Edgar Filing: DNB FINANCIAL CORP /PA/

dnb10q.htm

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: September 30, 2007

[ ] 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	23-2222567
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

4 Brandywine Avenue - Downingtown, PA 19335

(Address of principal executive offices and Zip Code)

(610) 269-1040

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days

Yes x

No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o

No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock ($1.00 Par Value)	2,479,445
(Class)	(Shares Outstanding as of
	August 13, 2007)

DNB FINANCIAL CORPORATION AND SUBSIDIARY

INDEX

	PART I - FINANCIAL INFORMATION	PAGE NO.

ITEM 1.	FINANCIAL STATEMENTS (Unaudited):

	CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
	September 30, 2007 and December 31, 2006	3

	CONSOLIDATED STATEMENTS OF OPERATIONS
	Three and Nine Months Ended September 30, 2007 and 2006	4

	CONSOLIDATED STATEMENTS OF CASH FLOWS
	Nine Months Ended September 30, 2007 and 2006	5

	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	6

ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	12


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	23

ITEM 4.	CONTROLS AND PROCEDURES	23

	PART II - OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	24

ITEM 1A.	RISK FACTORS	24

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	24

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	24

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	24

ITEM 5.	OTHER INFORMATION	24

ITEM 6.	EXHIBITS	24

SIGNATURES		25

EXHIBIT INDEX		26

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

DNB Financial Corporation and Subsidiary

Consolidated Statements of Financial Condition (Unaudited)

	September 30		December 31
(Dollars in thousands except share data)	2007		2006
Assets
Cash and due from banks	$ 10,626		$ 11,611
Federal funds sold	14,216		12,616
Cash and cash equivalents	24,842		24,227
AFS investment securities, at fair value (amortized cost of $130,468 and $132,805)	129,608		131,636
HTM investment securities (fair value of $14,695 and $18,393)	15,215		18,931
Other investment securities	3,024		3,608
Total investment securities	147,847		154,175
Loans and leases	320,160		329,466
Allowance for credit losses	(3,917	)	(4,226	)
Net loans and leases	316,243		325,240
Office property and equipment	9,972		7,699
Accrued interest receivable	2,604		2,420
Bank owned life insurance	7,207		7,036
Core deposit intangible	321		358
Net deferred taxes	2,710		2,499
Other assets	1,490		1,588
Total assets	$513,236		$525,242
Liabilities and Stockholders’ Equity
Liabilities
Non-interest-bearing deposits	$46,169		$ 50,852
Interest-bearing deposits:
NOW	81,624		82,579
Money market	93,780		66,352
Savings	39,835		54,956
Time	135,721		126,288
Total deposits	397,129		381,027
FHLB advances	40,450		55,450
Repurchase agreements	25,948		45,120
Junior subordinated debentures	9,279		9,279
Other borrowings	679		689
Total borrowings	76,356		110,538
Accrued interest payable	1,046		1,061
Other liabilities	7,677		1,205
Total liabilities	482,208		493,831
Stockholders’ Equity
Preferred stock, $10.00 par value;
1,000,000 shares authorized; none issued	—		—
Common stock, $1.00 par value;
10,000,000 shares authorized; 2,715,046 and 2,711,438 issued respectively	2,724		2,712
Treasury stock, at cost; 238,390 and 206,631 shares, respectively	(4,775	)	(4,158	)
Surplus	35,062		34,875
Accumulated deficit	(857	)	(688	)
Accumulated other comprehensive loss, net	(1,126	)	(1,330	)
Total stockholders’ equity	31,028		31,411
Total liabilities and stockholders’ equity	$513,236		$525,242
See accompanying notes to consolidated financial statements.

DNB Financial Corporation and Subsidiary

Consolidated Statements of Operations (Unaudited)

	Three Months Ended September 30,		Nine Months Ended September 30,
(Dollars in thousands except share data)	2007	2006	2007	2006
Interest Income:
Interest and fees on loans and leases	$ 5,714	$ 5,765	$ 17,199	$ 16,011
Interest and dividends on investment securities:
Taxable	1,520	1,161	4,152	3,544
Exempt from federal taxes	121	311	556	932
Interest on cash and cash equivalents	178	71	584	309
Total interest income	7,533	7,308	22,491	20,796
Interest Expense:
Interest on NOW, money market and savings	1,390	1,171	3,544	3,219
Interest on time deposits	1,441	983	4,362	2,491
Interest on FHLB advances	530	796	1,689	2,211
Interest on repurchase agreements	277	390	1,031	1,131
Interest on junior subordinated debentures	183	177	548	523
Interest on other borrowings	24	40	84	102
Total interest expense	3,845	3,557	11,258	9,677
Net interest income	3,688	3,751	11,233	11,119
Provision for credit losses	—	—	—	—
Net interest income after provision for credit losses	3,688	3,751	11,233	11,119
Non-interest Income:
Service charges on deposits	401	418	1,212	1,253
Wealth management fees	185	174	631	553
Increase in cash surrender value of BOLI	57	87	171	188
Gain on sale of securities	178	—	281	13
Other fees	239	192	637	578
Total non-interest income	1,060	871	2,932	2,585
Non-interest Expense:
Salaries and employee benefits	2,322	2,345	7,047	6,843
Furniture and equipment	409	341	1,171	1,010
Occupancy	396	335	1,124	927
Professional and consulting	284	447	894	1,082
Advertising and marketing	84	82	303	365
Printing and supplies	56	75	255	306
Other expenses	603	562	1,715	1,665
Total non-interest expense	4,154	4,187	12,509	12,198
Income before income taxes	594	435	1,656	1,506
Income tax expense	120	18	269	139
Net Income	$ 474	$ 417	$ 1,387	$ 1,367
Earnings per share:
Basic	$0.19	$0.17	$0.56	$0.55
Diluted	$0.19	$0.17	$0.55	$0.54
Cash dividends per share	$0.13	$0.12	$0.39	$0.37
Weighted average common shares outstanding:
Basic	2,481,689	2,504,556	2,493,910	2,497,032
Diluted	2,491,402	2,521,862	2,507,302	2,514,957
(Share data adjusted for 2006 5% stock dividend)
See accompanying notes to consolidated financial statements.

DNB Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)


	Nine Months Ended September 30,
(Dollars in thousands)		2007		2006
Cash Flows From Operating Activities:
Net income		$ 1,387		$ 1,367
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion		948		889
Unvested stock amortization		84		101
Net gain on sale of securities		(281	)	(13	)
Increase in interest receivable		(184	)	(413	)
Decrease in other assets		135		67
Increase in investment in BOLI		(171	)	(188	)
Decrease in interest payable		(15	)	(17	)
Increase in deferred tax benefit		(136	)	(56	)
Increase in other liabilities		5,709		182
Net Cash Provided By Operating Activities		7,476		1,919
Cash Flows From Investing Activities:
Activity in available-for-sale securities:
Sales		32,830		¾
Maturities, repayments and calls		30,263		9,652
Purchases		(60,547	)	(5,856	)
Activity in held-to-maturity securities:
Maturities, repayments and calls		3,675		7,512
Net decrease (increase) in other investments		584		(35	)
Net decrease (increase) in loans and leases		8,997		(46,787	)
Purchase of bank property and equipment, net		(3,108	)	(1,277	)
Net Cash Provided (Used) By Investing Activities		12,694		(36,791	)
Cash Flows From Financing Activities:
Net Increase in deposits		16,102		30,301
Increase (decrease) in FHLB advances		(15,000	)	(4,300	)
Increase (decrease) in short term repurchase agreements		(19,172	)	6,814
Decrease in lease obligations		(10	)	(9	)
Dividends paid		(973	)	(925	)
Proceeds from issuance of stock under stock option plan		117		68
(Increase) decrease in treasury stock		(619	)	137
Net Cash (Used) Provided By Financing Activities		(19,555	)	32,086
Net Change in Cash and Cash Equivalents		615		(2,786	)
Cash and Cash Equivalents at Beginning of Period		24,227		22,183
Cash and Cash Equivalents at End of Period		$24,842		$19,397
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest		$ 11,273		$ 9,694
Income taxes		411		1
Supplemental Disclosure of Non-cash Flow Information:
Change in unrealized gains (losses) on AFS securities		$ 309		$ (24	)
Change in deferred taxes due to change in unrealized
(gains) losses on AFS securities		(105	)	8

See accompanying notes to consolidated financial statements.

DNB FINANCIAL 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 nine-month period ended September 30, 2007, 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, 2006.

Stock-based compensation

Prior to January 1, 2006, SFAS Statement No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation, permitted entities to recognize as expense over the vesting period, the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 also allowed entities to continue to apply the provisions of the Accounting Principles Board Opinion No. 25 (“APB Opinion No. 25”), Accounting for Stock Issued to Employees, and related interpretations and provide pro-forma net income and pro-forma earnings per share disclosures for employee stock option grants made in 1995 and subsequent years as if the fair-value-based method defined in SFAS 123 had been applied. DNB elected to apply the provisions of APB Opinion No. 25 and provide the pro-forma disclosure provisions of SFAS 123. As such, there was no compensation expense recorded prior to 2006. Additionally, all options were granted at the then current market price.

Effective January 1, 2006, DNB adopted SFAS 123 (revised 2004), Share-Based Payment (“SFAS 123R”), which requires DNB to measure the cost of employee services received in exchange for all equity awards granted including stock options based on the fair market value of the award as of the grant date. SFAS 123R supersedes SFAS 123, Accounting for Stock-based Compensation (SFAS 123”) and APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires DNB to record compensation expense related to unvested stock awards as of January 1, 2006 by recognizing the unamortized grant date fair value of these awards over the remaining service periods of those awards. DNB had no unamortized stock option awards at January 1, 2006 as all stock options issued prior to January 1, 2006 were fully vested. Additionally, DNB did not issue any stock awards during the nine-month periods ended September 30, 2007 and 2006. As a result, there was no compensation expense related to stock options recorded during the nine-month periods ended September 30, 2007 and 2006.

NOTE 2: EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed based on the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the treasury stock method and reflects the potential dilution that could occur from the exercise of stock options and unvested stock awards. Stock options and unvested stock awards for which the exercise or the grant price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation. At September 30, 2007, there were 111,295 anti-dilutive stock options outstanding as well as 13,528 anti-dilutive stock awards. EPS, dividends per share, and weighted average shares outstanding have been adjusted to reflect the effect of the 5% stock dividend paid in December 2006. The dilutive effect of stock options and unvested shares on basic earnings per share is presented below.

Three Months Ended

Nine Months Ended

September 30, 2007

(In thousands, except per-share data)

Income

Shares

Amount

Income

Shares

Amount

Basic EPS

Income available to common stockholders

$ 474

2,482

$0.19

$ 1,387

2,494

$0.56

Effect of potential dilutive common stock – stock options and unvested shares

—

(.01

)

Diluted EPS

Income available to common stockholders

$ 474

2,491

$0.19

$ 1,387

2,507

$0.55

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Three Months Ended			Nine Months Ended
	September 30, 2006			September 30, 2006
(In thousands, except per-share data)	Income	Shares	Amount	Income	Shares	Amount
Basic EPS
Income available to common stockholders	$ 417	2,505	$0.17	$ 1,387	2,497	$0.55
Effect of dilutive potential common stock– stock options and unvested shares	—	17	—	—	18	(.01	)
Diluted EPS
Income available to common stockholders	$ 417	2,522	$0.17	$ 1,387	2,515	$0.54

NOTE 3: COMPREHENSIVE INCOME

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, net of tax, is disclosed in the following table.

	Three Months Ended		Three Months Ended
	September 30, 2007		September 30, 2006
(Dollars in thousands)	Net-of-Tax Amount		Net-of-Tax Amount
Net Income	$ 474		$ 417
Other Comprehensive Income:
Unrealized holding gains arising during the period	1,173		1,129
Reclassification for gains included in net income	(118	)	—
Total Comprehensive Income	$ 1,529		$ 1,546

	Nine Months Ended		Nine Months Ended
	September 30, 2007		September 30, 2006
(Dollars in thousands)	Net-of-Tax Amount		Net-of-Tax Amount
Net Income	$ 1,387		$ 1,367
Other Comprehensive Income:
Unrealized holding gains (losses) arising during the period	390		(7	)
Reclassification for gains included in net income	(186	)	(9	)
Total Comprehensive Income	$ 1,591		$ 1,351

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.

	September 30,		December 31,
(Dollars in thousands)	2007		2006
Commercial mortgage	$ 105,789		$ 99,333
Commercial term and lines of credit	95,129		99,732
Consumer	56,243		54,771
Residential mortgage	47,845		52,636
Commercial leases	15,154		22,994
Gross loans and leases	320,160		329,466
Allowance for credit losses	(3,917	)	(4,226	)
Net loans and leases	$ 316,243		$ 325,240

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 $5.2 million principal amount of DNB's floating rate junior subordinated debentures. The preferred securities have been redeemable since July 25, 2006 and must be redeemed upon maturity of the debentures on July 25, 2031.

DNB Capital Trust II

DNB’s second issuance of junior subordinated debentures was on March 30, 2005. This issuance of debentures are floating rate and were issued to DNB Capital Trust II, a Delaware business trust in which DNB owns all of the common equity. DNB Capital Trust II issued $4.0 million of floating rate (the rate is fixed at 6.56% for the first 5 years and will adjust at a rate of 3-month LIBOR plus 1.77% thereafter) capital preferred securities. The proceeds of these securities were used by the Trust, along with DNB's capital contribution, to purchase $4.1 million principal amount of DNB's floating rate junior subordinated debentures. The preferred securities are redeemable by DNB on or after May 23, 2010, or earlier in the event of certain adverse tax or bank regulatory developments. The preferred securities must be redeemed upon maturity of the debentures on May 23, 2035.

The majority of the proceeds of each issuance were invested in DNB’s subsidiary, DNB First, National Association, to increase the Bank's capital levels. The junior subordinated debentures issued in each case qualify as a component of capital for regulatory purposes.

NOTE 6: RECENT ACCOUNTING PRONOUNCEMENTS

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.” This Statement amends FASB Statements No. 133 and No. 140. This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” This Statement: a) permits fair value measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133; c) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and e) amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The fair value election provided for in paragraph 4(c) of this Statement may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated under paragraph 12 of Statement 133 prior to the adoption of this Statement. Earlier adoption is permitted as of the beginning of an entity's fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. Provisions of this Statement may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. SFAS 155 is effective for DNB on January 1, 2007 and did not have a material impact on DNB’s consolidated financial statements upon adoption.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets”. SFAS 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 156 permits, but does not require, an entity to choose either the amortization method or the fair value measurement method for measuring each class of separately recognized servicing assets and servicing liabilities. SFAS 156 is effective for DNB on January 1, 2007 and did not have a material impact on DNB’s consolidated financial statements.

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. The statement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The statement also establishes a framework for measuring fair value by creating a three-level fair value hierarchy that ranks the quality and reliability of information used to determine fair value, and requires new disclosures of assets and liabilities measured at fair value based on their level in the hierarchy. The Statement is effective for DNB on January 1, 2008. DNB has not yet determined if the adoption of this statement will have a material impact on its financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value and amends SFAS 115 to, among other things, require certain disclosures for amounts for which the fair value option is applied. Additionally, this Statement provides that an entity may reclassify held-to-maturity and available-for-sale securities to the trading account when the fair value option is elected for such securities, without calling into question the intent to hold other securities to maturity in the future. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS 157. DNB has not completed its assessment of SFAS 159 and the impact, if any, on the consolidated financial statements.

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 SFAS No. 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 is effective for fiscal years beginning after December 15, 2006. DNB has reserves related to certain of its tax positions, which are subject to analysis under FIN 48. DNB has adopted FIN 48 as of January 1, 2007, as required. The cumulative effect of adopting FIN 48 was recorded in retained earnings. The adoption of FIN 48 did not have a significant impact on DNB’s consolidated financial statements.

In September 2006, the Emerging Issues Task Force issued EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”. EITF 06-4 concludes that for a split-dollar life insurance arrangement within the scope of this Issue, an employer should recognize a liability for future benefits in accordance with SFAS 106 (if, in substance, a postretirement benefit plan exits) or APB Opinion No. 12 (if the arrangement is, in substance, an individual deferred compensation contract) based on the substantive agreement with the employee. The consensus is effective for fiscal years beginning after December 15, 2007. This EITF is applicable to the Replacement Plan referenced in Note 14 on page 70 of the December 31, 2006 10-K. The early adoption of EITF 06-4 resulted in a $583,000 net-of-tax charge to stockholders’ equity on January 1, 2007.

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

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 612,732 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 134,386 and 112,763 options available for grant at September 30, 2007 and December 31, 2006, respectively.

Stock option activity for the nine-month period ended September 30, 2007 is indicated below.

	Number		Weighted Average
	Outstanding		Exercise Price
Outstanding January 1, 2007	270,258		$20.09
Granted	–		–
Exercised	(9,132	)	(12.78)
Expired	(1,877	)	(12.43)
Forfeited	(19,748	)	(21.67)
Outstanding September 30, 2007	239,501		$20.30

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.

	September 30, 2007
Range of	Number	Weighted Average
Exercise Prices	Outstanding	Exercise Price	Remaining Contractual Life
$ 9.69-10.99	8,970	$9.69	2.75 years
11.00-13.99	8,965	11.72	3.75 years
14.00-19.99	118,077	18.31	6.12 years
20.00-23.99	57,735	23.24	4.16 years
24.00-25.99	45,754	25.49	7.55 years
Total	239,501	$20.30	5.71 years

Restricted Stock Awards

DNB maintains an Incentive Equity and Deferred Compensation Plan. The plan provides that up to 231,525 (as adjusted for subsequent stock dividends) shares of common stock may be granted, at the discretion of the Board, to individuals of the Corporation. DNB did not grant any shares of restricted stock during the nine-month period ended September 30, 2007. 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 two years, during which the shares may not be sold, pledged or otherwise disposed of. Prior to the Vest Date and in the event the recipient terminates association with DNB for reasons other than death, disability or change in control, the recipient forfeits all rights to the shares that would otherwise be issued under the grant.

Share awards granted by the plan were recorded at the date of award based on the market value of shares. Awards are being amortized to expense over the three-year cliff-vesting period. DNB records compensation expense equal to the value of the shares being amortized. For the three and nine-month period ended September 30, 2007, $28,000 and $85,000 were amortized to expense. At September 30, 2007, 217,997 shares were reserved for future grants under the plan.

DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Stock grant activity is indicated below. The shares have been adjusted for the 5% stock dividend in December 2006.

	Shares
Outstanding - January 1, 2007	13,528
Granted	–
Forfeited	–
Outstanding – September 30, 2007	13,528

NOTE 8: INCOME TAXES

DNB adopted FIN 48, on January 1, 2007. The adoption of FIN 48 did not impact our consolidated financial condition, results of operations or cash flows.

As of January 1, 2007, 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 2006 were open for examination as of September 30, 2007.

NOTE 9: BENEFIT PLANS

On November 24, 1999, the Bank and Henry F. Thorne, its then current Chief Executive Officer (the “Executive”), entered into a Death Benefit Agreement providing for supplemental death and retirement benefits for him (the “Supplemental Plan”). The Supplemental Plan provided that the Bank and the Executive share in the rights to the cash surrender value and death benefits of a split-dollar life insurance policy (the “Policy”) and provided for additional compensation to the Executive, equal to any income tax consequences related to the Supplemental Plan until retirement. The Policy is designed to provide the Executive, upon attaining age 65, with projected annual after-tax distributions of approximately $35,000, funded by loans against the cash surrender value of the Policy. In addition, the Policy is intended to provide the Executive with a projected death benefit of $750,000. Neither the insurance company nor the Bank guaranteed any minimum cash value under the Supplemental Plan.

On December 23, 2003, the Supplemental Plan was replaced by a Retirement and Death Benefit Agreement (the “Replacement Plan”). Pursuant to the Replacement Plan, ownership of the Policy was transferred to the Bank to comply with certain Federal income tax law

changes, and the Bank may establish a trust for the purpose of funding the benefits to be provided under the Replacement Plan, or the Bank’s obligations under the Replacement Plan and similar agreements or plans which it may enter into or establish for the benefit of the Executive, other employees of the Bank, or both.

The Replacement Plan provides that if the Executive remains employed continuously by the Bank until age 65, he shall, upon his termination of employment for any reason other than Cause, receive an annual retirement benefit of $34,915, payable monthly, from the date of his termination of employment until his death. If Executive’s employment with the Bank terminates prior to age 65 for any reason other than Cause, he will be entitled to an annual retirement benefit payable monthly commencing the month after he reaches age 65 until his death, but in this event his annual retirement benefit will be equal to that proportion of the $34,915 annual benefit his actual years of service with the Bank bears to the years of service he would have completed had he remained employed continuously by the Bank until age 65. In either case, he will also be entitled to receive monthly a tax allowance calculated, subject to certain assumptions, to substantially compensate him for his federal and state income, employment and excise tax liabilities attributable to the retirement benefit and the tax allowance. DNB adopted EITF 06-4 on January 1, 2007 and recorded a $583,000 net-of-tax charge to stockholders’ equity applicable to this Replacement Plan.

NOTE 10: STOCKHOLDERS’ EQUITY

Stockholders' equity was $31.0 million at September 30, 2007 compared to $31.4 million at December 31, 2006. The $383,000 decrease in stockholders’ equity was primarily a result of a $204,000 net-of-tax SFAS 115 adjustment due to appreciation in the AFS portfolio, the payment of $973,000 in dividends on common stock and a $583,000 net-of-tax charge on January 1, 2007 to stockholders’ equity in conjunction with DNB’s implementation of EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insure Arrangements” (See Note 6-Recent Accounting Pronouncements on Page 8). These adjustments, in addition to the $619,000 net increase in treasury stock, were partially offset by $1.4 million of year-to-date earnings.

ITEM 2 - 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. through the name “DNB Financial Services,” 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. A discussion on DNB’s Key Strategies follows below:

·	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

MATERIAL CHALLENGES, RISKS AND OPPORTUNITIES

The following is a summary of changes to material challenges, risks and opportunities DNB has faced during the nine-month period ended September 30, 2007.

Interest Rate Risk Management. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. DNB considers interest rate risk the predominant risk in terms of its potential impact on earnings. Interest rate risk can occur for any one or more of the following reasons: (a) assets and liabilities may mature or re-price at different times; (b) short-term or long-term market rates may change by different amounts; or (c) the remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change. During the quarter ended September 30, 2007, short term rates declined as the Federal Reserve reduced the Fed Funds rate by 50 basis points, while the rate on the 10 year treasury declined to 4.60%. Due to the shape of the yield curve and intense competition for loans and deposits, DNB’s net interest margin continued to experience pressure.

The principal objective of the Bank’s interest rate risk management is to evaluate the interest rate risk included in certain on and off balance sheet accounts, determine the level of risk appropriate given the Bank’s business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with approved guidelines. 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 Asset/Liability Committee (“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.

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, 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 a stable 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 September 30, 2007, DNB had $24.8 million in cash and cash equivalents to meet its funding requirements. This has increased slightly from $24.2 million at December 31, 2006, primarily due to strong deposit growth coupled with a $9.3 million decline in the loan and lease portfolio. Excess funds have been used to reduce borrowings which have declined $34.2 million year-to-date.

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 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, like 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 for individual customers and Remote Capture for commercial customers. In addition, DNB has introduced Market Managers and Personal Bankers to serve the special banking needs of its clients. In addition, DNB has hired several lenders familiar with the Delaware County marketplace to diversify its loan portfolio and grow its cash management business.

Bank Secrecy Act/OFAC/Patriot Act Implementation. Management of the Bank had previously determined that its BSA compliance program needed to be improved to a level commensurate with BSA, OFAC and Patriot Act related risks to which the Bank is exposed. An action plan was developed and implemented to strengthen the Bank’s compliance. It is management’s goal that these improvements to the BSA compliance program will address the Bank’s BSA compliance needs in order to establish the Bank as an institution that will not pose a target to those who would use the U.S. financial system to further criminal or terrorist ends. However, there is no assurance that the Bank’s improved compliance plan will eliminate all risks related to BSA, OFAC and Patriot Act because those regulatory requirements are dynamic and complex and must be continually reassessed in light of the changing environment in which they operate. During the first nine months of 2007, 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:

Capital Category	Supervisory Group
Capital Category	A	B	C
Well Capitalized	I 5-7 bps	II 10 bps	III 28 bps
Adequately Capitalized			III 28 bps
Undercapitalized	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.

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. Based on DNB’s assessment credit of $245,000, of which management expects the Bank will use $167,000 in 2007, management believes that the Bank will not be subject to net assessments in 2007. If DNB had not benefited from the assessment credit, management estimates that its deposit insurance assessment for the 9 months ended September 30, 2007 would have been $111,000.

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

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

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

The FICO assessment rate is adjusted quarterly to reflect changes in the assessment bases of the fund based on quarterly Call Report and Thrift Financial Report submissions. The FICO rate for the third quarter of 2007 is an annual rate of 1.14 basis points (1.14 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 Chester County hosts over 45 banks, thrifts and credit unions. In addition, brokerage firms, mutual fund companies and boutique investment firms are prevalent, given the county’s attractive demographics. Many of these competitors are much larger than DNB and consistently outspend the Bank in marketing to attract new customers and buy market share. DNB anticipates these pressures will continue and management will continue to work to mitigate the adverse effects on 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 accounting principals generally accepted in the United States of America. 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 for the year ended December 31, 2006, included in DNB's 10-K for the year ended December 31, 2006.

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

Management uses significant estimates to determine the allowance for credit losses. Because the allowance for credit losses is dependent, to a great extent, on conditions that may be beyond DNB’s control, management’s estimate of the amount necessary to absorb credit losses and actual credit losses could differ. DNB’s current judgment is that the valuation of the allowance for credit losses remains adequate at September 30, 2007. 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 audited consolidated financial statements for the fiscal year ended December 31, 2006.

Other-than temporary impairment of investment securities. FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities states, in part: for individual securities classified as either available-for-sale or held-to-maturity, an enterprise shall determine whether a decline in fair value below the amortized cost basis is other than temporary. For example, if it is probable that the investor will be unable to collect all amounts due according to the contractual terms of a debt security not impaired at acquisition, an other-than-temporary impairment shall be considered to have occurred. If the decline in fair value is judged to be other than temporary, the cost basis of the individual security shall be written down to fair value as a new cost basis and the amount of the write-down shall be included in earnings (that is, accounted for as a realized loss). While FASB Statement No. 115 uses a debt security as an example, similar considerations exist for investments in marketable equity securities. Accordingly, judgment is required in determining whether factors exist that indicate that an impairment loss has been incurred at the end of the reporting period. These judgments are based on subjective as well as objective factors, including knowledge and experience about past and current events and assumptions about future events. The following are examples of such factors.

•

Fair value is significantly below cost and the decline is attributable to adverse conditions specifically related to the security or to specific conditions in an industry or in a geographic area, the decline has existed for an extended period of time or Management does not possess both the intent and the ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

•

The security has been downgraded by a rating agency.

•

The financial condition of the issuer has deteriorated.

•

Dividends have been reduced or eliminated, or scheduled interest payments have not been made.

•

The entity recorded losses from the security subsequent to the end of the reporting period.

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 $513.2 million at September 30, 2007 compared to $525.2 million at December 31, 2006. The decline in total assets was primarily attributable to a decline in loans and investment securities as discussed below.

Investment Securities. Investment securities at September 30, 2007 were $147.8 million compared to $154.2 million at December 31, 2006. The decrease in investment securities was primarily due to $67.4 million in sales, principal pay-downs and maturities offset by the purchase of $60.9 million in investment securities.

Gross Loans and Leases. Loans and leases were $320.2 million at September 30, 2007 compared to $329.5 million at December 31, 2006. DNB’s loans declined $9.3 million as overall loan demand declined and intense competition for potential new loans intensified as a number of new financial institutions entered an already crowded Chester County marketplace. Total Commercial loans grew $1.9 million while residential real estate loans and commercial leases declined $4.8 million and $7.8 million respectively.

Deposits. Deposits were $397.1 million at September 30, 2007 compared to $381.0 million at December 31, 2006. Deposits increased $16.1 million or 4.2% during the nine-month period ended September 30, 2007. Time deposits increased $9.4 million or 7.5% while all other categories, in the aggregate, increased $6.7million or 2.6%. The increase in both categories of deposits is attributable to special promotions in the new Chadds Ford office, in addition to aggressive marketing and cross-selling strategies in all of our branches.

Borrowings. Borrowings were $76.4 million at September 30, 2007 compared to $110.5 million at December 31, 2006. The decrease of $34.2 million or 30.9% was due to a $15.0 million decrease in FHLB borrowings coupled with a $19.2 million decline in repurchase agreements. DNB paid down short term FHLB Borrowings by $15.0 million with cash flow from the investment portfolio and kept longer term borrowings constant during the nine-month period ended September 30, 2007. The decline in repurchase agreements was the result of a number of our larger customers selling their companies and/or moving their manufacturing operations overseas, coupled with seasonal variances.

RESULTS OF OPERATIONS

SUMMARY

Net income for the three and nine-month periods ended September 30, 2007 was $474,000 and $1.4 million compared to $417,000 and $1.4 million for the same periods in 2006. Diluted earnings per share for the three and nine-month periods ended September 30, 2007 were $0.19 and $0.55 compared to $0.17 and $0.54 for the same periods in 2006. Earnings per share in 2006 have been adjusted to reflect the effect of the 5% stock dividend paid in December 2006. The $56,000 increase in net income for the latest three-month period compared to the same period in 2006 was primarily attributable to a $189,000 increase in non-interest income and a $33,000 decrease in non-interest expense. This was offset by a $102,000 increase income tax expense and a $63,000 decline in net interest income. The changes in non-interest income and non-interest expense are discussed in detail below. The decline in net interest income during the three-month period ended September 30, 2007 was a result of growth in interest-earning assets, which was more than offset by net interest margin compression. The net interest margin compression was a result of an inverted/flat yield curve during the most recent quarter, and intense competition for loans and deposits in DNB’s marketplace. The increase in net income for the latest nine-month period compared to the same period in 2006 was primarily attributable to a $114,000 increase in net interest income, a $346,000 increase in non-interest income, offset by a $311,000 increase in non-interest expense and a $129,000 increase in income tax expense. The increase in net interest income was a result of growth of interest-earning assets and higher yields on assets, which was partially offset by higher interest expense on deposits. The increases 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 for the three and nine-month periods ended September 30, 2007 was $3.7 million and $11.2 million, compared to $3.8 million and $11.1 million for the same periods in 2006. Interest income for the three and nine-month periods ended September 30, 2007 was $7.5 million and $22.5 million compared to $7.3 million and $20.8 million for the same periods in 2006. The increase in interest income during the nine-month period was primarily attributable to an increase of interest on loans and leases, which was a result of the higher yield on the loan and lease portfolio. Lower volumes of loans outstanding during the most recent quarter caused a decline in interest on the loan and lease portfolio of $51,000 over the same period in 2006. The average balance of loans and leases was $321.8 million with an average yield of 7.05% for the current quarter, compared to $333.5 million with an average yield of 6.84% for the same quarter in 2006.

In addition, interest and dividends on investment securities increased due to an increase in taxable securities and a decrease in lower yielding tax-exempt securities during the first nine months of 2007. The yield on interest-earning assets for the third quarter in 2007 was 6.28%, compared to 6.12% for the same period in 2006. Interest expense for the three and nine-month periods ended September 30, 2007 was $3.8 million and $11.3 million compared to $3.6 million and $9.7 million for the same periods in 2006. The increase in interest expense for both periods was primarily attributable to deposit account growth as well as higher rates on interest-bearing liabilities. The costs of deposits increased to 2.87% for the third quarter in 2007, compared to 2.36% for the same period in 2006. The net interest margin for the three-month period ended September 30, 2007 was 3.10%, compared to 3.20% for the same period in 2006.

Interest on loans and leases was $5.7 million and $17.2 million for the three and nine-month periods ended September 30, 2007, compared to $5.8 million and $16.0 million for the same periods in 2006. The average balance of loans and leases was $325.1 million with an average yield of 7.06% for the nine-month period ended September 30, 2007 compared to an average balance of $317.1 million with an average yield of 6.71% for the same period in 2006. The increase in yield was primarily the result of a shift in the portfolio towards Commercial Loans.

Interest and dividends on investment securities was $1.6 million and $4.7 million for the three and nine-month periods ended September 30, 2007, compared to $1.5 million and $4.5 million for the same periods in 2006. The average balance on investment securities was $136.4 million with an average yield of 4.87% for the nine-month period ended September 30, 2007 compared to $142.0 million with an average yield of 4.65% for the same period in 2006. The decrease in the average balance was part of DNB’s strategic plan to reduce the size of its investment portfolio. The increase in yield 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 $2.8 million and $7.9 million for the three and nine-month periods ended September 30, 2007, compared to $2.2 million and $5.7 million for the same periods in 2006. The average balance of deposits was $382.1 million with an average rate of 2.77% for the nine-month period ended September 30, 2007 compared to $355.5 million with an average rate of 2.15% for the same period in 2006. The increase in the average balance was primarily the result of year-over-year increased deposit relationships through aggressive marketing efforts. The increase in rate was primarily attributable to higher rates being paid on maturing time deposits coupled with intense competition for deposits in the Chester County marketplace.

The average balance of borrowings was $85.5 million with an average rate of 5.24% for the nine-month period ended September 30, 2007 compared to $102.4 million with an average rate of 5.18% for the same period in 2006. The decrease in the average balance was attributable to declines in FHLB borrowings and repurchase agreements. The increase in rate was caused by the maturity of lower costing FHLB Advances. The composite cost of funds was 3.22% for the nine-month period ended September 30, 2007 compared to 2.83% for the same period in 2006.

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 1.22% at September 30, 2007 compared to 1.28% at December 31, 2006. Management believes that the allowance for credit losses was adequate and reflects known and inherent credit losses. Accordingly, no provision for credit losses was recorded in these periods.

The following table summarizes the changes in the allowance for credit losses for the periods indicated.

(Dollars in thousands)	Nine Months Ended September 30, 2007			Year Ended December 31, 2006			Nine Months Ended September 30, 2006
Beginning balance	$	4,226		$	4,420		$	4,420
Provisions		¾			—			—
Charge-offs		(396	)		(365	)		(196	)
Recoveries		87			171			63
Ending balance	$	3,917		$	4,226		$	4,287

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 nine-month periods ended September 30, 2007 was $1.1 million and $2.9 million, compared to $871,000 and $2.6 million for the same periods in 2006. The $189,000 increase during the three-month period was primarily attributable to a $178,000 gain on sale of investments. The $346,000 increase during the nine-month period was primarily attributable to a $281,000 gain on sales of securities during the first nine months of 2007, coupled with a $78,000 increase in Wealth Management fees, offset by a $42,000 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 nine-month periods ended September 30, 2007 was $4.2 million and $12.5 million compared to $4.2 million and $12.2 million for the same periods in 2006. The $33,000 decrease during the three-month period was mostly attributable to a $162,000 decrease in Professional & Consulting fees, coupled with a $23,000 decrease in Salaries & Employee Benefits. Occupancy, primarily land rent for Chadds Ford, increased $60,000 and Furniture & Equipment increased $68,000 due to higher levels of depreciation and expenditures for service contracts. In addition, Other non-interest expense increased $41,000 due to reduced year-over-year FAS 91 deferred cost on loans due to lower amounts of originations. Non-interest expenses increased $311,000 during the nine-months ended September 30, 2007 over the same period in 2006. This increase was primarily due to an increase of $197,000 in Occupancy and a $161,000 increase in Furniture & Equipment, primarily associated with the new Chadds Ford office. In addition, other non-interest expense increased $50,000, primarily due to reduced year-over-year FAS 91 deferred cost on loans due to lower amounts of originations year over year.

INCOME TAXES

Income tax expense for the three and nine-month periods ended September 30, 2007 was $120,000 and $269,000 compared to $18,000 and $139,000 for the same periods in 2006. The effective tax rate for the three and nine-month periods ended September 30, 2007 was 20.3% and 16.2 % respectively, compared to 4.2% and 9.3% for the same periods in 2006. Income tax expense and the effective tax rate for both current periods were higher than the same periods in 2006. This was caused by higher levels of pre-tax income in addition to DNB reducing its investments in tax-exempt loans and tax-exempt securities during the current periods. 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 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. DNB did not have any OREO at the end of all reported periods.

*Non-Performing Assets*
(Dollars in thousands)	September 30, 2007	December 31, 2006	September 30, 2006
Loans and leases:
Non-accrual	$ 883	$ 715	$ 1,465
90 days past due and still accruing	113	106	689
Troubled debt restructurings	—	—	—
Total non-performing loans and leases	996	821	2,154
Other real estate owned	—	—	—
Total non-performing assets	$ 996	$ 821	$ 2,154

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

	September 30, 2007		December 31, 2006		September 30, 2006
Asset quality ratios:
Non-performing loans to total loans	0.31	%	0.25	%	0.64	%
Non-performing assets to total assets	0.19		0.16		0.43
Allowance for credit losses to:
Total loans and leases	1.22		1.28		1.28
Non-performing loans and leases	393.32		514.70		199.07

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:

	Nine Months Ended		Year Ended		Nine Months Ended
(Dollars in thousands)	September 30, 2007		December 31, 2006		September 30, 2006
Interest income which would have been
recorded under original terms	$ 41		$ 56		$ 86
Interest income recorded during the period	(19	)	(28	)	(28	)
Net impact on interest income	$ 22		$ 28		$ 58

Impaired loans are those for which the Company has recorded a specific reserve. Information regarding impaired loans is presented as follows:

	Nine Months Ended	Year Ended	Nine Months Ended
(Dollars in thousands)	September 30, 2007	December 31, 2006	September 30, 2006
Total recorded investment	$ 733	$ 641	$ 1,353
Average recorded investment	702	962	1,070
Specific allowance allocation	50	76	497
Total cash collected	281	1,145	257
Interest income recorded	18	4	4

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 $51.3 million at September 30, 2007. 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 $146.1 million. Management believes that DNB has adequate resources to meet its short-term and long-term funding requirements.

At September 30, 2007, DNB had $62.6 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 September 30, 2007 totaled $58.2 million. Management believes that the majority of such deposits will be reinvested with DNB and that certificates that are not renewed will be funded by a reduction in Federal funds sold or by pay-downs and maturities of loans and investments.

In March of 2005, DNB completed a private offering of $4 million Trust Preferred Securities, and in November 2005, DNB completed a private offering of 265,730 shares of its common stock to 53 accredited investors at a price of $21.00 per share, realizing total offering proceeds of $5.6 million. DNB invested the majority of the proceeds of each of these securities issuances into the Bank to increase the Bank’s capital levels and legal lending limit.

Management believes that the Corporation and the Bank have each met the definition of “well capitalized” for regulatory purposes on September 30, 2007. 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 indicative of an institution’s overall financial condition.

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 Corrective
	Actual		Adequacy Purposes				Action Provisions
(Dollars in thousands)	Amount	Ratio		Amount	Ratio		Amount	Ratio
DNB Financial Corporation

September 30, 2007:
Total risk-based capital	$44,813	13.01	%	$27,554	8.00	%	$34,443	10.00	%
Tier 1 capital	40,827	11.85		13,777	4.00		20,666	6.00
Tier 1 (leverage) capital	40,827	8.17		19,983	4.00		24,979	5.00
December 31, 2006:
Total risk-based capital	$45,682	13.29	%	$27,504	8.00	%	$34,380	10.00	%
Tier 1 capital	41,384	12.04		13,752	4.00		20,628	6.00
Tier 1 (leverage) capital	41,384	8.28		19,987	4.00		24,984	5.00
DNB First, N.A.

September 30, 2007:
Total risk-based capital	$44,325	13.01	%	$27,246	8.00	%	$34,058	10.00	%
Tier 1 capital	40,341	11.84		13,623	4.00		20,435	6.00
Tier 1 (leverage) capital	40,341	8.08		19,959	4.00		24,949	5.00
December 31, 2006:
Total risk-based capital	$45,708	13.32	%	$27,451	8.00	%	$34,314	10.00	%
Tier 1 capital	41,419	12.07		13,725	4.00		20,588	6.00
Tier 1 (leverage) capital	41,419	8.30		19,966	4.00		24,958	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.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

To measure the impacts of longer-term asset and liability mismatches beyond two years, DNB utilizes Modified Duration of Equity and Economic Value of Equity ("EVE") models. The modified duration of equity measures the potential price risk of equity to changes in interest rates. A longer modified duration of equity indicates a greater degree of risk to rising interest rates. Because of balance sheet optionality, an EVE analysis is also used to dynamically model the present value of asset and liability cash flows, with rates ranging up or down 200 basis points. The economic value of equity is likely to be different if rates change. Results falling outside prescribed ranges require action by management. At September 30, 2007 and December 31, 2006, DNB's variance in the economic value of equity 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 September 30, 2007 and December 31, 2006, was within DNB's negative 25% guideline.

	September 30, 2007					December 31, 2006
Change in rates	Flat	-200bp		+200bp		Flat	-200bp		+200bp
EVE	$47,620	$40,382		$43,805		$48,771	$45,426		$43,466
Change		($7,238	)	$(3,815	)		(3,345	)	(5,305	)
Change as a % of assets		(1.4%	)	(.74%	)		(0.6%	)	(1.0%	)
Change as a % of PV equity		(15.2%	)	(8.0%	)		(6.9%	)	(10.9%	)

ITEM 4 - 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 September 30, 2007, the end of the period covered by this report, in accordance with the requirements of Exchange Act Rule 240.13a-15(b). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that DNB’s current disclosure controls and procedures are effective and timely, providing them with material information relating to DNB and its subsidiaries required to be disclosed in the report DNB files under the Exchange Act.

Management of DNB is responsible for establishing and maintaining adequate internal control over financial reporting for DNB, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. There was no change in the DNB’s “internal control over financial reporting” (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2007, that has materially affected, or is reasonably likely to materially affect, DNB’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not Applicable

ITEM 1A. 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, 2006, filed with the Commission on March 26, 2007 (File No. 000-16667).

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no Unregistered Sales of Equity Securities during the quarter ended September 30, 2007. The following table provides information on repurchases by DNB of its common stock in each month of the quarter ended September 30, 2007:

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)
July 1, 2007 – July 31, 2007	5,991	$19.85	5,991	96,232
August 1, 2007 – August 31, 2007	5,400	19.72	5,400	90,832
September 1, 2007 – September 30, 2007	900	18.11	900	89,932
Total	12,291	$19.67	12,291

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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable

ITEM 5. OTHER INFORMATION

Not Applicable

ITEM 6. EXHIBITS

Exhibits required by Item 601 of Regulation S-K.

The exhibits listed on the Index to Exhibits on pages 26-28 of this report are incorporated by reference or filed or furnished herewith in response to this Item.

Pursuant to 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 CORPORATION

November 14, 2007	BY:	/s/ William S. Latoff
		William S. Latoff, Chairman of the Board and Chief Executive Officer



November 14, 2007	BY:	/s/ Gerald F. Sopp
		Gerald F. Sopp, Chief Financial Officer and Executive Vice President

Index to Exhibits

Exhibit No. Under Item

601 of Regulation S-K Description of Exhibit and Filing Information

3	(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)	By-laws of the Registrant as amended December 19, 2001, filed on March 24, 2002 at Item 3(b) to Form 10-K for the fiscal year ended December 31, 2001 (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 Fillippo.
	(d)***	DNB Financial Corp. 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 March 14, 2006, filed May 10, 2006 as Item 10(m) to Form 10-Q for the fiscal quarter ended March 31, 2006 (No. 0-16667) and incorporated herein by reference.
	(h)**	Form of Stock Option Agreement for grants prior to 2005 under the Registrant’s Stock Option Plan, filed May 11, 2005 as Item 10(n) to Form 10-Q for the fiscal quarter ended March 31, 2005 (No. 0-16667) and incorporated herein by reference.
	(i)**	Form of Nonqualified Stock Option Agreement for April 18, 2005 and subsequent grants under the Stock Option Plan, filed May 11, 2005 as Item 10(o) to Form 10-Q for the fiscal quarter ended March 31, 2005 (No. 0-16667) and incorporated herein by reference.
	(j)	Agreement of Sale dated June 1, 2005 between DNB First, National Association (the “Bank”), as seller, and Papermill Brandywine Company, LLC, a Pennsylvania limited liability company, as buyer (“Buyer”) with respect to the sale of the Bank’s operations center and an adjunct administrative office (the “Property”) and accompanying (i) Agreement of Lease between the Buyer as landlord and the Bank as tenant, pursuant to which the Property will be leased back to the Bank, and (ii) Parking Easement Agreement to provide cross easements with respect to the Property, the Buyer’s other adjoining property and the Bank’s other adjoining property, filed August 15, 2005 as Item 10(p) to Form 10-Q for the fiscal quarter ended June 30, 2005 (No. 0-16667) and incorporated herein by reference.
	(k)	Agreement of Lease dated November 18, 2005 between Papermill Brandywine Company, LLC, a Pennsylvania limited liability company (“Papermill”), as Lessor, and DNB First, National Association as Lessee for the banks operations center and adjunct administrative office, filed March 23, 2006 as Item 10(q) to Form 10-K for the fiscal year ended December 31, 2005 (No. 0-16667) and incorporated herein by reference.
	(l)*	Amended and Restated Change of Control Agreement among DNB Financial Corporation, DNB First, N.A. and William J. Hieb, filed May 15, 2007 as Item 10(l) to Form 10-Q for the fiscal quarter ended March 31, 2007 (No. 0-16667) and incorporated herein by reference.
	(m)**	Form of Nonqualified Stock Option Agreement for grants on and after December 22, 2005 under the Stock Option Plan, filed March 23, 2006 as Item 10(s) to Form 10-K for the fiscal year ended December 31, 2005 (No. 0-16667) and incorporated herein by reference.
	(n)***	Deferred Compensation Plan For Directors of DNB Financial Corporation (adopted effective October 1, 2006), filed November 14, 2006 as Item 10(s) to Form 10-Q for the fiscal quarter ended September 30, 2006 (No. 0-16667) and incorporated herein by reference.
	(o)***	DNB Financial Corporation Deferred Compensation Plan (adopted effective October 1, 2006), filed November 14, 2006 as Item 10(t) to Form 10-Q for the fiscal quarter ended September 30, 2006 (No. 0-16667) and incorporated herein by reference.
	(p)***	Trust Agreement, effective as of October 1, 2006, between DNB Financial Corporation and DNB First, National Association (Deferred Compensation Plan), filed November 14, 2006 as Item 10(u) to Form 10-Q for the fiscal quarter ended September 30, 2006 (No. 0-16667) and incorporated herein by reference.
	(q)*	Change of Control Agreements among DNB Financial Corporation, DNB First, N.A. and each of the following executive officers, each in the form filed March 26, 2007 as item 10(q) to Form 10-K for the fiscal year-ended December 31, 2006 (No. 0-16667) and incorporated herein by reference: Albert J. Melfi, Jr. and Gerald F. Sopp.

	(r)*	DNB Financial Corporation Supplemental Executive Retirement Plan for William S. Latoff as amended and restated effective April 1, 2007,filed May 15, 2007 as Item 10(r) to Form 10-Q for the fiscal quarter ended March 31, 2007 (No. 0-16667) and incorporated herein by reference.
	(s)*	Trust Agreement effective as of December 20, 2006 between DNB Financial Corporation and DNB First, N.A. (William S. Latoff SERP), filed March 26, 2007 as item 10(s) to Form 10-K for the fiscal year-ended December 31, 2006 (No. 0-16667) and incorporated herein by reference, as modified by Agreement to Terminate Trust dated as of April 1, 2007, filed May 15, 2007 as Item 10(s) to Form 10-Q for the fiscal quarter ended March 31, 2007 (No. 0-16667) and incorporated herein by reference.
	(t)*	DNB Offer Letter to Albert J. Melfi, Jr., dated November 10, 2006, filed March 26, 2005 as item 10(t) to Form 10-K for the fiscal year-ended December 31, 2006 (No. 0-16667) and incorporated herein by reference.
	(u)*	DNB Offer Letter to Gerald F. Sopp, dated December 20, 2006, filed March 26, 2007 as item 10(u) to Form 10-K for the fiscal year-ended December 31, 2006 (No. 0-16667) and incorporated herein by reference.
11		Registrant’s Statement of Computation of Earnings Per Share. The information for this Exhibit is incorporated by reference to Note 2 to the Corporation’s Consolidated Financial Statements set forth on page 6 of this Form 10-Q.
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.