NOTE 8: STOCK-BASED COMPENSATION

Stock Option Plan

DNB has a Stock Option Plan for employees and directors. Under the plan, options (both qualified and non-qualified) to purchase a maximum of 643,368 (as adjusted for subsequent stock dividends) shares of DNB's common stock could be issued to employees and directors. Under the plan, option exercise prices must equal the fair market value of the shares on the date of option grant and the option exercise period may not exceed ten years. Vesting of options under the plan is determined by the Plan Committee. There were 156,923 shares available for grant at June 30, 2012. All options with the exception of 44,600 options granted on April 23, 2010 and 44,600 options granted on December 12, 2011 are immediately exercisable. The options granted on April 23, 2010 have a fair value of $100,000 or $2.25 per share, based on a risk free interest rate of 3.273%, a dividend yield of 1.73% and a volatility of 35.564% and are subject to four year cliff vesting. These options which expire on April 23, 2017 if not exercised or cancelled, have an exercise price of $6.93 per share, and the shares are restricted from resale for two years after exercise. These options are exercisable only at and after such time as the market value of the common stock first equals or exceeds $7.97, which is 115% of the $6.93 exercise price. The options granted on December 12, 2011 have a fair value of $141,000 or $3.17 per share, based on a risk free interest rate of 1.445%, a dividend yield of 1.16% and a volatility of 36.513% and are subject to three year cliff vesting. These options which expire on December 12, 2018 if not exercised or cancelled, have an exercise price of $10.31 per share, and the shares are restricted from resale for two years after exercise. These options are exercisable only at and after such time as the market value of the common stock first equals or exceeds $11.34, which is 110% of the $10.31 exercise price. DNB expensed $35,000 during the six months ended June 30, 2012 and anticipates additional expense of $43,000 through April 23, 2014 for the options granted on April 23, 2010 and $115,000 through December 12, 2014 for the options granted on December 12, 2011, the dates the options can first be exercised. Stock option activity is indicated below.

At DNB's Annual Meeting on April 25, 2012, shareholders approved the Board of Directors' recommendation to amend and restate the DNB Financial Corporation Amended and Restated 1995 Stock Option Plan. These amendments increased the amount of shares available for grant under the Plan by 150,000 shares and extended the Plan term by approximately eight years to April 25, 2022.

	Number Outstanding	Weighted Average Exercise Price
Outstanding January 1, 2012	236,438	$15.98
Issued	—	—
Exercised	—	—
Forfeited	1,000	6.93
Expired	—	—
Outstanding June 30, 2012	235,438	$16.01

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

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


June 30, 2012
Range of			Weighted Average
Exercise Prices	Number Outstanding	Number Exercisable	Exercise Price	Remaining Contractual Life	Intrinsic Value
$ 6.93-10.99	87,200	—	$8.66	5.65 years	$422,000
14.00-19.99	81,096	81,096	17.44	2.46 years	—
20.00-22.99	19,101	19,101	22.78	2.48 years	—
23.00-24.27	48,041	48,041	24.27	2.80 years	—
Total	235,438	148,238	$16.01	3.71 years	$422,000


June 30, 2011
Range of			Weighted Average
Exercise Prices	Number Outstanding	Number Exercisable	Exercise Price	Remaining Contractual Life	Intrinsic Value
$ 6.93-10.99	44,600	—	$6.93	5.82 years	$137,000
14.00-19.99	82,419	82,419	17.44	3.48 years	—
20.00-22.99	19,101	19,101	22.78	3.48 years	—
23.00-24.27	48,041	48,041	24.27	3.80 years	—
Total	194,161	149,561	$17.24	4.10 years	$137,000

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

Share awards granted by the Plan were recorded at the date of award based on the market value of shares. Awards are being amortized to expense over the three-year cliff-vesting period. DNB records compensation expense equal to the value of the shares being amortized. For the three and six-month periods ended June 30, 2012, $18,000 and $36,000 were amortized to expense. For the three and six-month periods ended June 30, 2011, $15,000 and $30,000, respectively, were amortized to expense. At June 30, 2012, approximately $160,000 in additional compensation will be recognized over the remaining service period of approximately 2.17 years. At June 30, 2012, 177,424 shares were reserved for future grants under the Plan.

Stock grant activity is indicated below:


	Shares	Weighted Average Stock Price
Non-vested stock awards—January 1, 2012	29,200	$8.67
Granted	—	—
Forfeited	—	—
Vested	—	—
Non-vested stock awards—June 30, 2012	29,200	$8.67


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