(13) BENEFIT PLANS

Pension Plan The Bank maintains a defined benefit pension plan (the “Plan”) covering all employees, including officers, who have been employed for one year and have attained 21 years of age. Prior to May 1, 1985, an individual must have attained the age of 25 and accrued one year of service. The Plan provides pension benefits to eligible retired employees at 65 years of age equal to 1.5% of their average monthly pay multiplied by their years of accredited service (maximum 40 years). The accrued benefit is based on the monthly average of their highest five consecutive years of their last ten years of service. The Plan generally covers only full-time employees.

Effective December 31, 2003, DNB amended its Plan to curtail future eligibility and so that no participants will earn additional benefits under the Plan after December 31, 2003. As a result of this amendment, no further service or compensation was credited under the Plan after December 31, 2003. The Plan, although frozen, will continue to provide benefit payments and employees can still earn vesting credits until retirement.

The following table sets forth the Plan’s funded status, as of the measurement dates of December 31, 2012 and 2011 and amounts recognized in DNB’s consolidated financial statements at December 31, 2012 and 2011:



	December 31
(Dollars in thousands)	2012		2011
Projected benefit obligation	$	(7,221)	$	(6,777)
Accumulated benefit obligation		(7,221)		(6,777)
Fair value of plan assets		5,283		5,040
Amounts recognized in the statement of financial position consist of:
Liabilities	$	(1,938)	$	(1,737)
Funded status	$	(1,938)	$	(1,737)
Amounts recognized in accumulated other comprehensive income (loss) consist of:
Net loss	$	2,233	$	2,131
Total	$	2,233	$	2,131

The amounts and changes in DNB’s pension benefit obligation and fair value of plan assets for the years ended December 31, 2012 and 2011 are as follows:



	Year ended December 31
(Dollars in thousands)	2012		2011
Change in benefit obligation
Benefit obligation at beginning of year	$	6,777	$	6,629
Interest cost		276		346
Actuarial loss		687		514
Benefits paid		(563)		(771)
Service cost		44		59
Benefit obligation at end of year	$	7,221	$	6,777
Change in plan assets
Fair value of assets at beginning of year	$	5,040	$	5,696
Actual return on plan assets		772		(48)
Employer contribution		90		163
Benefits paid		(563)		(771)
Estimated expenses		(56)		-
Fair value of assets at end of year	$	5,283	$	5,040

The Plan’s assets are invested using an asset allocation strategy in units of certain equity, bond, real estate and money market funds. The following table summarizes the weighted average asset allocations as of the dates indicated:



	December 31
	2012	2011
Cash and cash equivalents	15.2%	4.2%
Equity securities	22.0	44.2
Fixed income securities	62.8	51.6
Total	100.0%	100.0%

Equity securities consist mainly of equity common trust funds and mutual funds. Fixed income securities consist mainly of fixed income common trust funds and individual securities. Pension plan assets are invested with a moderate growth objective, with target asset allocations of approximately 50 - 60% bonds and cash and approximately 40 - 50% in stocks. As of December 31, 2012, the plan held 77.98% of its assets in bonds and cash due to market volatility surrounding fiscal cliff negotiations.

Net periodic pension costs for the years indicated include the following components:



	Year Ended December 31
(Dollars in thousands)	2012		2011
Service cost	$	44	$	59
Interest cost		276		346
Expected return on plan assets		(267)		(309)
Recognized net actuarial loss		134		56
Net periodic cost	$	187	$	152
Assumptions used:
Discount rate		3.60%		4.25%
Rate of increase in compensation level		N/A		N/A
Expected long-term rate of return on assets		5.5		5.5

DNB’s estimated future benefit payments are as follows:



(Dollars in thousands)	Period		Benefits
	2013	$	334
	2014		383
	2015		566
	2016		300
	2017		303
	2018-2022		2,878

The fair value of DNB’s pension plan assets by asset category are as follows:



	December 31, 2012
							Assets at
							Fair
(Dollars in thousands)	Level 1		Level 2		Level 3		Value
Mutual fund — equity
US equities	$	431	$	-	$	-	$	431
International equities		648		-		-		648
Real estate		84		-		-		84
Mutual funds — fixed income
Domestic fixed income		1,537		-		-		1,537
US corporate bonds, notes and cash
Corporate bonds		-		1,779		-		1,779
Cash		804		-		-		804
Total assets measured at fair value on a recurring basis	$	3,504	$	1,779	$	-	$	5,283



	December 31, 2011
							Assets at
							Fair
(Dollars in thousands)	Level 1		Level 2		Level 3		Value
Mutual fund — equity
US equities	$	1,217	$	-	$	-	$	1,217
International equities		812		-		-		812
Real estate		201		-		-		201
Mutual funds — fixed income
Domestic fixed income		577		-		-		577
US corporate bonds, notes and cash
Corporate bonds		-		2,023		-		2,023
Cash		210		-		-		210
Total assets measured at fair value on a recurring basis	$	3,017	$	2,023	$	-	$	5,040

Retirement and Death Benefit Agreement During 1999, the Bank and Henry F. Thorne, its then current Chief Executive Officer (the “Executive”), entered into a Death Benefit Agreement providing for supplemental death and retirement benefits for him (the “Supplemental Plan”). In 2003, the Supplemental Plan was replaced by a Retirement and Death Benefit Agreement (the “Replacement Plan”).

The Replacement Plan provides that the Bank and the Executive share in the rights to the cash surrender value and death benefits of a split-dollar life insurance policy (the “Policy”) The policy is designed to provide the Executive, upon attaining age 65, with projected annual after-tax payments of approximately $35,000. In addition, the Policy is intended to provide the Executive with a projected death benefit of $750,000.

In July 2008, DNB commenced making monthly payments of $3,658 to the Executive. The remaining liability under the plan was $729,000 and $730,000 as of December 31, 2012 and 2011, respectively. The annual expense for the same respective periods was $51,000 and $41,000.

Supplemental Executive Retirement Plan for Chairman and Chief Executive Officer On December 20, 2006, the Board of Directors of DNB Financial Corporation approved, and effective April 1, 2007 and December 8, 2008 modified, a Supplemental Executive Retirement Plan (also known as a SERP) for its Chairman and Chief Executive Officer, William S. Latoff. The purpose of the SERP is to provide Mr. Latoff a pension supplement beginning at age 70 for 15 years in approximately equal amounts each year and to compensate him for the loss of retirement plan funding opportunities from his other business interests because of his commitments to DNB as Chairman and CEO.

The remaining liability under the plan was $1.2 million and $1.1 million as of December 31, 2012 and 2011, respectively. The annual expense for the same respective periods was $67,000 and $63,000.

401(k) Retirement Savings Plan In 1994, the Bank adopted a retirement savings plan intended to comply with Section 401(k) of the Internal Revenue Code of 1986. Participants are permitted to authorize pre-tax savings contributions to a separate trust established under the 401(k) plan, subject to limitations on deductibility of contributions imposed by the Internal Revenue Code. Effective July 1, 2007 the Bank amended the plan to allow after-tax contributions to be made as well. The contributions are subject to the same limitations. Effective January 1, 2010, management indicated that it would evaluate discretionary matching contributions each quarter based upon DNB’s financial performance. DNB made no matching contributions to the 401(k) plan in 2012 and 2011.

Profit Sharing Plan The Bank maintains a Profit Sharing Plan for eligible employees. The plan provides that the Bank make contributions equal to 3% of the eligible participant’s W-2 wages. DNB’s related expense associated with the Profit Sharing Plan was $225,000 and $219,000 in 2012 and 2011, respectively.

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 793,368 (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 327,964 and 156,144 shares available for grant at December 31, 2012 and 2011, respectively. 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 $69,000 and $27,000 during the years ended December 31, 2012 and 2011, respectively, and anticipates additional expense of $31,000 through April 23, 2014 for the options granted on April 23, 2010 and $91,000 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:



	Number	Weighted Average
	Outstanding	Exercise Price
Outstanding January 1, 2011	203,575	$	16.96
Issued	44,600		10.31
Exercised	-		-
Forfeited	(2,323)		12.95
Expired	(9,414)		11.16
Outstanding December 31, 2011	236,438	$	15.98
Issued	-		-
Exercised	-		-
Forfeited	(2,605)		9.69
Expired	(19,215)		16.83
Outstanding December 31, 2012	214,618	$	15.98

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



December 31, 2012
Range of			Weighted Average
Exercise	Number	Number	Exercise		Remaining			Intrinsic
Prices	Outstanding	Exercisable	Price		Contractual Life			Value
$ 6.93-10.99	86,050	-	$	8.67	5.16	years	$	588,000
14.00-19.99	61,715	61,715		17.62	2.72	years		-
20.00-22.99	18,812	18,812		22.78	1.97	years		-
23.00-24.27	48,041	48,041		24.27	2.29	years		-
Total	214,618	128,568	$	15.98	3.54	years	$	588,000



December 31, 2011
Range of			Weighted Average
Exercise	Number	Number	Exercise		Remaining			Intrinsic
Prices	Outstanding	Exercisable	Price		Contractual Life			Value
$ 6.93-13.99	88,200	-	$	8.64	6.14	years	$	180,002
14.00-19.99	81,096	81,096		17.44	2.96	years		-
20.00-22.99	19,101	19,101		22.78	2.98	years		-
23.00-24.27	48,041	48,041		24.27	3.3	years		-
Total	236,438	148,238	$	15.98	4.22	years	$	180,002

Other Stock‑Based Compensation DNB maintains an Incentive Equity and Deferred Compensation Plan. The plan provides that up to 243,101 shares of common stock may be granted, at the discretion of the Board, to individuals of DNB. 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 twelve‑month periods ended December 31, 2012 and 2011, $74,000 and $61,000 was amortized to expense. At December 31, 2012, approximately $418,000 in additional compensation will be recognized over the weighted average remaining service period of approximately 1.97 years. At December 31, 2012, 158,354 shares were reserved for future grants under the plan. Stock grant activity is indicated below.



		Weighted Average
	Shares	Stock Price
Non-vested stock awards — January 1, 2011	22,750	$	7.91
Granted	15,000		10.31
Forfeited	(4)		9.55
Vested	(8,546)		9.55
Non-vested stock awards — December 31, 2011	29,200	$	8.67
Granted	19,070		15.56
Forfeited	-		-
Vested	-		-
Non-vested stock awards — December 31, 2012	48,270	$	11.39