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: March 31, 2008


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)
            2,590,697(Class)
            (Shares
      Outstanding as ofMay
      12, 2008)











DNB
FINANCIAL CORPORATION AND SUBSIDIARY








INDEX








PART  I
      - FINANCIAL INFORMATION
            PAGE
      NO.ITEM
      1.
            
            FINANCIAL
      STATEMENTS (Unaudited):CONSOLIDATED
      STATEMENTS OF FINANCIAL CONDITIONMarch
      31, 2008 and December 31, 2007
            3CONSOLIDATED
      STATEMENTS OF OPERATIONSThree
      Months Ended March 31, 2008 and 2007
            4CONSOLIDATED
      STATEMENTS OF CASH FLOWSThree
      Months Ended March 31, 2008 and 2007
            5NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
            6ITEM
      2.
            
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
            13ITEM
      3.
            
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            24ITEM
      4.T.
            
            CONTROLS
      AND PROCEDURES
            24PART
      II - OTHER INFORMATIONITEM
      1.
            
            LEGAL
      PROCEEDINGS
            25ITEM
      1A.
            
            RISK
      FACTORS
            25ITEM
      2.
            
            UNREGISTERED
      SALES OF EQUITY  SECURITIES AND USE OF PROCEEDS
            25ITEM
      3.
            
            DEFAULTS
      UPON SENIOR SECURITIES
            25ITEM
      4.
            
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
            25ITEM
      5.
            
            OTHER
      INFORMATION
            25ITEM
      6.
            
            EXHIBITS
            25SIGNATURES
            26EXHIBIT INDEX











2







PART
I – FINANCIAL INFORMATION


ITEM 1 – FINANCIAL
STATEMENTS




DNBFinancial Corporation and Subsidiary


Consolidated
Statements of Financial Condition (Unaudited)








March
      31
            
            
            December
      31(Dollars
      in thousands except share data)
            
            2008
            
            
            2007AssetsCash
      and due from banks
            
            $
            25,404
            
            
            $
            12,858Federal
      funds sold
            
            
            7,517
            
            
            
            32,473Cash
      and cash equivalents
            
            
            32,921
            
            
            
            45,331AFS
      investment securities, at fair value (amortized cost of
      $151,660
              and
      $151,848)
            
            
            154,187
            
            
            
            152,570HTM
      investment securities (fair value of $19,609 and $14,593)
            
            
            19,874
            
            
            
            14,921Other
      investment securities
            
            
            3,770
            
            
            
            3,418Total
      investment securities
            
            
            177,831
            
            
            
            170,909Loans
      and leases
            
            
            305,904
            
            
            
            309,342Allowance
      for credit losses
            
            
            (3,926
            )
            
            
            (3,891
            )Net
      loans and leases
            
            
            301,978
            
            
            
            305,451Office
      property and equipment, net
            
            
            9,640
            
            
            
            9,908Accrued
      interest receivable
            
            
            2,513
            
            
            
            2,610Other
      real estate owned
            
            
            451
            
            
            
            —Bank
      owned life insurance
            
            
            7,387
            
            
            
            7,321Core
      deposit intangible
            
            
            296
            
            
            
            308Net
      deferred taxes
            
            
            1,573
            
            
            
            2,163Other
      assets
            
            
            6,505
            
            
            
            1,839Total
      assets
            
            $
            541,095
            
            
            $
            545,840Liabilities
      and Stockholders’ EquityLiabilitiesNon-interest-bearing
      deposits
            
            $
            49,797
            
            
            $
            48,741Interest-bearing
      deposits:NOW
            
            
            83,801
            
            
            
            82,912Money market
            
            
            95,611
            
            
            
            93,029Savings
            
            
            36,585
            
            
            
            38,362Time
            
            
            130,614
            
            
            
            149,876Total
      deposits
            
            
            396,408
            
            
            
            412,920FHLB
      advances
            
            
            60,000
            
            
            
            50,000Repurchase
      agreements
            
            
            21,178
            
            
            
            29,923Junior
      subordinated debentures
            
            
            9,279
            
            
            
            9,279Other
      borrowings
            
            
            671
            
            
            
            675Total
      borrowings
            
            
            91,128
            
            
            
            89,877Accrued
      interest payable
            
            
            1,317
            
            
            
            1,498Other
      liabilities
            
            
            18,470
            
            
            
            8,910Total
      liabilities
            
            
            507,323
            
            
            
            513,205Stockholders’
      EquityPreferred
      stock, $10.00 par value;1,000,000 shares authorized;
      none issued
            
            
            —
            
            
            
            —Common
      stock, $1.00 par value;10,000,000
      shares authorized; 2,852,155 and 2,850,799 issued
    respectively
            
            
            2,863
            
            
            
            2,860Treasury
      stock, at cost; 258,111 and 249,859 shares, respectively
            
            
            (4,844
            )
            
            
            (4,757
            )Surplus
            
            
            35,016
            
            
            
            34,888Accumulated
      deficit
            
            
            (700
            )
            
            
            (771
            )Accumulated
      other comprehensive income, net
            
            
            1,437
            
            
            
            415Total stockholders’
      equity
            
            
            33,772
            
            
            
            32,635Total liabilities and
      stockholders’ equity
            
            $
            541,095
            
            
            $
            545,840See accompanying notes to
      consolidated financial statements.


3


DNBFinancial Corporation and Subsidiary


Consolidated
Statements of Operations (Unaudited)







(Dollars
      in thousands except share data)
            
            Three
      Months Ended March 31,2008
            
            
            2007Interest
      Income:Interest
      and fees on loans and leases
            
            $
            4,916
            
            
            $
            5,792Interest
      and dividends on investment securities:Taxable
            
            
            2,168
            
            
            
            1,229Exempt
      from federal taxes
            
            
            44
            
            
            
            292Interest
      on cash and cash equivalents
            
            
            144
            
            
            
            159Total
      interest income
            
            
            7,272
            
            
            
            7,472Interest
      Expense:Interest
      on NOW, money market and savings
            
            
            1,056
            
            
            
            1,025Interest
      on time deposits
            
            
            1,623
            
            
            
            1,475Interest
      on FHLB advances
            
            
            676
            
            
            
            586Interest
      on repurchase agreements
            
            
            169
            
            
            
            395Interest
      on junior subordinated debentures
            
            
            162
            
            
            
            182Interest
      on other borrowings
            
            
            23
            
            
            
            37Total
      interest expense
            
            
            3,709
            
            
            
            3,700Net
      interest income
            
            
            3,563
            
            
            
            3,772Provision
      for credit losses
            
            
            60
            
            
            
            —Net
      interest income after provision for credit losses
            
            
            3,503
            
            
            
            3,772Non-interest
      Income:Service
      charges on deposits
            
            
            385
            
            
            
            399Wealth
      management fees
            
            
            285
            
            
            
            213Increase
      in cash surrender value of BOLI
            
            
            66
            
            
            
            57Gain
      on sale of securities
            
            
            256
            
            
            
            103Other
      fees
            
            
            208
            
            
            
            196Total
      non-interest income
            
            
            1,200
            
            
            
            968Non-interest
      Expense:Salaries
      and employee benefits
            
            
            2,349
            
            
            
            2,363Furniture
      and equipment
            
            
            421
            
            
            
            370Occupancy
            
            
            398
            
            
            
            368Professional
      and consulting
            
            
            326
            
            
            
            286Advertising
      and marketing
            
            
            83
            
            
            
            79Printing
      and supplies
            
            
            51
            
            
            
            96Other
      expenses
            
            
            566
            
            
            
            569Total
      non-interest expense
            
            
            4,194
            
            
            
            4,131Income
      before income taxes
            
            
            509
            
            
            
            609Income
      tax expense
            
            
            100
            
            
            
            74Net
      Income
            
            $
            409
            
            
            $
            535Earnings
      per share:Basic
            
            $
            0.16
            
            
            $
            0.20Diluted
            
            $
            0.16
            
            
            $
            0.20Cash
      dividends per share
            
            $
            0.13
            
            
            $
            0.12Weighted
      average common shares outstanding:Basic
            
            
            2,596,501
            
            
            
            2,627,731Diluted
            
            
            2,600,575
            
            
            
            2,643,673(Share
      data adjusted for the 5% stock dividend in December 2007)See accompanying notes to
      consolidated financial statements.





4




DNBFinancial Corporation and Subsidiary


Consolidated
Statements of Cash Flows (Unaudited)





Three
      Months Ended March 31,(Dollars
      in thousands)
            
            2008
            
            
            2007Cash
      Flows From Operating Activities:Net
      income
            
            $
            409
            
            
            $
            535Adjustments
      to reconcile net income to net cash (used)provided
      by operating activities:Depreciation, amortization and
      accretion
            
            
            353
            
            
            
            296Provision for credit
      losses
            
            
            60
            
            
            
            —Unvested
      stock amortization
            
            
            49
            
            
            
            28Net gain on sale of
      securities
            
            
            (256
            )
            
            
            (103
            )Decrease in accrued interest
      receivable
            
            
            75
            
            
            
            69(Increase) decrease in other
      assets
            
            
            (140
            )
            
            
            315Increase in investment in
      BOLI
            
            
            (66
            )
            
            
            (57
            )Decrease in interest
      payable
            
            
            (181
            )
            
            
            (86
            )Deferred tax
    benefit
            
            
            (91
            )
            
            
            (23
            )Decrease in other
      liabilities
            
            
            (715
            )
            
            
            (158
            )Net
      Cash (Used) Provided By Operating Activities
            
            
            (503
            )
            
            
            816Cash
      Flows From Investing Activities:Activity
      in available-for-sale securities:Sales
            
            
            12,812
            
            
            
            24,478Maturities,
      repayments and calls
            
            
            6,244
            
            
            
            19,707Purchases
            
            
            (15,809
            )
            
            
            (23,979
            )Activity
      in held-to-maturity securities:Maturities,
      repayments and calls
            
            
            4,025
            
            
            
            399Purchases
            
            
            (6,027
            )
            
            
            —Net
      (increase) decrease in other investments
            
            
            (352
            )
            
            
            652Net
      decrease (increase) in loans and leases
            
            
            2,962
            
            
            
            (465
            )Purchase
      of bank property and equipment
            
            
            (56
            )
            
            
            (381
            )Net
      Cash Provided By Investing Activities
            
            
            3,799
            
            
            
            20,411Cash
      Flows From Financing Activities:Net
      decrease in deposits
            
            
            (16,512
            )
            
            
            (7,475
            )Increase
      (decrease) in FHLB advances
            
            
            10,000
            
            
            
            (15,000
            )Decrease
      in short term repurchase agreements
            
            
            (8,745
            )
            
            
            (5,497
            )Decrease
      in lease obligations
            
            
            (4
            )
            
            
            (4
            )Dividends
      paid
            
            
            (338
            )
            
            
            (324
            )Purchase
      of treasury stock
            
            
            (107
            )
            
            
            (72
            )Net
      Cash Used By Financing Activities
            
            
            (15,706
            )
            
            
            (28,372
            )Net
      Change in Cash and Cash Equivalents
            
            
            (12,410
            )
            
            
            (7,145
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            45,331
            
            
            
            24,227Cash and Cash Equivalents at
      End of Period
            
            $
            32,921
            
            
            $
            17,082Supplemental
      Disclosure of Cash Flow Information:Cash
      paid during the period for:Interest
            
            $
            3,890
            
            
            $
            3,786Income
      taxes
            
            
            351
            
            
            
            40Supplemental
      Disclosure of Non-cash Flow Information:Change
      in unrealized losses on AFS securities
            
            $
            1,805
            
            
            $
            309Change
      in deferred taxes due to change in unrealizedlosses
      on AFS securities
            
            
            (614
            )
            
            
            (105
            )Change
      in unsettled securities purchased included in otherliabilities
            
            
            10,275
            
            
            
            —Change
      in unsettled securities sold included in other assets
            
            
            (4,526
            )
            
            
            —Transfers
      from loans and leases to other real estate owned
            
            
            451
            
            
            
            —See
      accompanying notes to consolidated financial statements.





5


DNBFINANCIAL CORPORATION AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





NOTE
1: BASIS OF PRESENTATION





The
accompanying unaudited consolidated financial statements of DNB Financial
Corporation (referred to herein as the "Corporation" or "DNB") and its
subsidiary, DNB First, National Association (the "Bank") have been prepared in
accordance with the instructions for Form 10-Q and therefore do not include
certain information or footnotes necessary for the presentation of financial
condition, statement of operations and statement of cash flows required by
generally accepted accounting principles. However, in the opinion of management,
the consolidated financial statements reflect all adjustments (which consist of
normal recurring adjustments) necessary for a fair presentation of the results
for the unaudited periods. Prior amounts not affecting net income are
reclassified when necessary to conform to current period classifications. The
results of operations for the three-month period ended March 31, 2008, 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, 2007.





Allowance
for Credit Losses





The allowance for credit losses is an
estimate of the credit loss risk in our loan and lease portfolio. The allowance
is based on two basic principles of accounting: (1) Statement of Financial
Accounting Standards (“SFAS”) No. 5 “Accounting for Contingencies,” which
requires that losses be accrued when it is probable that a loss has occurred at
the balance sheet date and such loss can be reasonably estimated; and
(2) SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,”
which requires that losses be accrued on impaired loans based on the differences
between the value of collateral, present value of future cash flows or values
that are observable in the secondary market and the loan balance. DNB’s 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, 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 are 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 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 is appropriate
at March 31, 2008.




The
allowance for credit losses in the first quarter of 2008 was affected by
continued changes to the mix of assets and changes to estimates of loss in
certain asset classes. Specifically, changes in loss estimates for commercial
and industrial loans and commercial mortgages, resulted in a lower provision for
loan and lease losses in the first quarter of 2008 than would have resulted
under the previous loss estimates of approximately $150,000. Correspondingly,
the allowance for credit losses at March 31, 2008 is approximately $150,000
lower than it would have been under the previous loss estimates. The Corporation
believes that its revised estimates better reflect the loss inherent in the loan
and lease portfolio.







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
2007.  Additionally, all options were granted at the then current
market price.





6


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, Accounting for Stock-based Compensation (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 January 1, 2006 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 January 1, 2006 as all stock options issued prior to January 1, 2006 were
fully vested. Additionally, DNB did not issue any stock awards during the
three-month periods ended March 31, 2008 and 2007.  As a result, there
was no compensation expense related to stock options recorded during the
three-month periods ended March 31, 2008 and 2007.








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 is computed
using the treasury stock method and reflects the potential dilution that could
occur from the exercise of stock options and unvested stock
awards.   Stock options and unvested stock awards for which the
exercise or the grant price exceeds the average market price over the period
have an anti-dilutive effect on EPS and, accordingly, are excluded from the
calculation.  At March 31, 2008, there were 224,487 anti-dilutive
stock options outstanding as well as 30,024 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
paid in December 2007.  The dilutive effect of stock options and
unvested shares on basic earnings per share is presented below.





Three
      Months Ended
            
            
            Three
      Months EndedMarch
      31, 2008
            
            
            March
      31, 2007(In
      thousands, except per-share data)
            
            Income
            
            
            Shares
            
            
            Amount
            
            
            Income
            
            
            Shares
            
            
            AmountBasic
      EPSIncome
      available to common stockholders
            
            $
            409
            
            
            
            2,597
            
            
            $
            0.16
            
            
            $
            535
            
            
            
            2,628
            
            
            $
            0.20Effect
      of dilutive common stock equivalents – stock options
            
            
            —
            
            
            
            4
            
            
            
            —
            
            
            
            —
            
            
            
            16
            
            
            
            —Diluted
      EPSIncome
      available to common stockholders after assumed conversions
            
            $
            409
            
            
            
            2,601
            
            
            $
            0.16
            
            
            $
            535
            
            
            
            2,644
            
            
            $
            0.20











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 EndedMarch
      31, 2008
            
            
            March
      31, 2007(Dollars
      in thousands)
            
            Net-of-Tax
      Amount
            
            
            Net-of-Tax
      AmountNet
      Income
            
            $
            409
            
            
            $
            535Other
      Comprehensive Income:Unrealized
      holding gains arising during the period
            
            
            1,360
            
            
            
            272Reclassification
      for gains included in net income
            
            
            (169
            )
            
            
            (68
            )Unrealized
      actuarial losses-pension
            
            
            (169
            )
            
            
            —Total
      Comprehensive Income
            
            $
            1,431
            
            
            $
            739








7

















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.




March
      31,
            
            
            December
      31,(Dollars
      in thousands)
            
            2008
            
            
            2007Commercial
      mortgage
            
            $
            116,185
            
            
            $
            111,727Commercial
      term and lines of credit
            
            
            79,880
            
            
            
            81,021Consumer
            
            
            54,237
            
            
            
            56,553Residential
      mortgage
            
            
            44,400
            
            
            
            46,448Commercial
      leases
            
            
            11,202
            
            
            
            13,593Gross
      loans and leases
            
            
            305,904
            
            
            $
            309,342Allowance
      for credit losses
            
            
            (3,926
            )
            
            
            (3,891
            )Net
      loans and leases
            
            $
            301,978
            
            
            $
            305,451




NOTE
5: JUNIOR SUBORDINATED DEBENTURES





DNB has
two issuances of junior subordinated debentures (the "debentures") as
follows:





DNB Capital Trust
I





DNB’s
first issuance of junior subordinated debentures was on July 20, 2001. This
issuance of debentures are floating rate and were issued to DNB Capital Trust I,
a Delaware business trust in which DNB owns all of the common equity. DNB
Capital Trust I issued $5 million of floating rate (6 month Libor plus 3.75%,
with a cap of 12%) capital preferred securities to a qualified institutional
buyer. The proceeds of these securities were used by the Trust, along with DNB's
capital contribution, to purchase $5.2 million principal amount of DNB's
floating rate junior subordinated debentures.  The preferred
securities have been redeemable since July 25, 2006 and must be redeemed upon
maturity of the debentures on July 25, 2031.





DNB Capital Trust
II





DNB’s
second issuance of junior subordinated debentures was on March 30, 2005. This
issuance of debentures are floating rate and were issued to DNB Capital Trust
II, a Delaware business trust in which DNB owns all of the common equity. DNB
Capital Trust II issued $4.0 million of floating rate (the rate 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.





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.








NOTE
6: RECENT ACCOUNTING PRONOUNCEMENTS





FASB Statement
No. 155  In February 2006, the FASB issued FASB Statement
No. 155, “Accounting for Certain Hybrid Financial Instruments” (“Statement
155”). Among other things, this Statement permits fair value re-measurement for
certain hybrid financial instruments and requires that entities evaluate whether
beneficial interests contain embedded derivatives or are derivatives in their
entirety. This Statement became effective January 1, 2007 and did not have
a material impact on DNB’s consolidated financial statements.




8




DNB
FINANCIAL CORPORATION AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)







FASB Statement
No. 156  In March 2006, the FASB issued FASB Statement
No. 156, “Accounting for Servicing of Financial Assets” (“Statement 156”).
Statement 156 requires an entity to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset.
Statement 156 also requires fair value measurement of a servicing asset or
liability upon initial recognition and permits different methods to subsequently
measure each class of separately recognized servicing assets and servicing
liabilities. This Statement additionally permits under certain circumstances a
one-time reclassification of available-for-sale securities to trading securities
by entities with recognized servicing rights, without calling into question the
treatment of other available-for-sale securities under FASB Statement
No. 115. This Statement became effective January 1, 2007 and did not
have a material impact on DNB’s consolidated financial statements.




FASB Statement
No. 159 In February 2007 the FASB issued FASB Statement
No. 159 — “The Fair Value Option for Financial Assets and
Liabilities — Including an Amendment of FASB Statement No. 115”
(“Statement 159”). Statement 159 permits entities to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings without having to apply complex hedge accounting
provisions. Statement 159 is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. DNB did not early adopt
FASB Statement No. 159, and has determined this Statement did not have a
material impact on DNB’s consolidated financial statements upon
adoption.




FASB Statement
No. 160  In December 2007 the FASB issued FASB Statement
No. 160 — “Noncontrolling Interest in Consolidated Financial
Statements — Including an Amendment of ARB No. 51” (“Statement
160”). Statement 160 improves the relevance, comparability, and transparency of
the financial information that a reporting entity provides in its consolidated
financial statements by establishing accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the de-consolidation of a
subsidiary. Statement 160 is effective as of the beginning of an entity’s first
fiscal year that begins on or after December 15, 2008. Early adoption is
prohibited. DNB has not yet determined whether this statement will have a
material impact on DNB’s consolidated financial statements upon
adoption.




FASB Statement
No. 161 In March 2008 the FASB issued FASB Statement
No. 161 — “Disclosures about Derivative Instruments and Hedging
Activities—an amendment of FASB Statement No. 133” (“Statement
161”).  Statement 161 amends Statement No. 133 and its related
guidance by requiring expanded disclosures about derivative instruments and
hedging activities.  This Statement will require DNB to provide
additional disclosure about a) how and why we use derivative instruments; b) how
we account for derivative instruments and related hedged items under SFAS No.
133 and its related interpretations; and c) how derivative instruments and
related hedged items effect our financial condition, financial performance, and
cash flows.  Statement 161 does not change the accounting for
derivatives under SFAS No. 133. DNB does not currently engage in derivative
instruments and hedging activities.




FASB Statement
No. 141 (revised) In December 2007, FASB issued FASB Statement
No. 141 (revised 2007), “Business Combinations” (“Statement 141R).
Statement 141R retains the fundamental requirement of FASB Statement
No. 141 that the acquisition method of accounting be used for all business
combinations. However, Statement 141R does make significant changes to the
accounting for a business combination achieved in stages, the treatment of
contingent consideration, transaction and restructuring costs, and other aspects
of business combination accounting. Statement 141R will be effective with the
fiscal year that begins on January 1, 2009, and will change DNB’s
accounting treatment for business combinations on a prospective
basis.




EITF
06-4  In September 2006, the Emerging Issues Task Force
issued EITF 06-4, “Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”. EITF
06-4 concludes that for a split-dollar life insurance arrangement within the
scope of this Issue, an employer should recognize a liability for future
benefits in accordance with SFAS 106 (if, in substance, a postretirement
benefit plan exits) or APB Opinion No. 12 (if the arrangement is, in
substance, an individual deferred compensation contract) based on the
substantive agreement with the employee. The consensus is effective for fiscal
years beginning after December 15, 2007. This EITF is applicable to the
Replacement Plan referenced in Note 14. The early adoption of EITF 06-4
resulted in a $583,000 net-of-tax charge to stockholders’ equity on
January 1, 2007.







9




DNB
FINANCIAL CORPORATION AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)







EITF
06-5  In September 2006, the Emerging Issues Task Force
issued EITF 06-5, “Accounting for Purchases of Life Insurance-Determining the
Amount That Could Be Realized in Accordance with FASB Technical Bulletin
No. 85-4”. This consensus concludes that a policyholder should consider any
additional amounts included in the contractual terms of the insurance policy
other than the cash surrender value in determining the amount that could be
realized under the insurance contract. A consensus also was reached that a
policyholder should determine the amount that could be realized under the life
insurance contract assuming the surrender of an individual-life (or certificate
by certificate in a group policy). The consensuses are effective for fiscal
years beginning after December 15, 2006. This EITF is applicable to the
BOLI already recognized in DNB’s statement of condition. The Company adopted
EITF 06-5 on January 1, 2007 and there was no material impact on DNB’s
financial position or results of operations.




FIN
48  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 FASB Statement 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 was effective on
January 1, 2007. The adoption of FIN 48 did not have a significant impact
on DNB’s consolidated financial statements.




SAB No. 109In November 2007, the SEC issued SAB No. 109, “Written Loan
Commitments Recorded at Fair Value Through Earnings” (“SAB 109”).
SAB 109 supersedes SAB No. 105, “Loan Commitments Accounted for as
Derivative Instruments,” and expresses the view that expected net future cash
flows related to the servicing of loans should be included in the fair value
measurement of all written loan commitments that are accounted for at fair value
through earnings. SAB 109 retains the views in SAB No. 105 that
internally developed intangible assets (such as client relationship intangible
assets) should not be included in the fair value measurement of derivative loan
commitments. SAB 109 is effective on January 1, 2008. DNB concluded
that SAB 109 did not have a material effect on its consolidated financial
statements upon adoption.




SAB
No. 110  In December 2007, the SEC issued SAB
No. 110, and extended, under certain circumstances, the availability of a
“simplified” method for estimating the expected term of “plain vanilla” share
options in accordance with FASB Statement No. 123 (revised). DNB determined
SAB 110 did not affect DNB’s consolidated financial statements upon
adoption.




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 643,368
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.  The Plan Committee determines vesting of options under the
plan. There were 149,263 options available for grant at both March 31, 2008 and
December 31, 2007.





Stock
option activity for the three-month period ended March 31, 2008 is indicated
below.


Number
            
            
            Weighted
      AverageOutstanding
            
            
            Exercise
      PriceOutstanding
      January 1, 2008
            
            
            243,320
            
            
            $
            19.36Granted
            
            
            –
            
            
            
            –Exercised
            
            
            –
            
            
            
            –Expired
            
            
            –
            
            
            
            –Forfeited
            
            
            –
            
            
            
            –Outstanding
      March 31, 2008
            
            
            243,320
            
            
            $
            19.36





10




DNB
FINANCIAL CORPORATION AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








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





March
      31, 2008Range
      of
            Number
            Weighted
      AverageExercise
      Prices
            Outstanding
            Exercise
      Price
            Remaining
      Contractual Life$
      9.23-10.99
            9,419
            
            $9.23
            2.25
      years11.00-13.99
            9,414
            
            11.16
            3.25
      years14.00-19.99
            117,127
            
            17.42
            5.64
      years20.00-22.99
            59,319
            
            22.12
            3.59
      years23.00-24.27
            48,041
            
            24.27
            7.05
      yearsTotal
            243,320
            
            $19.36
            5.20
      years








Restricted Stock
Awards





DNB
maintains an Incentive Equity and Deferred Compensation Plan.  The
plan provides that up to 243,101 (as adjusted for subsequent stock dividends)
shares of common stock may be granted, at the discretion of the Board, to
individuals of the Company.  DNB did not grant any shares of
restricted stock during the three-month period ended March 31,
2008.  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 period of time,
during which the shares may not be sold, pledged or otherwise disposed
of.  The 2005 grant is restricted for 2 years and the 2007 grant
is restricted for 1 year. 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-month period
ended March 31, 2008, $49,000 was amortized to expense compared to $28,000
during the same period in 2007.  At March 31, 2008, 213,077 shares
were reserved for future grants under the plan.





Stock
grant activity is indicated below. The shares have been adjusted for the 5%
stock dividend in December 2007.





SharesOutstanding
      - January 1, 2008
            30,103Granted
            –Forfeited
            (79)Outstanding
      – March 31, 2008
            30,024





NOTE  8:  INCOME
TAXES





As of
March 31, 2008, the Company had no material unrecognized tax benefits or accrued
interest and penalties. It is the Company’s policy to account for interest and
penalties accrued relative to unrecognized tax benefits as a component of income
tax expense.  Federal and state tax years 2004 through 2007 were open
for examination as of March 31, 2008. Income tax expense for the three month
period ended March 31, 2008 was $100,000 compared to $74,000 for the same period
in 2007. The effective tax rate for the three month periods ended March 31, 2008
was 19.6%, compared to 12.2% for the same period in 2007. Although 2008
pre-tax income was $100,000 lower during the first quarter of 2008, income
tax expense and the effective tax rate for the current period were higher than
the same period in 2007.  This was caused by DNB reducing its
investments in tax-exempt loans and tax-exempt securities and investing the
proceeds in taxable securities.





11





DNB
FINANCIAL CORPORATION AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





NOTE
9:  FAIR VALUE MEASUREMENT





The
following disclosures are made in conjunction with the initial application of
the statement of FASB Statement No. 157 (“FAS 157”), Fair Value Measurement,
effective January 1, 2008.





FAS 157
establishes a fair value hierarchy based on the nature of data inputs for fair
value determinations, under which DNB is required to value each asset using
assumptions that market participations would utilize to value that
asset.  When DNB uses its own assumptions it is required to disclose
additional information about the assumptions used and the effect of the
measurement on earnings or the net change in assets for the period.





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





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





These
investment securities are classified as available for sale.





The value
of the investment portfolio is determined using three broad levels of
input:





Level 1 –
Quoted prices in active markets for identical securities;





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





Level 3 –
Instruments whose significant value drivers are unobservable.





These
levels are not necessarily an indication of the risks or liquidity associated
with these investments.  The following table summaries the assets at
March 31, 2008 that are recognized on DNB’s balance sheet using fair value
measurement determined based on the differing levels of input.





March
      31, 2008Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            Assets
      at Fair Value(Dollars in
      thousands)Securities
      available for sale
            
            $
            30
            
            
            $
            154,157
            
            
            $
            –
            
            
            $
            154,187Total
      Assets
            
            $
            30
            
            
            $
            154,157
            
            
            $
            –
            
            
            $
            154,187





The
provisions of FAS 157 related to disclosures surrounding non-financial assets
and non-financial liabilities have not been applied because in February 2008,
the FASB deferred the required implementation of these disclosures until
2009.





12




DNB
FINANCIAL CORPORATION AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





NOTE
10:  STOCKHOLDERS’ EQUITY





Stockholders'
equity was $33.8 million at March 31, 2008 compared to $32.6 million at December
31, 2007.  The increase in stockholders’ equity was primarily a result
of year-to-date earnings, coupled with a $1.2 million, net-of-tax SFAS 115
adjustment on the securities portfolio. These additions to stockholders equity
were partially offset by $338,000 of dividends paid on DNB’s common
stock.







ITEM2 -
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. The FDIC
insures DNB’s deposits. DNB provides a broad range of banking services to
individual and corporate customers through its thirteen community offices
located throughout Chester and Delaware Counties, Pennsylvania. DNB is a
community banking organization that focuses its lending and other services on
businesses and consumers in the local market area. DNB funds all these
activities with retail and business deposits and borrowings.  Through
its DNB Advisors division, the Bank provides wealth management and trust
services to individuals and businesses.  The Bank and its subsidiary,
DNB Financial Services, Inc., make available certain non-depository products and
services, such as securities brokerage, mutual funds, life insurance and
annuities.





DNB earns
revenues and generates cash flows by lending funds to commercial and consumer
customers in its marketplace. DNB generates its largest source of interest
income through its lending function.  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
the third quarter of 2007, management updated the 5-year strategic plan that was
designed to reposition its balance sheet and improve core earnings. Through the
Plan, which covers years 2008 through 2012, management will continue to expand
its loan portfolio through new originations, increased loan participations, as
well as strategic loan and lease receivable purchases.  Management
also plans to reduce the absolute level of borrowings with cash flows from
existing loans and investments as well as from new deposit
growth.  DNB’s Key Strategies include:





·
            Focus
      on penetrating markets and allowing existing locations to maximize
      profitability





·
            Improve
      earnings by allowing revenues to catch up to the investments made over the
      past five years in people, infrastructure and branch
    expansion





·
            Emphasize
      Private Banking, with the objective of promoting loan growth and fee based
      income by providing high net worth individuals with banking and wealth
      management services





·
            Implement
      a formal training program that will emphasize product knowledge, sales
      skills, people skills and technical knowledge to promote customer
      satisfaction





·
            Maintain
      sound asset quality by continuing to apply prudent underwriting
      standards





·
            Grow
      loans and diversify the mix





13


·
            Reduce
      long-term borrowings





·
            Focus
      on profitable customer segments





·
            Grow
      and diversify non-interest income







Strategic
Plan Update. During 2007, DNB focused on expense control and initiated a
formal training program emphasizing product knowledge and skills necessary to
improve customer satisfaction. In conjunction with its desire to penetrate new
markets and maximize existing locations, management opened its new Chadds Ford
office and renovated its West Goshen and Little Washington offices during 2007.
Despite these increases to occupancy costs, management was able to limit the
year over year increase in total non-interest expenses to only 1.52%, Both
offices have been successful at attracting new customers and increasing
relationships with existing customers. As a result of these and other efforts
during 2007, DNB increased deposits by $31.9 million or 8.4% and was able
to reduce FHLB Advances by $5.5 million. During the first quarter of 2008,
DNB’s total deposits declined $16.5 million, primarily due the maturity of time
deposits greater than $100,000. The maturity of these higher costing deposits
has contributed to a decline in our composite cost of funds from 3.17% during
the first quarter of 2007 to 3.07% during the first quarter of 2008




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 in 2007 accounted for approximately 78.7% 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 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.






MATERIAL
CHALLENGES, RISKS AND OPPORTUNITIES





The
following is a summary of changes to material challenges, risks and
opportunities DNB has faced during the three-month period ended March 31,
2008.





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. During the
quarter ended March 31, 2008, short term rates declined as the Federal Reserve
reduced the Fed Funds rate by 200 basis points, while the rate on the 10 year
treasury declined to 3.45%. Due to the shape of the yield curve and intense
competition for loans and deposits, DNB’s net interest margin continued to
experience pressure.





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. Through
such management, DNB seeks to reduce the vulnerability of its operations to
changes in interest rates. The Bank’s Asset Liability Committee (the “ALCO”) is
responsible for reviewing the Bank’s asset/liability policies and interest rate
risk position and making decisions involving asset liability considerations. The
ALCO meets on a monthly basis and reports trends and the Bank’s interest rate
risk position to the Board of Directors.  The extent of the movement
of interest rates is an uncertainty that could have a negative impact on the
earnings of the Bank.





The
largest component of DNB’s total income is net interest income, and the majority
of DNB’s financial instruments are comprised of interest rate-sensitive assets
and liabilities with various terms and maturities.  The primary
objective of management is to maximize net interest income while minimizing
interest rate risk.  Interest rate risk is derived from timing
differences in the re-pricing of assets and liabilities, loan prepayments,
deposit withdrawals, and differences in lending and funding rates. The ALCO
actively seeks to monitor and control the mix of in­terest rate-sensitive
assets and interest rate-sensitive ­liabilities. One measure of interest
rate risk is




14


net
interest income simulation analysis.  The ALCO utilizes simulation
analysis, whereby the model estimates the variance in net interest income with a
change in interest rates of plus or minus 200 basis points in addition to four
yield curve twists over a twelve-month period.





Liquidity and
Market Risk Management.Liquidity is the ability to meet current and
future financial obligations. The Bank further defines liquidity as the ability
to respond to deposit outflows as well as maintain flexibility to take advantage
of lending and investment opportunities.  The Bank’s primary sources
of funds are operating earnings, deposits, repurchase agreements, principal and
interest payments on loans, proceeds from loan sales, 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 its deposit base as well as a
marketable investment portfolio that provides cash flow through regular
maturities or that can be used for collateral to secure funding in an
emergency. As of March 31, 2008, DNB had $32.9 million in cash and cash
equivalents to meet its funding requirements.  This has decreased from
$45.3 million at December 31, 2007, primarily due to a $16.5 million decline in
total deposits. The decline was primarily due to a $10.2 million decline in time
deposits over $100,000, which DNB anticipated would be leaving due to specific
customers funding requirements.





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





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





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 and implemented to
strengthen the Bank’s compliance.  It is management’s goal that these
improvements to the BSA compliance program 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 terrorist ends.  However, there is no assurance that the
Bank’s improved compliance plan will eliminate all risks related to BSA, OFAC
and Patriot Act because those regulatory requirements are dynamic and complex
and must be continually reassessed in light of the changing environment in which
they operate. During the first three months of 2008, DNB continued its efforts
to strengthen its BSA policies, procedures and systems to ensure compliance with
OFAC regulations.





Deposit Insurance
Assessments; FICO Assessments.All Federally insured
depository institutions are liable to pay periodic premiums, or assessments, to
a deposit insurance fund organized by the Federal government to insure bank and
savings association deposits, generally up to $100,000 per
customer.  We are insured by the Deposit Insurance Fund (“DIF”)
administered by the FDIC, and hence are subject to periodic assessments by the
FDIC to maintain the reserve level of that fund.  The FDIC assesses
higher rates on those institutions that pose greater risks to the insurance
fund. Banks are divided into four risk categories and are subject to deposit
insurance assessments according to the risk category into which they fall, as
set forth in the following table:





15


Capital
      Category
            Supervisory
      GroupA
            B
            CWell
      Capitalized
            I
              5-7
      bps
            II
              10
      bps
            III
              28
      bpsAdequately
      CapitalizedUndercapitalized
            III
              28
      bps
            IV
              43
      bps


Note:
Rates for institutions that do not pay the minimum or maximum rate will vary
between these rates.  Basis points are cents per $100 of assessable
deposits (annual rate).





In the
above table, Supervisory Group “A” generally includes institutions with CAMELS
composite ratings of 1 or 2; Supervisory Group “B” generally includes
institutions with a CAMELS composite rating of 3; and Supervisory Group “C”
generally includes institutions with CAMELS composite ratings of 4 or
5.





For
example, a bank with the highest composite CAMELS rating that is also well
capitalized will be in Risk Category I and will pay an assessment rate of 5 to 7
basis points, depending upon a calculation involving certain financial ratios
and CAMELS ratings for the bank.  On the other hand, a bank that has
the lowest composite CAMELS ratings and is undercapitalized will pay an
assessment rate of 43 basis points. DNB is well capitalized and has been
assessed an annual rate of 5.87 bps.




These
initial assessment rates became effective on January 1, 2007 and are 3 basis
points above the base rate schedule adopted in the final rule. The FDIC may
adjust rates up or down by 3 basis points from the base rate schedule without
further notice-and-comment rulemaking, provided that any single adjustment from
one quarter to the next cannot change rates more than 3 basis
points.





The law
provides assessment credits to certain institutions that paid high premiums in
the past.  DNB used $170,000 of its $245,000 assessment credit in
2007.  Of the remaining $75,000, $61,000 was used in the first quarter
of 2008 with the remaining $14,000 to be used in the second quarter. If DNB had
not benefited from the assessment credit, management estimates that its deposit
insurance assessment for the 3 months ended March 31, 2008 would have been
$61,000.




For
institutions in Risk Category I (generally, those institutions with less than
$10 billion in assets that are well capitalized and receive one of the two best
composite ratings under the CAMELS regulatory examination rating system), the
base assessment rate will range from 5 basis points to 7 basis
points.  The actual base assessment rate will be based on a formula
that combines the institution’s financial ratios and CAMELS component
ratings.  This is called the “financial ratio
method.”  Under the financial ratio method, each of several financial
ratios and a weighted average of CAMELS component ratings are multiplied by a
pricing multiplier. The financial ratios include the institution’s Tier 1
Leverage Ratio, its Loans Past Due 30-89 Days as a percent of Gross Assets, its
Nonperforming Assets as a percent of Gross Assets, its Net-Loan Charge-Offs as a
percent of Gross Assets, its Net Income Before Taxes as a percent of its
Risk-Weighted Assets.




In
addition to paying basic deposit insurance assessments, depository institutions
must also pay FICO assessments.  The Financing Corporation (FICO),
established by the Competitive Equality Banking Act of 1987, is a
mixed-ownership government corporation whose sole purpose was to function as a
financing vehicle for the Federal Savings & Loan Insurance Corporation
(FSLIC). Effective December 12, 1991, as provided by the Resolution Trust
Corporation Refinancing, Restructuring and Improvement Act of 1991, the FICO's
ability to issue new debt was terminated. Outstanding FICO bonds, which are
30-year non-callable bonds with a principal amount of approximately $8.1
billion, mature in 2017 through 2019.




The FICO
has assessment authority, separate from the FDIC's authority to assess
risk-based premiums for deposit insurance, to collect funds from FDIC-insured
institutions sufficient to pay interest on FICO bonds. The FDIC acts as
collection agent for the FICO. The Deposit Insurance Funds Act 1996 (DIFA)
authorized the FICO to assess both BIF- and SAIF-insured deposits, and require
the BIF rate to equal one-fifth the SAIF rate through year-end 1999, or until
the insurance funds are merged, whichever occurs first. Since the first quarter
of 2000, all FDIC-insured deposits have been assessed at the same rate by FICO.
Effective March 31, 2006, the BIF and SAIF were merged into the newly created
Deposit Insurance Fund (DIF).




The FICO
assessment rate is adjusted quarterly to reflect changes in the assessment bases
of the fund based on quarterly Call Report and Thrift Financial Report
submissions. The FICO rate for the first quarter of 2008 is an annual rate of
1.12 basis points (1.12 cents per $100 of assessable deposits).




16


Material Trends
and Uncertainties.The industry has been affected by the fall out of the
sub-prime housing market. Although DNB does not participate in the sub-prime
lending market, a number of large providers who were involved in this type of
lending were cut off or curtailed from drawing on credit lines at large regional
or money-center banks.  In addition, a number of large brokers and
banks that held such paper in their funds or portfolios experienced capital and
or cash flow issues.   These events prompted the Federal Reserve
to lower the borrowing rate at the Discount Window which increased market
stability and liquidity. Also, larger institutions have been acquiring smaller
regional and community banks and thrifts in an effort to broaden market share by
capitalizing on operational efficiencies.  Chester County has
witnessed such mergers due to attractive demographics, commercial expansion and
other growth indicators.  As a result of these factors, the operating
environment is very competitive as DNB's market hosts over 70 banks, thrifts and
credit unions. In addition, brokerage firms, mutual fund companies and boutique
investment firms are prevalent, given the 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 to adversely affect
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.








CRITICAL
ACCOUNTING POLICIES





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





In
management's opinion, the most critical accounting policies and estimates
impacting DNB's consolidated financial statements are listed
below.  These policies are critical because they are highly dependent
upon subjective or complex judgments, assumptions and
estimates.  Changes in such estimates may have a significant impact on
the financial statements.  For a complete discussion of DNB's
significant accounting policies, see the footnotes to the Consolidated Financial
Statements included in DNB's 10-K for the year ended December 31,
2007.





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





Management
uses significant estimates to determine the allowance for credit
losses.  Because the allowance for credit losses is dependent, to a
great extent, on conditions that may be beyond DNB’s control, management’s
estimate of the amount necessary to absorb credit losses and actual credit
losses could differ.  DNB’s current judgment is that the valuation of
the allowance for credit losses remains adequate at March 31,
2008.  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.





17





Realization of
deferred income tax items.Estimates of deferred
tax assets and deferred tax liabilities make up the asset category titled “net
deferred taxes”.  These estimates involve significant judgments and
assumptions by management, which may have a material impact on the carrying
value of net deferred tax assets for financial reporting
purposes.  Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis, as well as operating loss carry
forwards.  Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.  A valuation allowance would be established against
deferred tax assets when in the judgment of management, it is more likely than
not that such deferred tax assets will not become available.  For a
more detailed description of these items, refer to Footnote 11 (Federal Income
Taxes) to DNB’s consolidated financial statements for the year ended December
31, 2007.





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 $541.1 million at March 31, 2008 compared to $545.8 million at
December 31, 2007.  The decline in total assets was primarily
attributable to a decline in Federal funds sold and total loans during the three
month period ended March 31, 2008 as discussed below. Other assets at March 31,
2008 were $6.5 million compared to $1.8 million at December 31, 2007. Other
liabilities at March 31, 2008 were $18.5 million compared to $8.9 million at
December 31, 2007. The increases in both other assets and other liabilities are
due to the application of “Trade-Date” accounting for certain investment sales
and purchases. Trade Date accounting is a method used to record transactions
that take place on the date at which an agreement has
been entered (the trade date), and not on the date the transaction has
been finalized (the settlement date).





Investment
Securities. Investment securities at March 31, 2008 were $177.8 million
compared to $170.9 million at December 31, 2007. The increase in investment
securities was primarily due to the purchase of $32.5 million in investment
securities offset by $27.4 million in sales, principal pay-downs and
maturities.





Gross Loans and
Leases. Loans and
leases were $305.9 million at March 31, 2008 compared to $309.3 million at
December 31, 2007.  DNB’s loans declined during the first quarter as
overall loan demand declined and competition for potential new loans
intensified.  Commercial loans grew $3.3 million while residential
real estate loans, consumer loans and commercial leases declined $6.8 million in
the aggregate.





Deposits. Deposits were $396.4 million
at March 31, 2008 compared to $412.9 million at December 31,
2007.  Deposits declined $16.5 million or 4.0% during the three-month
period ended March 31, 2008.  The decrease was attributable to
decreases of $19.3 million in time deposits, offset by a $2.8 million increase
in core deposits.





Borrowings.
Borrowings were $91.1 million at March 31, 2008 compared to $89.9 million at
December 31, 2007.  The increase of $1.2 million or 1.4% was primarily
due to a $10.0 million increase in FHLB borrowings coupled with an $8.7 million
decline in repurchase agreements.






RESULTS
OF OPERATIONS




SUMMARY





Net
income for the three-month period ended March 31, 2008 was $409,000 compared to
$535,000 for the same period in 2007.  Diluted earnings per share for
the three-month period ended March 31, 2008 were $0.16 compared to $0.20 for the
same period in 2007.  Earnings per share in 2007 reflect the effect of
the 5% stock dividend paid in December 2007.  The decrease in net
income for the latest three-month period compared to the same period in 2007 was
primarily attributable to a $232,000 increase in non-interest income, which
included a $153,000 increase in securities gains and a $72,000 increase in
wealth management income due to higher sales of annuities and mutual
funds.  This was offset by a $269,000 decrease in net-interest income
after provision, a $63,000 increase in non-interest expense and a $26,000
increase in income taxes.  The increases in non-interest income and
non-interest expense are discussed in detail below.  The decrease in
net interest income was a result of net interest margin compression and intense
competition for loan and deposit products in DNB’s marketplace.





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.





For the
three-month period ended March 31, 2008, net interest income after a $60,000
provision for credit losses was $3.5 million, compared to $3.8 million for the
same period in 2007.  Interest income for the three-month period ended
March 31, 2008 was $7.3 million compared to $7.5 million for the same period in
2007.  The decrease in interest income was primarily attributable to
an $876,000 decrease in interest on loans and leases, which was a result of a
lower volume of loans outstanding, coupled with a lower yield on the loan
portfolio. The yield on interest-earning assets for the first quarter in 2008
was 5.8%, compared to 6.3% for the same period in 2007.  Interest
expense for the three-month period ended March 31, 2008 was flat at $3.7
million, when compared to the same period in 2007. The cost of deposits was
2.67% for the first quarter in 2008 and the first quarter in 2007. The net
interest margin for the three-month period ended March 31, 2008 was 2.86%,
compared to 3.21% for the same period in 2007.





Interest
on loans and leases was $4.9 million for the three-month period ended March 31,
2008, compared to $5.8 million for the same period in 2007. The average balance
of loans and leases was $307.2 million with an average yield of 6.42% for the
three-month period ended March 31, 2008 compared to an average balance of $333.0
million with an average yield of 7.00% for the same period in 2007. The decrease
in the average balance was primarily due to heavy competition in DNB’s
marketplace.  The decrease in yield was primarily the result of lower
yields on DNB’s prime-rate based loans which were lower in 2008 as a result of
the Federal Reserve lowering the Federal funds rate by 300 basis points since
the end of March 2007.





Interest
and dividends on investment securities was $2.2 million for the three-month
period ended March 31, 2008, compared to $1.5 million for the same period in
2007.  The average balance on investment securities was $172.6 million
with an average yield of 5.18% for the three-month period ended March 31,
2008 compared to an average balance of $138.5 million with an average yield of
4.81% for the same period in 2007. The increase in yield was primarily due to
the sale of tax-free securities throughout 2007 and the purchase of taxable
securities with the proceeds.





Interest
expense was $3.7 million for the three-month period ended March 31, 2008,
compared to $3.7 million for the same period in 2007.  The average
balance of deposits was $403.8 million with an average rate of 2.67% for the
quarter-ended March 31, 2008 compared to $379.3 million with an average rate of
2.67% for the same period in 2007. 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 Chadds Ford. The
average balance of borrowings was $82.7 million with an average rate of 5.01%
for the three-month period ended March 31, 2008 compared to $94.1 million with
an average rate of 5.17% for the same period in 2007. The decrease in the
average balance was attributable to a $20.1 million average decline in
repurchase agreements, offset by a $9.7 million average increase in FHLB
borrowings. The decrease in average balance of repurchase agreements was due to
a fewer number of commercial customers using this product during the quarter as
compared to the prior year.  The decrease in rate was attributable to
a decrease in market rates resulting from the Federal Reserve’s tightening
actions over the last eight months. The composite cost of funds was 3.07% for
the quarter ended March 31, 2008 compared to 3.17% for the same period in
2007.








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 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




19


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
March 31, 2008 compared to 1.26% at December 31, 2007.  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)
            
            Three
      Months Ended
              March
      31,
              2008
            
            
            Year
      Ended
              December
      31,
              2007
            
            
            Three
      Months Ended
              March
      31,
              2007Beginning
      balance
            
            $
            3,891
            
            
            $
            4,226
            
            
            $
            4,226Provisions
            
            
            60
            
            
            
            60
            
            
            
            -Charge-offs
            
            
            (42
            )
            
            
            (486
            )
            
            
            (8
            )Recoveries
            
            
            17
            
            
            
            91
            
            
            
            31Ending
      balance
            
            $
            3,926
            
            
            $
            3,891
            
            
            $
            4,249





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-month period ended March 31, 2008 was $1.2 million compared
to $968,000 for the same period in 2007.  The $232,000 increase was
primarily attributable to an increase of $153,000 in gain on the sale of
securities and an increase of $72,000 in wealth advisory income due to higher
annuity sales.





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-month period ended March
31, 2008 was $4.2 million compared to $4.1 million for the same period in 2007
resulting in a $63,000 increase quarter-over-quarter. The primary cause of the
increase was attributable to an $81,000 increase in Occupancy and Furniture
& Equipment expense, which was attributable to the addition of the Chadds
Ford office and the renovation of the West Goshen office. This was offset by a
$45,000 decrease in Printing & Supplies quarter over
quarter.  Non-interest expense to average assets was 3.20% for the
quarter compared to 3.30% for the same quarter in 2007.  The
efficiency ratio was 86.72% for the quarter compared to 83.83% for the same
quarter in 2007.





INCOME
TAXES





Income
tax expense for the three month period ended March 31, 2008 was $100,000
compared to $74,000 for the same period in 2007. The effective tax rate for the
three month periods ended March 31, 2008 was 19.6%, compared to 12.2% for the
same period in 2007. Although 2008 pre-tax income was $100,000 lower during
the first quarter of 2008, income tax expense and the effective tax rate
for the current period were higher than the same period in 2007.  This
was caused by DNB reducing its investments in tax-exempt loans and tax-exempt
securities and investing the proceeds in taxable securities.  Income tax
expense 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.





20








ASSET
QUALITY





Non-performing
assets are comprised of non-accrual loans and leases, loans and leases
delinquent over ninety days and still accruing, troubled debt
restructurings ("TDRs")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.





Non-Performing
      Assets(Dollars
      in thousands)
            
            March
      31,
              2008
            
            
            December
      31,
              2007
            
            March
      31,
              2007Loans
      and leases:Non-accrual
            
            $
            5,612
            
            
            $
            1,521
            
            
            $
            1,00290
      days past due and still accruing
            
            
            710
            
            
            
            345
            
            
            
            177Troubled
      debt restructurings
            
            
            —
            
            
            
            —
            
            
            
            —Total
      non-performing loans and leases
            
            
            6,322
            
            
            
            1,866
            
            
            
            1,179Other
      real estate owned
            
            
            451
            
            
            
            —
            
            
            
            —Total
      non-performing assets
            
            $
            6,773
            
            
            $
            1,866
            
            
            $
            1,179





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





March
      31,
              2008
            
            
            December
      31,
              2007
            
            
            March
      31,
              2007Asset
      quality ratios:Non-performing loans to total
      loans
            
            
            2.1
            %
            
            
            0.6
            %
            
            
            0.4
            %Non-performing assets to total
      assets
            
            
            1.3
            
            
            
            0.3
            
            
            
            0.2Allowance
      for credit losses to:Total loans and
      leases
            
            
            1.3
            
            
            
            1.3
            
            
            
            1.3Non-performing loans and
      leases
            
            
            62.1
            
            
            
            208.5
            
            
            
            360.5








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:





Three
      Months Ended
            
            
            Year
      Ended
            
            
            Three
      Months Ended(Dollars
      in thousands)
            
            March
      31,
              2008
            
            
            December
      31,
              2007
            
            
            March
      31,
              2007Interest
      income which would have beenrecorded under original
      terms
            
            $
            106
            
            
            $
            109
            
            
            $
            20Interest
      income recorded during the period
            
            
            (1
            )
            
            
            (70
            )
            
            
            (4
            )Net
      impact on interest income
            
            $
            105
            
            
            $
            39
            
            
            $
            16








21




Impaired
loans-- Under FAS 114, a loan is impaired when it is probable that the bank will
be unable to collect all amounts due according to the contractual terms of the
agreement.  Information regarding impaired loans is presented as
follows:





Three
      Months Ended
            Year
      Ended
            Three
      Months Ended(Dollars
      in thousands)
            March
      31,
              2008
            December
      31,
              2007
            March
      31,
              2007Total
      recorded investment
            $  10,257
            
            $2,274
            
            $  641Average
      recorded investment
            10,257
            
            1,095
            
            641Specific
      allowance allocation
            480
            
            485
            
            76Total
      cash collected
            81
            
            344
            
            9Interest
      income recorded
            69
            
            27
            
            —








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 $97.9
million at March 31, 2008.  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 $194.3
million. Management believes that DNB has adequate resources to meet its
short-term and long-term funding requirements.





At March
31, 2008, DNB had $65.1 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 March 31, 2008 totaled $63.1
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 March 31, 2008.  The Bank’s
capital category is determined for the purposes of applying the bank regulators’
“prompt corrective action” regulations and for determining levels of deposit
insurance assessments and may not constitute an accurate representation of the
Corporation’s or the Bank’s overall financial condition or prospects. The
Corporation’s capital exceeds the FRB’s minimum lever­age ratio requirements
for bank holding companies (see additional discussion included in Footnote
17 of DNB’s 10-K).





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








22







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 CorrectiveActual
            Adequacy
      Purposes
            Action
      Provisions(Dollars
      in thousands)
            Amount
            
            Ratio
            
            Amount
            
            Ratio
            
            Amount
            
            RatioDNB
      Financial CorporationMarch
      31, 2008:Total risk-based
      capital
            $45,026
            
            13.03
            %
            $27,644
            
            8.00
            %
            $34,554
            
            10.00
            %Tier 1 capital
            41,029
            
            11.87
            
            13,822
            
            4.00
            
            20,733
            
            6.00Tier 1 (leverage)
      capital
            41,029
            
            7.82
            
            20,993
            
            4.00
            
            26,241
            
            5.00December
      31, 2007:Total risk-based
      capital
            $44,859
            
            13.08
            %
            $27,437
            
            8.00
            %
            $34,296
            
            10.00
            %Tier 1 capital
            40,901
            
            11.93
            
            13,719
            
            4.00
            
            20,578
            
            6.00Tier 1 (leverage)
      capital
            40,901
            
            7.77
            
            21,061
            
            4.00
            
            26,326
            
            5.00DNB
      First, N.A.March
      31, 2008:Total risk-based
      capital
            $44,946
            
            13.03
            %
            $27,593
            
            8.00
            %
            $34,491
            
            10.00
            %Tier 1 capital
            40,949
            
            11.87
            
            13,796
            
            4.00
            
            20,695
            
            6.00Tier 1 (leverage)
      capital
            40,949
            
            7.81
            
            20,969
            
            4.00
            
            26,211
            
            5.00December
      31, 2007:Total risk-based
      capital
            $44,581
            
            13.02
            %
            $27,385
            
            8.00
            %
            $34,231
            
            10.00
            %Tier 1 capital
            40,624
            
            11.87
            
            13,692
            
            4.00
            
            20,539
            
            6.00Tier 1 (leverage)
      capital
            40,624
            
            7.72
            
            21,036
            
            4.00
            
            26,295
            
            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) 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




23


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.








ITEM3 -
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





To
measure the impacts of longer-term asset and liability mismatches beyond two
years, DNB utilizes an Economic Value of Equity ("EVE") model.  The
EVE model measures the potential price risk of equity to changes in interest
rates and factors in the optionality included on the balance
sheet.  EVE analysis is used to dynamically model the present value of
asset and liability cash flows, with rates ranging up or down 200 basis
points.  The EVE is likely to be different if rates
change.  Results falling outside prescribed ranges require action by
management.  At March 31, 2008 and December 31, 2007, DNB's variance
in the EVE as a percentage of assets with an instantaneous and sustained
parallel shift of 200 basis points was within its negative 3% guideline, as
shown in the table below.  The change as a percentage of the present
value of equity with a 200 basis point increase or decrease at March 31, 2008
and December 31, 2007, was within DNB's negative 25% guideline.





March
      31, 2008
            
            December
      31, 2007Change
      in rates
            Flat
            
            -200bp
            
            +200bp
            
            Flat
            
            -200bp
            
            +200bpEVE
            $38,471
            
            $33,304
            
            $34,011
            
            $40,466
            
            $36,234
            
            $36,672Change
            
            
            ($5,167
            )
            ($4,460
            )
            
            
            (4,232
            )
            (3,793
            )Change
      as a % of assets
            
            
            (1.0%
            )
            (0.8%)
            
            
            
            (0.8%)
            
            (0.7%
            )Change
      as a % of PV equity
            
            
            (13.4%
            )
            (11.6%
            )
            
            
            (10.5%
            )
            (9.4%
            )








ITEM4 -
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 March 31, 2008, 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
March 31, 2008, that has materially affected, or is reasonably likely to
materially affect, DNB’s internal control over financial reporting.





24


PART
II - OTHER INFORMATION





ITEM1.
LEGAL PROCEEDINGS








Not
Applicable





ITEM1A.
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,
2007, filed with the Commission on March 26, 2008 (File No.
000-16667).





ITEM2.
UNREGISTERED SALES OF EQUITY  SECURITIES AND USE OF
PROCEEDS





There
were no Unregistered Sales of Equity Securities during the quarter ended March
31, 2008.  The following table provides information on repurchases by
DNB of its common stock in each month of the quarter ended March 31,
2008:


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)January
      1, 2008 – January 31, 2008
            
            4,500
            
            $16.44
            
            4,500
            
            81,732February
      1, 2008 – February 29, 2008
            
            4,600
            
            14.77
            
            4,600
            
            77,132March
      1, 2008 – March 31, 2008
            
            3,200
            
            14.85
            
            3,200
            
            73,932Total
            
            12,300
            
            $15.40
            
            12,300







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





ITEM3.
DEFAULTS UPON SENIOR SECURITIES





Not
Applicable





ITEM4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





Not
Applicable





ITEM5.
OTHER INFORMATION





Not
Applicable





ITEM6.
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


Pursuantto 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 CORPORATIONMay
      15, 2008
            BY:
            /s/
      William S. LatoffWilliam
      S. Latoff, Chairman of the
              Board
      and Chief Executive OfficerMay
      15, 2008
            BY:
            /s/
      Gerald F. SoppGerald
      F. Sopp, Chief Financial Officer and Executive Vice
    President








26


Indexto Exhibits




Exhibit
      No.
                Under
      Item 601
                of
      Regulation S-K
            Description
      of Exhibit and Filing Information3
            (i)
            Amended
      and Restated Articles of Incorporation, as amended effective June 15,
      2001, filed on August 14, 2001, as Item 6(a) to Form 10-Q
      (No. 0-16667) and incorporated herein by reference.(ii)
            Bylaws
      of the Registrant as amended December 19, 2007, filed March 28,
      2008 as item 3(ii) to Form 10-K for the fiscal year-ended
      December 31, 2007 (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)*
            Amended
      and Restated Change of Control Agreements dated December 20, 2006
      between DNB Financial Corporation and DNB First, N.A. and the following
      executive officers, each in the form filed March 26, 2007 as
      item 10(a) to Form 10-K for the fiscal year-ended
      December 31, 2006 (No. 0-16667) and incorporated herein by
      reference: Ronald K. Dankanich, Bruce E. Moroney,
      C. Tomlinson Kline III, and Richard J.
      Hartmann.(b)**
            1995
      Stock Option Plan of DNB Financial Corporation (as amended and restated,
      effective as of April 27, 2004), filed on March 29, 2004 as
      Appendix A to Registrant’s Proxy Statement for its Annual Meeting of
      Stockholders held April 27, 2004, and incorporated herein by
      reference.(c)*
            Form
      of 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 A. Fillippo.(d)***
            DNB
      Financial Corporation 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.(e)*
            Amended
      and Restated Change of Control Agreement among DNB Financial Corporation,
      DNB First, N.A. and William S. Latoff, dated December 20, 2006, filed
      March 26, 2007 as item 10(e) to Form 10-K for the fiscal
      year-ended December 31, 2006 (No. 0-16667) and incorporated
      herein by reference.(f)*
            Agreement
      of Lease dated February 10, 2005 between Headwaters Associates, a
      Pennsylvania general partnership, as Lessor, and DNB First, National
      Association as Lessee for a portion of premises at 2 North Church Street,
      West Chester, Pennsylvania, filed March 10, 2005 as Item 10(l)
      to Form 10-K for the fiscal year ended December 31, 2004
      (No. 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-Q for the fiscal quarter ended
      June 30, 2006 (No. 0-16667) and incorporated herein by
      reference.(g)
            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 December 19, 2007,
      filed March 28, 2008 as item 10(g) to Form 10-K for the
      fiscal year-ended December 31, 2007 (No. 0-16667) and
      incorporated herein by reference.(h)**
            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.




27


(i)**
            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.(j)
            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.(k)
            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.(l)*
            Amended
      and Restated Change of Control Agreement among DNB Financial Corporation,
      DNB First, N.A. and William J. Hieb, filed May 15, 2007 as
      Item 10(l) to Form 10-Q for the fiscal quarter ended
      March 31, 2007 (No. 0-16667) and incorporated herein by
      reference.(m)**
            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.(n)***
            Deferred
      Compensation Plan For Directors of DNB Financial Corporation (adopted
      effective October 1, 2006), filed November 14, 2006 as
      Item 10(s) to Form 10-Q for the fiscal quarter ended
      September 30, 2006 (No. 0-16667) and incorporated herein by
      reference.(o)***
            DNB
      Financial Corporation Deferred Compensation Plan (adopted effective
      October 1, 2006), filed November 14, 2006 as Item 10(t) to
      Form 10-Q for the fiscal quarter ended September 30, 2006
      (No. 0-16667) and incorporated herein by reference.(p)***
            Trust
      Agreement, effective as of October 1, 2006, between DNB Financial
      Corporation and DNB First, National Association (Deferred Compensation
      Plan), filed November 14, 2006 as Item 10(u) to Form 10-Q
      for the fiscal quarter ended September 30, 2006 (No. 0-16667)
      and incorporated herein by reference.(q)*
            Change
      of Control Agreements among DNB Financial Corporation, DNB First, N.A. and
      each of the following executive officers, each in the form filed
      March 26, 2007 as item 10(q) to Form 10-K for the fiscal
      year-ended December 31, 2006 (No. 0-16667) and incorporated
      herein by reference: Albert J. Melfi, Jr. and Gerald F. Sopp.(r)*
            DNB
      Financial Corporation Supplemental Executive Retirement Plan for William
      S. Latoff as amended and restated effective April 1, 2007, filed
      May 15, 2007 as Item 10(r) to Form 10-Q for the fiscal
      quarter ended March 31, 2007 (No. 0-16667) and incorporated
      herein by reference.(s)*
            Trust
      Agreement effective as of December 20, 2006 between DNB Financial
      Corporation and DNB First, N.A. (William S. Latoff SERP), filed
      March 26, 2007 as item 10(s) to Form 10-K for the fiscal
      year-ended December 31, 2006 (No. 0-16667) and incorporated
      herein by reference, as modified by Agreement to Terminate Trust dated as
      of April 1, 2007, filed May 15, 2007 as Item 10(s) to
      Form 10-Q for the fiscal quarter ended March 31, 2007
      (No. 0-16667) and incorporated herein by reference.(t)*
            DNB
      Offer Letter to Albert J. Melfi, Jr., dated November 10, 2006,
      filed March 26, 2005 as item 10(t) to Form 10-K for the
      fiscal year-ended December 31, 2006 (No. 0-16667) and
      incorporated herein by reference.(u)*
            DNB
      Offer Letter to Gerald F. Sopp, dated December 20, 2006, filed
      March 26, 2007 as item 10(u) to Form 10-K for the fiscal
      year-ended December 31, 2006 (No. 0-16667) and incorporated
      herein by reference.




28


(v)***
            Form
      of Restricted Stock Award Agreement dated November, 28, 2007, filed
      March 28, 2008 as item 10(v) to Form 10-K for the fiscal
      year-ended December 31, 2007 (No. 0-16667) and incorporated
      herein by reference.11
            
            Registrant’s
      Statement of Computation of Earnings Per Share is incorporated herein by
      reference to page 6 of this Form 10Q.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
            
            Rule 13a-14(a)/15d-14 (a) Certification of
      Chief Executive Officer, filed herewith.31.2
            
            Rule 13a-14(a)/15d-14 (a) Certification of
      Chief Financial Officer, filed herewith.32.1
            
            Section 1350 Certification of Chief Executive
      Officer, filed herewith.32.2
            
            Section 1350 Certification of Chief Financial
      Officer, filed herewith.*
            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