the Trustee settles certain securities transactions on the basis of contractual settlement date accounting, the Trustee may reverse any entry relating to such contractual settlement if the Trustee reasonably believes that such amount will not be received.

(c) Settlements of transactions may be effected in trading and processing practices customary in the jurisdiction or market where the transaction occurs. The Company acknowledges that this may, in certain circumstances, require the delivery of cash or securities (or other property) without the concurrent receipt of securities (or other property) or cash. In such circumstances, the Trustee shall have no responsibility for nonreceipt of payment (or late payment) or nondelivery of securities or other property (or late delivery) by the counterparty.

Section 8. Disposition of Income.

During the term of this Trust, all income received by the Trust with respect to each Deferred Compensation Account, net of expenses and taxes, shall be accumulated and reinvested in and for the benefit of such Deferred Compensation Account according to the procedures and valuation provisions as are applicable under the Company’s dividend reinvestment plan from time to time. In order to comply with this requirement, the Trustee is authorized to deposit Stock held by it in one or more accounts under the Company’s dividend reinvestment plan. The Trustee shall have no liability to anyone whatsoever for any failure of the Company, any administrator or any other agent of the Company to adhere to the provisions of the Company’s dividend reinvestment plan.

Section 9. Accounting by Trustee.

The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between the Company and the Trustee. Within sixty (60) days following the close of each calendar year and within ninety (90) days after the removal or resignation of the Trustee, the Trustee shall deliver to the Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in
 
 
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the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. If, within 120 days after the Trustee mails to the Company a statement with respect to the Trust, the Company has not given the Trustee written notice of any exception or objection thereto, the statement shall be deemed to have been approved, and in such case, the Trustee shall not be liable for any matters in such statements. The Company or its agent shall have the right at its own expense and with prior written notice to the Trustee to inspect the Trustee's books and records directly relating to the Trust Fund during normal business hours.

Section 10. Responsibility of Trustee.

(a) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that the Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by the Company which is contemplated by, and in conformity with, the terms of the Plans (as certified to the Trustee by the Company) or this Trust and is given in writing by the Company. In the event of a dispute between the Company and a third party, the Trustee may apply to a court of competent jurisdiction to resolve the dispute.

(b) The Trustee is not a party to and has no duties or responsibilities under any Plan other than those that may be expressly contained in this Trust Agreement. In any case in which a provision of this Trust Agreement conflicts with any provision in any Plan or Plans, this Trust Agreement shall control.

(c) The Trustee shall not be responsible for the title, validity or genuineness of any property or evidence of title thereto received by it or delivered by it pursuant to this Trust Agreement and shall be held harmless in acting upon any notice, request, direction, instruction, consent, certification or other instrument believed by it to be genuine and delivered by the proper party or parties.

(d) The Company agrees to indemnify and hold harmless the Trustee, its parent, subsidiaries and affiliates, and each of their respective officers, directors, employees and agents from and against all liability, loss and expense, including reasonable attorneys' fees and expenses incurred by the Trustee or any of the foregoing indemnitees arising out of or in connection with this Trust Agreement, except as a result of the Trustee's own negligence, willful misconduct, bad faith or breach of this Agreement or of its fiduciary duties. The Trustee shall be fully indemnified by the Company for any action taken in accordance with, or any failure to act in the absence of, the Company's or an investment manager's directions. If the Trustee undertakes or defends any litigation arising in connection with this Trust, the Company agrees to indemnify the Trustee against the Trustee's costs, expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments except where the Trustee is determined to be liable due to its negligence, willful misconduct, bad faith, or breach of this Trust Agreement or of its fiduciary duties. If the Company does not pay such costs, expenses and liabilities in a reasonably timely manner, the Trustee may obtain payment from the Trust. This Section 10(d) shall survive the termination of this Trust Agreement. The
 
 
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provisions of this subsection shall supplement and shall not restrict the application of any other provisions of this Trust Agreement providing for indemnification, hold-harmless or release of the Trustee, and in the event of a conflict in application of this subsection and any other such provision, the provision most protective to the Trustee shall control.

(e) The Trustee may consult with legal counsel (who may also be counsel for the Company generally) with respect to any of its duties or obligations hereunder and as a part of its reimbursable expenses under this Agreement, pay counsel's reasonable compensation and expenses. The Trustee shall be entitled to rely on and may act upon advice of counsel on all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice.

(f) The Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals, including affiliates, to assist it in performing any of its duties or obligations hereunder.

(g) The Trustee shall have without exclusion, all powers conferred on Trustees by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Trust, the Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy.

(h) Notwithstanding any powers granted to the Trustee pursuant to this Trust Agreement or to applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of Section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Code.

(i) Notwithstanding anything in this Trust Agreement to the contrary contained herein, the Trustee shall not be responsible or liable for any losses to the Trust resulting from any event beyond the reasonable control of the Trustee, its agents or custodians, including but not limited to nationalization, strikes, expropriation, devaluation, seizure, or similar action by any governmental authority, de facto or de jure; or enactment, promulgation, imposition or enforcement by any such governmental authority of currency restrictions, exchange controls, levies or other charges affecting the Trust's property; or the breakdown, failure or malfunction of any utilities or telecommunications systems; or any order or regulation of any banking or securities industry including changes in market rules and market conditions affecting the execution or settlement of transactions; or acts of war, terrorism, insurrection or revolution; or acts of God; or any other similar event; or any action or omission taken by the Trustee consistent with the provisions of this Trust Agreement.

(j) The Trustee shall not be liable for any act or omission of any other person, except to the extent that such person is an agent of the Trustee (not appointed pursuant to the direction of the Company or an investment manager) or under the control of the Trustee, in carrying out any responsibility imposed upon such person and under no circumstances shall the Trustee be liable for any indirect, consequential, or special damages with respect to its role as Trustee.

 
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(k) The Trustee shall not be obligated to monitor, or to advise or give any notices to any Participant with respect to, the Stock, the Company or the market value, trading prices or other events affecting the Stock or the Company.

(l) The provisions of this Section shall survive the termination of this Trust Agreement.

Section 11. Compensation and Expenses of Trustee.

The Company shall pay all Trustee's fees and expenses necessary for the Trustee to fulfill its duties hereunder as mutually agreed between the parties. If not so paid within sixty (60) days after an invoice is sent to the Company, the fees and expenses shall be paid from the Trust. The Company acknowledges that as part of the Trustee's compensation, the Trustee may earn interest on balances including disbursement balances and balances arising from purchase and sale transactions. If the Trustee advances cash or securities to the Trust for any purpose, or in the event that the Trustee shall incur or be assessed taxes, interest, charges, expenses, assessments, or other liabilities in connection with the performance of this Trust Agreement, except such as may arise from its own negligent failure to act or willful misconduct, any property at any time held in the Trust Fund shall be, to the extent of the advance, security therefor and the Trustee shall be entitled to collect from the Trust sufficient cash for reimbursement, and if such cash is insufficient, dispose of the assets of the Trust Fund to the extent necessary to obtain reimbursement. To the extent the Trustee advances funds to the Trust for disbursements or to effect the settlement of purchase transactions, the Trustee shall be entitled to collect from the Trust either (i) with respect to domestic assets, an amount equal to what would have been earned on the sums advanced (an amount approximating the "federal funds" interest rate) or (ii) with respect to non-domestic assets, the rate applicable to the appropriate foreign market.

Section 12. Change of Control

(a) For purposes of this Agreement, a "Change of Control" shall mean any one or more of the following with respect to the Company:

(1) a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") (or any successor provision) as it may be amended from time to time;

(2) any "persons" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act in effect on the date first written above), other than Company, its primary wholly owned subsidiary bank (“Bank’) or any "person" who on the date hereof is a director of officer of Company or Bank, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Company representing 25% or more of the combined voting power of Company's then outstanding securities; or

(3) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board of Directors of Company or Bank cease for any
 
 
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reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period.

(b) The Company shall have the duty to inform the Trustee in writing upon the occurrence of a Change of Control. The Trustee shall be entitled to conclusively rely upon such written certification of the Company and shall have no responsibility or liability for determining whether a Change of Control has occurred.

Section 13. Resignation and Removal of Trustee.

(a) The Trustee may resign at any time by written notice to the Company, which shall be effective sixty (60) days after receipt of such notice unless the Company and the Trustee agree otherwise.

(b) The Trustee may be removed by the Company on sixty (60) days notice or upon shorter notice accepted by the Trustee, except that after a Change of Control as defined herein, the Trustee may not be removed by the Company for one year.

(c) Upon resignation or removal of the Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within ninety (90) days after receipt of the notice of resignation, removal or transfer, unless the Company extends the time limit.

(d) If the Trustee resigns or is removed, a successor shall be appointed in accordance with Section 14 hereof by the effective date of resignation or removal under paragraphs (a) or (b) of this Section. If no such appointment has been made, the Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. The Trustee shall continue to fulfill its duties hereunder and shall receive compensation pursuant to Section 11 until the successor's appointment is effective. All expenses of the Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust.

(e) If the Trustee resigns within one year of a Change of Control, as defined herein, the Trustee shall select a successor Trustee in accordance with the provisions of Section 14(c) hereof prior to the effective date of the Trustee's resignation.

Section 14. Appointment of Successor.

(a) If the Trustee resigns or is removed in accordance with Section 13 (a) or (b) hereof, the Company shall appoint any third party, such as a bank trust department or other party that may be granted corporate trustee powers under state law, as a successor to replace the Trustee upon such resignation or removal. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the Company or the successor Trustee to evidence the transfer.

 
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(b) The successor Trustee need not examine the records and acts of any prior Trustee and shall not be responsible for and the Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee.

(c) If the Trustee resigns pursuant to the provisions of Section 13(e) hereof and selects a successor Trustee, the Trustee may appoint any third party such as a bank trust department or other party that may be granted corporate trustee powers under state law. The appointment of a successor Trustee shall be effective when accepted in writing by the new Trustee. The new Trustee shall have all the rights and powers of the former Trustee, including ownership rights in Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the successor Trustee to evidence the transfer.

Section 15. Amendment or Termination.

(a) Subject to Section 15(c), this Trust Agreement may be amended by a written instrument which is executed by the Trustee and Company and which recites that it is an amendment to this Trust Agreement. Notwithstanding the foregoing, no such amendment shall conflict with the terms of any Plan (as certified to the Trustee by the Company) or shall make the Trust revocable.

(b) The Trust shall not terminate until the date on which the Participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of any Plan (as certified to the Trustee by the Company). Upon termination of the Trust any assets remaining in the Trust shall be returned to the Company.

(c) Notwithstanding any other provision in this Trust Agreement, this Trust Agreement may not be amended within one year after the occurrence of a Change of Control, unless the Trustee determines, in its discretion, that such amendment is necessary for the administration of the trust and does not conflict with or alter the provisions of any Plan.

Section 16. Miscellaneous.

(a) Neither the Company nor the Trustee may assign this Trust Agreement without the prior written consent of the other, except that the Trustee may assign its rights and delegate its duties hereunder to any corporation or entity which directly or indirectly is controlled by, or is under common control with, the Trustee. This Trust Agreement shall be binding upon, and inure to the benefit of, the Company and the Trustee and their respective successors and permitted assigns. Any entity which shall by merger, consolidation, purchase, or otherwise, succeed to substantially all the trust business of the Trustee shall, upon such succession and without any appointment or other action by the Company, be and become successor trustee hereunder, upon notification to the Company

(b) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof.

 
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(c) Benefits payable to Participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process

(d) Notwithstanding anything to the contrary contained elsewhere in this Trust Agreement, any reference to a Plan or Plan provisions which require knowledge or interpretation of the Plan shall impose a duty upon the Company to communicate such knowledge or interpretation to the Trustee. The Trustee shall have no obligation to know or interpret any portion of any Plan and shall in no way be liable for any proper action taken contrary to any Plan.

(e) This Trust Agreement shall be governed by and construed in accordance with the internal laws of the Commonwealth of Pennsylvania (without reference to rules of conflicts of law or choice of law) and applicable federal law. The parties hereby expressly waive, to the full extent permitted by applicable law, any right to trial by jury with respect to any judicial proceeding arising from or related to this Trust Agreement.

Section 17. Reliance of Representations.

(a) The Company and the Trustee each acknowledge that the other will be relying, and shall be entitled to rely, on the representations, undertakings and acknowledgments of the other as set forth in this Trust Agreement. The Company and the Trustee each agree to notify the other promptly if any of its representations, undertakings, or acknowledgments set forth in this Trust Agreement ceases to be true.

(b) The Company and the Trustee hereby each represent and warrant to the other that it has full authority to enter into this Agreement upon the terms and conditions hereof and that the individual executing this Trust Agreement on their behalf has the requisite authority to bind the Company and the Trustee to this.

IN WITNESS WHEREOF, the parties have duly executed this Trust Agreement as of the date first set forth above.

DNB FINANCIAL CORPORATION
 
By: ____________________________
Name: ______________________
Title: _______________________
DNB FIRST, NATIONAL ASSOCIATION, as Trustee
 
By: ____________________________
Name: ______________________
Title: _______________________


 
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APPENDIX A
to
RABBI TRUST AGREEMENT
between
DNB FINANCIAL CORPORATION
and
DNB FIRST, NATIONAL ASSOCIATION

Name(s) of Plans:

1.
DNB Financial Corporation Incentive Equity and Deferred Compensation Plan adopted effective November 24, 2004.

2.
Deferred Compensation Plan for Directors of DNB Financial Corporation adopted effective October 1, 2006.

3.
DNB Financial Corporation Deferred Compensation Plan adopted effective October 1, 2006.

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Exhibit 31.1
 
CERTIFICATION PURSUANT
TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, William S. Latoff, certify that:

1. I have reviewed this quarterly report on Form 10-Q of DNB Financial Corporation (the "Registrant");

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

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

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

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

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

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

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

/s/ William S. Latoff  
William S. Latoff
Chairman and Chief Executive Officer
November 14, 2006
 
 

Exhibit 31. 2

CERTIFICATION PURSUANT
TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Bruce E. Moroney, certify that:

1. I have reviewed this quarterly report on Form 10-Q of DNB Financial Corporation (the "Registrant");

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

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

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

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

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

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

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




/s/ Bruce E. Moroney
Bruce E. Moroney
Chief Financial Officer
November 14, 2006





Exhibit 32.1

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

In connection with the Quarterly Report of DNB Financial Corporation (the "Registrant") on Form 10-Q for the period ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William S. Latoff, Chairman and Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:

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

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




/s/ William S. Latoff
William S. Latoff
Chairman and Chief Executive Officer
November 14, 2006
 
 
 

Exhibit 32. 2

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


In connection with the Quarterly Report of DNB Financial Corporation (the "Registrant") on Form 10-Q for the period ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Bruce E. Moroney, Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

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

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




/s/ Bruce E. Moroney
Bruce E. Moroney
Chief Financial Officer
November 14, 2006