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: June 30, 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, or a smaller reporting company.
See definition of “accelerated filer”, “large accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 Large
      accelerated filer    o
              Accelerated
      filer                  oNon-accelerated
      filer     x
              Smaller
      reporting company o
  Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
 Yeso
              
              No
      x
 
 Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
 Common
      Stock ($1.00 Par Value)
                (Class)
              2,608,704
                (Shares
      Outstanding as of August 11,
2008)




1
  DNB
FINANCIAL CORPORATION AND SUBSIDIARY
 
 
 INDEX
 
 
 PART  I
      - FINANCIAL INFORMATION
              PAGE
      NO.ITEM
      1.
              
              FINANCIAL
      STATEMENTS (Unaudited):CONSOLIDATED
      STATEMENTS OF FINANCIAL CONDITIONJune
      30, 2008 and December 31, 2007
              3CONSOLIDATED
      STATEMENTS OF OPERATIONSThree
      and Six Months Ended June 30, 2008 and 2007
              4CONSOLIDATED
      STATEMENTS OF CASH FLOWSSix
      Months Ended June 30, 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
              25ITEM
      4T.
              
              CONTROLS
      AND PROCEDURES
              25PART
      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
              26ITEM
      4.
              
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
              26ITEM
      5.
              
              OTHER
      INFORMATION
              26ITEM
      6.
              
              EXHIBITS
              26SIGNATURES
              27EXHIBIT INDEX
 
 
 2
  PART
I – FINANCIAL INFORMATION
 ITEM1 –
FINANCIAL STATEMENTS
  DNB
Financial Corporation and Subsidiary
 Consolidated
Statements of Financial Condition (Unaudited)
 
 
 June
      30
              
              
              December
      31(Dollars
      in thousands except share data)
              
              2008
              
              
              2007AssetsCash
      and due from banks
              
              $
              14,296
              
              
              $
              12,858Federal
      funds sold
              
              
              716
              
              
              
              32,473Cash
      and cash equivalents
              
              
              15,012
              
              
              
              45,331AFS
      investment securities, at fair value (amortized cost of
      $149,275
                and
      $151,848)
              
              
              146,773
              
              
              
              152,570HTM
      investment securities (fair value of $18,309 and $14,593)
              
              
              18,964
              
              
              
              14,921Other
      investment securities
              
              
              4,112
              
              
              
              3,418Total
      investment securities
              
              
              169,849
              
              
              
              170,909Loans
      and leases
              
              
              318,821
              
              
              
              309,342Allowance
      for credit losses
              
              
              (4,222
              )
              
              
              (3,891
              )Net
      loans and leases
              
              
              314,599
              
              
              
              305,451Office
      property and equipment, net
              
              
              9,747
              
              
              
              9,908Accrued
      interest receivable
              
              
              2,290
              
              
              
              2,610Other
      real estate owned
              
              
              451
              
              
              
              —Bank
      owned life insurance
              
              
              7,450
              
              
              
              7,321Core
      deposit intangible
              
              
              284
              
              
              
              308Net
      deferred taxes
              
              
              3,330
              
              
              
              2,163Other
      assets
              
              
              1,643
              
              
              
              1,839Total
      assets
              
              $
              524,655
              
              
              $
              545,840Liabilities
      and Stockholders’ EquityLiabilitiesNon-interest-bearing
      deposits
              
              $
              49,540
              
              
              $
              48,741Interest-bearing
      deposits:NOW
              
              
              106,033
              
              
              
              82,912Money market
              
              
              95,836
              
              
              
              93,029Savings
              
              
              35,877
              
              
              
              38,362Time
              
              
              116,009
              
              
              
              149,876Total
      deposits
              
              
              403,295
              
              
              
              412,920FHLB
      advances
              
              
              60,000
              
              
              
              50,000Repurchase
      agreements
              
              
              17,366
              
              
              
              29,923Junior
      subordinated debentures
              
              
              9,279
              
              
              
              9,279Other
      borrowings
              
              
              668
              
              
              
              675Total
      borrowings
              
              
              87,313
              
              
              
              89,877Accrued
      interest payable
              
              
              926
              
              
              
              1,498Other
      liabilities
              
              
              2,522
              
              
              
              8,910Total
      liabilities
              
              
              494,056
              
              
              
              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; 2,865,242 and 2,850,799 issued
    respectively
              
              
              2,865
              
              
              
              2,860Treasury
      stock, at cost; 256,762 and 249,859 shares, respectively
              
              
              (4,788
              )
              
              
              (4,757
              )Surplus
              
              
              35,014
              
              
              
              34,888Accumulated
      deficit
              
              
              (611
              )
              
              
              (771
              )Accumulated
      other comprehensive (loss) income, net
              
              
              (1,881
              )
              
              
              415Total stockholders’
      equity
              
              
              30,599
              
              
              
              32,635Total liabilities and
      stockholders’ equity
              
              $
              524,655
              
              
              $
              545,840See accompanying notes to
      consolidated financial statements.
  3
 
 DNBFinancial Corporation and Subsidiary
 Consolidated
Statements of Operations (Unaudited)
 
  Three
      Months Ended
                June
      30,
              
              
              Six
      Months Ended
                June
      30,(Dollars
      in thousands except share data)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Interest
      Income:Interest
      and fees on loans and leases
              
              $
              4,637
              
              
              $
              5,692
              
              
              $
              9,553
              
              
              $
              11,485Interest
      and dividends on investment securities:Taxable
              
              
              2,092
              
              
              
              1,404
              
              
              
              4,261
              
              
              
              2,632Exempt
      from federal taxes
              
              
              44
              
              
              
              143
              
              
              
              87
              
              
              
              435Interest
      on cash and cash equivalents
              
              
              110
              
              
              
              248
              
              
              
              254
              
              
              
              406Total
      interest income
              
              
              6,883
              
              
              
              7,487
              
              
              
              14,155
              
              
              
              14,958Interest
      Expense:Interest
      on NOW, money market and savings
              
              
              975
              
              
              
              1,129
              
              
              
              2,030
              
              
              
              2,155Interest
      on time deposits
              
              
              1,042
              
              
              
              1,446
              
              
              
              2,665
              
              
              
              2,921Interest
      on FHLB advances
              
              
              736
              
              
              
              574
              
              
              
              1,413
              
              
              
              1,160Interest
      on repurchase agreements
              
              
              118
              
              
              
              359
              
              
              
              287
              
              
              
              753Interest
      on junior subordinated debentures
              
              
              155
              
              
              
              183
              
              
              
              317
              
              
              
              365Interest
      on other borrowings
              
              
              23
              
              
              
              23
              
              
              
              46
              
              
              
              60Total
      interest expense
              
              
              3,049
              
              
              
              3,714
              
              
              
              6,758
              
              
              
              7,414Net
      interest income
              
              
              3,834
              
              
              
              3,773
              
              
              
              7,397
              
              
              
              7,544Provision
      for credit losses
              
              
              454
              
              
              
              —
              
              
              
              514
              
              
              
              —Net
      interest income after provision for credit losses
              
              
              3,380
              
              
              
              3,773
              
              
              
              6,883
              
              
              
              7,544Non-interest
      Income:Service
      charges on deposits
              
              
              393
              
              
              
              412
              
              
              
              778
              
              
              
              811Wealth
      management fees
              
              
              236
              
              
              
              234
              
              
              
              521
              
              
              
              447Increase
      in cash surrender value of BOLI
              
              
              63
              
              
              
              57
              
              
              
              129
              
              
              
              114Gain
      on sale of securities
              
              
              481
              
              
              
              —
              
              
              
              737
              
              
              
              103Other
      fees
              
              
              214
              
              
              
              201
              
              
              
              422
              
              
              
              397Total
      non-interest income
              
              
              1,387
              
              
              
              904
              
              
              
              2,587
              
              
              
              1,872Non-interest
      Expense:Salaries
      and employee benefits
              
              
              2,256
              
              
              
              2,363
              
              
              
              4,605
              
              
              
              4,725Furniture
      and equipment
              
              
              460
              
              
              
              392
              
              
              
              881
              
              
              
              762Occupancy
              
              
              368
              
              
              
              360
              
              
              
              767
              
              
              
              728Professional
      and consulting
              
              
              314
              
              
              
              324
              
              
              
              641
              
              
              
              610Advertising
      and marketing
              
              
              189
              
              
              
              139
              
              
              
              272
              
              
              
              218Printing
      and supplies
              
              
              93
              
              
              
              103
              
              
              
              144
              
              
              
              199Other
      expenses
              
              
              551
              
              
              
              544
              
              
              
              1,115
              
              
              
              1,113Total
      non-interest expense
              
              
              4,231
              
              
              
              4,225
              
              
              
              8,425
              
              
              
              8,355Income
      before income taxes
              
              
              536
              
              
              
              452
              
              
              
              1,045
              
              
              
              1,061Income
      tax expense
              
              
              105
              
              
              
              74
              
              
              
              205
              
              
              
              148Net
      Income
              
              $
              431
              
              
              $
              378
              
              
              $
              840
              
              
              $
              913Earnings
      per share:Basic
              
              $
              0.17
              
              
              $
              0.14
              
              
              $
              0.32
              
              
              $
              0.35Diluted
              
              $
              0.17
              
              
              $
              0.14
              
              
              $
              0.32
              
              
              $
              0.35Cash
      dividends per share
              
              $
              0.13
              
              
              $
              0.12
              
              
              $
              0.26
              
              
              $
              0.25Weighted
      average common shares outstanding:Basic
              
              
              2,600,292
              
              
              
              2,622,552
              
              
              
              2,598,397
              
              
              
              2,625,127Diluted
              
              
              2,603,828
              
              
              
              2,638,662
              
              
              
              2,602,201
              
              
              
              2,641,153(Share
      data adjusted for 2007 5% stock dividend)See
      accompanying notes to consolidated financial statements.
 
 4
  DNBFinancial Corporation and Subsidiary
 Consolidated
Statements of Cash Flows (Unaudited)
 
 Six
      Months Ended
                June
      30,(Dollars
      in thousands)
              
              2008
              
              
              2007Cash
      Flows From Operating Activities:Net
      income
              
              $
              840
              
              
              $
              913Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation, amortization and
      accretion
              
              
              689
              
              
              
              603Provision for credit
      losses
              
              
              514
              
              
              
              —Unvested
      stock amortization
              
              
              84
              
              
              
              56Net gain on sale of
      securities
              
              
              (737
              )
              
              
              (103
              )(Decrease) increase in interest
      receivable
              
              
              320
              
              
              
              (2
              )Decrease in other
      assets
              
              
              196
              
              
              
              7Increase in investment in
      BOLI
              
              
              (129
              )
              
              
              (114
              )Decrease in interest
      payable
              
              
              (572
              )
              
              
              (48
              )Increase in deferred tax
      benefit
              
              
              (138
              )
              
              
              (79
              )(Decrease) increase in other
      liabilities
              
              
              (448
              )
              
              
              290Net
      Cash Provided By Operating Activities
              
              
              619
              
              
              
              1,523Cash
      Flows From Investing Activities:Activity
      in available-for-sale securities:Sales
              
              
              71,523
              
              
              
              24,478Maturities,
      repayments and calls
              
              
              12,597
              
              
              
              24,765Purchases
              
              
              (86,744
              )
              
              
              (33,877
              )Activity
      in held-to-maturity securities:Maturities,
      repayments and calls
              
              
              4,876
              
              
              
              1,812Purchases
              
              
              (8,936
              )
              
              
              —Net
      (increase) decrease in other investments
              
              
              (694
              )
              
              
              651Net
      (increase) decrease in loans and leases
              
              
              (10,113
              )
              
              
              6,958Purchase
      of bank property and equipment
              
              
              (492
              )
              
              
              (1,647
              )Net
      Cash (Used) Provided By Investing Activities
              
              
              (17,983
              )
              
              
              23,140Cash
      Flows From Financing Activities:Net
      (decrease) increase in deposits
              
              
              (9,625
              )
              
              
              8,046Increase
      (decrease) in FHLB advances
              
              
              10,000
              
              
              
              (20,000
              )Decrease
      in short term repurchase agreements
              
              
              (12,557
              )
              
              
              (6,641
              )Decrease
      in lease obligations
              
              
              (7
              )
              
              
              (7
              )Dividends
      paid
              
              
              (680
              )
              
              
              (647
              )Proceeds
      from issuance of stock under stock option plan
              
              
              —
              
              
              
              47Purchase
      of treasury stock
              
              
              (86
              )
              
              
              (470
              )Net
      Cash Used By Financing Activities
              
              
              (12,955
              )
              
              
              (19,672
              )Net
      Change in Cash and Cash Equivalents
              
              
              (30,319
              )
              
              
              4,991Cash
      and Cash Equivalents at Beginning of Period
              
              
              45,331
              
              
              
              24,227Cash and Cash Equivalents at
      End of Period
              
              $
              15,012
              
              
              $
              29,218Supplemental
      Disclosure of Cash Flow Information:Cash
      paid during the period for:Interest
              
              $
              7,330
              
              
              $
              7,462Income
      taxes
              
              
              488
              
              
              
              311Supplemental
      Disclosure of Non-cash Flow Information:Change
      in unrealized losses on AFS securities
              
              $
              (3,224
              )
              
              $
              (1,290
              )Change
      in deferred taxes due to change in unrealizedlosses
      on AFS securities
              
              
              1,096
              
              
              
              439Change
      in unsettled securities purchased  included in other
      liabilities
              
              
              (5,940
              )
              
              
              —Transfers
      from loans and leases to 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 six-month period ended June 30, 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.
 
 NOTE
2: EARNINGS PER SHARE
 
 Basic
earnings per share (“EPS”) are 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 the
amortized portion of 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.  There were 194,702
anti-dilutive stock options outstanding and 15,724 anti-dilutive stock
awards at June 30, 2008. There were 108,662 anti-dilutive stock options
outstanding and 14,204 anti-dilutive stock awards at June 30,
2007.  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 on basic
earnings per share is presented below.
 
 Three
      Months Ended
              
              
              Six
      Months EndedJune
      30, 2008
              
              
              June
      30, 2008(In
      thousands, except per-share data)
              
              Income
              
              
              Shares
              
              
              Amount
              
              
              Income
              
              
              Shares
              
              
              AmountBasic
      EPSIncome
      available to common stockholders
              
              $
              431
              
              
              
              2,600
              
              
              $
              0.17
              
              
              $
              840
              
              
              
              2,598
              
              
              $
              0.32Effect
      of potential dilutive common stock– stock options and unvested
      shares
              
              
              —
              
              
              
              4
              
              
              
              —
              
              
              
              —
              
              
              
              4
              
              
              
              —Diluted
      EPSIncome
      available to common stockholders
              
              $
              431
              
              
              
              2,604
              
              
              $
              0.17
              
              
              $
              840
              
              
              
              2,602
              
              
              $
              0.32
 
 
 Three
      Months Ended
              
              
              Six
      Months EndedJune
      30, 2007
              
              
              June
      30, 2007(In
      thousands, except per-share data)
              
              Income
              
              
              Shares
              
              
              Amount
              
              
              Income
              
              
              Shares
              
              
              AmountBasic
      EPSIncome
      available to common stockholders
              
              $
              378
              
              
              
              2,623
              
              
              $
              0.14
              
              
              $
              913
              
              
              
              2,625
              
              
              $
              0.35Effect
      of potential dilutive common stock – stock options and unvested
      shares
              
              
              —
              
              
              
              16
              
              
              
              —
              
              
              
              —
              
              
              
              16
              
              
              
              —Diluted
      EPSIncome
      available to common stockholders
              
              $
              378
              
              
              
              2,639
              
              
              $
              0.14
              
              
              $
              913
              
              
              
              2,641
              
              
              $
              0.35
 
 
 6
  DNB
FINANCIAL CORPORATION AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 
 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 EndedJune
      30, 2008
              
              
              June
      30, 2007(Dollars
      in thousands)
              
              Net-of-Tax
      Amount
              
              
              Net-of-Tax
      AmountNet
      Income
              
              $
              431
              
              
              $
              378Other
      Comprehensive Income:Unrealized
      holding losses arising during the period
              
              
              (3,001
              )
              
              
              (1,055
              )Reclassification
      for gains included in net income
              
              
              (318
              )
              
              
              —Unrealized
      actuarial losses- pension
              
              
              —
              
              
              
              —Total
      Comprehensive Loss
              
              $
              (2,888
              )
              
              $
              (677
              )Six
      Months Ended
              
              
              Six
      Months EndedJune
      30, 2008
              
              
              June
      30, 2007(Dollars
      in thousands)
              
              Net-of-Tax
      Amount
              
              
              Net-of-Tax
      AmountNet
      Income
              
              $
              840
              
              
              $
              913Other
      Comprehensive Income:Unrealized
      holding losses arising during the period
              
              
              (1,641
              )
              
              
              (783
              )Reclassification
      for gains included in net income
              
              
              (487
              )
              
              
              (68
              )Unrealized
      actuarial losses- pension
              
              
              (169
              )
              
              
              —Total
      Comprehensive (Loss) Income
              
              $
              (1,457
              )
              
              $
              62
 
 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.
 
 
 June
      30,
              
              
              December
      31,(Dollars
      in thousands)
              
              2008
              
              
              2007Commercial
      mortgage
              
              $
              130,662
              
              
              $
              111,727Commercial
      term and lines of credit
              
              
              74,500
              
              
              
              81,021Consumer
              
              
              60,538
              
              
              
              56,553Residential
      mortgage
              
              
              43,435
              
              
              
              46,448Commercial
      leases
              
              
              9,686
              
              
              
              13,593Gross
      loans and leases
              
              
              318,821
              
              
              
              309,342Allowance
      for credit losses
              
              
              (4,222
              )
              
              
              (3,891
              )Net
      loans and leases
              
              $
              314,599
              
              
              $
              305,451
 
 
 7
  DNB
FINANCIAL CORPORATION AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 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 $5,155,000 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.
  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 became effective January 1, 2008 and did not have a
material impact on DNB’s consolidated financial statements upon
adoption.
  8
 DNB
FINANCIAL CORPORATION AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  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. The early adoption of EITF 06-4
resulted in a $583,000 net-of-tax charge to stockholders’ equity on
January 1, 2007.
  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 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 was effective on January 1, 2008. DNB concluded
that SAB 109 did not have a material effect on its consolidated financial
statements upon adoption.
  9
 DNB
FINANCIAL CORPORATION AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
  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 179,048 and 149,263 options available for grant at
June 30, 2008 and December 31, 2007, respectively.
 
 Stock
option activity for the six-month period ended June 30, 2008 is indicated
below.
 Number
              Weighted
      AverageOutstanding
              Exercise
      PriceOutstanding
      January 1, 2008
              243,320
              
              $19.36Granted
              –
              
              –Exercised
              –
              
              –Expired
              (29,221)
              
              (21.64)Forfeited
              (565)
              
              (20.21)Outstanding
      June 30, 2008
              213,534
              
              $19.04
 
 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.
 
 June
      30, 2008Range
      of
              Number
              Weighted
      AverageExercise
      Prices
              Outstanding
              Exercise
      Price
              Remaining
      Contractual Life$
      9.23-10.99
              9,419
              $9.23
              2.00
      years11.00-13.99
              9,414
              11.16
              3.00
      years14.00-16.99
              22,985
              16.83
              4.00
      years17.00-19.99
              93,866
              17.56
              5.73
      years20.00-22.99
              29,809
              22.59
              6.59
      years23.00-24.27
              48,041
              24.27
              6.80
      yearsTotal
              213,534
              $19.04
              5.62
      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 six-month period ended June 30, 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.
 
 
 10
 
 DNB
FINANCIAL CORPORATION AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 Share
awards granted by the plan were recorded at the date of award based on the
market value of shares.  Awards are being amortized to expense over
the three-year cliff-vesting period. DNB records compensation expense equal to
the value of the shares being amortized.  For the three and six-month
periods ended June 30, 2008, $34,000 and $83,000 was amortized to
expense.  At June 30, 2008, 214,291 shares were reserved for future
grants under the plan.
 
 Unvested
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
              –Vested
      shares
              (13,087)Forfeited
              (1,292)Outstanding
      – June 30, 2008
              15,724
 
 
 NOTE  8:  INCOME
TAXES
 
 As of
June 30, 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 June 30, 2008. Income tax expense for the three and
six-month periods ended June 30, 2008 was $105,000 and $205,000 compared to
$74,000 and $148,000 for the same periods in 2007. The effective tax rate for
the three and six-month periods ended June 30, 2008 was 19.6% and 19.6%,
compared to 16.4% and 13.9% for the same period in 2007. Although 2008
pre-tax income was $16,000 lower during the first six months of 2008 compared to
2007, income tax expense and the effective tax rate for the current six
month period was 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.
 
 NOTE
9:  FAIR VALUE MEASUREMENT
 
 The
following disclosures are made in conjunction with FASB Statement No. 157 (“FAS
157”), Fair Value Measurement, which became 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 within its
scope 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
available-for-sale 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.
 
 11
 DNB
FINANCIAL CORPORATION AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 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
June 30, 2008 that are recognized on DNB’s balance sheet using fair value
measurement determined based on the differing levels of input.
 
 June
      30, 2008Level
      1
              
              
              Level
      2
              
              
              Level
      3
              
              
              Assets
      at Fair Value(Dollars
      in thousands)Assets
      Measured at Fair Value on a Recurring BasisSecurities
      available for sale
              
              $
              21
              
              
              $
              146,752
              
              
              $
              -
              
              
              $
              146,773Total
      assets measured at fair value on a recurring basis
              
              $
              21
              
              
              $
              146,752
              
              
              $
              -
              
              
              $
              146,773Assets
      Measured at Fair Value on a Nonrecurring BasisImpaired
      loans
              
              $
              -
              
              
              $
              6,032
              
              
              $
              -
              
              
              $
              6,032Total
      assets measured at fair value on a nonrecurring basis
              
              $
              -
              
              
              $
              6,032
              
              
              $
              -
              
              
              $
              6,032
 Impaired loans. Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $9.0 million at
June 30, 2008. The valuation allowance on impaired loans was $606,000 as of
June 30, 2008. During the six months ended June 30, 2008, we
recognized impairment charges of $181,000 related to approximately $6.0 million
in loans.
 
 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.
  
 NOTE
10:  STOCKHOLDERS’ EQUITY
 
 Stockholders'
equity was $30.6 million at June 30, 2008 compared to $32.6 million at December
31, 2007.  The decrease in stockholders’ equity was primarily the
result of a $2.1 million, net-of-tax adjustment on the available for sale
investment securities portfolio and dividends paid on DNB’s common stock
totaling $680,000. These decreases were partially offset by year-to-date
earnings totaling $840,000
 
 12
  
 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
 
 ·
              Reduce
      long-term borrowings
 
 ·
              Focus
      on profitable customer segments
 
 ·
              Grow
      and diversify non-interest income
 
 13
 Strategic
Plan Update.During the first six months of 2008, DNB focused on expense control as
non-interest expenses have increased a modest $70,000 or 0.8% over the first six
months of 2007. DNB’s loans and leases increased $9.5 million to $318.8 million
at June 30, 2008 compared to $309.3 million at December 31,
2007.   During the first six months of 2008, DNB’s total deposits
declined $9.6 million, primarily due to 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 3.19% during the first six months
of 2007 to 2.79% during the first six months 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 accounted for 74.1% of total revenue during the first six months of 2008.
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 and six-month periods ended June
30, 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. DNB’s margin was
affected by the Federal Reserve’s 225 basis point reductions during the six
months ended June 30, 2008, coupled with DNB’s asset sensitivity. Since most of
DNB’s floating rate loans reprice within 30 days of a rate change, downward loan
pricing adjustments began in the fourth quarter of 2007 and continued during the
first six months of 2008. Funding costs, typically take 90 to 120 days to
reprice. Consequently, most of the corresponding decreases in funding costs did
not begin until the first quarter of 2008 and continued to lag the repricing in
the loan portfolio. This put pressure on DNB’s net interest margin which was
2.96% for the six months ended June 30, 2008 compared to 3.21% for the prior
year.
 
 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 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.
 
 14
 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 June 30, 2008, DNB had $15.0 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 $9.5
million increase in loans and a $9.6 million decline in total deposits and the
payment of $5.9 million for securities which had a Trade Date in December 2007,
but a settlement date in January 2008. The decline in deposits was primarily due
to a $21.0 million decline in time deposits over $100,000, which DNB
anticipated would be leaving due to specific customer’s funding requirements.
Consistent with prudent balance sheet management, DNB has been balancing deposit
pricing with liquidity needs and has been able to lower the cost of funds while
growing the loan portfolio.
 
 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.It is management’s goal to maintain
a BSA compliance program that will address its compliance needs to a level
commensurate with BSA, OFAC and Patriot Act related risks to which the Bank is
exposed 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
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 six 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 6.42 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 used in the second quarter. If DNB had not benefited
from the assessment credit, management estimates that its deposit insurance
assessment for the 6 months ended June 30, 2008 would have been
$125,000.
  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).
  16
  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 second quarter of 2008 is an annual rate of
1.12 basis points (1.12 cents per $100 of assessable deposits).
  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. DNB anticipates these pressures will continue to 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.
 
 17
 
 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 June 30,
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.
 
 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 $524.7 million at June 30, 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 with a corresponding decline in
total deposits and total borrowings as discussed below.
 
 Investment
Securities. Investment securities at June 30, 2008 were $169.8 million
compared to $170.9 million at December 31, 2007. The slight decrease in
investment securities was primarily due to $88.0 million in sales, principal
pay-downs and maturities offset by the purchase of $95.7 million in investment
securities. Included in the $95.7 million of investment securities purchased
were $5.9 million for securities which had a trade date in December 2007, and a
settlement date in January 2008. 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).
 
 Gross Loans and
Leases. DNB’s
loans and leases increased $9.5 million to $318.8 million at June 30, 2008
compared to $309.3 million at December 31, 2007.  Total commercial
loans grew $12.4 million and consumer loans grew $4.0 million while residential
real estate loans and commercial leases declined $3.0 million and $3.9 million
respectively.
 
 Deposits. Deposits were $403.3 million
at June 30, 2008 compared to $412.9 million at December 31,
2007.  Deposits decreased $9.6 million or 2.3% during the six-month
period ended June 30, 2008.  Time deposits, primarily accounts greater
than $100,000, declined $33.9 million, while the aggregate of demand, NOW, money
markets and savings accounts increased $24.2 million. . Consistent with prudent
balance sheet management, DNB has been balancing deposit pricing with liquidity
needs and has been able to lower the cost of funds while growing the loan
portfolio.
 
 Borrowings.
Borrowings were $87.3 million at
June 30, 2008 compared to $89.9 million at December 31, 2007.  The
decrease of $2.6 million or 2.9% was primarily due to a $10.0 million increase
in FHLB borrowings coupled with a $12.6 million decline in repurchase
agreements.
 
 18
  RESULTS
OF OPERATIONS
 SUMMARY
 
 Net
income for the three and six-month periods ended June 30, 2008 was $431,000 and
$840,000 compared to $378,000 and $913,000 for the same periods in
2007.  Diluted earnings per share for the three and six-month period
ended June 30, 2008 were $0.17 and $0.32 compared to $0.14
and $0.35 for the same periods in 2007.  Earnings per share in 2007
have been adjusted to reflect the effect of the 5% stock dividend paid in
December 2007.  The $53,000 increase during the most recent
three-month period was attributable to a $483,000 increase in non-interest
income, offset by a $393,000 decline in net interest income after provision for
credit losses, a $31,000 increase in income tax expense and a $6,000 increase in
non-interest expense.  Theincreases in non-interest income and
non-interest expense are discussed in detail below.
 
 NET
INTEREST INCOME
 
 DNB's
earnings performance is primarily dependent upon its level of net interest
income, which is the excess of interest income over interest
expense.  Interest income includes interest earned on loans,
investments and federal funds sold and interest-earning cash, as well as loan
fees and dividend income earned on investment securities.  Interest
expense includes interest on deposits, FHLB advances, repurchase agreements,
Federal funds purchased and other borrowings.
 
 Net
interest income after provision for credit losses for the three and six-month
periods ended June 30, 2008 was $3.4 million and $6.9 million, compared to $3.8
million and $7.5 million for the same periods in 2007.  Interest
income for the three and six-month periods ended June 30, 2008 was $6.9 million
and $14.2 million compared to $7.5 million and $15.0 million for the same
periods in 2007.  The decrease in interest income during both periods
was primarily attributable to a decrease of interest on loans and leases, which
was a result of lower average balances and lower yields on the loan and lease
portfolio.  In addition, interest and dividends on investment
securities increased during both periods due to an increase in taxable
securities and a decrease in tax-exempt securities year over
year.  The yield on interest-earning assets for the three and
six-month periods ended June 30, 2008 was 5.49% and 5.66%, compared to 6.32% and
6.30% for the same periods in 2007.  Interest expense for the three
and six-month periods ended June 30, 2008 was $3.0 million and $6.8 million
compared to $3.7 million and $7.4 million for the same periods in 2007. The
decrease in interest expense during both periods was primarily attributable to
lower rates on interest-bearing liabilities. The composite cost of funds for the
three and six-month periods ended June 30, 2008 was 2.51% and 2.79%, compared to
3.21% and 3.19% for the same periods in 2007.   The net interest
margin for the three and six-month periods ended June 30, 2008 was 3.06% and
2.96%, compared to 3.21% and 3.21% for the same periods in 2007.
 
 Interest
on loans and leases was $4.6 million and $9.6 million for the three and
six-month periods ended June 30, 2008, compared to $5.7 million and $11.5
million for the same periods in 2007. The average balance of loans and leases
was $306.4 million with an average yield of 6.08% for the current quarter
compared to $320.6 million with an average yield of 7.11% for the same period in
2007.  The average balance of loans and leases was $306.8 million with
an average yield of 6.25% for the current six months compared to $326.8 million
with an average yield of 7.06% for the same period in 2007.  The
decrease in yield during both periods was primarily the result of a declining
interest rate environment.
 
 Interest
and dividends on investment securities was $2.1 million and $4.3 million for the
three and six-month periods ended June 30, 2008, compared to $1.5 million and
$3.1 million for the same periods in 2007.  The average balance of
investment securities was $170.6 million with an average yield of 5.06% for the
current quarter compared to $132.8 million with an average yield of 4.87% for
the same period in 2007.  The average balance of investment securities
was $171.6 million with an average yield of 5.12% for the current six months
compared to $135.7 million with an average yield of 4.85% for the same period in
2007. The increase in the average balance during both periods was the result of
increased cash flows from net new deposits and lower levels of average loans
outstanding during both periods.  The increase in the yield during
both periods was primarily due to an increase in the amount of taxable
securities in the portfolio and a decrease in the amount of tax-exempt
securities.
 
 Interest
on deposits was $2.0 million and $4.7 million for the three and six-month
periods ended June 30, 2008, compared to $2.6 million and $5.1 million for the
same periods in 2007.   The average balance of deposits was
$399.8 million with an average rate of 2.03% for the current quarter compared to
$376.1 million with an average rate of 2.75% for the same period in
2007.    The average balance of deposits was $401.8 million
with an average rate of 2.35% for the six months ended June 30, 2008 compared to
$377.7 million with an average rate of 2.71% for the same period in 2007. The
increase in the average balance during both periods was primarily the result of
year-over-year increased deposit relationships through aggressive marketing
efforts.  The decrease in rate during both periods was primarily
attributable to lower rates being paid on maturing time deposits and certain
money market accounts, stimulated by a lower interest rate
environment.
 
 19
  Interest
on borrowings was $1.0 million and $2.1 million for the three and six-month
periods ended June 30, 2008, compared to $1.1 million and $2.3 million for the
same periods in 2007. The average balance of borrowings was $89.0 million with
an average rate of 4.66% for the current quarter compared to $87.3 million with
an average rate of 5.23% for the same period in 2007.    The
average balance of borrowings was $85.8 million with an average rate of 4.83%
for the six months ended June 30, 2008 compared to $90.7 million with an average
rate of 5.20% for the same period in 2007. The decrease in the average balance
during the six-months ended June 30, 2008 compared to the same period in 2007
was attributable to a $19.5 million decline in repurchase agreements, offset by
a $15.2 million increase in FHLB advances. The decrease in average balance of
repurchase agreements was due to a fewer number of commercial customers using
this product during both periods 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 twelve
months.
 
 ALLOWANCE
FOR CREDIT LOSSES
 
 To
provide for known and inherent losses in the loan and lease portfolios, DNB
maintains an allowance for credit losses. Provisions for credit losses are
charged against income to increase the allowance when necessary. Loan and lease
losses are charged directly against the allowance and recoveries on previously
charged-off loans and leases are added to the allowance. In establishing its
allowance for credit losses, management considers the size and risk exposure of
each segment of the loan and lease portfolio, past loss experience, present
indicators of risk such as delinquency rates, levels of non-accruals, the
potential for losses in future periods, and other relevant factors. Management’s
evaluation of the loan and lease portfolio generally includes reviews of problem
borrowers of $100,000 or greater. Consideration is also given to examinations
performed by regulatory agencies, primarily the Office of the Comptroller of the
Currency (“OCC”).
 
 In
establishing and reviewing the allowance for adequacy, management establishes
the allowance for credit losses in accordance with generally accepted accounting
principles in the United States and the guidance provided in the Securities and
Exchange Commission’s Staff Accounting Bulletin 102 (SAB 102).  Its
methodology for assessing the appropriateness of the allowance consists of
several key elements which include: specific allowances for identified problem
loans; formula based allowances for commercial and commercial real estate loans;
and allowances for pooled, homogenous loans.  As a result, management
has taken into consideration factors and variables which may influence the risk
of loss within the loan portfolio, including: (i) trends in delinquency and
non-accrual loans; (ii) changes in the nature and volume of the loan portfolio;
(iii) effects of any changes in lending policies; (iv) experience, ability, and
depth of management; (v) quality of loan review; (vi) national and local
economic trends and conditions; (vii) concentrations of credit; and (viii)
effect of external factors on estimated credit losses.  In addition,
DNB reviews historical loss experience for the commercial real estate,
commercial, residential real estate, home equity and consumer installment loan
pools to determine a historical loss factor. The historical loss factors are
then applied to the current portfolio balances to determine the required reserve
percentage for each loan pool based on risk rating.
 
 DNB’s
percentage of allowance for credit losses to total loans and leases was 1.32% at
June 30, 2008 compared to 1.26% at December 31, 2007.  Management
believes that the allowance for credit losses was adequate and reflects known
and inherent credit losses. During the six months ended June 30, 2008, DNB made
a $514,000 provision for credit losses as a result of a $9.5 million net
increase in loans and leases, coupled with a $5.8 million increase in
non-performing loans.
 
 The
following table summarizes the changes in the allowance for credit losses for
the periods indicated.
 
 (Dollars
      in thousands)
              
              Six
      Months Ended June 30,
                2008
              
              
              Year
      Ended
                December
      31,
                2007
              
              
              Six
      Months Ended June 30,
                2007Beginning
      balance
              
              
              3,891
              
              
              $
              4,226
              
              
              
              4,226Provisions
              
              
              514
              
              
              
              60
              
              
              
              3⁄4Charge-offs
              
              
              (230
              )
              
              
              (486
              )
              
              
              (362
              )Recoveries
              
              
              47
              
              
              
              91
              
              
              
              76Ending
      balance
              
              $
              4,222
              
              
              $
              3,891
              
              
              $
              3,940
 
 20
  NON-INTEREST
INCOME
 
 Total
non-interest income includes service charges on deposit products; fees received
in connection with the sale of non-depository products and services, including
fiduciary and investment advisory services offered through DNB Advisors;
securities brokerage products and services and insurance brokerage products and
services offered through DNB Financial Services; and other sources of income
such as increases in the cash surrender value of bank owned life insurance
("BOLI"), net gains on sales of investment securities and other real estate
owned ("OREO") properties. In addition, DNB receives fees for cash management,
merchant services, debit cards, safe deposit box rentals, lockbox services and
similar activities.
 
 Non-interest
income for the three and six-month periods ended June 30, 2008 was $1.4 million
and $2.6 million, compared to $904,000 and $1.9 million for the same periods in
2007.  The $483,000 increase during the three months ended June 30, 2008
was mainly attributable to a $481,000 increase in gains on sales of securities
offset by a $19,000 decrease in service charges on deposits. The $715,000
increase during the six months ended June 30, 2008 was mainly attributable to a
$634,000 increase in gains on sales of securities, a $122,000 increase in income
from DNB Financial Services, offset by a $47,000 decline in fees from DNB
Advisors and a $33,000 decrease in service charges on deposits.
 
 NON-INTEREST
EXPENSE
 
 Non-interest
expense includes salaries & employee benefits, furniture & equipment,
occupancy, professional & consulting fees as well as printing &
supplies, marketing and other less significant expense
items.  Non-interest expense for the three and six-month periods ended
June 30, 2008 was $4.2 million and $8.4 million compared to $4.2 million and
$8.4 million for the same periods in 2007.  The level of non-interest
expenses during both periods has remained flat as a result of management’s focus
on expense control. There were increases in occupancy costs as well as furniture
and equipment expenses as a result of a new office in Chadds Ford and branch
renovations in West Goshen and Little Washington. In addition, advertising and
marketing expenditures were higher during both periods as a result of increased
target marketing during 2008. For the three-months ended June 30, 2008 and 2007,
DNB’s non-interest expense to average assets ratio was 3.22% and 3.41%,
respectively.  For the six-months ended June 30, 2008 and 2007, DNB’s
non-interest expense to average assets ratio was 3.21% and 3.35%,
respectively.
 
 INCOME
TAXES
 
 Income
tax expense for the three and six-month periods ended June 30, 2008 was $105,000
and $205,000 compared to $74,000 and $148,000 for the same periods in 2007. The
effective tax rate for the three and six-month periods ended June 30, 2008 was
19.6% and 19.6 % respectively, compared to 16.4% and 13.9% for the same periods
in 2007.  The effective tax rates for both current periods were higher
than the same periods 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.
 
 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.
 
 21
 Non-Performing
      Assets(Dollars
      in thousands)
              
              June
      30,
                2008
              
              
              December
      31,
                2007
              
              
              June
      30,
                2007Loans
      and leases:Non-accrual
              
              $
              6,973
              
              
              $
              1,521
              
              
              $
              40490
      days past due and still accruing
              
              
              672
              
              
              
              345
              
              
              
              60Troubled
      debt restructurings
              
              
              —
              
              
              
              —
              
              
              
              —Total
      non-performing loans and leases
              
              
              7,645
              
              
              
              1,866
              
              
              
              464Other
      real estate owned
              
              
              451
              
              
              
              —
              
              
              
              —Total
      non-performing assets
              
              $
              8,096
              
              
              $
              1,866
              
              
              $
              464
 
 The
increase in non-performing assets can be attributed largely to three commercial
credits totaling $5.8 million that are secured by commercial real estate. The
first commercial credit totaling $4.2 million became impaired and was placed on
non-accrual status during the first quarter. The second commercial credit was a
land development loan for $392,000, which was placed on non-accrual status
during the first quarter and the third commercial credit was a construction loan
that became impaired during the second quarter and was also placed on
non-accrual status. The following table sets forth DNB's asset quality and
allowance coverage ratios at the dates indicated:
 
 June
      30,
                2008
              
              
              December
      31,
                2007
              
              
              June
      30,
                2006Asset
      quality ratios:Non-performing loans to total
      loans
              
              
              2.40
              %
              
              
              0.60
              %
              
              
              0.14
              %Non-performing assets to total
      assets
              
              
              1.54
              
              
              
              0.34
              
              
              
              0.09Allowance
      for credit losses to:Total loans and
      leases
              
              
              1.32
              
              
              
              1.26
              
              
              
              1.22Non-performing loans and
      leases
              
              
              55.22
              
              
              
              208.52
              
              
              
              849.32
 
 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:
 
 Six
      Months Ended
              
              
              Year
      Ended
              
              
              Six
      Months Ended(Dollars
      in thousands)
              
              June
      30,
                2008
              
              
              December
      31,
                2007
              
              
              June
      30,
                2007Interest
      income which would have beenrecorded under original
      terms
              
              $
              239
              
              
              $
              109
              
              
              $
              20Interest
      income recorded during the period
              
              
              (29
              )
              
              
              (70
              )
              
              
              (5
              )Net
      impact on interest income
              
              $
              210
              
              
              $
              39
              
              
              $
              15
 
 Impaired
loans are those for which the Company has recorded a specific reserve. The total
recorded investment amount below of $9.03 million is $2.06 million larger than
the $6.97 million of the non-accrual loan number in the Non-Performing Assets
table above. The reason for this $2.06 million difference is that certain loans
have been identified as impaired. We have performed a SFAS 114 calculation on
them and the collateral is adequate and they are currently paying and have not
been put on non-accrual.
 Information
regarding impaired loans is presented as follows:
 
 Six
      Months Ended
              
              
              Year
      Ended
              
              
              Six
      Months Ended(Dollars
      in thousands)
              
              June
      30,
                2008
              
              
              December
      31,
                2007
              
              
              June
      30,
                2007Total
      recorded investment
              
              $
              9,026
              
              
              $
              2,274
              
              
              $
              733Average
      recorded investment
              
              
              8,979
              
              
              
              1,095
              
              
              
              687Specific
      allowance allocation
              
              
              606
              
              
              
              485
              
              
              
              25Total
      cash collected
              
              
              313
              
              
              $
              344
              
              
              
              30Interest
      income recorded
              
              
              108
              
              
              
              27
              
              
              
              —
  22
  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 $66.9
million at June 30, 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 $166.5
million. Management believes that DNB has adequate resources to meet its
short-term and long-term funding requirements.
 
 At June
30, 2008, DNB had $60.6 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 June 30, 2008
totaled $64.0 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.
 
 The
Corporation and the Bank have each met the definition of “well capitalized” for
regulatory purposes on June 30, 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.
 
 23
  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 CorporationJune
      30, 2008:Total risk-based
      capital
              
              $
              45,463
              
              
              
              12.50
              %
              
              $
              29,088
              
              
              
              8.00
              %
              
              $
              36,360
              
              
              
              10.00
              %Tier 1 capital
              
              
              41,185
              
              
              
              11.33
              
              
              
              14,544
              
              
              
              4.00
              
              
              
              21,816
              
              
              
              6.00Tier 1 (leverage)
      capital
              
              
              41,185
              
              
              
              7.81
              
              
              
              21,082
              
              
              
              4.00
              
              
              
              26,353
              
              
              
              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.June
      30, 2008:Total risk-based
      capital
              
              $
              45,135
              
              
              
              12.43
              %
              
              $
              29,050
              
              
              
              8.00
              %
              
              $
              36,313
              
              
              
              10.00
              %Tier 1 capital
              
              
              40,857
              
              
              
              11.25
              
              
              
              14,525
              
              
              
              4.00
              
              
              
              21,788
              
              
              
              6.00Tier 1 (leverage)
      capital
              
              
              40,857
              
              
              
              7.76
              
              
              
              21,059
              
              
              
              4.00
              
              
              
              26,324
              
              
              
              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 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.
 
 24
 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 policy ranges require
action by management.  At June 30, 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 June
30, 2008 and December 31, 2007, was within DNB's negative 25%
guideline.
 
 (Dollars
      in thousands)
              June
      30, 2008
              
              December
      31, 2007Change
      in rates
              Flat
              
              -200bp
              
              +200bp
              
              Flat
              
              -200bp
              
              +200bpEVE
              $37,001
              
              $35,603
              
              $31,710
              
              $40,466
              
              $36,234
              
              $36,672Change
              
              
              ($1,399
              )
              $(5,291
              )
              
              
              (4,232
              )
              (3,793
              )Change
      as a % of assets
              
              
              (.27%
              )
              (1.01
              )
              
              
              (0.8%)
              
              (0.7%
              )Change
      as a % of PV equity
              
              
              (3.78%
              )
              (14.3%
              )
              
              
              (10.5%
              )
              (9.4%
              )
 
 
 ITEM4T-
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 June 30, 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 fiscal quarter
ended June 30, 2008, that has materially affected, or is reasonably likely to
materially affect, DNB’s internal control over financial reporting.
 
 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 28, 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 June
30, 2008.  The following table provides information on repurchases by
DNB of its common stock in each month of the quarter ended June 30,
2008:
  25
 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)April
      1, 2008 – April 30, 2008
              
              2,631
              
              $13.17
              
              2,631
              
              71,301May
      1, 2008 – May 31, 2008
              
              3,031
              
              13.73
              
              3,031
              
              68,270June
      1, 2008 – June 30, 2008
              
              —
              
              —
              —
              —
              
              68,270Total
              
              5,662
              
              $13.47
              
              5,662
 
  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
 
 (a)
              The
      Corporation held its Annual Meeting of Shareholders on April 30, 2008
      for the purpose of considering and acting upon a proposal to elect two
      Class A directors to serve a three year
term.
 
 (b)
              The
      directors elected and the numbers of votes cast for or withheld with
      respect to each were:
  For
              WithheldJames
      H.
      Thornton
              1,845,817
              129,373William J. Hieb
              1,851,167
              124,023
 
 
  
 (c)
              The
      following other matters were voted on at the
  meeting:
 
 (1)
              A
      motion to ratify the appointment of KPMG LLP as the independent auditors
      for the fiscal year ending December 31,
2008:
 
 For
              Against
              Abstain
              Broker
      Non-Votes1,919,342
              54,483
              1,365
              ---
  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 28-30 of this report are
incorporated by reference or filed or furnished herewith in response to this
Item.
 
 
  26
  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 CORPORATIONAugust
      14, 2008
              BY:
              /s/
      William S. LatoffWilliam
      S. Latoff, Chairman of the
                Board
      and Chief Executive OfficerAugust
      14, 2008
              BY:
              /s/
      Gerald F. SoppGerald
      F. Sopp, Chief Financial Officer and Executive Vice
    President
 
  27
  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.
  28
 (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.(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.
  29
 (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.(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.