Regulatory Matters

12 Months Ended

Dec. 31, 2011

Regulatory Matters [Abstract]

REGULATORY MATTERS

(17)    REGULATORY MATTERS

        Recent market conditions have made it difficult or uneconomical to access the capital markets. As a result, the United States Congress, the Treasury, and the FDIC have announced various programs designed to enhance market liquidity and bank capital.

        In response to the financial crisis affecting the banking system and financial markets, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 ("EESA") was signed into law and established the Troubled Assets Relief Program ("TARP") administered by the U.S. Treasury Department ("Treasury"). As part of TARP, the Treasury established the Capital Purchase Program ("CPP") to provide up to $700 billion of funding to eligible financial institutions through the purchase of capital stock and other financial instruments for the purpose of stabilizing and providing liquidity to the U.S. financial markets. In connection with EESA, there have been numerous actions by the Federal Reserve Board, Congress, the Treasury, the FDIC, the SEC and others to further the economic and banking industry stabilization efforts under EESA. It remains unclear at this time what further legislative and regulatory measures will be implemented under EESA affecting DNB.

        On January 30, 2009, as part of the CPP administered by the United States Department of the Treasury, DNB Financial Corporation entered into a Letter Agreement and a Securities Purchase Agreement with the U.S. Treasury, pursuant to which DNB issued and sold on January 30, 2009, and the U.S. Treasury purchased for cash on that date (i) 11,750 shares of DNB's Fixed Rate Cumulative Perpetual Preferred Stock, Series 2008A, par value $10.00 per share, having a liquidation preference of $1,000 per share (the "CPP Shares"), and (ii) a ten-year warrant to purchase up to 186,311 shares of DNB's common stock, $1.00 par value, at an exercise price of $9.46 per share, for an aggregate purchase price of $11,750,000 in cash. This transaction closed on January 30, 2009. The issuance and sale of these securities was a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. From January 30, 2009 to August 4, 2011, the Bank provided dividends to DNB in connection with the Series 2008A Preferred Stock.. The Series 2008A Preferred Stock had priority over DNB's common stock with regard to the payment of dividends and liquidation distribution. The Series 2008A Preferred Stock qualified as Tier 1 capital. DNB paid cumulative dividends at a rate of five percent per annum while these shares were outstanding. Dividends were payable quarterly in arrears and accrued as earned over the period the Series 2008A Preferred Stock was outstanding. Preferred dividends paid (declared and accrued) and the related accretion was deducted from net income for computing income available to common stockholders and earnings per share computations. Dividends were payable quarterly on February 15, May 15, August 15, and November 15 of each year.

        As further response to the economic crisis, the American Recovery and Reinvestment Act of 2009 ("ARRA"), more commonly known as the economic stimulus or economic recovery package, was signed into law on February 17, 2009, by President Obama. ARRA included a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, ARRA imposed certain new executive compensation and corporate expenditure limits on all current and future TARP recipients until they had repaid the Treasury.,

        On August 4, 2011, DNB entered into a Securities Purchase Agreement with the Secretary of the Treasury, pursuant to which DNB issued and sold to the Treasury 13,000 shares of its Non-Cumulative Perpetual Preferred Stock, Series 2011A ("Series 2011A Preferred Stock"), having a liquidation preference of $1,000 per share (the CPP Shares"), for aggregate proceeds of $13,000,000. The Securities Purchase Agreement was entered into, and the Series 2011A Preferred Stock was issued, pursuant to the Treasury's Small Business Lending Fund program ("SBLF"), a $30 billion fund established under the Small Business Jobs Act of 2010, that encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion. Of the $13 million in aggregate proceeds, $11,879,000 was used on August 4, 2011 to repurchase all CPP Shares ($11,750,000 was paid in principal and $128,900 in accrued, unpaid dividends related to the CPP Shares) held by the Treasury as described above. The securities sold in this transaction were exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a transaction by DNB not involving a public offering.

        On September 21, 2011, DNB entered into the Warrant Letter Agreement with the Treasury. Pursuant to the Warrant Letter Agreement, DNB Financial Corporation repurchased from the Treasury the warrant to purchase 186,311 shares of DNB Financial Corporation's common stock issued to Treasury in January 2009 under CPP. DNB Financial Corporation paid a purchase price of $458,000 for the warrant.

        Under the Federal Reserve's Regulation H, DNB First, National Association may not, without regulatory approval, declare or pay a dividend to DNB if the total of all dividends declared in a calendar year exceeds the total of (a) the Bank's net income for that year and (b) its retained net income for the preceding two calendar years, less any required transfers to additional paid-in capital or to a fund for the retirement of preferred stock.

        Federal banking agencies impose three minimum capital requirements—Total risk-based, Tier 1 risk-based and Leverage capital. The risk-based capital ratios measure the adequacy of a bank's capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for "prompt corrective action" or other regulatory enforcement action. In assessing a bank's capital adequacy, regulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level of earnings; concentrations of credit, quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management's overall ability to monitor and control risks.

        Quantitative measures established by regulation to ensure capital adequacy require DNB to maintain certain minimum amounts and ratios as set forth below. Management believes that DNB and the Bank meet all capital adequacy requirements to which they are subject. The Bank is considered "Well Capitalized" under the regulatory framework for prompt corrective action. To be categorized as Well Capitalized, the Bank must maintain minimum ratios as set forth below. There are no conditions or events since the most recent regulatory notification that management believes would have changed the Bank's category. Actual capital amounts and ratios are presented below.

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
DNB Financial Corporation
December 31, 2011:
Total risk-based capital	$	66,716		15.57	%	$	34,275		8.00	%		N/A		N/A
Tier 1 risk-based capital		61,354		14.32			17,138		4.00			N/A		N/A
Tier 1 (leverage) capital		61,354		10.14			24,205		4.00			N/A		N/A
December 31, 2010:
Total risk-based capital	$	61,653		14.28	%	$	34,531		8.00	%		N/A		N/A
Tier 1 risk-based capital		56,255		13.03			17,265		4.00			N/A		N/A
Tier 1 (leverage) capital		56,255		9.25			24,324		4.00			N/A		N/A
DNB First, N.A.
December 31, 2011:
Total risk-based capital	$	66,692		15.58	%	$	34,242		8.00	%	$	42,803		10.00	%
Tier 1 risk-based capital		61,330		14.33			17,121		4.00			25,682		6.00
Tier 1 (leverage) capital		61,330		10.14			24,188		4.00			30,235		5.00
December 31, 2010:
Total risk-based capital	$	61,288		14.21	%	$	34,497		8.00	%	$	43,121		10.00	%
Tier 1 risk-based capital		55,890		12.96			17,248		4.00			25,872		6.00
Tier 1 (leverage) capital		55,890		9.20			24,306		4.00			30,383		5.00