DNB FINANCIAL CORP /PA/ (Form: 10-K, Received: 03/28/2008 14:30:20)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2007
or

o 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

(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, Pennsylvania (Address of principal executive offices)		19335 (Zip Code)
Registrant's telephone number, including area code: (610) 269-1040 Securities registered pursuant to Section 12 (b) of the Act: N/A Securities registered pursuant to Section 12 (g) of the Act: Common stock, par value $1.00 per share (Title of class)

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes ý No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes ý No

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. ý Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer ý
(Do not check if a smaller
reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes ý No

As of March 24, 2008, $33.9 million of the Registrant's Common Stock, $1 par value per share, was held by non-affiliates of the Registrant.

As of March 24, 2008, the Registrant had outstanding 2,600,786 shares of Common Stock, $1 par value per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement relating to the Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

DNB FINANCIAL CORPORATION

Table of Contents

Part I
	Item 1.	Business	1
	Item 1A.	Risk Factors	10
	Item 1B.	Unresolved Staff Comments	14
	Item 2.	Properties	14
	Item 3.	Legal Proceedings	14
	Item 4.	Submission of Matters to a Vote of Security Holders	14
Part II
	Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15
	Item 6.	Selected Financial Data	17
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	45
	Item 8.	Financial Statements and Supplementary Data	46
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	78
	Item 9A.	Controls and Procedures	78
	Item 9B.	Other Information	78
Part III
	Item 10.	Directors and Executive Officers of the Registrant	78
	Item 11.	Executive Compensation	78
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	79
	Item 13.	Certain Relationships and Related Transactions	79
	Item 14.	Principal Accounting Fees and Services	79
Part IV
	Item 15.	Exhibits, Financial Statement Schedules	80
SIGNATURES			81

DNB FINANCIAL CORPORATION
FORM 10-K

Forward-Looking Statements

This report contains 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.

Part I

Item 1. Business

(a) General Description of Registrant's Business and Its Development

DNB Financial Corporation (the "Registrant" or "DNB"), a Pennsylvania business corporation, is a bank holding company registered with and supervised by the Board of Governors of the Federal Reserve System (Federal Reserve Board). The Registrant was incorporated on October 28, 1982 and commenced operations on July 1, 1983 upon consummation of the acquisition of all of the outstanding stock of Downingtown National Bank, now known as DNB First, National Association (the "Bank"). Since commencing operations, DNB's business has consisted primarily of managing and supervising the Bank, and its principal source of income has been derived from the Bank. At December 31, 2007, DNB had total consolidated assets, total liabilities and stockholders' equity of $545.8 million, $513.2 million, and $32.6 million, respectively.

The Bank was organized in 1861. The Bank is a national banking association that is a member of the Federal Reserve System, the deposits of which are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is a full service commercial bank providing a wide range of services to individuals and small to medium sized businesses in the southeastern Pennsylvania market area, including accepting time, demand, and savings deposits and making secured and unsecured commercial, real estate and consumer loans. In addition, the Bank has eleven full service and two limited service branches and a full-service wealth management group known as "DNB Advisors". The Bank's financial subsidiary, DNB Financial Services, Inc., is a Pennsylvania licensed insurance agency, which, together with the Bank, sells a broad

variety of insurance and investment products. The Bank's other subsidiary, Downco, Inc. was incorporated in December 1995 for the purpose of acquiring and holding other real estate owned acquired through foreclosure or deed in-lieu-of foreclosure and now owns certain Bank-occupied real estate.

(b) Financial Information about Segments

In accordance with U.S. generally accepted accounting principles, the Registrant and the Bank operate as one segment, and therefore do not report financial information for multiple segments of their business.

The Bank's headquarters is located at 4 Brandywine Avenue, Downingtown, Pennsylvania. As of December 31, 2007, the Bank had total assets of $545.3 million, total deposits of $413.4 million and total stockholders' equity of $41.4 million. The Bank's business is not seasonal in nature. The FDIC, to the extent provided by law, insures its deposits. At December 31, 2007, the Bank had 116 full-time employees and 22 part-time employees.

The Bank derives its income principally from interest charged on loans and, to a lesser extent, interest earned on investments and fees received in connection with the origination of loans and for other services. The Bank's principal expenses are interest expense on deposits and borrowings and operating expenses. Funds for activities are provided principally by operating revenues, deposit growth and the repayment of outstanding loans and investments.

The Bank encounters vigorous competition from a number of sources, including other commercial banks, thrift institutions, other financial institutions and financial intermediaries. In addition to commercial banks, Federal and state savings and loan associations, savings banks, credit unions and industrial savings banks actively compete in the Bank's market area to provide a wide variety of banking services. Mortgage banking firms, real estate investment trusts, finance companies, insurance companies, leasing companies and brokerage companies, financial affiliates of industrial companies and certain government agencies provide additional competition for loans and for certain financial services. The Bank also competes for interest-bearing funds with a number of other financial intermediaries, which offer a diverse range of investment alternatives, including brokerage firms and mutual fund companies.

Supervision and Regulation - Registrant

Sarbanes-Oxley Act of 2002 - On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), which imposed significant additional requirements and restrictions on publicly-held companies, such as the Registrant. These provisions include new requirements governing the composition and responsibilities of audit committees, financial disclosures and reporting and restrictions on personal loans to directors and officers. Sarbanes-Oxley, among other things, now mandates chief executive and chief financial officer certifications of periodic financial reports, additional financial disclosures concerning off-balance sheet items, and speedier transaction reporting requirements for executive officers, directors and 10% shareholders. Rules promulgated by the SEC pursuant to Sarbanes-Oxley impose substantial reporting and compliance obligations on management and boards of directors, and new obligations and restrictions have been placed on auditors and audit committees that is intended to enhance their independence from management. In addition, penalties for non-compliance with the federal securities laws are heightened. While the Registrant has and will incur significant additional expense complying with Sarbanes Oxley requirements, the Registrant does not anticipate this legislation to have any other material adverse impact on the Registrant.

Federal Banking Laws

The Registrant is subject to a number of complex Federal banking laws, most notably the provisions of the Bank Holding Company Act of 1956, as amended ("Bank Holding Company Act") and the Change in Bank Control Act of 1978 ("Change in Control Act"), and to supervision by the Federal Reserve Board.

Bank Holding Company Act - Financial Holding Companies

The Bank Holding Company Act requires a "company" (including the Registrant) to secure the prior approval of the Federal Reserve Board before it owns or controls, directly or indirectly, more than five percent (5%) of the voting shares or substantially all of the assets of any bank. It also prohibits acquisition by any "company" (including the Registrant) of more than five percent (5%) of the voting shares of, or interest in, or all or substantially all of the assets of, any bank located outside of the state in which a current bank subsidiary is located unless such acquisition is specifically authorized by laws of the state in which such bank is located. A "bank holding company" (including the Registrant) is prohibited from engaging in or acquiring direct or indirect control of more than five percent (5%) of the voting shares of any company engaged in non-banking activities unless the Federal Reserve Board, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making this determination, the Federal Reserve Board considers whether the performance of these activities by a bank holding company would offer benefits to the public that outweigh possible adverse effects. Applications under the Bank Holding Company Act and the Change in Control Act are subject to review, based upon the record of compliance of the applicant with the Community Reinvestment Act of 1977 ("CRA"). See further discussion below.

The Registrant is required to file an annual report with the Federal Reserve Board and any additional information that the Federal Reserve Board may require pursuant to the Bank Holding Company Act. The Federal Reserve Board may also make examinations of the Registrant and any or all of its subsidiaries. Further, under Section 106 of the 1970 amendments to the Bank Holding Company Act and the Federal Reserve Board's regulations, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of credit or provision of any property or services. The so-called "anti-tie-in" provisions state generally that a bank may not extend credit, lease, sell property or furnish any service to a customer on the condition that the customer provide additional credit or service to the bank, to its bank holding company or to any other subsidiary of its bank holding company or on the condition that the customer not obtain other credit or service from a competitor of the bank, its bank holding company or any subsidiary of its bank holding company.

Permitted Non-Banking Activities. The Federal Reserve Board permits bank holding companies to engage in non-banking activities so closely related to banking or managing or controlling banks as to be a proper incident thereto. A number of activities are authorized by Federal Reserve Board regulation, while other activities require prior Federal Reserve Board approval. The types of permissible activities are subject to change by the Federal Reserve Board. Recent revisions to the Bank Holding Company Act contained in the Federal Gramm-Leach Bliley Act of 1999 permit certain eligible bank holding companies to qualify as "financial holding companies" and thereupon engage in a wider variety of financial services such as securities and insurance activities.

Gramm-Leach Bliley Act of 1999 ("GLB"). This law repeals certain restrictions on bank and securities firm affiliations, and allows bank holding companies to elect to be treated as a "financial holding company" that can engage in approved "financial activities," including insurance, securities underwriting and merchant banking. Banks without holding companies can engage in many of these new financial activities through a "financial subsidiary." The law also mandates functional regulation of bank securities activities. Banks' exemption from broker-dealer regulation would be limited to, for example, trust, safekeeping, custodian, shareholder and employee benefit plans, sweep accounts, private placements (under certain conditions), self-directed IRAs, third party networking arrangements to offer brokerage

services to bank customers, and the like. It also requires banks that advise mutual funds to register as investment advisers. The legislation provides for state regulation of insurance, subject to certain specified state preemption standards. It establishes which insurance products banks and bank subsidiaries may provide as principal or underwriter, and prohibits bank underwriting of title insurance, but also preempts state laws interfering with affiliations. GLB prohibits approval of new de novo thrift charter applications by commercial entities and limits sales of existing so-called "unitary" thrifts to commercial entities. The law bars banks, savings and loans, credit unions, securities firms and insurance companies, as well as other "financial institutions," from disclosing customer account numbers or access codes to unaffiliated third parties for telemarketing or other direct marketing purposes, and enables customers of financial institutions to "opt out" of having their personal financial information shared with unaffiliated third parties, subject to exceptions related to the processing of customer transactions and joint financial services marketing arrangements with third parties, as long as the institution discloses the activity to its customers and requires the third party to keep the information confidential. It requires policies on privacy and disclosure of information to be disclosed annually, requires federal regulators to adopt comprehensive regulations for ensuring the security and confidentiality of consumers' personal information, and allows state laws to give consumers greater privacy protections. The GLB is likely to increase the competition the Bank faces, and this increased competition is likely to come from a wider variety of non-banking competitors as well as banks.

Change in Bank Control Act

Under the Change in Control Act, no person, acting directly or indirectly or through or in concert with one or more other persons, may acquire "control" of any Federally insured depository institution unless the appropriate Federal banking agency has been given 60 days prior written notice of the proposed acquisition and within that period has not issued a notice disapproving of the proposed acquisition or has issued written notice of its intent not to disapprove the action. The period for the agency's disapproval may be extended by the agency. Upon receiving such notice, the Federal agency is required to provide a copy to the appropriate state regulatory agency, if the institution of which control is to be acquired is state chartered, and the Federal agency is obligated to give due consideration to the views and recommendations of the state agency. Upon receiving a notice, the Federal agency is also required to conduct an investigation of each person involved in the proposed acquisition. Notice of such proposal is to be published and public comment solicited thereon. A proposal may be disapproved by the Federal agency if the proposal would have anticompetitive effects, if the proposal would jeopardize the financial stability of the institution to be acquired or prejudice the interests of its depositors, if the competence, experience or integrity of any acquiring person or proposed management personnel indicates that it would not be in the interest of depositors or the public to permit such person to control the institution, if any acquiring person fails to furnish the Federal agency with all information required by the agency, or if the Federal agency determines that the proposed transaction would result in an adverse effect on a deposit insurance fund. In addition, the Change in Control Act requires that, whenever any Federally insured depository institution makes a loan or loans secured, or to be secured, by 25% or more of the outstanding voting stock of a Federally insured depository institution, the president or chief executive officer of the lending bank must promptly report such fact to the appropriate Federal banking agency regulating the institution whose stock secures the loan or loans.

Pennsylvania Banking Laws

Under the Pennsylvania Banking Code of 1965, as amended ("PA Code"), the Registrant is permitted to control an unlimited number of banks, subject to prior approval of the Federal Reserve Board as more fully described above. The PA Code authorizes reciprocal interstate banking without any geographic limitation. Reciprocity between states exists when a foreign state's law authorizes Pennsylvania bank holding companies to acquire banks or bank holding companies located in that state on terms and conditions substantially no more restrictive than those applicable to such an acquisition by a bank holding

company located in that state. Interstate ownership of banks in Pennsylvania with banks in Delaware, Maryland, New Jersey, Ohio, New York and other states is currently authorized. However, state laws still restrict de novo formations of branches in other states. Pennsylvania law also provides Pennsylvania state chartered institutions elective parity with the power of national banks, federal thrifts, and state-chartered institutions in other states as authorized by the Federal Deposit Insurance Corporation ("Competing Institutions"). In some cases, this may give state chartered institutions broader powers than national banks such as the Bank, and may increase competition the Bank faces from other banking institutions.

Environmental Laws

The Registrant, the Bank and the Bank's customers are subject in the course of their activities to a growing number of Federal, state and local environmental laws and regulations. Neither the Registrant nor the Bank anticipates that compliance with environmental laws and regulations will have any material effect on capital expenditures, earnings, or on its competitive positions.

Supervision and Regulation - Bank

The operations of the Bank are subject to Federal and State statutes applicable to banks chartered under the banking laws of the United States, to members of the Federal Reserve System and to banks whose deposits are insured by the FDIC. Bank operations are also subject to regulations of the Office of the Comptroller of the Currency ("OCC"), the Federal Reserve Board and the FDIC.

The primary supervisory authority of the Bank is the OCC, who regularly examines the Bank. The OCC has the authority to prevent a national bank from engaging in an unsafe or unsound practice in conducting its business.

Federal and state banking laws and regulations govern, among other things, the scope of a bank's business, the investments a bank may make, the reserves against deposits a bank must maintain, loans a bank makes and collateral it takes, the activities of a bank with respect to mergers and consolidations and the establishment of branches. All nationally and state-chartered banks in Pennsylvania are permitted to maintain branch offices in any county of the state. National bank branches may be established only after approval by the OCC. It is the general policy of the OCC to approve applications to establish and operate domestic branches, including ATMs and other automated devices that take deposits, provided that approval would not violate applicable Federal or state laws regarding the establishment of such branches. The OCC reserves the right to deny an application or grant approval subject to conditions if (1) there are significant supervisory concerns with respect to the applicant or affiliated organizations, (2) in accordance with CRA, the applicant's record of helping meet the credit needs of its entire community, including low and moderate income neighborhoods, consistent with safe and sound operation, is less than satisfactory, or (3) any financial or other business arrangement, direct or indirect, involving the proposed branch or device and bank "insiders" (directors, officers, employees and 10% or greater shareholders) involves terms and conditions more favorable to the insiders than would be available in a comparable transaction with unrelated parties.

The Bank, as a subsidiary of a bank holding company, is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or its subsidiaries, on investments in the stock or other securities of the bank holding company or its subsidiaries and on taking such stock or securities as collateral for loans. The Federal Reserve Act and Federal Reserve Board regulations also place certain limitations and reporting requirements on extensions of credit by a bank to principal shareholders of its parent holding company, among others, and to related interests of such principal shareholders. In addition, such legislation and regulations may affect the terms upon which any person becoming a principal shareholder of a holding company may obtain credit from banks with which the subsidiary bank maintains a correspondent relationship.

Prompt Corrective Action. Federal banking law mandates certain "prompt corrective actions" which Federal banking agencies are required to take, and certain actions which they have discretion to take, based upon the capital category into which a Federally regulated depository institution falls. Regulations have been adopted by Federal bank regulatory agencies setting forth detailed procedures and criteria for implementing prompt corrective action in the case of any institution, which is not adequately capitalized. Under the rules, an institution will be deemed to be "adequately capitalized" or better if it exceeds the minimum Federal regulatory capital requirements. However, it will be deemed "undercapitalized" if it fails to meet the minimum capital requirements, "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0%, or a leverage ratio that is less than 3.0%, and "critically undercapitalized" if the institution has a ratio of tangible equity to total assets that is equal to or less than 2.0%. The rules require an undercapitalized institution to file a written capital restoration plan, along with a performance guaranty by its holding company or a third party. In addition, an undercapitalized institution becomes subject to certain automatic restrictions including a prohibition on the payment of dividends, a limitation on asset growth and expansion, and in certain cases, a limitation on the payment of bonuses or raises to senior executive officers, and a prohibition on the payment of certain "management fees" to any "controlling person". Institutions that are classified as undercapitalized are also subject to certain additional supervisory actions, including increased reporting burdens and regulatory monitoring, a limitation on the institution's ability to make acquisitions, open new branch offices, or engage in new lines of business, obligations to raise additional capital, restrictions on transactions with affiliates, and restrictions on interest rates paid by the institution on deposits. In certain cases, bank regulatory agencies may require replacement of senior executive officers or directors, or sale of the institution to a willing purchaser. If an institution is deemed to be "critically undercapitalized" and continues in that category for four quarters, the statute requires, with certain narrowly limited exceptions, that the institution be placed in receivership.

Under the Federal Deposit Insurance Act, the OCC possesses the power to prohibit institutions regulated by it, such as the Bank, from engaging in any activity that would be an unsafe and unsound banking practice and in violation of the law. Moreover, Federal law enactments have expanded the circumstances under which officers or directors of a bank may be removed by the institution's Federal supervisory agency; unvested and further regulated lending by a bank to its executive officers, directors, principal shareholders or related interests thereof; and unvested management personnel of a bank from serving as directors or in other management positions with certain depository institutions whose assets exceed a specified amount or which have an office within a specified geographic area; and unvested management personnel from borrowing from another institution that has a correspondent relationship with their bank.

Capital Rules. Pursuant to The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and the laws it amended, the Federal banking agencies have issued certain "risk-based capital" guidelines, which supplemented existing capital requirements. In addition, the OCC imposes certain "leverage" requirements on national banks such as the Bank. Banking regulators have authority to require higher minimum capital ratios for an individual bank or bank holding company in view of its circumstances.

The risk-based guidelines require all banks and bank holding companies to maintain two "risk-weighted asset" ratios. The first is a minimum ratio of total capital ("Tier 1" and "Tier 2" capital) to risk-weighted assets equal to 8.00%; the second is a minimum ratio of "Tier 1" capital to risk-weighted assets equal to 4.00%. Assets are assigned to five risk categories, with higher levels of capital being required for the categories perceived as representing greater risk. In making the calculation, certain intangible assets must be deducted from the capital base. The risk-based capital rules are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and to minimize disincentives for holding liquid assets.

The risk-based capital rules also account for interest rate risk. Institutions with interest rate risk exposure above a normal level would be required to hold extra capital in proportion to that risk. A bank's exposure to declines in the economic value of its capital due to changes in interest rates is a factor that the banking agencies will consider in evaluating a bank's capital adequacy. The rule does not codify an explicit minimum capital charge for interest rate risk. The Bank currently monitors and manages its assets and liabilities for interest rate risk, and management believes that the interest rate risk rules, which have been implemented and proposed, will not materially adversely affect the Bank's operations.

The OCC's "leverage" ratio rules require national banks which are rated the highest by the OCC in the composite areas of capital, asset quality, management, earnings and liquidity to maintain a ratio of "Tier 1" capital to "adjusted total assets" (equal to the bank's average total assets as stated in its most recent quarterly Call Report filed with the OCC, minus end-of-quarter intangible assets that are deducted from Tier 1 capital) of not less than 3.00%. For banks which are not the most highly rated, the minimum "leverage" ratio will range from 4.00% to 5.00%, or higher at the discretion of the OCC, and is required to be at a level commensurate with the nature of the riskiness of the bank's condition and activities.

For purposes of the capital requirements, "Tier 1" or "core" capital is defined to include common stockholders' equity and certain non-cumulative perpetual preferred stock and related surplus. "Tier 2" or "qualifying supplementary" capital is defined to include a bank's allowance for credit losses up to 1.25% of risk-weighted assets, plus certain types of preferred stock and related surplus, certain "hybrid capital instruments" and certain term subordinated debt instruments.

Management does not anticipate that the foregoing capital rules will have a material effect on the Registrant's business and capital plans.

Deposit Insurance Assessments. All Federally insured depository institutions pay special assessments toward the funding of interest payments on FICO bonds, which were issued in 1989 to fund the savings and loan bailout. The special assessments are calculated on a deposit-by-deposit basis. The FDIC sets the Financing Corporation assessment rate every quarter. Currently, the special assessment rate is 1.14 basis points on all assessable deposits.

The FDIC sets deposit insurance assessment rates on a semiannual basis. The FDIC has authority to impose or change the assessment rates within its discretion to maintain the deposit insurance fund's reserve ratio at the required levels. While the required ratio was designated at 1.25% prior to 2006, the Deposit Insurance Reform Act of 2005 (the "Reform Act") changes the designated ratio to a required range, giving the FDIC authority to establish the reserve level within that range. For further information, please refer to "Deposit Insurance Reform Act of 2005" on page 8.

An institution's semiannual deposit insurance assessment is computed primarily by multiplying its "average assessment base" (generally, total insurable domestic deposits) for the prior semiannual period by one-half the annual assessment rate applicable to that institution depending upon its risk category, which is based on capital and supervisory factors.

Interstate Banking. Federal law permits interstate bank mergers and acquisitions. Limited branch purchases are still subject to state laws. Pennsylvania law permits out-of-state banking institutions to establish branches in Pennsylvania with the approval of the Pennsylvania Banking Department, provided the law of the state where the banking institution is located would permit a Pennsylvania banking institution to establish and maintain a branch in that state on substantially similar terms and conditions. It also permits Pennsylvania banking institutions to maintain branches in other states. Bank management anticipates that interstate banking will continue to increase competitive pressures in the Bank's market by permitting entry of additional competitors, but management is of the opinion that this will not have a material impact upon the anticipated results of operations of the Bank.

Bank Secrecy Act and OFAC. Under the Bank Secrecy Act ("BSA"), the Bank is required to report to the Internal Revenue Service, currency transactions of more than $10,000 or multiple transactions of which

the Bank is aware in any one day that aggregate in excess of $10,000. Civil and criminal penalties are provided under the BSA for failure to file a required report, for failure to supply information required by the BSA or for filing a false or fraudulent report. The Department of the Treasury's Office of Foreign Asset Control ("OFAC") administers and enforces economic and trade sanctions against targeted foreign countries, terrorism-sponsoring jurisdictions and organizations, and international narcotics traffickers based on U.S. foreign policy and national security goals. OFAC acts under presidential wartime and national emergency powers and authority granted by specific legislation to impose controls on transactions and freeze foreign assets under U.S. jurisdiction. Acting under authority delegated from the Secretary of the Treasury, OFAC promulgates, develops, and administers the sanctions under its statutes and executive orders. OFAC requirements are separate and distinct from the BSA, but both OFAC requirements and the BSA share a common national security goal. Because institutions and regulators view compliance with OFAC sanctions as related to BSA compliance obligations, supervisory examination for OFAC compliance is typically connected to examination of an institution's BSA compliance. Examiners focus on a banking organization's compliance processes and evaluate the sufficiency of a banking organization's implementation of policies, procedures and systems to ensure compliance with OFAC regulations.

USA PATRIOT Act. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (together with its implementing regulations, the "Patriot Act"), designed to deny terrorists and others the ability to obtain access to the United States financial system, has significant implications for banks and other financial institutions. It requires the Registrant and its subsidiary to implement new policies and procedures or amend existing policies and procedures with respect to, anti-money laundering, compliance, suspicious activity and currency transaction reporting and due diligence on customers, as well as related matters. The Patriot Act permits and in some cases requires information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, and it requires federal banking agencies to evaluate the effectiveness of an institution in combating money laundering activities, both in ongoing examinations and in connection with applications for regulatory approval.

Deposit Insurance Reform Act of 2005. Pursuant to the Federal Deposit Insurance Reform Act of 2005, the FDIC merged the Bank Insurance Fund (BIF) and Savings Insurance Fund (SAIF) to form the Deposit Insurance Fund (DIF) effective March 31, 2006.

On April 1, 2006, the FDIC issued an interim rule, made final in September 2006, to implement the deposit insurance coverage changes of the Federal Deposit Insurance Reform Act of 2005. The rule: (1) increases the deposit insurance limit for certain retirement plan deposits to $250,000 effective April 1, 2006 (the basic insurance limit for other depositors such as individuals, joint accountholders, businesses, government entities and trusts remains at $100,000), (2) provides per-participant insurance coverage to employee benefit plan accounts, even if the depository institution at which the deposits are placed is not authorized to accept employee benefit plan deposits and (3) allows the FDIC to consider inflation adjustments to increase the insurance limits for all deposit accounts every five years, beginning in 2010.

On November 2, 2006, the FDIC set the designated reserve ratio for the deposit insurance fund at 1.25% of estimated insured deposits, and adopted final regulations to implement the risk-based deposit insurance assessment system mandated by the Deposit Insurance Reform Act of 2005, which is intended to more closely tie each bank's deposit insurance assessments to the risk it poses to the deposit insurance fund. Under the new risk-based assessment system, the FDIC will evaluate each institution's risk based on three primary factors — supervisory ratings for all insured institution, financial ratios for most institutions, and long-term debt issuer ratings for large institutions that have them. An institution's assessment rate will depend upon the level of risk it poses to the deposit insurance system as measured by these factors. The new rates for most institutions will vary between 5 and 7 cents for every $100 of domestic insurable deposits.

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

The law provides assessment credits to certain institutions that paid high premiums in the past. DNB used $170,000 of their $245,000 assessment credit in 2007 with the remaining $75,000 to be used in early 2008. If DNB had not benefited from the assessment credit its deposit insurance assessment expense for the 12 months ended December 31, 2007 would have been $170,000.

Other Laws and Regulations. The Bank is subject to a variety of consumer protection laws, including the Truth in Lending Act, the Truth in Savings Act adopted as part of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Electronic Funds Transfer Act, the Real Estate Settlement Procedures Act and the regulations adopted hereunder. In the aggregate, compliance with these consumer protection laws and regulations involves substantial expense and administrative time on the part of the Bank and the Registrant.

Legislation and Regulatory Changes. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities and/or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, and before various bank regulatory agencies. No prediction can be made as to the likelihood of any major changes or the impact such changes might have on the Registrant and its subsidiary Bank.

Effect of Government Monetary Policies. The earnings of the Registrant are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States Government and its agencies (particularly the Federal Reserve Board). The monetary policies of the Federal Reserve Board have had and will likely continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The Federal Reserve Board has a major effect upon the levels of bank loans, investments and deposits through its open market operations in United States Government securities and through its regulation of, among other things, the discount rate on borrowing of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.

(d) Financial Information about Geographical Areas

All of the Registrant's revenues are attributable to customers located in the United States, and primarily from customers located in Southeastern Pennsylvania. All of Registrant's assets are located in the United States and in Southeastern Pennsylvania. Registrant has no activities in foreign countries and hence no risks attendant to foreign operations.

(e) Available Information

Registrant files reports with the Securities and Exchange Commission ("SEC"). The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC Internet site's address is http://www.sec.gov . The Registrant maintains a corporate website at www.dnbfirst.com . We will provide printed copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports at no charge upon written request. Requests should be made to DNB Financial Corporation, 4 Brandywine Avenue, Downingtown, PA 19335, Attention: Gerald F. Sopp, Chief Financial Officer.

Item 1A. Risk Factors

Here are some of the risks that affect DNB's business:

Our Profitability is Affected by Interest Rate Changes. Our profitability depends largely on our net interest income. This is the difference between our interest income on loans, investments and other assets, and our interest expense on our deposits, borrowing and other liabilities. We try to identify and manage interest rate risk, which is the risk that we will not be able to keep investing our money at a higher rate than we borrow it. To manage interest rate risks, we have to keep track of the interest we earn and the interest we pay. When interest rates change, the relationship between our interest income and our interest expense changes. Interest rate changes can be complex. For example, the relationship between short-term interest rates and long-term interest rates can change. We try to limit the chances that these changes may make us less profitable. The types of assets and liabilities we have can also affect our profitability when interest rates change.

For example:

(a) Our assets and liabilities may change interest rates at different times.
(b) Our assets and liabilities may not mature at the same time.
(c) Some types of assets and liabilities may be repayable sooner or later as interest rates change.

Normally, we expect our assets and liabilities not to have the same sensitivity to changes in interest rates. This means that a change in interest rates will normally either increase or decrease our net income. As of December 31, 2007, our assets, on average were scheduled to re-price sooner than our liabilities. As a result, when short-term interest rates fall faster than long-term interest rates, the interest we receive on our assets will decrease faster than the interest we pay on our liabilities, which can reduce our net income. We cannot predict interest rate changes or the relationships between long-term interest rates and short-term interest rates.

Heavy Competition. We now face strong competition from many Pennsylvania and out-of-state banking and thrift institutions, many of which have been in business for a number of years and have established customer bases. We expect to continue to face this strong competition in the future. Competition also comes from other businesses that provide financial services, including consumer loan companies, credit unions, mortgage brokers, insurance companies, securities brokerage firms, investment advisors, money market funds and other mutual funds, and private lenders. Many of these competitors have resources greater than ours. They have the advantages of an established market presence and customer base, name recognition and a greater capital base. While our strategy is to attract customers by providing personalized services and making use of the business and personal ties of our management, there is no assurance we will keep or increase market acceptance and be able to operate profitably. Many financial service providers believe our primary market area, Chester and Delaware Counties, is an attractive market because of its strong economic growth. As a result, we are experiencing particularly intense competition in our primary marketplace. This includes attempts at new entry into the market by established competitors that had not previously done business in DNB's market area, as well as the formation of new banks with management that are experienced in DNB's market area. All of these factors may adversely impact our ability to maintain or increase our profitability.

Small Size and Geographic Restrictions. We are a community bank and do not have the capital resources or the number of people that many of our competitors have. In addition, we cannot provide as many products or services as some of our competitors, making it more difficult for us to compete. Our market territory is relatively small, which limits our ability to diversify our credit risks and increase our business.

Real Estate Loans. Like many community banks, many of our loans are commercial loans secured primarily by commercial real estate. We are more vulnerable to losses on these loans if commercial real estate generally suffers a downturn in values. As a result, if commercial real estate values decline in the future, our profitability could be adversely affected.

Dependence on Interest Income. Our profitability depends heavily on net interest income. This means we can only be profitable if we lend money at higher interest rates than we borrow it through deposits and other debt. Recently the margin between lending rates and borrowing rates has gotten smaller, causing our net interest income to decline. While we are increasing fee-based income to make us less dependent on interest rates for profitability, we have not completed the implementation of strategies to increase our fee-based income. If interest rate margins shrink further, or if we are unable to diversify our business to generate greater fee-based income, our profitability may be negatively impacted.

Dependence on Key Personnel. As a community bank, our success will depend greatly on the continued services of our executive officers. In order to be successful, we must attract, retain and motivate key employees, and if we fail to do that, our profits could be hurt. We may not be successful in continuing to recruit experienced people for positions with us, or in retaining necessary people. If we lose Mr. Latoff's or Mr. Hieb's services or those of other key personnel, our future prospects could be harmed.

Director and Officer Liability Limitations. Under our articles of incorporation and Pennsylvania law, our directors and officers may not be liable to us unless they breach a duty of loyalty, or they engage in intentional misconduct or violate the law, or if they gain an improper personal benefit. Our bylaws permit us to indemnify our officers and directors to the fullest extent permitted by law for all expenses incurred in settlement of actions against them in connection with their service to us. Because we indemnify our directors and officers, there is a risk they could make riskier decisions than they would make if we did not offer them this protection.

Risks Related to the Execution of DNB's Strategic 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. The plan calls for a reduction in the size of the investment portfolio and expansion of the loan portfolio through new originations, increased loan participations, as well as strategic loan and lease receivable purchases. We also announced plans to reduce debt borrowings with cash flows from existing loans and investments and from new core deposit growth. It is possible we will not be able to originate new loans or additional core deposits as quickly as planned, or that changes in interest rates will make this strategy less effective in achieving our profitability goals. If we do not achieve our balance sheet repositioning or revenue enhancement goals, our profitability may be adversely affected.

Concentration of Voting Control. As of March 3, 2008, William S. Latoff, our Chairman and Chief Executive Officer, owned 137,378 shares of our common stock, including 4,862 and 3,150 shares of unvested stock that will vest on May 25, 2008 and November 28, 2010, respectively. He can also obtain 55,513 additional shares of common stock by exercising options he has previously been granted by the Company. Therefore, with the shares of common stock represented by options, he potentially controls 7.27% of issued and outstanding voting stock. He has expressed his intent to purchase additional shares of our common stock in the future. We are likely to grant him additional stock options, unvested stock or other equity-based compensation that would increase his voting percentage further. As of February 29, 2008 our directors and officers as a group own a total of 270,866 shares of our common stock, including 24,414 shares of unvested stock that will vest in the future. They can also acquire 163,998 additional shares of common stock by exercising options they have been granted. With the shares of common stock represented by options granted to them, our directors and officers as a group potentially control 15.75% of our issued and outstanding voting stock. Many of our directors and officers have indicated their intent to purchase additional shares of common stock in the future. Further, it is likely they will be granted additional stock options, unvested stock or other equity-based compensation that would further increase

the total voting percentage of our directors and officers. We believe ownership of stock causes our directors and officers to have the same interests as our shareholders, but it also gives them the ability to vote as shareholders for matters that are in their personal interest.

Possible Future Capital Needs. There is no assurance we will be able to generate sufficient capital through retained earnings to achieve our operating and growth goals. We may require additional capital in the future to support growth and expansion, to increase our legal lending limit, and to accept increased deposits. If we are not able to raise sufficient capital at an acceptable cost, we may not reach our profitability goals and the value of a shareholder's investment may be adversely affected.

Possible Dilution from Future Equity or Debt Offerings. We may make additional offerings of equity or debt privately or publicly without further approval by holders of our common stock. These offerings may include senior debt, subordinated debt, additional trust preferred securities or common or preferred stock, any of which we can issue without shareholder approval. Additional debt or equity could be issued at prices that are greater or lower than the market price of our shares. The offerings could dilute the book value, voting control or market value of shares you purchase under the Plan.

If the Economy Gets Worse in Our Market, our Profits Could Be Hurt. Recent news reports indicate economists believe the U.S. economy is in a recession. Our profits can be hurt if the economy does not do well in areas where we do business, because we may not be able to find as many creditworthy borrowers, or borrowers may decide to borrow less, or our losses on defaulted loans can increase if borrowers have financial problems.

If our Allowance for Credit Losses is Not Enough to Cover Future Credit Losses, or if We Do Not Manage our Credit Risks, our Earnings Could Decrease. We make assumptions and judgments about the collectibility of our loans, including the creditworthiness of our borrowers and the value of any collateral securing our loans. To determine our allowance for credit losses, we review our loans and our experience with loan losses and late loan payments, and we evaluate economic conditions. If we make the wrong assumptions, our allowance for credit losses may not be large enough to cover future losses on our loans. We also might make other mistakes in managing our credit risks. For example, we might not identify credit risks in a loan or in our portfolio accurately. We might make mistakes in managing our loans or in trying to recover losses. These mistakes might reduce our income, or require us to apply more of our income to add to the allowance for credit losses, or both. Either of these results would hurt our profits. Our bank regulators also have to review our allowance for credit losses. If our regulators decide we should increase it, we have to apply more of our income to do so, which might reduce our profits.

We Have a Concentration of Exposure to Some Borrowers, Which Adds to our Risks. The total amount of loans we make to a group of related borrowers is called our exposure to a borrowing relationship. As of December 31, 2007, the largest exposure we had to a group of related borrowers was $5.1 million. This equaled 11.4% of the total amount of our regulatory capital. For these purposes, our regulatory capital includes our stated capital, our capital surplus, and certain portions of our allowance for credit losses, with further adjustments, as required by our banking regulators. The standard lending limit for national banks is equal to 15% of this regulatory capital. As of December 31, 2007, our total exposure to our 10 largest borrowing relationships was approximately $45.2 million. This was approximately 100.8% of our regulatory capital for these purposes. Because a default on a loan to one borrower in a group of related borrowers can often result in defaults on the other loans to related borrowers, and because larger loan amounts produce more losses to a bank when they go into a default, if any of these loans goes into default and we cannot recover all we have lent, there is a greater risk that a default on these loans will produce a greater loss, and consequently a greater reduction in our profitability. If the total exposure to a few borrowing relationships gets too big in relation to a bank's capital, it increases the risk that loan defaults on those borrowing relationships will reduce the bank's capital. Without enough capital, a bank cannot operate profitably and may be subject to regulatory enforcement action.

Unexpected Events Affecting our Marketing Partners Could Hurt Our Revenues. Over recent years, we have sold more products and services jointly with other organizations, and we have relied more on other organizations to provide services to us to support our activities. We believe this trend will continue and that we will be more dependent in the future on other organizations in order to run our business efficiently and profitably. If an unexpected loss or problem affects one of these organizations, it could cost us money or hurt our ability to be profitable. While we try to plan for these risks, we may not predict some of these types of events.

Our Expansion Plans May Not be Successful. We have been adding branches and offices, and we may add more in the future. We do this so that we can provide our products and services to more customers, which we believe will make us more profitable. New offices cost us more money, but we expect them to become profitable after a time. If new offices do not become as profitable as we hope or do not become profitable as quickly as we expect, our profits may be hurt.

Unexpected Disasters May Hurt Our Profitability and Your Investment. Terrorist acts, conflicts, wars and natural disaster may seriously harm our business and revenue, costs and expenses and financial condition and stock price. While we try to make contingency plans to help continue our business if a disaster occurs, we might not anticipate every type of disaster, and our plans might fail. In addition, some disasters might be so overwhelming that we would not be able to recover from them. These situations could hurt our profitability and in the worst case could destroy our business and wipe out your investment.

Here are some risks that do not affect our business but could affect the value of an investment in DNB Common Stock:

On a Liquidation or in Certain Other Cases, Our Debt Holders May Hold Rights Superior to Shareholders. We have issued trust preferred securities that constitute indebtedness. These securities contain covenants requiring us to repay the debt with interest. If we fail to do so, the holders of that debt will have rights to seek repayment, and their claims on our assets will have priority over your claim as a shareholder.

Our Governing Documents May Reduce the Influence of an Individual Shareholder. Our articles of incorporation and bylaws give our directors substantial control over who sits on our board of directors and what proposals are presented to our shareholder to consider. For example, the board is divided into three staggered classes of directors. Only one class gets re-elected each year. As a result, it may take at least two years for a majority of directors to change. Second, under our articles of incorporation, a shareholder may not cumulate votes for the election of directors. As a result, the same majority of shareholders may control the election of each director position. Third, our bylaws impose time limits and other requirements on a shareholder who wants to nominate a director or make a proposal for new business at a shareholder meeting. As a result, the nomination or proposal may be delayed until the shareholder meets these requirements. These provisions may also give our management more time to evaluate and respond to a shareholder nomination or proposal and, if management believes the nomination or proposal is not in the best interests of shareholders, to advocate that it not be adopted.

Our Governing Documents May Make it More Difficult for Another Company to Buy DNB. Our articles of incorporation and bylaws contain provisions that may make it harder for another company to acquire control of DNB. For example, a change in control of DNB cannot occur unless it has been approved by shareholders owning at least 75% of the shares of DNB common stock or by two-thirds of DNB's directors. In addition, the board of directors may oppose another company's offer to buy DNB from its shareholders and in doing so may consider many factors not directly involving the current value of DNB stock. We believe these provisions help DNB become more profitable because they let our management concentrate on developing the profitability of DNB's business for the benefit of our shareholders. As a result of these provisions, if another company tries to offer shareholders a higher price than shareholders

can obtain by selling them in the open market, our shareholders may not be able to sell their shares to the other company without the approval of our board of directors.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

The main office of the Bank is located at 4 Brandywine Avenue, Downingtown, Pennsylvania 19335. The Registrant's registered office is also at this location. The Registrant pays no rent or other form of consideration for the use of the Bank's main office as its principal executive office. The Bank leases its operations center located at 104-106 Brandywine Avenue, Downingtown. With the exception of the Chadds Ford office, West Goshen office, Exton office, West Chester office and limited service offices in Newtown Square and at Tel Hai Retirement Community, all of which are leased, the Bank owns all of its existing branches as described below which had a net book value of $7.1 million including leasehold improvements at December 31, 2007. The Bank's trust department and wealth management unit, operating under the name, "DNB Advisors," have offices in the Bank's Exton Office.

The bank has thirteen offices located in Chester and Delaware Counties, Pennsylvania. In addition to the Main Office discussed above, they are:

Office	Office Location	Owned/Leased
Caln	1835 East Lincoln Highway, Coatesville	Owned
Chadds Ford	300 Oakland Road, West Chester	Leased
East End	701 East Lancaster Avenue, Downingtown	Owned
Exton	410 Exton Square Parkway, Exton	Leased
Kennett Square	215 E. Cypress St., Kennett Square	Owned
Lionville	Intersection of Route 100 and Welsh Pool Road, Exton	Owned
Little Washington	Route 322 and Culbertson Run Road, Downingtown	Owned
Ludwig's Corner	Intersection of Routes 100 and 401, Chester Springs	Owned
Tel Hai	Tel Hai Retirement Community, Honey Brook (Limited Service)	Leased
West Goshen	1115 West Chester Pike, West Chester	Leased
West Chester	2 North Church Street, West Chester	Leased
Newtown Square	3409 West Chester Pike, Suite 102, Newtown Square (Limited Service)	Leased

On October 17, 2007 the Bank signed an agreement to lease office space in Media, Delaware County, Pennsylvania, for the purpose of relocating its limited service Newtown Square office. The Bank began to operate its new limited service office in Media in February, 2008.

Item 3. Legal Proceedings

DNB is a party to a number of lawsuits arising in the ordinary course of business. While any litigation causes an element of uncertainty, management is of the opinion that the liability, if any, resulting from the actions, will not have a material effect on the accompanying consolidated financial statements.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Part II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) Market Price of and Dividends on Registrant's Common Equity

DNB Financial Corporation's common stock is listed under the symbol "DNBF" on the Over-The-Counter Electronic Bulletin Board, an automated quotation service, made available through and governed by the NASDAQ system. Current price information is available from account executives at most brokerage firms as well as the firms listed at the back of this report who are market makers of DNB's common stock. There were approximately 1,250 stockholders who owned 2.6 million shares of common stock outstanding at February 29, 2008.

The following table sets forth the quarterly high and low prices for a share of DNB's common stock during the periods indicated. Prices for the sale of stock are based upon transactions reported by the brokerage firms of Boenning & Scattergood, Inc. and Ferris, Baker Watts, Inc. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The quoted high and low bids prices are limited only to those transactions known by management to have occurred and there may, in fact, have been additional transactions of which management is unaware. Prices have been adjusted to reflect stock dividends.

	2007				2006
	High		Low		High		Low

First quarter	$	19.52	$	18.19	$	20.41	$	17.60
Second quarter		19.52		18.70		19.59		19.05
Third quarter		19.05		16.19		19.72		18.91
Fourth quarter		18.57		14.50		19.71		18.86

The information required with respect to the frequency and amount of the Registrant's cash dividends declared on each class of its common equity for the two most recent fiscal years is set forth in the section of this report titled, "Item 6 - Selected Financial Data" on page 17.

The information required with respect to securities authorized for issuance under the Registrant's equity compensation plans is set forth in "Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" on page 79.

(b) Recent Sales of Unregistered Securities

Not applicable

The following table provides information on repurchases by or on behalf of DNB or any "affiliated purchaser" (as defined in Regulation 10b-18(a)(3)) of its common stock in each month of the quarter ended December 31, 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)

October 1, 2007 – October 31, 2007	600	$18.87	600	89,332
November 1, 2007 – November 30, 2007	200	19.05	200	89,132
December 1, 2007 – December 31, 2007	2,900	16.86	2,900	86,232

Total	3,700	$17.30	3,700

(a): 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.

(d) Corporation Performance Graph

The following graph presents the 5 year cumulative total return on DNB Financial Corporation's common stock, compared to the S&P 500 Index and S&P Financial Index for the 5 year period ended December 31, 2007. The comparison assumes that $100 was invested in the Corporation's common stock and each of the foregoing indices and that all dividends have been reinvested.

CORPORATION PERFORMANCE
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG DNB FINANCIAL CORP., the S&P INDEX & the S&P FINANCIAL INDEX

Item 6. Selected Financial Data

The selected financial data set forth below is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements and Notes thereto, contained elsewhere herein.

	At or For the Year Ended December 31 (Dollars in thousands, except share data)
	2007			2006			2005			2004			2003

RESULTS OF OPERATIONS
Interest income	$	30,237		$	28,249		$	23,427		$	20,233		$	18,894
Interest expense		15,417			13,368			9,313			6,833			7,421

Net interest income		14,820			14,881			14,114			13,400			11,473
Provision for credit losses		60			—			—			—			—
Other non-interest income		4,003			3,414			2,356			2,940			2,540
Other-than-temporary impairment charge		—			—			—			(2,349	)		—

Total non-interest income		3,943			3,414			2,356			591			2,540
Non-interest expense		16,589			16,507			14,411			13,189			12,622

Income before income taxes		2,174			1,788			2,059			802			1,391

Income tax expense (benefit)		372			41			(89	)		504			(10	)

Net income	$	1,802		$	1,747		$	2,148		$	298		$	1,401

PER SHARE DATA*
Basic earnings	$	0.69		$	0.67		$	0.92		$	0.12		$	0.61
Diluted earnings		0.69			0.66			0.91			0.12			0.59
Cash dividends		0.50			0.47			0.45			0.43			0.41
Book value		12.55			11.94			11.83			10.34			10.98
Weighted average
Common shares outstanding - basic		2,614,417			2,625,182			2,332,552			2,292,473			2,309,730
FINANCIAL CONDITION
Total assets	$	545,840		$	525,242		$	473,046		$	441,059		$	409,013
Loans and leases		309,342			329,466			288,130			232,577			203,553
Allowance for credit losses		3,891			4,226			4,420			4,436			4,559
Deposits		412,920			381,027			339,627			323,144			292,436
Borrowings		89,877			110,538			99,880			90,643			88,720
Stockholders' equity		32,635			31,411			30,186			24,738			25,372
SELECTED RATIOS
Return on average stockholders' equity		5.96	%		5.73	%		8.31	%		1.16	%		5.47	%
Return on average assets		0.36			0.35			0.48			0.07			0.35
Average equity to average assets		6.02			6.18			5.77			6.05			6.41
Loans to deposits		74.92			86.47			84.84			71.97			69.61
Dividend payout ratio		72.17			71.37			49.39			334.34			68.83

*: Per share data and shares outstanding have been adjusted for the 5% stock dividends in December of 2007, 2006, 2005, 2004 and 2003.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

I. Introductory Overview

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

DNB earns revenues and generates cash flows by lending funds to commercial and consumer customers in its marketplace. DNB generates its largest source of interest income through its lending function. A secondary source of interest income is 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 culture. To that end, DNB continues to make appropriate investments in all areas of our business, including people, technology, facilities and marketing.

Highlights of DNB's results for the year-end December 31, 2007 include:

•: Opened our 13 ^th office in Chadds Ford and renovated our West Goshen office
•: Control of non-interest expenses — increase over 2006 of less than 1%
•: Steady growth in deposits — up 8.4%

Earnings. For the year ended December 31, 2007, DNB reported net income of $1.8 million, an increase of $55,000 from the $1.7 million reported for the year ended December 31, 2006, or $0.69 per share versus $0.67 per share, respectively, on a fully diluted basis. DNB's earnings were impacted by general economic conditions challenging all commercial banking institutions — the flat yield curve and increased pricing competition on loans and deposits.

The following table sets forth selected quarterly financial data and earnings per share for the periods indicated. Per share data have been adjusted for the five percent (5%) stock dividends paid in 2007 and 2006.

*Quarterly Financial Data* (Dollars in thousands, except per share data)	2007				2006
	Fourth Quarter	Third Quarter	Second Quarter	First Quarter	Fourth Quarter		Third Quarter	Second Quarter	First Quarter

Interest income	$7,745	$7,533	$7,487	$7,472	$7,452		$7,308	$7,018	$6,471
Interest expense	4,158	3,845	3,714	3,700	3,690		3,557	3,222	2,899

Net interest income	3,587	3,688	3,773	3,772	3,762		3,751	3,796	3,572
Provision for credit losses	60	—	—	—	—		—	—	—

Net interest income before credit losses	3,527	3,688	3,773	3,772	3,762		3,751	3,796	3,572

Non-interest income	1,071	1,060	904	968	829		871	899	815
Non-interest expense	4,079	4,154	4,225	4,131	4,309		4,187	4,144	3,867

Income before income taxes	519	594	452	609	282		435	551	520
Income tax expense (benefit)	104	120	74	74	(98	)	18	65	56

Net income	415	474	378	535	380		417	486	464

Basic earnings per share	$ 0.16	$ 0.18	$ 0.14	$ 0.20	$ 0.14		$ 0.16	$ 0.19	$ 0.18

Diluted earnings per share	0.16	0.18	0.14	0.20	0.14		0.16	0.18	0.18

Cash dividends per share	$0.124	$0.124	$0.124	$0.124	$0.118		$0.118	$0.118	$0.118

Asset Quality. Total non-performing loans were $1.9 million at December 31, 2007 compared to $821,000 at December 31, 2006. Non-performing loans to total loans were .60% at December 31, 2007 compared to .25% at December 31, 2006. The allowance for credit losses was $3.9 million at December 31, 2007, compared to $4.2 million at December 31, 2006. The allowance to total loans was 1.26% at December 31, 2007 compared to 1.28% at December 31, 2006. DNB's delinquency ratio (total delinquent loans and leases to total loans and leases) was 1.39% at December 31, 2007, up from 1.03% at December 31, 2006. Delinquencies increased during 2007 in the residential and consumer loan portfolios, primarily home equity loans. During the first quarter of 2008, DNB had one commercial borrower with an outstanding loan balance of $4.2 million, which became impaired because the borrower ceased making payments. The loan is collateralized by 2 properties which are currently under agreements of sale to unaffiliated third parties. The loan is well secured and in the process of collection. Management expects to fully recover the principal and uncollected interest once the properties have been sold. As the U.S. economy enters a period of recession, it is possible that delinquencies may rise as the value of homes decline and DNB's borrowers experience financial difficulty due to corporate downsizing, reduced sales, or other negative events which may impact their ability to meet their contractual loan payments.

II. Overview of Financial Condition — Major Changes and Trends

At December 31, 2007, DNB had consolidated assets of $545.8 million and a Tier I/Leverage Capital Ratio of 7.77%. Loans and leases comprise 66.0% of earning assets, while investments and federal funds sold constitute the remainder. During 2007, assets increased $20.6 million to $545.8 million at December 31, 2007, compared to $525.2 million at December 31, 2006. Investment securities increased $16.7 million to $170.9 million, while the loan and lease portfolio declined $20.1 million, or 6.11%, to $309.3 million. Deposits increased $31.9 million to $412.9 million at December 31, 2007. DNB's liabilities are comprised of a high level of core deposits with a low cost of funds in addition to a moderate level of borrowings with costs that are more volatile than core deposits. During the last few years, a flat yield curve, strategic investment in revenue producing personnel, as well as significant margin compression contributed to lower levels of earnings.

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 endeavor 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

Strategic Plan Update. During 2007, DNB focused on expense control and initiated a formal training program emphasizing product knowledge and skills necessary to improve customer satisfaction. In conjunction with its desire to penetrate new markets and maximize existing locations, management opened its new Chadds Ford Office in June 2007 and renovated its West Goshen Office in July 2007. Both offices have been successful at attracting new customers and increasing relationships with existing customers. As a result of these and other efforts during 2007, DNB increased deposits by $31.9 million or 8.4% and was able to reduce FHLB Advances by $5.5 million.

Management's strategies are designed to direct DNB's tactical investment decisions and support financial objectives. DNB's most significant revenue source continues to be net interest income, defined as total interest income less interest expense, which in 2007 accounted for approximately 78.7% of total revenue. To produce net interest income and consistent earnings growth over the long-term, DNB must generate loan and deposit growth at acceptable economic spreads within its market area. To generate and grow loans and deposits, DNB must focus on a number of areas including, but not limited to, the economy, branch expansion, sales practices, customer satisfaction and retention, competition, customer behavior, technology, product innovation and credit performance of its customers.

Management has made a concerted effort to improve the measurement and tracking of business lines and overall corporate performance levels. Improved information systems have increased DNB's ability to track key indicators and enhance corporate performance levels. Better measurement against goals and objectives and increased accountability will be integral in attaining desired loan, deposit and fee income production.

III. DNB's Principal Products and Services

Loans and Lending Services. DNB's primary source of earnings and cash flows is derived from its lending function. More than sixty-seven percent of DNB's portfolio relates to commercial loans and lease products. DNB focuses on providing these products to small to mid-size businesses throughout Chester and Delaware Counties. In keeping with DNB's goal to match customer business initiatives with products designed to meet their needs, DNB offers a wide variety of fixed and variable rate loans that are priced competitively. DNB serves this market by providing funds for the purchase of business property or ventures, working capital lines, lease financing for equipment and for a variety of other purposes. The

commercial loan and lease portfolios amounted to $206.3 million or 66.7% of total loans as of December 31, 2007.

As a community bank, DNB also serves consumers by providing home equity and home mortgages, as well as term loans for the purchase of consumer goods. During the current interest rate environment, there has been a high demand for consumer home equity loan products. DNB has successfully met this demand with a variety of fixed and variable rate home equity loans and lines, secured by first or second liens on the borrowers' primary residence. At December 31, 2007, consumer loans totaled $56.6 million, up 3.2% from 2006.

In addition to providing funds to customers, DNB also provides a variety of services to its commercial customers. These services, such as cash management, remote capture, commercial sweep accounts, internet banking, letters of credit and other lending services, are designed to meet our customer needs and help them become successful. DNB provides these services to assist its customers in obtaining financing, securing business opportunities, providing access to new resources and managing cash flows.

Deposit Products and Services. DNB's primary source of funds is derived from customer deposits, which are typically generated by DNB's thirteen branch offices. DNB's deposit base, while highly concentrated in central Chester County, extends to southern Chester County and into parts of Delaware and Lancaster Counties. In addition, a growing amount of new deposits are being generated through expanded government service offerings and as a part of comprehensive loan or wealth management relationships.

The majority of DNB's deposit mix consists of low costing core deposits, (demand, NOW and savings accounts). The remaining deposits are comprised of rate-sensitive money market and time products. DNB offers tiered savings and money market accounts, designed to attract high dollar, less volatile funds. Certificates of deposit and IRAs are traditionally offered with interest rates commensurate with their terms.

Non-Deposit Products and Services. DNB offers non-deposit products and services through its subsidiaries under the names "DNB Financial Services" ("DNBFS") and "DNB Advisors." Revenues under these entities were $859,000, $707,000 and $712,000 or 4.58%, 3.90% and 4.35% of total revenues for 2007, 2006 and 2005, respectively.

DNB Financial Services. Through a partnership with UVEST Financial Services, DNBFS offers a complete line of investment and insurance products.

•	Fixed & Variable Annuities	•	Defined Benefit Plans
•	401(k) Rollovers	•	Stocks
•	Self-Directed IRAs	•	Bonds
•	Mutual Funds	•	Full Services Brokerage
•	Long Term Care Insurance	•	529 College Savings Plans
•	Life Insurance	•	Estate Accounts
•	Disability Insurance	•	Trust Services
•	Self Employed Pension (SEP)

DNB Advisors. DNB Advisors offers a full line of products and services, which includes the following:

•	Investment Management	•	Investment Advisory
•	Estate Settlement	•	Trust Services
•	Custody Services	•	Retirement Planning
•	Safekeeping

IV. Material Challenges, Risks and Opportunities

A. 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 a 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.

The principal objective of DNB'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 DNB's business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with approved guidelines. Through such management, DNB seeks to reduce the vulnerability of its operations to changes in interest rates. DNB's Asset Liability Committee (the "ALCO") is responsible for reviewing DNB'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 DNB'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 DNB's earnings. (See additional discussion in Item 7a. Quantitative and Qualitative Disclosures About Market Risk on page 45 of this Form 10-K.)

1. Net Interest Margin

DNB's net interest margin is the ratio of net interest income to average interest-earning assets. Unlike the interest rate spread, which measures the difference between the rates on earning assets and interest paying liabilities, the net interest margin measures that spread plus the effect of net free funding sources. This is a more meaningful measure of profitability because a bank can have a narrow spread but a high level of equity and non-interest-bearing deposits, resulting in a good net interest margin. One of the most critical challenges DNB faced over the last several years was the impact of historically low interest rates and a narrower spread between short-term rates and long-term rates as noted in the tables below.

	December 31

	2007	2006	2005	2004	2003	2002

Prime	7.25%	8.25%	7.25%	5.25%	4.00%	4.25%
Federal Funds Sold ("FFS")	4.25%	5.25%	4.25%	2.25%	1.00%	1.25%
6 month Treasury	3.51%	5.08%	4.25%	2.56%	1.00%	1.21%

	Historical Yield Spread December 31

	2007	2006	2005	2004	2003	2002

FFS to 5 Year U.S. Treasury	-0.62%	-0.56%	0.10%	1.38%	2.25%	1.53%
FFS to 10 Year U.S. Treasury	-0.04%	-0.55%	0.14%	1.99%	3.27%	2.58%

In general, financial institutions price their fixed rate loans off of 5 and 10 year treasuries and price their deposits off of shorter indices, like the federal funds rate. As you can see in the table above, the spread between the Federal Funds Sold rate and the 5 and 10 year treasuries has gone from 2.25% and 3.27% at the end of 2003 to a negative .62% and negative .04%, respectively at the end of 2007. As a result of the compression between long and short term rates, many banks, including DNB, have seen their net interest margin decline during the last 4 years.

The table below provides, for the periods indicated, information regarding: (i) DNB's average balance sheet; (ii) the total dollar amounts of interest income from interest-earning assets and the resulting average yields (tax-exempt yields and yields on agency preferred stock that have a 70% dividend received deduction ("DRD") have been adjusted to a tax equivalent basis using a 34% tax rate); (iii) the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs; (iv) net interest income; (v) net interest rate spread; and (vi) net interest margin. Average balances were calculated based on daily balances. Non-accrual loan balances are included in total loans. Loan fees and costs are included in interest on total loans.

Average Balances, Rates, and Interest Income and Expense
(Dollars in thousands)

		Year Ended December 31
		2007						2006						2005
		Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate

ASSETS
Interest-earning assets:
Investment securities:
	Taxable	$	127,416	$	6,136	4.82	%	$	109,027	$	4,699	4.31	%	$	128,238	$	5,063	3.95	%
	Tax-exempt		15,014		906	6.04			31,989		1,924	6.01			28,380		1,664	5.86
	Tax-preferred DRD		—		—	—			—		—	—			2,199		77	3.50

Total securities			142,430		7,042	4.94			141,016		6,623	4.70			158,817		6,804	4.28
Cash and cash equivalents			23,566		849	3.60			13,853		347	2.51			13,085		218	1.66
Total loans and leases			322,381		22,838	7.08			321,289		22,110	6.88			259,077		17,056	6.58

Total interest-earning assets			488,377		30,729	6.29			476,158		29,080	6.11			430,979		24,078	5.59
Non-interest-earning assets			19,447						17,297						16,965

Total assets		$	507,824					$	493,455					$	447,944


LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
	Savings deposits	$	210,572	$	4,841	2.30	%	$	211,647	$	4,257	2.01	%	$	193,205	$	2,438	1.26	%
	Time deposits		131,133		6,172	4.71			96,964		3,870	3.99			74,549		2,096	2.81

Total interest-bearing deposits			341,705		11,013	3.22			308,611		8,127	2.63			267,754		4,534	1.69
Federal funds purchased			263		15	5.52			799		43	5.38			624		21	3.44
Repurchase agreements			33,871		1,263	3.73			38,920		1,535	3.94			30,549		821	2.69
FHLB advances			39,724		2,303	5.80			50,843		2,852	5.61			59,506		3,278	5.51
Other borrowings			9,961		824	8.27			9,974		811	8.13			8,990		659	7.32

Total interest-bearing liabilities			425,524		15,417	3.62			409,147		13,368	3.27			367,423		9,313	2.53
Demand deposits			47,675						50,595						52,863
Other liabilities			3,705						3,241						1,803
Stockholders' equity			30,920						30,472						25,855

Total liabilities and stockholders' equity		$	507,824					$	493,455					$	447,944


Net interest income				$	15,312					$	15,712					$	14,765


Interest rate spread						2.67	%					2.84	%					3.05	%


Net interest margin						3.14	%					3.30	%					3.43	%

2. Rate / Volume Analysis

During 2007, net interest income, before the provision for credit losses, decreased $400,000 or 2.5% on a tax equivalent basis, to $15.3 million, from $15.7 million in 2006. As shown in the Rate/Volume Analysis below, $432,000 was attributable to volume changes which were mostly attributable to time deposit growth, which amounted to $1.6 million, offset by $644,000 related to lower levels of FHLB advances and $188,000 related to lower levels of repurchase agreements. The average balance of time deposits was $131.1 million in 2007 compared to $97.0 million in 2006, representing an increase of $34.1 million, or 35.2%, year-over-year. The average balance of FHLB advances and repurchase agreements were $39.7 million and $33.9 million in 2007, compared to $50.8 million and $38.9 million, respectively, in 2006. The $432,000 decrease in net interest income, on a tax-equivalent basis, due to volume was offset by a $32,000 increase related to rate changes. The increase in yields on interest-bearing assets and the increase in rates on interest-bearing liabilities offset each other, resulting in a slight $32,000 difference. The tax equivalent yield on loans and leases in 2007 was 7.08%, compared to 6.88% in 2006. The tax equivalent yield on securities was 4.94% in 2007, compared to 4.70% in 2006. The change due to rate on savings deposits was $609,000 which had an average rate of 2.30% in 2007 and 2.01% in 2006. The change due to rate on time deposits was $694,000 which had an average rate of 4.71% in 2007 and 3.99% in 2006. DNB's composite cost of funds increased to 3.62% in 2007 compared to 3.27% in 2006.

During 2006, net interest income increased $947,000 or 6.4% on a tax equivalent basis, to $15.7 million, from $14.8 million in 2005. As shown in the Rate/Volume Analysis below, $2.4 million was attributable to volume changes mostly attributable to loan and lease growth, which accounted for $4.3 million, offset by $688,000 related to investment portfolio run-off. The average balance on loans and leases were $321.3 million in 2006 compared to $259.1 million in 2005, representing an increase of $62.2 million, or 24.0%, year-over-year. The $2.4 million increase to net interest income was offset by a $1.5 million decrease related to rate changes. As in 2005, the rates on DNB's interest-bearing liabilities increased at a faster pace than the rates on DNB's interest-earning assets, which had a negative impact on interest income. The tax equivalent yield on loans and leases increased to 6.88% for 2006 compared to 6.58% for 2005. The cost of interest-bearing deposits increased to 2.63% for 2006 compared to 1.69% for 2005. DNB's composite cost of funds increased to 3.27% in 2006 compared to 2.53% in 2005.

The following table sets forth, among other things, the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have affected interest income and expense for the periods noted (tax-exempt yields and yields on agency-preferred stock that have a 70% dividend received deduction have been adjusted to a tax equivalent basis using a 34% tax rate). For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (i) changes in rate (change in rate multiplied by old volume) and (ii) changes in volume (change in volume multiplied by new rate). The net change attributable to the combined impact of rate and volume has been allocated proportionately to the change due to rate and the change due to volume.

Rate / Volume Analysis
(Dollars in thousands)

		2007 Versus 2006									2006 Versus 2005
		Change Due To									Change Due To
		Rate			Volume			Total			Rate			Volume			Total

Interest-earning assets:
Loans and leases		$	651		$	77		$	728		$	772		$	4,281		$	5,053
Investment securities:
	Taxable		551			886			1,437			464			(828	)		(364	)
	Tax-exempt		7			(1,025	)		(1,018	)		43			217			260
	Tax-preferred DRD		—			—			—			—			(77	)		(77	)
Cash and cash equivalents			152			350			502			111			19			130

Total			1,361			288			1,649			1,390			3,612			5,002

Interest-bearing liabilities:
Savings deposits			609			(25	)		584			1,447			371			1,818
Time deposits			694			1,608			2,302			879			895			1,774
Federal funds purchased			1			(30	)		(29	)		12			10			22
Repurchase agreements			(83	)		(188	)		(271	)		384			330			714
FHLB advances			94			(644	)		(550	)		61			(486	)		(425	)
Other borrowings			14			(1	)		13			72			80			152

Total			1,329			720			2,049			2,855			1,200			4,055

Net interest income		$	32		$	(432	)	$	(400	)	$	(1,465	)	$	2,412		$	947

3. Interest Rate Sensitivity Analysis

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.

ALCO continually evaluates interest rate risk management opportunities, including the use of derivative financial instruments. Management believes that hedging instruments currently available are not cost-effective, and therefore, has focused its efforts on increasing DNB's spread by attracting lower-costing retail deposits and in some instances, borrowing from the FHLB of Pittsburgh.

DNB reports its callable agency and callable municipal investments ($56.5 million at December 31, 2007) and callable FHLB advances ($35 million at December 31, 2007) at their Option Adjusted Spread ("OAS") effective duration date, as opposed to the call or maturity date. In management's opinion, using effective duration dates on callable securities and advances provides a better estimate of the option exercise date under any interest rate environment. The OAS methodology is an approach whereby the likelihood of option exercise takes into account the coupon on the security, the distance to the call date, the maturity date and current interest rate volatility. In addition, prepayment assumptions derived from historical data have been applied to mortgage-related securities, which are included in investments. (See additional discussion in Item 7a. Quantitative and Qualitative Disclosures About Market Risk on page 45 of this Form 10-K.)

B. Liquidity and Market Risk Management

Liquidity is the ability to meet current and future financial obligations. The Bank further defines liquidity as the ability to respond to deposit outflows as well as maintain flexibility to take advantage of lending and investment opportunities. The Bank's primary sources of funds are operating earnings, deposits, repurchase agreements, principal and interest payments on loans, proceeds from loan sales, sales and maturities of mortgage-backed and investment securities, and FHLB advances. The Bank uses the funds generated to support its lending and investment activities as well as any other demands for liquidity such as deposit outflows. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, mortgage prepayments, loan and security sales and the exercise of call features are greatly influenced by general interest rates, economic conditions and competition.

The objective of DNB's asset/liability management function is to maintain consistent growth in net interest income within DNB's policy limits. This objective is accomplished through the management of liquidity and interest rate risk, as well as customer offerings of various loan and deposit products. DNB maintains adequate liquidity to meet daily funding requirements, anticipated deposit withdrawals, or asset opportunities in a timely manner. Liquidity is also necessary to meet obligations during unusual, extraordinary or adverse operating circumstances, while avoiding a significant loss or cost. DNB's foundation for liquidity is 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 part of its liquidity management, DNB maintains assets, which comprise its primary liquidity (Federal funds sold, investments and interest-bearing cash balances, less pledged securities).

C. Credit Risk Management

DNB defines credit risk as the risk of default by a customer or counter-party. The objective of DNB's credit risk management strategy is to quantify and manage credit risk on an aggregate portfolio basis as well as to limit the risk of loss resulting from an individual customer default. Credit risk is managed through a combination of underwriting, documentation and collection standards. DNB's credit risk management strategy calls for regular credit examinations and quarterly management reviews of large credit exposures and credits experiencing credit quality deterioration. DNB's loan review procedures provide objective 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. As the U.S. economy enters a period of recession, it is possible that delinquencies and non-performing assets may rise as the value of homes decline and DNB's borrowers experience financial difficulty due to corporate downsizing, reduced sales, or other negative events which will impact their ability to meet their contractual loan payments. To minimize the impact on DNB's earnings and maintain sound credit quality, management continues to aggressively monitor credit and credit relationships that may be impacted by such adverse factors.

D. Management of Others Risks

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 economies 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.

E. Competition

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

F. 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 2007, DNB continued its efforts to strengthen its BSA policies, procedures and systems to ensure compliance with OFAC regulations.

V. Material Trends and Uncertainties

The industry is experiencing an on-going and widespread trend of consolidation in response to shrinking margins, as well as competitive and economic challenges. In an effort to broaden market share by capitalizing on operational efficiencies, larger institutions have been acquiring smaller regional and community banks and thrifts. DNB's marketplace has witnessed many recent mergers due to attractive demographics, commercial expansion and other growth indicators. As a result of these factors, the operating environment is very competitive as DNB's market hosts over 70 banks, thrifts and credit unions. In addition, brokerage firms, mutual fund companies and boutique investment firms are prevalent, given the attractive demographics. This intense competition continually puts pressures on DNB's margins and operating results as competitors offer a full range of loan, deposit and investment products and services. In addition, many of these competitors are much larger than DNB and consistently outspend the Bank in marketing to attract new customers and buy market share. DNB anticipates these pressures will continue to adversely affect operating results.

VI. Recent Developments

From August of 2007 through March of 2008, the Federal Reserve reduced the Federal funds rate by 2.25 percent in an effort to stimulate the economy and lessen in impact of a national recession. The Federal Reserve recently reported that business activity had expanded modestly in the Third District during the fourth quarter of 2007. Manufacturers had reported slight increases in new orders and shipments and retailers reported better sales growth. Auto sales remained slow, and below the year-ago level. Auto dealers generally do not expect the sales rate to strengthen. Overall bank lending has been rising, with better growth in business lending than in consumer and real estate lending. Residential real estate sales remained well off the pace set in 2006 and earlier in 2007, and home building continued to decline. Bankers anticipate slow expansion in overall lending, with gains coming largely from commercial and industrial lending while consumer and real estate lending growth slows. Commercial building occupancy and rents have been rising, but building prices have eased down and leasing activity has slowed

since the middle of 2007. Contacts in commercial real estate anticipate near steady demand for office and industrial space, although they believe leasing activity will not increase significantly unless employment growth in the region accelerates. Home builders and residential real estate agents expect sales to remain weak through the winter, and they are not certain that sales will improve appreciably in the second and third quarters of 2008. Firms reporting on labor costs generally noted a continuing trend of moderate increase in wages, but they continued to report large increases in health care benefits costs. Firms reported increases in input costs and output prices in November, and some noted that prices were rising for an increasing number of imported goods.

DNB has been impacted by these changes in the economy. DNB's net interest margin declined during 2007 because of the flat/inverted yield curve and will continue to experience pressure as the Federal Reserves' rate cuts may outpace our ability to drop rates on our deposit products. Home equity and residential mortgage loan originations may also be down as the value of existing homes decline and the availability to borrow against equity diminishes. DNB also provides loans to builders who construct new homes in residential tract developments. In general, DNB does not advance funds for home construction unless there is a sales agreement in place, however we do advance funds for land acquisition and improvements. As the market for new homes slow, DNB could be impacted by the inability of borrowers to meet their contractual obligations.

A. Regulatory Developments

As a national bank and a publicly traded corporation, DNB has a wide-range of regulatory supervision. Over the past few years the regulatory environment has significantly changed, as bank regulators act to monitor economic pressures while the Federal government acts to monitor corporate activities. Bank regulators have increased their scrutiny of asset/liability management, underwriting and capital policies, while Federal regulators have increased their scrutiny on employee compensation arrangements, stock activity, and insider transactions. To help monitor insider transactions and other areas of concern, Congress enacted the Sarbanes-Oxley Act of 2002, which requires members of the Board of Directors to be more knowledgeable and involved with the Bank, imposes more stringent corporate governance standards on publicly held companies, and prompts more transparent disclosure to investors. Fundamentally, the Sarbanes-Oxley Act of 2002 requires more ownership of, and accountability for, financial information by the Board and oversight committees. It also requires increased documentation reporting and review by management in all areas of the Bank and the Corporation.

B. Accounting Developments Affecting DNB

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

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

FASB Statement No. 157 In September 2006, the FASB issued FASB Statement No. 157 — "Fair Value Measurements" ("Statement 157"). Statement 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. The Statement applies only to fair-value measurements that are already required or permitted by other accounting standards. Statement 157 is effective for fair-value measures already required or permitted by other standards for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. DNB did not early adopt FASB Statement No. 157 and has determined this Statement will not have a material impact on DNB's consolidated financial statements upon adoption.

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

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

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

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

EITF 06-5 In September 2006, the Emerging Issues Task Force issued EITF 06-5, "Accounting for Purchases of Life Insurance-Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4". This consensus concludes that a policyholder should consider any additional amounts included in the contractual terms of the insurance policy other than the cash surrender value in

determining the amount that could be realized under the insurance contract. A consensus also was reached that a policyholder should determine the amount that could be realized under the life insurance contract assuming the surrender of an individual-life (or certificate by certificate in a group policy). The consensuses are effective for fiscal years beginning after December 15, 2006. This EITF is applicable to the BOLI already recognized in DNB's statement of condition. The Company adopted EITF 06-5 on January 1, 2007 and there was no material impact on DNB's financial position or results of operations.

FIN 48 In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes"—an interpretation of FASB Statement No. 109 (FIN 48). This interpretation of FASB Statement 109 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The interpretation was effective on January 1, 2007. The adoption of FIN 48 did not have a significant impact on DNB's consolidated financial statements.

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

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

C. Internal Developments Affecting DNB

In order to support the Bank's five-year strategic plan, which calls for strong growth in deposits, loans and fee income, as well as expense control, the Bank opened its 13 ^th office in Chadds Ford, Delaware County in July 2007. DNB renovated its West Goshen office during the third quarter of 2007 and signed an agreement on October 17, 2007 to lease office space in Media, Delaware County, Pennsylvania, for the purpose of relocating its limited service Newtown Square office. DNB began operations of the Media office in February 2008. In addition, DNB initiated a management committee to review all vendor contracts for products and services in order to reduce operating expenses.

VII. Critical Accounting Policies and Estimates

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 U.S. generally accepted accounting principles. 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 and discussion throughout this Form 10-K.

1. Determination of the allowance for credit losses . Credit loss allowance policies involve significant judgments, estimates and assumptions by management which may have a material impact on the carrying value of net loans and, 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 allowance for credit losses remains appropriate at December 31, 2007.

VIII. 2007 Financial Results

A. Liquidity

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. 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 $134.2 million at December 31, 2007. Management believes that DNB has adequate resources to meet its short-term and long-term funding requirements.

As of December 31, 2007, deposits totaled $412.9 million, up $31.9 million from $381.0 million at December 31, 2006. There were approximately $138.1 million in certificates of deposit scheduled to mature during the next twelve months. At December 31, 2007, DNB had $60.6 million in un-funded loan commitments. In addition, there were $4.6 million in un-funded letters of credit. Management anticipates the majority of these commitments will be funded by means of normal cash flows.

The following table sets forth the composition of DNB's deposits at the dates indicated.

Deposits By Major Classification
(Dollars in thousands)

		December 31
		2007		2006		2005		2004		2003

Non-interest-bearing deposits		$	48,741	$	50,852	$	51,407	$	53,402	$	52,788
Interest-bearing deposits:
	NOW		82,912		82,579		78,664		79,527		67,158
	Money market		93,029		66,352		45,390		42,199		55,412
	Savings		38,362		54,956		77,216		77,897		46,630
	Certificates		133,530		108,970		70,621		53,558		52,611
	IRA		16,346		17,318		16,329		16,561		17,837

Total deposits		$	412,920	$	381,027	$	339,627	$	323,144	$	292,436

Capital Resources and Adequacy

Stockholders' equity was $32.6 million at December 31, 2007 compared to $31.4 million at December 31, 2006. The increase was primarily the result of net income and other comprehensive income offset by cash dividends paid.

Management believes that the Corporation and the Bank have each met the definition of "well capitalized" for regulatory purposes on December 31, 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 in Regulatory Matters — Footnote 17 to DNB's consolidated financial statements).

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

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 credit losses, (ii) "total capital" includes, among other things, certain subordinated debt, and "total assets" is increased by the allowance for credit losses. DNB's primary capital ratio and its total capital ratio are both 7.8%. Based on the foregoing, as of December 31, 2007, both DNB and the Bank would be deemed to be "well capitalized" for regulatory purposes.

B. Results of Operations

1. Summary of Performance

(a) Summary of Results

For the year ended December 31, 2007, DNB reported net income of $1.8 million versus $1.7 million for 2006. Per share earnings on a fully diluted basis were $0.69, up from $0.66 for the prior year.

DNB's earnings were impacted by the general economic conditions challenging all commercial banking institutions—the flat to inverted yield curve and increased pricing competition on loans and deposits. In addition, the average balance of loans and leases remained flat amidst heavy competition in DNB's market. During the year, management focused on expense control and adherence to sound underwriting standards. During 2007, DNB's recognized the benefits of the efficiency study it undertook in 2006 as operating expenses increased only $82,000 or .50%. DNB was able to maintain expenses at relatively the same level as 2006, despite opening a new branch at Chadds Ford and renovating the West Goshen branch. During 2007, DNB restructured portions of its investment portfolio and recognized $395,000 in net gains. Highlights for the year include:

•: Efficiencies recognized in connection with a bank-wide project that took place in the second quarter of 2006.
•: The opening of a new office in Chadds Ford and the renovation of our West Goshen branch.
•: A $31.9 million or 8.4% increase in deposits

DNB continued to build franchise value in 2007 by investing in strategies that will improve earnings and increase market share in the future. DNB grew deposits in spite of a difficult environment and the efficiencies initiated in 2006 position DNB well for improved earnings.

(b) Significant Events, Transactions and Economic Changes Affecting Results

Despite a great many challenges in 2007, DNB made definitive progress on its strategic plan. Some of the accomplishments include the following:

•: The full implementation of the company-wide initiative to improve efficiency and enhance the customer's experience that was begun in 2006. A nationally recognized bank-consulting firm was hired to assist in this study. As a result of this initiative, DNB developed ways to more effectively utilize technology, streamline processes and procedures, and maximize the effectiveness of all employees. During 2007, DNB streamlined its new loan application process, benefiting customers and eliminating redundancies.
•: Overall, deposits increased $31.9 million or 8.37%, as compared to December 31, 2006. Demand, money market, NOW and savings deposits, which DNB considers core to its deposit-gathering strategy, were up in aggregate on a net basis by $8.3 million or 3.26%, when compared to December 31, 2006. Management considers these types of deposits to be a key indicator of the DNB's ability to generate lower cost funds that are longer in duration and can better support DNB's liquidity needs. At the same time, net borrowings were down $20.7 million or 18.69%.
•: During 2007, DNB opened a new full service office in Chadds Ford, Delaware County and renovated its West Goshen Office in order to enhance its delivery system.

(c) Trends and Uncertainties

Between June 2004 and September 2007, the federal funds target rate had been raised 17 times, by a total of 425 basis points. However, in part because of continued strong demand for U.S. Treasury and agency debt by foreign investors, long-term U.S. interest rates have been slower to rise. The result has been a significant flattening of the Treasury yield curve, to the point where it has actually become inverted. The average spread between 10-year U.S. Treasury yields and the federal funds rate has declined from 3.27% at the end of 2003 to negative 0.04% in December 2007. The inverted yield curve, along with heightened competition for loans and deposits, has put downward pressure on the net interest margin of most financial institutions. DNB's profitability depends largely on our net interest margin. Continued downward pressure could have a significant impact on the future earnings of DNB. DNB has been impacted by these changes in the economy. DNB's net interest margin declined during 2007 because of the flat/inverted yield curve and will continue to experience pressure as the Federal Reserves' rate cuts may outpace our ability to drop rates on our deposit products. Home equity and residential mortgage loan originations may also be down as the value of existing homes decline and the availability to borrow against equity diminishes. As the U.S. economy enters a period of recession, it is possible that delinquencies may rise as the value of homes decline and DNB's borrowers experience financial difficulty due to corporate downsizing, reduced sales, or other negative events which may impact their ability to meet their contractual loan payments. DNB also provides loans to builders who construct new homes in residential tract developments. In general, DNB does not advance funds for home construction unless there is a sales agreement in place, however we do advance funds for land acquisition and improvements. As the market for new homes slow, DNB could be impacted by the inability of borrowers to meet their contractual obligations.

(d) Material Changes in Results

Please refer to the discussion above in the section titled "Significant Events, Transactions and Economic Changes Affecting Results".

(e) Effect of Inflation and Changing Rates

For detailed discussion of the effects of inflation and changes in rates on DNB's results, refer to the discussion below on Net Interest Income.

2. 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 and leases (net of interest reversals on non-performing loans), investments and Federal funds sold, as well as net loan fee amortization and dividend income. Interest expense includes the interest cost for deposits, FHLB advances, repurchase agreements, corporate debentures, Federal funds purchased and other borrowings.

2007 Results Compared to 2006 Results

In 2007, DNB focused on improving operational efficiencies and containing costs. As a result of intense competition in DNB's market, outstanding loans declined by $20.1 million during 2007, however average loans remained relatively flat and the average yield was up 20 basis points year over year. In addition, the yield on the investment portfolio increased due to purchase of higher yielding securities. Higher costing deposits, primarily time deposits, offset the benefit of the higher yield on loans and investments. This resulted in a $61,000 decline in net interest income and a 16 basis point decline in DNB's net interest margin which decreased from 3.30% in 2006 to 3.14% in 2007.

Interest on loans and leases was $22.7 million for 2007 compared to $21.9 million for 2006. The average balance on loans and leases was $322.4 million with an average yield of 7.08% in 2007 compared to an average balance of $321.3 million with an average yield of 6.88% in 2006. Year over year, the average balance of loans and leases remained flat amidst heavy competition in DNB's market. During the year,

management focused on adherence to sound underwriting standards during a period when real estate values declined and many of DNB's competitors were plagued by their origination of sub-prime loans. The increase in yield was the result of higher interest rates on prime-based loans year over year.

Interest and dividends on investment securities was $6.7 million and $6.0 million for 2007 and 2006, respectively. The average balance on investment securities was $142.4 million with an average yield of 4.94% in 2007 compared to $141.0 million with an average yield of 4.70% in 2006. Interest and dividends increased $764,000 year over year, even though the average balance remained relatively flat. The primary reason for this increased income was the sale of $32.5 million of tax-free municipal securities during the year and the purchase of higher yielding taxable securities with the proceeds.

Interest on deposits was $11.0 million for 2007 compared to $8.1 million for 2006. The average balance of interest-bearing deposits was $341.7 million with an average rate of 3.22% for 2007 compared to $308.6 million with an average rate of 2.63% for 2006. The increase in average balance was primarily the result of aggressive marketing of deposit relationships. The increase in rate was primarily the result of an increase in the cost of funds resulting from the rising interest rate environment during the first three quarters of 2007.

Interest on FHLB advances was $2.3 million for 2007 compared to $2.9 million for 2006. The average balance on FHLB advances was $39.7 million with an average rate of 5.80% for 2007 compared to $50.8 million with an average rate of 5.61% for 2006. The decrease in the average balance was the result of FHLB borrowings that matured and were repaid. The increased average rate in 2007 resulted from maturity or pay-down of lower rate borrowings during the year.

Interest on repurchase agreements was $1.3 million for 2007 compared to $1.5 million for 2006. The average balance on repurchase agreements was $33.9 million with an average rate of 3.73% for 2007 compared to $38.9 million with an average rate of 3.94% for 2006. The decrease in average balance was due to a fewer number of commercial customers using this product during the year and the decrease in rate was primarily the result of lower competitive market rates during 2007.

2006 Results Compared to 2005 Results

In 2006, DNB continued its progress to reposition its balance sheet as net interest income increased year-over-year by $767,000 to $14.9 million. This increase was primarily due to a higher volume of interest-earning assets with higher yields offset by an increased cost of funds on interest-bearing liabilities. The higher volume of interest-earning assets was attributable to strong loan growth offset by investment portfolio run-off. The higher yield on the interest-earning assets as well as the increased cost of funds on interest-bearing liabilities was a result of a rising interest rate environment as the Fed funds rate increased by 100 basis points since December 2005. The Fed funds rate was 5.25% at December 31, 2006.

Interest on loans and leases was $21.9 million for 2006 compared to $17.0 million for 2005. The average balance on loans and leases was $321.3 million with an average yield of 6.88% compared to an average balance of $259.1 million with an average yield of 6.58%. The increase in the average balance was the result of implementing DNB's strategic plan to aggressively grow the balance sheet through loan originations, participations and purchases. This has been accomplished with the addition of key revenue producing personnel as well as by adding a loan production office in Newtown Square. The increase in yield was the result of the rising interest rate environment mentioned above.

Interest and dividends on investment securities was $6.0 million and $6.2 million for 2006 and 2005, respectively. The average balance on investment securities was $141.0 million with an average yield of 4.70% in 2006 compared to $158.8 million with an average yield of 4.28% in 2005. The decrease in balance was the result of investment portfolio run-off, which was part of DNB's strategic plan. The increase in yield was the result of DNB taking advantage of the interest rate environment to restructure a significant portion of its investment securities portfolio. In March 2005, DNB sold $73.3 million of structured securities, government agency preferred stock, longer-term municipal securities, as well as corporate securities. The majority of the proceeds received on the sale of these investments were re-invested into higher yielding agency mortgage-backed securities, agency bonds and municipal securities.

Interest on deposits was $8.1 million for 2006 compared to $4.5 million for 2005. The average balance of interest-bearing deposits was $308.6 million with an average rate of 2.63% for 2006 compared to $267.8 million with an average rate of 1.69% for 2005. The increase in average balance was primarily the result of aggressive marketing of deposit relationships in an effort to fund loan growth. The increase in rate was primarily the result of an increase in the cost of funds resulting from the rising interest rate environment.

Interest on FHLB advances was $2.9 million for 2006 compared to $3.3 million for 2005. The average balance on FHLB advances was $50.8 million with an average rate of 5.61% for 2006 compared to $59.5 million with an average rate of 5.51% for 2005. The decrease in the average balance was the result of FHLB borrowings that matured and were repaid. The increase in rate was the result of lower cost FHLB borrowings that matured and were repaid during 2006.

Interest on repurchase agreements was $1.5 million for 2006 compared to $821,000 for 2005. The average balance on repurchase agreements was $38.9 million with an average rate of 3.94% for 2006 compared to $30.6 million with an average rate of 2.69% for 2005. The increase in average balance was primarily the result of aggressive marketing of customer relationships resulting in a need to fund loan growth. The increase in rate was primarily the result of an increase in the cost of funds resulting from the rising interest rate environment.

3. Provision for Credit Losses

To provide for known and inherent losses in the loan and lease portfolio, DNB maintains an allowance for credit losses. There was a $60,000 provision made in 2007, and there were no provisions for credit losses made during the years ended December 31, 2006 and 2005. For a detailed discussion on DNB's reserving methodology, refer to "Item 1 — Determination of the allowance for credit losses" which can be found under "Critical Accounting Policies and Estimates".

4. Non-Interest Income

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 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, remote capture, merchant services, debit cards, safe deposit box rentals and similar activities.

2007 Results Compared to 2006 Results

Non-interest income was $4.0 million for 2007 compared to $3.4 million for 2006. This increase was primarily due to the sale of $58.7 million securities during the year, resulting in $395,000 net gains. The increase in non-interest income was also partly due to higher levels of estate fees, coupled with increased income on BOLI policies. Service charges on deposit accounts were $1.6 million for 2007 compared to $1.7 million for 2006. This decrease was primarily attributable to a lower level of non-sufficient funds ("NSF") fees, which decreased $54,000 year-over-year. Wealth management fees were $859,000 for 2007 compared to $707,000 for 2006. This increase was primarily the result of increased fee income from estate settlements from DNB Advisors.

2006 Results Compared to 2005 Results

Non-interest income was $3.4 million for 2006 compared to $2.4 million for 2005. This increase was primarily due to DNB restructuring its investment portfolio in 2005, resulting in a $699,000 pre-tax loss on the sale of securities. Additionally, the increase in non-interest income was also partly due to additional service charges on deposit accounts.

Service charges on deposit accounts were $1.7 million for 2006 compared to $1.4 million for 2005. This increase was primarily attributable to non-sufficient funds ("NSF") fees, which increased $306,000 year-over-year.

5. Non-Interest Expense

Non-interest expense includes salaries & employee benefits, furniture & equipment, occupancy, professional & consulting fees as well as marketing, printing & supplies and other less significant expense items.

2007 Results Compared to 2006 Results

Non-interest expense was $16.6 million for 2007 compared to $16.5 million for 2006.

Salary and employee benefits. Salary and employee benefits were $9.2 million for 2007 compared to $9.1 million for 2006. The increase was attributable to merit increases, offset by lower levels of full-time equivalent employees year over year.

Furniture and equipment. Furniture and equipment expense was $1.6 million for 2007 compared to $1.4 million for 2006. The increase was primarily attributable to depreciation on equipment purchased for DNB's new Chadds Ford office and for its renovated West Goshen office as well as additional hardware and software upgrades made during 2007.

Occupancy. Occupancy expense was $1.5 million for 2007 compared to $1.3 million for 2006. The increase was associated with an increase in rent and depreciation expense resulting from the opening of a new full-service branch in Chadds Ford Township, Delaware County, Pennsylvania. In addition, the bank renovated it West Goshen office during 2007 contributing to the increase in occupancy expense.

Professional and consulting. Professional and consulting expenses were $1.2 million for 2007 compared to $1.6 million for 2006. The primary reason for the decrease was due to the $312,000 in expenses recognized in 2006 relating to the efficiency project started in the second quarter of 2006 that did not recur in 2007. This project has helped to streamline many processes throughout DNB, which has helped to decrease non-interest expenses in many areas. The efficiencies gained in this project led to a reduction of 14 full time equivalent employees.

2006 Results Compared to 2005 Results

Non-interest expense was $16.5 million for 2006 compared to $14.4 million for 2005.

Salary and employee benefits. Salary and employee benefits were $9.1 million for 2006 compared to $8.2 million for 2005. The increase was largely attributable to the substantial investment in key staff, principally revenue producing personnel. DNB continued to make significant progress by adding seasoned individuals who will provide DNB with additional leadership serving the Private Banking, Credit and Retail needs of our customers.

Furniture and equipment. Furniture and equipment expense was $1.4 million for 2006 compared to $1.2 million for 2005. The increase was primarily attributable to depreciation on additional equipment

purchased at DNB's new West Chester office as well as additional hardware and software upgrades made during 2006.

Occupancy. Occupancy expense was $1.3 million for 2006 compared to $1.0 million for 2005. The increase was associated with an increase in rent expense resulting from a full years rent expense recognized in 2006, versus a partial year rent expense recognized in 2005 on new offices opened in 2005 in Newtown Square and West Chester. Additionally, on April 26, 2006 the Bank signed an agreement to lease a parcel of land in Chadds Ford Township, Delaware County, Pennsylvania, for the purpose of developing the premises to accommodate a future branch.

Professional and consulting. Professional and consulting expenses were $1.6 million for 2006 compared to $1.1 million for 2005. The primary reason for the increase was due to expenses recognized relating to the efficiency project started in the second quarter of 2006. This project has helped to streamline many processes throughout the bank, which will help to decrease non-interest expense in the future along with a reduction of 14 full time equivalent employees. Additionally, DNB outsourced its internal audit function during 2006 and the cost of outsourcing is included in professional and consulting expenses for 2006.

6. Income Taxes

2007 Results Compared to 2006 Results

Income tax expense was $372,000 for 2007 compared to $41,000 for 2006. 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. The effective tax rate for 2007 was 17.1% and 2.3% in 2006. The higher effective tax in 2007 was caused by higher levels of pre-tax income in addition to DNB reducing its investments in tax-exempt securities during 2007.

2006 Results Compared to 2005 Results

Income tax expense was $41,000 for 2006 compared to a benefit of $89,000 for 2005. Income tax expense (benefit) 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. During 2005, DNB reversed a portion of the previously recorded valuation allowance for deferred tax assets and recognized a related income tax benefit of $308,000. Most of the reversal was associated with a tax gain recognized on the sale of two operations buildings as well as an additional reversal that was made in connection with the sale of agency preferred securities both of which are "Capital Assets" as defined under Internal Revenue Code Section 1221.

Financial Condition Analysis

1. Investment Securities

DNB's investment portfolio consists of US agency securities, mortgage-backed securities issued by US Government agencies, collateralized mortgage obligations, state and municipal securities, bank stocks, and other bonds and notes. In addition to generating revenue, DNB maintains the investment portfolio to manage interest rate risk, provide liquidity, provide collateral for borrowings and to diversify the credit risk of earning assets. The portfolio is structured to maximize DNB's net interest income given changes in the economic environment, liquidity position and balance sheet mix.

Given the nature of the portfolio, and its generally high credit quality, management normally expects to realize all of its investment upon the maturity of such instruments. Management determines the appropriate classification of securities at the time of purchase. Investment securities are classified

as: (a) securities held to maturity ("HTM") based on management's intent and ability to hold them to maturity; (b) trading account ("TA") securities that are bought and held principally for the purpose of selling them in the near term; and (c) securities available for sale ("AFS"). DNB does not currently maintain a trading account portfolio.

Securities classified as AFS include securities that may be sold in response to changes in interest rates, changes in prepayment assumptions, the need to increase regulatory capital or other similar requirements. DNB does not necessarily intend to sell such securities, but has classified them as AFS to provide flexibility to respond to liquidity needs.

DNB's investment portfolio (HTM and AFS securities) totaled $167.5 million at December 31, 2007, up 11% from $150.6 million at December 31, 2006.

The following tables set forth information regarding the composition, stated maturity and average yield of DNB's investment security portfolio as of the dates indicated (tax-exempt yields have been adjusted to a tax equivalent basis using a 34% tax rate). The first two tables do not include amortization or anticipated prepayments on mortgage-backed securities. Callable securities are included at their stated maturity dates.

Investment Maturity Schedule, Including Weighted Average Yield
(Dollars in thousands)

	December 31, 2007
Held to Maturity	Less than 1 Year			1-5 Years			5-10 Years			Over 10 Years			No Stated Maturity			Total			Yield

US Government agency obligations	$	3,731		$	—		$	—		$	—		$	—		$	3,731		3.41	%
US agency mortgage-backed securities		255			217			230			140			—			842		4.79
Collateralized mortgage obligations		—			—			444			5,364			—			5,808		3.66
State and municipal tax-exempt		—			791			700			3,049			—			4,540		3.81

Total	$	3,986		$	1,008		$	1,374		$	8,553		$	—		$	14,921		3.71	%

Percent of portfolio		27	%		7	%		9	%		57	%		—	%		100	%

Weighted average yield		3.41	%		3.85	%		3.80	%		3.81	%		—	%		3.71	%

Available for Sale	Less than 1 Year			1-5 Years			5-10 Years			Over 10 Years			No Stated Maturity			Total			Yield

US Government agency obligations	$	6,012		$	4,422		$	15,039		$	8,796		$	—		$	34,269		5.39	%
US agency mortgage-backed securities		40			—			3,970			78,955			—			82,965		5.28
Collateralized mortgage obligations		—			—			—			7,261						7,261		5.49
State and municipal taxable		—			—			3,050			24,996			—			28,046		5.74
Equity securities		—			—			—			—			29			29		3.35

Total	$	6,052		$	4,422		$	22,059		$	120,008		$	29		$	152,570		5.40	%

Percent of portfolio		4	%		3	%		14	%		79	%		—	%		100	%

Weighted average yield		5.28	%		4.30	%		5.50	%		5.46	%		3.35	%		5.40	%

Composition of Investment Securities
(Dollars in thousands)

	December 31
	2007				2006
	Held to Maturity		Available for Sale		Held to Maturity		Available for Sale

US Government agency obligations	$	3,731	$	34,269	$	4,728	$	49,771
US agency mortgage-backed securities		842		82,965		1,192		49,222
Collateralized mortgage obligations		5,808		7,261		6,929		—
State and municipal tax-exempt		4,540		—		6,082		32,605
State and municipal taxable		—		28,046		—		—
Equity securities		—		29		—		38

Total	$	14,921	$	152,570	$	18,931	$	131,636

2. Loans and Lease Portfolio

DNB's loan and lease portfolio consists primarily of commercial and residential real estate loans, commercial loans and lines of credit (including commercial construction), commercial leases and consumer loans. The portfolio provides a stable source of interest income, monthly amortization of principal and, in the case of adjustable rate loans, re-pricing opportunities.

Net loans and leases were $305.5 million at December 31, 2007, down $19.8 million or 6.1% from 2006. Commercial loans decreased $18.7 million or 18.8% to $81.0 million, commercial leases decreased $9.4 million or 40.9% to $13.6 million, residential mortgage loans decreased $6.2 million or 11.8% to $46.4 million, consumer loans increased $1.8 million or 3.3% to $56.6 million and commercial mortgage loans increased $12.4 million or 12.5% to $111.7 million.

The following table sets forth information concerning the composition of total loans outstanding, net of unearned income and fees and the allowance for credit losses, as of the dates indicated.

Total Loans and Leases Outstanding, Net of Allowance for Credit Losses
(Dollars in thousands)

	December 31,
	2007			2006			2005			2004			2003

Residential mortgages	$	46,448		$	52,636		$	43,738		$	18,677		$	16,048
Commercial mortgages		111,727			99,333			88,921			87,795			89,027
Commercial loans		81,021			99,732			83,156			63,595			54,587
Commercial leases		13,593			22,994			23,934			19,300			8,434
Consumer		56,553			54,771			48,381			43,210			35,457

Total loans and leases		309,342			329,466			288,130			232,577			203,553
Less allowance for credit losses		(3,891	)		(4,226	)		(4,420	)		(4,436	)		(4,559	)

Net loans and leases	$	305,451		$	325,240		$	283,710		$	228,141		$	198,994

The following table sets forth information concerning the contractual maturities of the loan portfolio, net of unearned income and fees. For amortizing loans, scheduled repayments for the maturity category in which the payment is due are not reflected below, because such information is not readily available.

Loan and Lease Maturities
(Dollars in thousands)

	December 31, 2007
	Less than 1 Year		1-5 Years		Over 5 Years		Total

Residential mortgages	$	2,984	$	28,405	$	15,059	$	46,448
Commercial mortgages		19,885		42,667		49,175		111,727
Commercial term loans		32,346		20,969		27,706		81,021
Commercial leases		1,642		11,951		—		13,593
Consumer loans		1,566		21,992		32,995		56,553

Total loans and leases		58,423		125,984		124,935		309,342


Loans and leases with fixed interest rates		18,779		66,692		58,856		144,327
Loans and leases with variable interest rates		39,644		59,292		66,079		165,015

Total loans and leases	$	58,423	$	125,984	$	124,935	$	309,342

3. Non-Performing Assets

Total non-performing assets increased $870,000 to $1.9 million at December 31, 2007, compared to $821,000 at December 31, 2006. The increase was primarily attributable to one home equity loan totaling $500,000 and 2 residential mortgages totaling $697,000 that were placed on non-accrual during 2007. As a result of the increase in non-performing loans, the non-performing loans to total loans ratio increased to .60% at December 31, 2007 from .25% at December 31, 2006. DNB has a significant level of commercial and commercial real estate loans and continues to work diligently to improve asset quality and position itself for possible economic downturns by tightening underwriting standards and improving lending policies and procedures. Non-performing assets have, and will continue to have, an impact on earnings; therefore management intends to continue working aggressively to reduce the level of such assets.

Non-performing assets are comprised of non-accrual loans, loans delinquent over ninety days and still accruing, troubled debt restructurings ("TDRs") and other real estate owned ("OREO"). Non-accrual loans are loans on 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. OREO includes both real estate obtained as a result of, or in lieu of, foreclosure. 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.

DNB's Credit Policy Committee monitors the performance of the loan and lease portfolio to identify potential problem assets on a timely basis. Committee members meet to design, implement and review asset recovery strategies, which serve to maximize the recovery of each troubled asset. As of December 31, 2007, DNB had $5.6 million of loans, which, although performing at that date, are believed to require increased supervision and review; and may, depending on the economic environment and other factors, become non-performing assets in future periods. The amount of such loans at December 31, 2006 was $3.7 million. The majority of the loans are secured by commercial real estate, with lesser amounts being secured by residential real estate, inventory and receivables.

The following table sets forth those assets that are: (i) placed on non-accrual status, (ii) contractually delinquent by 90 days or more and still accruing, (iii) troubled debt restructurings other than those included in items (i) and (ii), and (iv) OREO as a result of foreclosure or voluntary transfer to DNB.

Non-Performing Assets
(Dollars in thousands)

		December 31
		2007			2006			2005			2004			2003

Non-accrual loans:
	Residential mortgages	$	697		$	—		$	—		$	117		$	165
	Commercial mortgages		—			—			5			25			2,142
	Commercial term loans		—			42			1,017			231			233
	Commercial leases		255			38			83			—			—
	Consumer loans		569			635			—			16			16

Total non-accrual loans			1,521			715			1,105			389			2,556
Loans 90 days past due and still accruing			345			106			245			36			472
Troubled debt restructurings			—			—			—			—			—

Total non-performing loans			1,866			821			1,350			425			3,028

Other real estate owned			—			—			—			—			—

Total non-performing assets		$	1,866		$	821		$	1,350		$	425		$	3,028


Asset quality ratios:
	Non-performing loans to total loans		0.6	%		0.3	%		0.5	%		0.2	%		1.5	%
	Non-performing assets to total assets		0.3			0.1			0.3			0.1			0.7
Allowance for credit losses to:
	Total loans and leases		1.3			1.3			1.5			1.9			2.2
	Non-performing loans and leases		208.5			514.7			327.3			1,043.8			150.5

4. 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 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 U.S. generally accepted accounting principles 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 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. The unallocated portion of the allowance is intended to provide for probable losses not otherwise accounted for in management's other elements of its overall estimate. 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 1.26% at December 31, 2007 compared to 1.28% and 1.53% for the years ended December 31, 2006 and 2005, respectively. There was a $60,000 provision made in 2007. Net charge-offs were $395,000 in 2007 compared to $194,000 and $16,000 in 2006 and 2005, respectively. The percentage of net charge-offs to total average loans and leases were .13%, .06% and 0.01% during the same respective periods.

Analysis of Allowance for Credit Losses
(Dollars in thousands)

		Year Ended December 31
		2007			2006			2005			2004			2003

Beginning balance		$	4,226		$	4,420		$	4,436		$	4,559		$	4,546
Provisions			60			—			—			—			—
Loans charged off:
	Real estate		—			—			—			—			(10	)
	Commercial		(1	)		—			(31	)		(8	)		(302	)
	Leases		(458	)		(360	)		—			(75	)		—
	Consumer		(27	)		(5	)		(15	)		(105	)		(14	)

Total charged off			(486	)		(365	)		(46	)		(188	)		(326	)

Recoveries:
	Real estate		7			8			6			16			111
	Commercial		15			44			20			14			220
	Leases		62			117			—			—			—
	Consumer		7			2			4			35			8

Total recoveries			91			171			30			65			339

Ending balance		$	3,891		$	4,226		$	4,420		$	4,436		$	4,559

The following table sets forth the composition of DNB's allowance for credit losses at the dates indicated.

Composition of Allowance for Credit Losses
(Dollars in thousands)

December 31
	2007				2006				2005				2004				2003
	Amount		Percent of Loan Type to Total Loans		Amount		Percent of Loan Type to Total Loans		Amount		Percent of Loan Type to Total Loans		Amount		Percent of Loan Type to Total Loans		Amount		Percent of Loan Type to Total Loans

Real estate	$	1,320	51	%	$	954	46	%	$	927	46	%	$	1,033	46	%	$	1,495	51	%
Commercial*		744	26			1,155	30			1,220	29			1,640	27			1,752	27
Leases		680	4			1,191	7			1,132	8			952	8			450	4
Consumer		821	18			347	17			305	17			310	19			288	18
Unallocated		326	—			579	—			836	—			501	—			574	—

Total	$	3,891	100	%	$	4,226	100	%	$	4,420	100	%	$	4,436	100	%	$	4,559	100	%

* Includes commercial construction

5. Certain 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. The sum of these items amounted to $3.2 million for the year ended December 31, 2007.

The FDIC has authority to assess and change federal deposit insurance assessment rates on assessable deposits of the Bank. For further information, please refer to the discussion of FDIC deposit insurance assessments under Part I, Item 1 ("Business"), section (c) ("Narrative Description of Business") — "Supervision and Regulation — Bank" under the heading "Deposit Insurance Assessments" on page 7 of this report. If additional deposit insurance premiums were assessed in future years, they would reduce the earnings and profitability of DNB. Bank management cannot predict whether the deposit insurance fund reserve level will remain above the Designated Reserve Ratio of 1.25%, or, if it does not, what assessment rate the FDIC might impose in future periods.

Please refer to Footnote 17 to DNB's Consolidated Financial Statements for a table that summarizes required capital ratios and the corresponding regulatory capital positions of DNB and the Bank at December 31, 2007.

6. Off Balance Sheet Arrangements

In the normal course of business, various commitments and contingent liabilities are outstanding, such as guarantees and commitments to extend credit, borrow money or act in a fiduciary capacity, which are not reflected in the consolidated financial statements. Management does not anticipate any significant losses as a result of these commitments.

DNB had outstanding stand-by letters of credit totaling $4.6 million and unfunded loan and lines of credit commitments totaling $60.6 million at December 31, 2007.

These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet. The exposure to credit loss, in the event of non-performance by the party to the financial instrument for commitments to extend credit and stand-by letters of credit, is represented by the contractual amount. Management uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. DNB evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral, if any, obtained upon the extension of credit, usually consists of real estate, but may include securities, property or other assets.

Stand-by letters of credit are conditional commitments issued by DNB to guarantee the performance or repayment of a financial obligation of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risks involved in issuing letters of credit are essentially the same as those involved in extending loan facilities to customers. DNB holds various forms of collateral to support these commitments.

DNB maintains borrowing arrangements with a correspondent bank and the FHLB of Pittsburgh, as well as access to the discount window at the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs. Through these relationships, DNB has available credit of approximately $134.2 million.

Approximately $64.1 million of assets are held by DNB Advisors in a fiduciary, custody or agency capacity. These assets are not assets of DNB, and are not included in the consolidated financial statements.

The following table sets forth DNB's known contractual obligations as of December 31, 2007. The amounts presented below do not include interest.

		Payments Due by Period
(Dollars in thousands)		Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years

Contractual Obligations
	FHLB advances	$	50,000	$	—	$	35,000	$	5,000	$	10,000
	Repurchase agreements		29,923		29,923		—		—		—
	Capital lease obligations		675		16		62		93		504
	Operating lease obligations		3,236		504		908		339		1,485
	Junior subordinated debentures		9,279		—		—		—		9,279

Total		$	93,113	$	30,443	$	35,970	$	5,432	$	21,268

		Expiration by Period
(Dollars in thousands)		Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years

Off Balance Sheet Obligations
	Commitments to extend credit	$	60,626	$	27,270	$	24,426	$	8,370	$	560
	Letters of credit		4,593		4,521		72		—		—

Total		$	65,219	$	31,791	$	24,498	$	8,370	$	560

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

To measure the impacts of longer-term asset and liability mismatches beyond two years, DNB utilizes Key Rate Duration and Economic Value of Equity ("EVE") models. The Key Rate Duration measures the differences in durations in various maturity buckets and indicates potential asset and liability mismatches. 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 December 31, 2007 and 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 December 31, 2007 and 2006, was within DNB's negative 25% guideline. (See additional discussion in Item 7a., Section IV, Material Challenges, Risks and Opportunities on page 22 of this Form 10-K.)

(Dollars in thousands)	December 31, 2007								December 31, 2006

Change in rates	Flat		-200bp			+200bp			Flat		-200bp			+200bp

EVE	$	40,466	$	36,234		$	36,672		$	48,771	$	45,426		$	43,466
Change				(4,232	)		(3,793	)				(3,345	)		(5,305	)
Change as a % of assets				(0.8	)%		(0.7	)%				(0.6	)%		(1.0	)%
Change as a % of PV equity				(10.5	)%		(9.4	)%				(6.9	)%		(10.9	)%

Item 8. Financial Statements and Supplementary Data

DNB F INANCIAL C ORPORATION AND S UBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands, except share data)

		December 31

		2007			2006

Assets
Cash and due from banks		$	12,858		$	11,611
Federal funds sold			32,473			12,616

Cash and cash equivalents			45,331			24,227

AFS Investment securities, at fair value (amortized cost of $151,848 in 2007 and $132,805 in 2006)			152,570			131,636
HTM Investment securities (fair value $14,593 in 2007 and $18,393 in 2006)			14,921			18,931
Other investment securities			3,418			3,608

Total investment securities			170,909			154,175

Loans and leases			309,342			329,466
Allowance for credit losses			(3,891	)		(4,226	)

Net loans and leases			305,451			325,240

Office property and equipment, net			9,908			7,699
Accrued interest receivable			2,610			2,420
Bank owned life insurance			7,321			7,036
Core deposit intangible			308			358
Net deferred taxes			2,163			2,499
Other assets			1,839			1,588

Total assets		$	545,840		$	525,242


Liabilities and Stockholders' Equity
Liabilities
Non-interest-bearing deposits		$	48,741		$	50,852
Interest-bearing deposits:
	NOW		82,912			82,579
	Money market		93,029			66,352
	Savings		38,362			54,956
	Time		149,876			126,288

Total deposits			412,920			381,027

FHLB advances			50,000			55,450
Repurchase agreements			29,923			45,120
Junior subordinated debentures			9,279			9,279
Other borrowings			675			689

Total borrowings			89,877			110,538

Accrued interest payable			1,498			1,061
Other liabilities			8,910			1,205

Total liabilities			513,205			493,831


Commitments and contingencies (Note 15)
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; 2,850,799 and 2,847,010 issued, respectively			2,860			2,712
Treasury stock, at cost; 249,859 and 216,963 shares, respectively			(4,757	)		(4,158	)
Surplus			34,888			34,875
Accumulated deficit			(771	)		(688	)
Accumulated other comprehensive income (loss), net			415			(1,330	)

Total stockholders' equity			32,635			31,411

Total liabilities and stockholders' equity		$	545,840		$	525,242

See accompanying notes to consolidated financial statements.

DNB F INANCIAL C ORPORATION AND S UBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per share data)

		Year Ended December 31

		2007	2006	2005

Interest Income:
Interest and fees on loans and leases		$ 22,652	$ 21,930	$ 16,988
Interest and dividends on investment securities:
	Taxable	6,136	4,699	5,063
	Exempt from federal taxes	600	1,273	1,101
	Tax-preferred dividends	—	—	57
Interest on cash and cash equivalents		849	347	218

Total interest income		30,237	28,249	23,427

Interest Expense:
Interest on NOW, money market and savings		4,841	4,257	2,438
Interest on time deposits		6,172	3,870	2,096
Interest on FHLB advances		2,303	2,852	3,278
Interest on repurchase agreements		1,263	1,535	821
Interest on junior subordinated debentures		731	716	562
Interest on other borrowings		107	138	118

Total interest expense		15,417	13,368	9,313

Net interest income		14,820	14,881	14,114
Provision for credit losses		60	—	—

Net interest income after provision for credit losses		14,760	14,881	14,114

Non-interest Income:
Service charges		1,612	1,668	1,362
Wealth management		859	707	712
Increase in cash surrender value of BOLI		285	244	214
Securities gains (losses)		395	13	(662	)
Other fees		852	782	730

Total non-interest income		4,003	3,414	2,356

Non-interest Expense:
Salaries and employee benefits		9,246	9,139	8,161
Furniture and equipment		1,605	1,380	1,248
Occupancy		1,543	1,256	968
Professional and consulting		1,222	1,606	1,117
Marketing		375	494	519
Printing and supplies		296	389	305
Other expenses		2,302	2,243	2,093

Total non-interest expense		16,589	16,507	14,411

Income before income taxes		2,174	1,788	2,059
Income tax expense (benefit)		372	41	(89	)

Net Income		$ 1,802	$ 1,747	$ 2,148


Earnings per share:
	Basic	$ 0.69	$ 0.67	$ 0.92
	Diluted	$ 0.69	$ 0.66	$ 0.91
Cash dividends per share		$ 0.50	$ 0.47	$ 0.45
Weighted average common shares outstanding:
	Basic	2,614,417	2,625,182	2,332,552
	Diluted	2,626,066	2,643,657	2,361,566

See accompanying notes to consolidated financial statements.

DNB F INANCIAL C ORPORATION AND S UBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Dollars in thousands)

			Compre-hensive Income			Common Stock		Treasury Stock			Surplus			Retained Earnings			Accumulated Other Compre-hensive Income (Loss)			Total


Balance at January 1, 2005						$	2,170	$	(4,488	)	$	29,388		$	(2,273	)	$	(59	)	$	24,738
Comprehensive Income:
		Net income	$	2,148			—		—			—			2,148			—			2,148
Other comprehensive loss, net of tax:
	Unrealized losses on investments			(935	)		—		—			—			—			(935	)		(935	)
	Unrealized actuarial losses — pension			(745	)		—		—			—			—			(745	)		(745	)

Total comprehensive income			$	468
Release of unvested stock							3		—			88			—			—			91
Common stock issued							266		—			5,259			—			—			5,525
Cash dividends							—		—			—			(1,064	)		—			(1,064	)
Cash payment for fractional shares							—		—			—			(7	)		—			(7	)
Issuance of stock dividends							122		—			(122	)		—			—			—
Purchase of treasury shares							—		(5	)		—			—			—			(5	)
Sale of treasury shares to 401-K plan							—		240			9			—			—			249
Exercise of stock options							11		—			180			—			—			191

Balance at December 31, 2005							2,572		(4,253	)		34,802			(1,196	)		(1,739	)		30,186
Comprehensive Income:
		Net income	$	1,747			—		—			—			1,747			—			1,747
Other comprehensive income, net of tax:
	Unrealized gains on investments			222			—		—			—			—			222			222

Total comprehensive income			$	1,969
Release of unvested stock							4		—			128			—			—			132
Cash dividends							—		—			—			(1,233	)		—			(1,233	)
Cash payment for fractional shares							—		—			—			(6	)		—			(6	)
Issuance of stock dividends							129		—			(129	)		—			—			—
Adjustment to initially apply FASB Statement No. 158, net of tax							—		—			—			—			187			187
Purchase of treasury shares							—		(310	)		—			—			—			(310	)
Sale of treasury shares to 401-K plan							—		405			(12	)		—			—			393
Exercise of stock options							7		—			61			—			—			68
Stock compensation tax benefit							—		—			25			—			—			25

Balance at December 31, 2006							2,712		(4,158	)		34,875			(688	)		(1,330	)		31,411
Comprehensive Income:
		Net income	$	1,802			—		—			—			1,802			—			1,802
Other comprehensive income, net of tax:
	Unrealized gains on investments			1,248			—		—			—			—			1,248			1,248
	Unrealized actuarial gains—pension			497			—		—			—			—			497			497

Total comprehensive income			$	3,547
Release of unvested stock							4		—			49			—			—			53
Cash dividends							—		—			—			(1,297	)		—			(1,297	)
Cash payment for fractional shares							—		—			—			(5	)		—			(5	)
Issuance of stock dividends							135		—			(135	)		—			—			—
Purchase of treasury shares							—		(869	)		—			—			—			(869	)
Sale of treasury shares to 401-K plan							—		270			(9	)		—			—			261
Exercise of stock options							9		—			108			—			—			117
Adjustment to apply EITF 06-4, net of tax							—		—			—			(583	)		—			(583	)

Balance at December 31, 2007						$	2,860	$	(4,757	)	$	34,888		$	(771	)	$	415		$	32,635

See accompanying notes to consolidated financial statements.

DNB F INANCIAL C ORPORATION AND S UBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)

		Year Ended December 31

		2007			2006			2005

Cash Flows From Operating Activities:
Net income		$	1,802		$	1,747		$	2,148
Adjustments to reconcile net income to net cash
provided by operating activities:
	Depreciation, amortization and accretion		1,387			1,186			1,315
	Provision for credit losses		60			—			—
	Unvested stock amortization		53			132			91
	Securities (gains) losses		(395	)		(13	)		662
	Deferred gain on sale of buildings		—			—			(812	)
	Increase in accrued interest receivable		(190	)		(286	)		(362	)
	Decrease in other assets		311			152			260
	Tax benefit on exercised stock options		—			—			31
	Increase in investment in BOLI		(285	)		(244	)		(197	)
	Increase in interest payable		437			122			16
	Deferred tax benefit		(216	)		(384	)		(518	)
	Increase (decrease) in other liabilities		1,002			(80	)		(326	)

Net Cash Provided By Operating Activities			3,966			2,332			2,308

Cash Flows From Investing Activities:
Proceeds from maturities and paydowns — AFS securities			35,075			12,907			23,161
Proceeds from maturities and paydowns — HTM securities			3,962			7,948			6,337
Purchase of AFS securities			(106,602	)		(28,287	)		(105,443	)
Proceeds from sale of AFS securities			58,727			—			95,780
Net decrease (increase) in other investments			190			(241	)		662
Net decrease (increase) in loans and leases			19,729			(41,530	)		(55,569	)
Purchase of BOLI			—			(150	)		(150	)
Proceeds from the sale of property and equipment			—			—			1,683
Purchase of property and equipment			(3,382	)		(1,930	)		(1,285	)

Net Cash Provided (Used) By Investing Activities			7,699			(51,283	)		(34,824	)

Cash Flows From Financing Activities:
Net increase in deposits			31,893			41,400			16,483
(Decrease) increase in FHLB advances			(5,450	)		1,600			(7,800	)
(Decrease) increase in short term repurchase agreements			(15,197	)		9,070			12,923
Increase in junior subordinated debentures			—			—			4,124
Decrease in lease obligations			(14	)		(12	)		(10	)
Dividends paid			(1,302	)		(1,239	)		(1,071	)
Proceeds from the issuance of common stock			—			—			5,525
Proceeds from issuance of stock under stock option plan			117			68			160
Tax benefit on exercised stock options			—			25			—
(Purchase) sale of treasury stock, net			(608	)		83			244

Net Cash Provided By Financing Activities			9,439			50,995			30,578

Net Change in Cash and Cash Equivalents			21,104			2,044			(1,938	)
Cash and Cash Equivalents at Beginning of Year			24,227			22,183			24,121

Cash and Cash Equivalents at End of Year		$	45,331		$	24,227		$	22,183

Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest		$	14,981		$	13,246		$	9,297
Income taxes			411			153			101
Supplemental Disclosure of Non-cash Flow Information:
Change in unrealized losses on AFS securities		$	1,891		$	337		$	1,409
Change in deferred taxes due to change in unrealized gains on AFS securities			(643	)		(115	)		(474	)
Unsettled AFS securities purchased included in other liabilities			5,940			—			—

See accompanying notes to consolidated financial statements.

Notes to Consolidated Financial Statements

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DNB Financial Corporation (the "Corporation" or "DNB") through its wholly owned subsidiary, DNB First, National Association (the "Bank") formerly Downingtown National Bank, has been serving individuals and small to medium sized businesses of Chester County, Pennsylvania since 1861. DNB Capital Trust I and II are special purpose Delaware business trusts (see additional discussion in Junior Subordinated Debentures-Footnote 9). The Bank is a locally managed commercial bank providing personal and commercial loans and deposit products, in addition to investment and trust services from thirteen community offices. The Bank encounters vigorous competition for market share from commercial banks, thrift institutions, credit unions and other financial intermediaries.

The consolidated financial statements of DNB and its subsidiary, the Bank, which together are managed as a single operating segment, are prepared in accordance with U.S. generally accepted accounting principles applicable to the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and affect revenues and expenses for the period. Actual results could differ significantly from those estimates.

The more significant accounting policies are summarized below. Prior period amounts not affecting net income are reclassified when necessary to conform with current year classifications.

Principles of Consolidation — The accompanying consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiary, the Bank. All significant inter-company transactions have been eliminated.

Cash and Due From Banks — For purposes of the consolidated statement of cash flows, cash and due from banks, and federal funds sold are considered to be cash equivalents. Generally, federal funds are sold for one-day periods. DNB is required to maintain certain daily reserve balances in accordance with Federal Reserve Board requirements. The average reserve balance maintained at the Federal Reserve for the years ended December 31, 2007 and 2006 was approximately $119,000 and $43,000 respectively.

Investment Securities — Investment securities are classified and accounted for as follows:

Held-To-Maturity ("HTM") — includes debt and non-readily marketable equity securities that DNB has the positive intent and ability to hold to maturity. Debt securities are reported at cost, adjusted for amortization of premiums and accretion of discounts.

Trading Account ("TA") — includes securities that are generally held for a short term in anticipation of market gains. Such securities would be carried at fair value with realized and unrealized gains and losses on trading account securities included in the statement of operations. DNB did not have any securities classified as TA during 2007, 2006 or 2005.

Available-For-Sale ("AFS") — includes debt and equity securities not classified as HTM or TA securities. Securities classified as AFS are securities that DNB intends to hold for an indefinite period of time, but not necessarily to maturity. Such securities are reported at fair value, with unrealized holding gains and losses excluded from earnings and reported, net of tax (if applicable), as a separate component of stockholders' equity. Realized gains and losses on the sale of AFS securities are computed on the basis of specific identification of the adjusted cost of each security.

Other Investment Securities — includes investments in Federal Home Loan Bank (FHLB), Federal Reserve Bank (FRB) and Atlantic Central Bankers Bank (ACBB) stock which are carried at cost and are redeemable at par with certain restrictions. Investments in these stocks are necessary to participate in FHLB, FRB and ACBB programs.

Amortization of premiums and accretion of discounts for all types of securities are computed using a method approximating a level-yield basis.

Loans and Leases — Loans and leases are stated net of unearned discounts, unamortized net loan origination fees and the allowance for credit losses. Interest income is recognized on an accrual basis. The accrual of interest on loans and leases is generally discontinued when loans become 90 days past due or earlier when, in management's judgment, it is determined that a reasonable doubt exists as to its collectibility. When a loan or lease is placed on non-accrual, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Additional interest payments on such loans or leases are generally applied to principal or recognized to 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.

Deferred Loan Fees and Costs — Loan origination and commitment fees and related direct-loan origination costs of completed loans are deferred and accreted to income as a yield adjustment over the life of the loan using the level-yield method. The accretion to income is discontinued when a loan is placed on non-accrual status. When a loan is paid off, any unamortized net deferred fee balance is credited to income. When a loan is sold, any unamortized net deferred fee balance is considered in the calculation of gain or loss.

Allowance for Credit Losses — The allowance for credit losses is an estimate of the credit loss risk in our loan and lease portfolio. The allowance is based on two basic principles of accounting: (1) Statement of Financial Accounting Standards ("SFAS") No. 5 "Accounting for Contingencies," which requires that losses be accrued when it is probable that a loss has occurred at the balance sheet date and such loss can be reasonably estimated; and (2) SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which requires that losses be accrued on impaired loans based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. DNB's credit loss allowance policies involve significant judgments and assumptions by management which may have a material impact on the carrying value of net loans and, potentially, on the net income recognized by DNB from period to period. The allowance for credit losses is based on management's ongoing evaluation of the loan and lease portfolio and reflects an amount considered by management to be its best estimate of the amount necessary to absorb known and inherent losses in the portfolio. Management considers a variety of factors when establishing the allowance, such as the impact of current economic conditions, diversification of the portfolios, delinquency statistics, results of loan review and related classifications, and historic loss rates. In addition, certain individual loans which management has identified as problematic are specifically provided for, based upon an evaluation of the borrower's perceived ability to pay, the estimated adequacy of the underlying collateral and other relevant factors. In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for credit losses. They may require additions to the allowance based upon their judgments about information available to them at the time of examination. Although provisions are established and segmented by type of loan, based upon management's assessment of their differing inherent loss characteristics, the entire allowance for credit losses is available to absorb losses in any category.

Management uses significant estimates to determine the allowance for credit losses. Because the allowance for credit losses is dependent, to a great extent, on conditions that may be beyond DNB's control, management's estimate of the amount necessary to absorb credit losses and actual credit losses could differ. DNB's current judgment is that the valuation of the allowance for credit losses is appropriate at December 31, 2007.

Other Real Estate Owned — Other real estate owned ("OREO") consists of properties acquired as a result of, or in-lieu-of, foreclosure. Properties classified as OREO are reported at the lower of carrying value or fair value, less estimated costs to sell. Costs relating to the development or improvement of the

properties are capitalized and costs relating to holding the properties are charged to expense. DNB did not have any OREO at December 31, 2007 or December 31, 2006.

Office Properties and Equipment — Office properties and equipment are recorded at cost. Depreciation is computed using the straight-line method over the expected useful lives of the assets. The costs of maintenance and repairs are expensed as they are incurred; renewals and betterments are capitalized. All long-lived assets are reviewed for impairment, based on the fair value of the asset. In addition, long-lived assets to be disposed of are generally reported at the lower of carrying amount or fair value, less cost to sell. Gains or losses on disposition of premises and equipment are reflected in operations.

Other Assets — Financing costs related to the issuance of junior subordinated debentures are being amortized over the life of the debentures and are included in other assets.

Income Taxes — DNB uses the asset and liability method of accounting for income taxes. Under this method, 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 bases. 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 from a change in tax rates is recognized in income in the period that includes the enactment date. The Corporation files a consolidated Federal income tax return with the IRS.

Pension Plan — The Bank maintains a noncontributory defined benefit pension plan covering substantially all employees over the age of 21 with one year of service. Plan benefits are based on years of service and the employee's monthly average compensation for the highest five consecutive years of their last ten years of service (see Note 14—Benefit Plans).

Stock Option Plan — DNB has stock option plans for certain employees that were accounted for under the intrinsic value method prior to January 1, 2006. Because the exercise price at the date of the grant was equal to the market value of the stock, no compensation expense was recognized under our prior method of accounting. On January 1, 2006, DNB adopted SFAS 123R using the modified prospective transition method. SFAS 123R (revised) (SFAS 123R), "Share-Based Payment" replaced SFAS No. 123 (SFAS 123), "Accounting for Stock-Based Compensation" and superseded APB Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees" and amended SFAS No. 95, "Statement of Cash Flows." Under this transition method, compensation cost to be recognized beginning with the first quarter of 2006 includes: (a) compensation cost for the portion of share-based payment awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payment awards granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. DNB did not have any unvested options at January 1, 2006 as all options issued prior to that date vested immediately. Additionally, no new options were granted in 2006 or 2007; therefore, DNB did not recognize any compensation cost related to options for 2006 or 2007.

Had DNB determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, DNB's net income and earnings per share would have been reduced to the proforma amounts for 2005 presented below:

(Dollars in thousands, except per share data)	Year Ended December 31 2005

Net income - as reported	$	2,148
Less: Stock option expense		572

Proforma net income	$	1,576


EPS – diluted – as reported	$	0.91
Less: Stock option expense effect		.24

Proforma earnings per share - diluted	$	0.67

Earnings Per Share (EPS) — Basic EPS is computed based on the weighted average number of common shares outstanding during the year. Diluted EPS reflects the potential dilution that could occur from the exercise of stock options and is computed using the treasury stock method. Stock options and awards for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the EPS calculation.

Earnings per share, dividends per share and weighted average shares outstanding have been adjusted to reflect the effects of the 5% stock dividend paid in December 2007, 2006 and 2005.

Trust Assets — Assets held by DNB Advisors in fiduciary or agency capacities are not included in the consolidated financial statements since such items are not assets of DNB. Operating income and expenses of DNB Advisors are included in the consolidated statements of operations and are recorded on an accrual basis.

Statements of Cash Flows — For purposes of the statements of cash flows, DNB considers cash in banks, amounts due from banks, and Federal funds sold to be cash equivalents. Generally, Federal funds are sold for one-day periods.

Recent Accounting Pronouncements

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

FASB Statement No. 157 In September 2006, the FASB issued FASB Statement No. 157 – "Fair Value Measurements" ("Statement 157"). Statement 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. The Statement applies only to fair-value measurements that are already required or permitted by other accounting standards. Statement 157 is effective for fair-value measures already required or permitted by other standards for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. DNB did not early adopt FASB Statement No. 157 and has determined this Statement will not have a material impact on DNB's consolidated financial statements upon adoption.

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

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

(2) INVESTMENT SECURITIES

The amortized cost and estimated fair values of investment securities, as of the dates indicated, are summarized as follows:

			December 31, 2007
(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value

Held To Maturity
US Government agency obligations	$	3,731	$	—	$	(19	)	$	3,712
US agency mortgage-backed securities		842		9		(1	)		850
Collateralized mortgage obligations		5,808		—		(340	)		5,468
State and municipal tax-exempt		4,540		25		(2	)		4,563

Total	$	14,921	$	34	$	(362	)	$	14,593


Available For Sale
US Government agency obligations	$	33,943	$	326	$	—		$	34,269
US agency mortgage-backed securities		82,608		518		(161	)		82,965
Collateralized mortgage obligations		7,213		48		—			7,261
State and municipal taxable		28,047		106		(107	)		28,046
Equity securities		37		—		(8	)		29

Total	$	151,848	$	998	$	(276	)	$	152,570

			December 31, 2006
(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value

Held To Maturity
US Government agency obligations	$	4,728	$	—	$	(109	)	$	4,619
US agency mortgage-backed securities		1,192		2		(8	)		1,186
Collateralized mortgage obligations		6,929		—		(431	)		6,498
State and municipal tax-exempt		6,082		14		(6	)		6,090

Total	$	18,931	$	16	$	(554	)	$	18,393


Available For Sale
US Government agency obligations		50,194		—		(423	)		49,771
US agency mortgage-backed securities		50,023		68		(869	)		49,222
State and municipal tax-exempt		32,551		215		(161	)		32,605
Equity securities		37		1		—			38

Total	$	132,805	$	284	$	(1,453	)	$	131,636

Included in unrealized losses are market losses on securities that have been in a continuous unrealized loss position for twelve months or more and those securities that have been in a continuous unrealized loss position for less than twelve months. The table below details the aggregate unrealized losses and aggregate fair value of the underlying securities whose fair values are below their amortized cost at December 31, 2007 and 2006.

	December 31, 2007
(Dollars in thousands)	Total Fair Value		Total Unrealized Loss			Fair value Impaired Less Than 12 Months		Unrealized Loss Less Than 12 Months			Fair value Impaired More Than 12 Months		Unrealized Loss More Than 12 Months

Held To Maturity
US Government agency obligations	$	3,712	$	(19	)	$	—	$	—		$	3,712	$	(19	)
Collateralized mortgage obligations		5,468		(340	)		—		—			5,468		(340	)
State and municipal tax-exempt		1,052		(2	)		1,052		(2	)		—		—
US agency mortgage-backed securities		252		(1	)		—		—			252		(1	)

Total	$	10,484	$	(362	)	$	1,052	$	(2	)	$	9,432	$	(360	)


Available For Sale
State and municipal taxable	$	9,204	$	(107	)	$	9,204	$	(107	)	$	—	$	—
US agency mortgage-backed securities		21,908		(161	)		6.581		(7	)		15,327		(154	)
Equity securities		29		(8	)		29		(8	)		—		—

Total	$	31,141	$	(276	)	$	15,814	$	(122	)	$	15,327	$	(154	)

	December 31, 2006
(Dollars in thousands)	Total Fair Value		Total Unrealized Loss			Fair value Impaired Less Than 12 Months		Unrealized Loss Less Than 12 Months			Fair value Impaired More Than 12 Months		Unrealized Loss More Than 12 Months

Held To Maturity
US Government agency obligations	$	4,619	$	(109	)	$	—	$	—		$	4,619	$	(109	)
Collateralized mortgage obligations		6,498		(431	)		—		—			6,498		(431	)
State and municipal tax-exempt		2,344		(6	)		500		—			1,844		(6	)
US agency mortgage-backed securities		658		(8	)		324		(1	)		334		(7	)

Total	$	14,119	$	(554	)	$	824	$	(1	)	$	13,295	$	(553	)


Available For Sale
US Government agency obligations	$	49,771	$	(424	)	$	14,991	$	(6	)	$	34,780	$	(418	)
State and municipal tax-exempt		12,721		(160	)		6,210		(82	)		6,511		(78	)
US agency mortgage-backed securities		43,199		(869	)		567		(3	)		42,632		(866	)

Total	$	105,691	$	(1,453	)	$	21,768	$	(91	)	$	83,923	$	(1,362	)

DNB has $15.3 million in securities available for sale, which have had fair values below amortized cost for at least twelve continuous months at December 31, 2007. The total unrealized loss of these securities was $154,000. The impaired securities consist of fixed and variable rate government agency MBS securities. The unrealized losses on the mortgage-related securities and the US agency obligation is attributed to the securities having a below market yield. Management believes that the impairment associated with these and all other securities, where fair value is below book value at December 31, 2007, is only temporary.

The amortized cost and estimated fair value of investment securities as of December 31, 2007, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid without penalties.

	Held to Maturity				Available for Sale
(Dollars in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value

Due in one year or less	$	3,986	$	3,966	$	6,052	$	6,052
Due after one year through five years		1,008		1,016		4,382		4,422
Due after five years through ten years		1,374		1,367		24,973		22,059
Due after ten years		8,553		8,244		116,404		120,008
No stated maturity		—		—		37		29

Total investment securities	$	14,921	$	14,593	$	151,848	$	152,570

DNB sold $58.7 million, $0, and $95.8 million of securities from the AFS portfolio during 2007, 2006 and 2005. Gains and losses resulting from investment sales, redemptions or calls were as follows:

	Year Ended December 31
(Dollars in thousands)	2007		2006		2005

Gross realized gains	$	530	$	13	$	509
Gross realized losses		135		—		1,171

Net realized gain (loss)	$	395	$	13	$	(662	)

At December 31, 2007 and 2006, investment securities with a carrying value of approximately $81.4 million and $101.9 million, respectively, were pledged to secure public funds, repurchase agreements and for other purposes as required by law. See Footnote 7 regarding the use of certain securities as collateral.

(3) LOANS AND LEASES

	December 31
(Dollars in thousands)	2007			2006

Residential mortgage	$	46,448		$	52,636
Commercial mortgage		111,727			99,333
Commercial		81,021			99,732
Leases		13,593			22,994
Consumer		56,553			54,771

Total loans and leases	$	309,342		$	329,466

Less allowance for credit losses		(3,891	)		(4,226	)

Net loans and leases	$	305,451		$	325,240

Included in the loan portfolio are loans for which DNB has ceased the accrual of interest (i.e. non-accrual loans). Loans of approximately $1.5 million, $715,000 and $1.1 million as of December 31, 2007, 2006 and 2005, respectively, were on a non-accrual basis. DNB also had loans of approximately $345,000, $106,000 and $46,000 that were 90 days or more delinquent, but still accruing as of December 31, 2007, 2006 and 2005, respectively. If contractual interest income had been recorded on non-accrual loans, interest would have been increased as shown in the following table:

	Year Ended December 31
(Dollars in thousands)	2007			2006			2005

Interest income which would have been recorded under original terms	$	109		$	56		$	87
Interest income recorded during the year		(70	)		(28	)		(8	)

Net impact on interest income	$	39		$	28		$	79

DNB had $5.6 million of loans, which, although performing at December 31, 2007, are believed to require increased supervision and review, and may, depending on the economic environment and other factors, become non-performing assets in future periods. There was $3.7 million of such loans at December 31, 2006. The majority of these loans are secured by commercial real estate with lesser amounts being secured by residential real estate, inventory and receivables.

Subsequent to December 31, 2007, DNB had one commercial loan, with an outstanding balance of $4.2 million, for which DNB will not collect all amounts according to the contractual terms of the loan agreement and therefore has become impaired. The loan is collateralized by 2 properties which are currently under agreements of sale to unaffiliated third parties. While the related borrower ceased making payments, the loan is well secured and in the process of collection. Management expects to fully recover the principal and uncollected interest and therefore no specific reserve has been established at this time.

DNB has a significant concentration of residential and commercial mortgage loans collateralized by first mortgage liens on properties located in Chester County. DNB did not have any concentration of loans to borrowers engaged in similar activities that exceed 10% of total loans at December 31, 2007, except for loans of approximately $54.4 million relating to commercial real estate buildings. See Footnote 7 regarding the use of certain loans as collateral.

(4) ALLOWANCE FOR CREDIT LOSSES

Changes in the allowance for credit losses, for the years indicated, are as follows:

	Year Ended December 31
(Dollars in thousands)	2007			2006			2005

Beginning balance	$	4,226		$	4,420		$	4,436
Provisions		60			—			—
Loans charged off		(28	)		(5	)		(46	)
Leases charged off		(458	)		(360	)		—
Recoveries		91			171			30

Net charge-offs		(395	)		(194	)		(16	)

Ending balance	$	3,891		$	4,226		$	4,420

There was a $60,000 provision made during 2007 and there were no provisions for credit losses made during the years ended December 31, 2006 and 2005 based on management's analysis of the adequacy of the allowance for credit losses.

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

	Year Ended December 31
(Dollars in thousands)	2007		2006		2005

Total recorded investment	$	2,274	$	641	$	916
Average recorded investment		1,095		962		1,118
Specific allowance allocation		485		76		442
Total cash collected		344		1,145		564
Interest income recorded		27		4		18

(5) OFFICE PROPERTY AND EQUIPMENT

	Estimated Useful Lives	December 31
(Dollars in thousands)	Estimated Useful Lives	2007			2006

Land		$	611		$	611
Buildings	5-31.5 years		9,595			7,065
Furniture, fixtures and equipment	2-20 years		12,294			11,468

Total cost			22,500			19,144
Less accumulated depreciation			(12,592	)		(11,445	)

Office property and equipment, net		$	9,908		$	7,699

Amounts charged to operating expense for depreciation for the years ended December 31, 2007, 2006 and 2005 amounted to $1.2 million, $965,000 and $867,000, respectively.

On November 18, 2005, the Bank sold its operations center and an adjunct administrative office at 104-106 Brandywine Avenue, to an unaffiliated buyer for $1,700,000 and leased the property from the buyer for an initial term ending December 1, 2010, on a triple net basis for an initial annual basic lease rental of approximately $176,000. The lease gives the Bank successive options to renew for three additional terms of five years each at a basic rent to be established at a fair market rental taking into account all of the terms and conditions of this lease, and an option to terminate the lease at any time on 120 days prior notice.

(6) DEPOSITS

Included in interest bearing time deposits are certificates of deposit issued in amounts of $100,000 or more. These certificates and their remaining maturities were as follows:

	December 31
(Dollars in thousands)	2007		2006

Three months or less	$	31,119	$	14,420
Over three through six months		35,877		15,147
Over six through twelve months		6,427		16,235
Over one year through two years		1,712		1,940
Over two years		219		575

Total	$	75,354	$	48,317

(7) FHLB ADVANCES AND SHORT-TERM BORROWED FUNDS

DNB's short-term borrowed funds consist of borrowings at the Federal Home Loan Bank (FHLB) of Pittsburgh, repurchase agreements and Federal funds purchased. Repurchase agreements and Federal funds purchased generally represent one-day borrowings. Borrowings at the FHLB consist of overnight and 90 day borrowings. DNB had $29.9 million of repurchase agreements at December 31, 2007 with an average rate of 3.55%.

In addition to short-term borrowings, DNB maintains other borrowing arrangements with the FHLB. DNB has a maximum borrowing capacity at the FHLB of approximately $124.0 million. At December 31, 2007, DNB had $50 million of outstanding advances, which mature at various dates through the year-ended December 31, 2015, as shown in the table below. Of the advances maturing in 2009 and thereafter, $35 million are convertible term advances and are callable, at the FHLB's option, at various dates starting on January 22, 2008. None of these advances were called on that date. If an advance is called by the FHLB, DNB has the option of repaying the borrowing, or continue to borrow at three month Libor plus 10-14 basis points, depending on the advance. FHLB advances are collateralized by a pledge of unencumbered investment securities, certain mortgage loans or a lien on the Bank's FHLB stock.

	December 31, 2007
(Dollars in thousands)	Weighted Average Rate		Amount

Due by December 31, 2009	4.43	%	$	7,000
Due by December 31, 2010	5.34			28,000
Due by December 31, 2011	5.46			5,000
Thereafter	5.86			10,000

Total	5.33	%	$	50,000

(8) CAPITAL LEASE OBLIGATIONS

Included in other borrowings is a long-term capital lease agreement, which relates to DNB's West Goshen branch. As of December 31, 2007 the branch has a carrying amount of $471,000, net of accumulated depreciation of $279,000, and is included in the balance of office properties and equipment in the accompanying statements of financial condition. The following is a schedule of the future minimum lease payments, together with the present value of the net minimum lease payments, as of December 31, 2007:

(Dollars in thousands) Year ended December 31	Amount

2008	$	106
2009		106
2010		106
2011		106
2012		106
Thereafter		1,030

Total minimum lease payments		1,560
Less amount representing interest		(885	)

Present value of net minimum lease payments	$	675

(9) JUNIOR SUBORDINATED DEBENTURES

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

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 $5.0 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.

(10) FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value assumptions, methods, and estimates are set forth below for DNB's financial instruments.

Limitations Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time DNB's entire holdings of a particular financial instrument. Because no market exists for a significant portion of DNB's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments.

Cash, Federal Funds Sold, Investment Securities, Accrued Interest Receivable and Accrued Interest Payable The carrying amounts for short-term investments (cash and Federal funds sold) and accrued interest receivable and payable approximate fair value. The fair value of investment securities is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The carrying amount of non-readily marketable equity securities approximates liquidation value.

Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial mortgages, residential mortgages, consumer and student loans, and non-accrual loans. The fair value of performing loans is calculated by discounting expected cash flows using an estimated market discount rate. Expected cash flows include both contractual cash flows and prepayments of loan balances. Prepayments on consumer loans were determined using the median of estimates of securities dealers for mortgage-backed investment pools.

The estimated discount rate considers credit and interest rate risk inherent in the loan portfolios and other factors such as liquidity premiums and incremental servicing costs to an investor. Management has made estimates of fair value discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, management has no basis to determine whether the fair value presented below would be indicative of the value negotiated in an actual sale.

The fair value for non-accrual loans was derived through a discounted cash flow analysis, which includes the opportunity costs of carrying a non-performing asset. An estimated discount rate was used for all non-accrual loans, based on the probability of loss and the expected time to recovery.

Deposits and Borrowings The fair value of deposits with no stated maturity, such as non-interest-bearing deposits, savings, NOW and money market accounts, is equal to the amount payable on demand at December 31, 2007 and 2006. The fair values of time deposits and borrowings are based on the present value of contractual cash flows. The discount rates used to compute present values are estimated using the rates currently offered for deposits of similar maturities in DNB's marketplace and rates currently being offered for borrowings of similar maturities.

Off-balance-sheet Instruments Off-balance-sheet instruments are primarily comprised of loan commitments, which are generally priced at market at the time of funding. Fees on commitments to extend credit and stand-by letters of credit are deemed to be immaterial and these instruments are expected to be settled at face value or expire unused. It is impractical to assign any fair value to these instruments. At December 31, 2007 and 2006, un-funded loan commitments totaled $60.6 million and $62.1 million, respectively. Stand-by letters of credit totaled $4.6 million and $7.6 million at December 31, 2007 and 2006, respectively.

The following tables summarize information for all on-balance-sheet financial instruments.

	December 31
	2007				2006
(Dollars in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value

Financial assets
Cash and Federal funds sold	$	45,331	$	45,331	$	24,227	$	24,227
Investment securities — AFS		152,570		152,570		131,636		131,636
Investment securities — HTM		14,921		14,592		18,931		18,393
Net loans and leases		309,342		308,078		325,240		319,190
Accrued interest receivable		2,610		2,610		2,420		2,420
Financial liabilities
Deposits		412,920		401,576		381,027		361,444
Borrowings		89,877		91,731		110,538		109,720
Accrued interest payable		1,498		1,498		1,061		1,061

(11) FEDERAL INCOME TAXES

Income tax expense (benefit) was comprised of the following:

		Year Ended December 31
(Dollars in thousands)		2007			2006			2005

Current tax expense:
	Federal	$	586		$	425		$	429
	State		2			—			—
Deferred income tax (benefit):
	Federal		(216	)		(384	)		(518	)
	State		—			—			—

Income tax expense (benefit)		$	372		$	41		$	(89	)

The effective income tax rates of 17% for 2007, 2% for 2006 and (4%) for 2005 were different than the applicable statutory Federal income tax rate of 34%. The reason for these differences follows:

	Year Ended December 31
(Dollars in thousands)	2007			2006			2005

Federal income taxes at statutory rate	$	739		$	608		$	700
Decrease resulting from:
Low income housing credits		(36	)		(36	)		(36	)
Tax-exempt interest and dividend preference		(285	)		(498	)		(394	)
Change in valuation allowance		(11	)		29			(308	)
Bank owned life insurance		(97	)		(83	)		(73	)
Other, net increase		62			21			22

Income tax expense (benefit)	$	372		$	41		$	(89	)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

			December 31
(Dollars in thousands)			2007			2006

Deferred tax assets:
	Allowance for credit losses		$	1,323		$	1,437
	Unrealized losses on securities available for sale			—			398
	Unrealized loss on pension obligation			119			288
	AMT credit carryforward			314			381
	Low income housing tax credit carry forward			500			407
	Capital loss disallowance			443			454
	Unvested stock awards			94			76
	Deferred gain on sale / leaseback on buildings			159			214
	Deferred compensation (SERP)			141			38
	Non accrued interest			39			146
	Charitable contributions carryover			81			48
	Joint venture difference			67			59
	Deferred compensation (BOLI)			270			—
	Accrued expenses			4			—

	Total gross deferred tax assets			3,554			3,946
Deferred tax liabilities:
	Unrealized gains on securities available for sale			(245	)		—
	Depreciation			(179	)		(272	)
	Pension expense			(140	)		(293	)
	Tax bad debt reserve			(130	)		(167	)
	Bank shares tax credit			(68	)		(68	)
	Prepaid expenses			(186	)		(193	)

	Total gross deferred tax liabilities			(948	)		(993	)

Valuation allowance				(443	)		(454	)

		Net deferred tax asset	$	2,163		$	2,499

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 December 31, 2007

During 2005, DNB reversed a portion of the previously recorded valuation allowance for deferred tax assets and recognized a related income tax benefit of $308,000. A significant portion of the reversal was associated with a tax capital gain recognized on the sale of two operations buildings, as well as an additional reversal made in connection with the sale of agency preferred securities, both of which are considered "Capital Assets" as defined under Internal Revenue Code (IRC) Section 1221.

During 2006, DNB increased the valuation allowance for federal tax assets by $29,000 related to additional capital loss tax benefits that management believes will not be realized. During 2007, DNB decreased the valuation allowance for federal tax assets by $11,000 related to realized capital gains that were offset by DNB's capital loss carryovers.

During 2006, DNB recorded an income tax benefit of $25,000 relating to the exercise of stock options by employees and directors. This benefit was credited to surplus. DNB has capital loss carryovers of $1,303,000 which will expire on December 31, 2009 if not utilized. DNB has recorded a valuation allowance of $443,000 for the entire amount of tax benefits associated with this item. In addition, DNB had AMT and low-income housing tax credit (LIHC) carryforwards as of December 31, 2007 of $314,000 and $500,000, respectively. The AMT credit carryforward has an indefinite life. The LIHC carryforward has a life of twenty years and will expire in the year 2023, if not used. DNB also has a charitable contribution carryover of $238,000 at December 31, 2007, which will expire on December 31, 2011 if not utilized.

(12) 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 reflects the potential dilution that could occur from the exercise of stock options and is computed using the treasury stock method. The difference between basic and diluted EPS, for DNB, is attributable to stock options and unvested stock. At December 31, 2007, there were 224,487 anti-dilutive stock options outstanding as well as 13,093 anti-dilutive stock awards. At December 31, 2006, there were 120,962 anti-dilutive stock options outstanding and 14,204 anti-dilutive stock awards and at December 31, 2005 there were 94,500 anti-dilutive stock options and 17,728 anti-dilutive stock awards. EPS, dividends per share, and weighted average shares outstanding have been adjusted to reflect the effect of the 5% stock dividend paid in December 2007. The dilutive effect of stock options on basic earnings per share is presented below.

	Year Ended December 31
	2007					2006						2005

(In thousands, except share data)	Income		Shares	Amount		Income		Shares	Amount			Income		Shares	Amount

Basic EPS
Income available to common stockholders	$	1,802	2,614	$	0.69	$	1,747	2,625	$	0.67		$	2,148	2,333	$	0.92

Diluted EPS
Effect of dilutive common stock options		—	12		—		—	19		(.01	)		—	29		(.01	)

Income available to common stockholders	$	1,802	2,626	$	0.69	$	1,747	2,644	$	0.66		$	2,148	2,362	$	0.91

(13) OTHER COMPREHENSIVE INCOME (LOSS)

The components of "Other Comprehensive Income (Loss)" and the related tax effects are as follows:

(Dollars in thousands)		Before-Tax Amount			Tax Benefit (Expense)			Net-of-Tax Amount

Year Ended December 31, 2007:
Unrealized losses on securities:
	Unrealized holding gains arising during the period	$	2,286		$	(777	)	$	1,509
	Less reclassification for gains included in net income		(395	)		134			(261	)
Unrealized actuarial gains—pension			753			(256	)		497

Other Comprehensive Income		$	2,644		$	(899	)	$	1,745

Year Ended December 31, 2006:
Unrealized losses on securities:
	Unrealized holding gains arising during the period	$	348		$	(118	)	$	230
	Less reclassification for gains included in net income		(13	)		5			(8	)

Other Comprehensive Income		$	335		$	(113	)	$	222

Year Ended December 31, 2005:
Unrealized losses on securities:
	Unrealized holding losses arising during the period	$	(2,071	)	$	699		$	(1,372	)
	Less reclassification for losses included in net income		662			(225	)		437
Unrealized actuarial losses—pension			(1,129	)		384			(745	)

Other Comprehensive Loss		$	(2,538	)	$	858		$	(1,680	)

(14) BENEFIT PLANS

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

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

The following table sets forth the Plan's funded status, as of the measurement dates of December 31, 2007 and 2006 and amounts recognized in DNB's consolidated financial statements at December 31, 2007 and 2006:

	December 31
(Dollars in thousands)	2007			2006

Projected Benefit obligation	$	(6,557	)	$	(6,850	)

Accumulated benefit obligation		(6,557	)		(6,850	)
Fair value of plan assets		6,968			6,866

Amounts recognized in the statement of financial position consist of:
Assets	$	411		$	16
Liabilities		—			—

Funded status	$	411		$	16

Amounts recognized in accumulated other comprehensive income consist of:
Net loss	$	349		$	847
Net transition obligation (asset)		—			—

Total	$	349		$	847

The amounts and changes in DNB's pension benefit obligation and fair value of plan assets for the years ended December 31, 2007 and 2006 are as follows:

		Year ended December 31
(Dollars in thousands)		2007			2006

Change in benefit obligation
	Benefit obligation at beginning of year	$	6,850		$	6,641
	Interest cost		395			383
	Actuarial (gain) loss		(388	)		213
	Benefits paid		(321	)		(387	)
	Service Cost		21			—

	Benefit obligation at end of year	$	6,557		$	6,850

Change in plan assets
	Fair value of assets at beginning of year	$	6,866		$	6,475
	Actual return on plan assets		423			778
	Employer contribution		—			—
	Benefits paid		(321	)		(387	)

	Fair value of assets at end of year	$	6,968		$	6,866

The Plan's assets are invested using an asset allocation strategy in units of certain equity, bond, real estate and money market funds.

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

	Year Ended December 31
(Dollars in thousands)	2007			2006			2005

Service cost	$	21		$	16		$	21
Interest cost		395			383			391
Expected return on plan assets		(400	)		(409	)		(414	)
Amortization of transition asset		—			—			(1	)
Recognized net actuarial loss		86			111			98

Net periodic cost	$	102		$	101		$	95

Assumptions used:
Discount rate		6.35	%		5.75	%		5.75	%
Rate of increase in compensation level		N/A			N/A			N/A
Expected long-term rate of return on assets		6.50			6.50			6.50

DNB's estimated future benefit payments are as follows:

(Dollars in thousands)	Benefits

2008	$	366
2009		381
2010		381
2011		363
2012		376
2013-2017		2,075

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, as defined in the Plan, receive an annual retirement benefit of $34,915, payable monthly, from the date of his termination of employment until his death. If the 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 the Replacement Plan.

Supplemental Executive Retirement Plan for Chairman and Chief Executive Officer On December 20, 2006, the Board of Directors of DNB Financial Corporation approved a Supplemental Executive Retirement Plan (also known as a SERP) for its Chairman and Chief Executive Officer, William S. Latoff. The purpose of the SERP is to provide Mr. Latoff a pension supplement beginning at age 70 for 10 years in approximately equal amounts each year and to compensate him for the loss of retirement plan funding opportunities from his other business interests because of his commitments to DNB as Chairman and CEO. Mr. Latoff was age 55 when DNB hired him as Chairman and CEO. Pursuant to the SERP, DNB proposes to make annual contributions of $70,000 prior to December 31 each year, commencing in 2006, until 2018, the year in which Mr. Latoff turns age 70, for a total of 13 installments. These contributions will be funded under a Trust Agreement (also known as a rabbi trust) between DNB Financial Corporation, as grantor, and its wholly owned subsidiary DNB First, National Association, as trustee, which was also approved by the Board of Directors of DNB Financial Corporation on December 20, 2006.

On March 28, 2007, DNB's Board of Directors approved an amendment and restatement to the existing SERP that had been adopted by DNB on December 20, 2006 for William S. Latoff, the Chairman and Chief Executive Officer of DNB and the Bank. The amendment and restatement amends the SERP to provide for a 15-year payout schedule instead of a 10-year payout schedule, and substitutes a designated rate of return for the original provision that amounts credited to Mr. Latoff be invested according to his direction in order to determine a rate of return on DNB's payment obligations under the SERP. On March 28, 2007, DNB's Board of Directors also approved a termination of the rabbi trust agreement that

had secured the SERP. The amendment of the SERP and the termination of the trust were effective April 1, 2007.

401(k) Retirement Savings Plan During the fourth quarter of 1994, the Bank adopted a retirement savings plan intended to comply with Section 401 (k) of the Internal Revenue Code of 1986. Prior to January 1, 2004, employees became eligible to participate after 6 months of service, and would thereafter participate in the 401(k) plan for any year in which they have been employed by the Bank for at least 501 hours. Effective January 1, 2004, employees were eligible to participate in the plan immediately after hire and regardless of the hours they were employed in any year. Effective July 1, 2005 all employees, with the exception of on-call employees, were eligible to participate in the plan immediately after hire and regardless of the hours they were employed in any year. In general, amounts held in a participant's account are not distributable until the participant terminates employment with the Bank, reaches age 59 ¹ / 2 , dies or becomes permanently disabled.

Participants are permitted to authorize pre-tax savings contributions, and beginning July 1, 2006, after-tax contributions, to a separate trust established under the 401(k) plan, subject to limitations on deductibility of contributions imposed by the Internal Revenue Code. The Bank makes matching contributions of $.25 for every dollar of deferred salary, up to 6% of each participant's annual compensation. Each participant is 100% vested at all times in employee and employer contributions. The Corporation's matching contributions to the 401 (k) plan was $93,000, $94,000 and $81,000 in 2007, 2006 and 2005, respectively.

Profit Sharing Plan The Bank initiated a Profit Sharing Plan for eligible employees in 2004. Under the plan, employees are immediately eligible for benefits and will be 100% vested after 3 years of service. In order to receive the profit sharing contribution, an employee must be employed on the last day of each plan year to participate in benefits. The plan provides that the Bank make contributions beginning in 2005 for the 2004 plan year equal to 3% of the eligible participant's W-2 wages.

Safe Harbor Contribution — Beginning January 1, 2005, the Bank adopted a safe harbor plan, which requires a 3% qualified non-elective contribution to be made to any employee with wages in the current year. Vesting is 100% at all times.

DNB's related expense associated with the Profit Sharing Plan was $226,000, $252,000 and $187,000 in 2007, 2006 and 2005, respectively.

Stock Option Plan DNB has a Stock Option Plan for employees and directors. Under the plan, options (both qualified and non-qualified) to purchase a maximum of 643,369 shares of DNB's common stock could be issued to employees and directors.

Under the plan, option exercise prices must equal the fair market value of the shares on the date of option grant and the option exercise period may not exceed ten years. Vesting of options under the plan is determined by the Plan Committee. There were 149,263, 118,400 and 90,852 shares available for grant at December 31, 2007, 2006 and 2005, respectively.

The per share weighted-average fair value of stock options granted during 2005 was $6.54 on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions:

	Year Ended December 31
(Dollars in thousands)	2005

Dividend yield	1.99	%
Expected volatility	25.05
Risk-free interest rate	4.45
Expected lives (in years)	10.00

Stock option activity is indicated below. Stock options have been adjusted for the 5% stock dividends in December of 2007, 2006 and 2005.

		Number Outstanding		Weighted Average Exercise Price

Outstanding January 1, 2005		201,315		$	17.90
	Granted	132,383			20.15
	Exercised	(12,705	)		12.61
	Forfeited	(2,320	)		22.75

Outstanding December 31, 2005		318,673			19.01
	Granted	—			—
	Exercised	(7,355	)		9.13
	Forfeited	(27,548	)		20.39

Outstanding December 31, 2006		283,770			19.13
	Granted	—			—
	Exercised	(9,589	)		12.17
	Forfeited	(28,891	)		20.06
	Expired	(1,970	)		11.84

Outstanding December 31, 2007		243,320		$	19.36

The weighted average price and weighted average remaining contractual life as of December 31, 2007 for outstanding options are listed below. All outstanding options are exercisable.

		Weighted Average
Range of Exercise Prices	Number Outstanding	Exercise Price		Remaining Contractual Life

$ 9.23-10.99	9,419	$	9.23	2.50 years
11.00-13.99	9,414		11.16	3.50 years
14.00-19.99	117,127		17.42	5.89 years
20.00-22.99	59,319		22.12	3.84 years
23.00-24.27	48,041		24.27	7.30 years

Total	243,320	$	19.36	5.45 years

Stock-Based Compensation DNB maintains an Incentive Equity and Deferred Compensation Plan. The plan provides that up to 243,101 (as adjusted for subsequent stock dividends) shares of common stock may be granted, at the discretion of the Board, to individuals of the Company. During 2007, 2006 and 2005, DNB granted 17,010, 0 and 19,309 shares of unvested stock, issuable on the earlier of three years after the date of the grant or a change in control of DNB if the recipients are then employed by DNB ("Vest Date"). Upon issuance of the shares, resale of the shares is restricted for an additional period of time, during which the shares may not be sold, pledged or otherwise disposed of. The 2005 grant is restricted for 2 years and the 2007 grant is restricted for 1 year. Prior to the vest date and in the event the recipient terminates association with DNB for reasons other than death, disability or change in control, the recipient forfeits all rights to the shares that would otherwise be issued under the grant. Share awards granted by the plan were recorded at the date of award based on the market value of shares. Awards are being amortized to expense over the three-year cliff-vesting period. During this three-year period, DNB records compensation expense equal to the value of the shares being amortized. For the year ended December 31, 2007, 2006 and 2005, $53,000, $133,000 and $92,000, respectively was amortized to expense. At December 31, 2007, 2006 and 2005, 212,999, 229,592 and 224,487 shares were reserved for future grants under the plan.

Stock grant activity is indicated below. The shares have been adjusted for the 5% stock dividends in December 2005, 2006 and 2007.

	Shares
Outstanding — January 1, 2005	—
Granted	19,309
Forfeited	(695	)

Outstanding — December 31, 2005	18,614

Granted	—
Forfeited	(4,410	)

Outstanding — December 31, 2006	14,204

Granted	17,010
Forfeited	(1,111	)

Outstanding — December 31, 2007	30,103

(15) COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE-SHEET RISK

DNB had outstanding stand-by letters of credit in the amount of approximately $4.6 million and un-funded loan and lines of credit totaling $60.6 million at December 31, 2007, of which, $61.5 million were variable rate and $3.7 million were fixed rate.

These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet. The exposure to credit loss in the event of non-performance by the party to the financial instrument for commitments to extend credit and stand-by letters of credit is represented by the contractual amount. Management uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. DNB evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral, if any, obtained upon the extension of credit, usually consists of real estate, but may include securities, property or other assets.

Approximately $64.1 million of assets were held by DNB Advisors in a fiduciary, custody or agency capacity at December 31, 2007. These assets are not assets of DNB, and are not included in the consolidated financial statements.

(16) PARENT COMPANY FINANCIAL INFORMATION

Condensed financial information of DNB Financial Corporation (parent company only) follows:

Condensed Statements of Financial Condition (Dollars in thousands)
		December 31
		2007		2006

Assets
	Cash	$	440	$	165
	Investment securities		29		38
	Investment in subsidiary		41,631		40,725
	Other assets		147		156

	Total assets	$	42,247	$	41,084

Liabilities and Stockholders' Equity
Liabilities
	Junior subordinated debentures	$	9,279	$	9,279
	Other liabilities		333		394

	Total liabilities		9,612		9,673

Stockholders' equity			32,635		31,411

Total liabilities and stockholders' equity		$	42,247	$	41,084

Condensed Statements of Operations (Dollars in thousands)
		Year Ended December 31
		2007		2006		2005

Income:
	Equity in undistributed income of subsidiary	$	1,238	$	1,221	$	1,638
	Dividends from subsidiary		1,294		1,240		1,071
	Other income		1		—		—

	Total income		2,533		2,461		2,709

Expenses:
	Interest expense		731		714		561
	Other expenses		—		—		—

	Total expense		731		714		561

Net income		$	1,802	$	1,747	$	2,148

Condensed Statements of Cash Flows (Dollars in thousands)
		Year Ended December 31
		2007			2006			2005

Cash Flows From Operating Activities:
Net income		$	1,802		$	1,747		$	2,148
Adjustments to reconcile net income to net cash
provided by operating activities:
	Equity in undistributed income of subsidiary		(1,238	)		(1,221	)		(1,638	)
	Unvested stock amortization		53			132			91
	Net change in other liabilities		(5	)		11			40
	Net change in other assets		15			1			6

Net Cash Provided by Operating Activities			627			670			647

Cash Flows From Investing Activities:
Payments for investments in and advances to subsidiaries			(56	)		258			(9,672	)
Dividend from subsidiary			1,500			3			33
Purchase of available for sale security			—			(1	)		(37	)

Net Cash Provided (Used) by Investing Activities			1,444			260			(9,676	)

Cash Flows From Financing Activities:
Proceeds from advances from subsidiaries			—			—			4,124
Proceeds from issuance of common stock			378			485			5,965
Purchase of treasury stock			(872	)		(310	)		(5	)
Dividends paid			(1,302	)		(1,239	)		(1,071	)

Net Cash (Used) Provided by Financing Activities			(1,796	)		(1,064	)		9,013

Net Change in Cash and Cash Equivalents			275			(134	)		(16	)

Cash at Beginning of Period			165			299			315

Cash at End of Period		$	440		$	165		$	299

(17) 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, which amounted to $3.2 million for the year ended December 31, 2007.

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

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

since the most recent regulatory notification that management believes would have changed the Bank's category. Actual capital amounts and ratios are presented below.

		Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)		Amount		Ratio		Amount		Ratio		Amount		Ratio

DNB Financial Corporation
December 31, 2007:
	Total risk-based capital	$	44,859	13.08	%	$	27,437	8.00	%	$	34,296	10.00	%
	Tier 1 capital		40,901	11.93			13,719	4.00			20,578	6.00
	Tier 1 (leverage) capital		40,901	7.77			21,061	4.00			26,326	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.
December 31, 2007:
	Total risk-based capital	$	44,581	13.02	%	$	27,385	8.00	%	$	34,231	10.00	%
	Tier 1 capital		40,624	11.87			13,692	4.00			20,539	6.00
	Tier 1 (leverage) capital		40,624	7.72			21,036	4.00			26,295	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

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
DNB Financial Corporation:

We have audited the accompanying consolidated statements of financial condition of DNB Financial Corporation and subsidiaries (the "Corporation") as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DNB Financial Corporation and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in note 1 to the consolidated financial statements, the Corporation adopted FASB Statement No. 123(revised), Share-Based Payment, a revision of FASB Statement No. 123 , Accounting for Stock-Based Compensation , effective January 1, 2006, and Emerging Issues Task Force Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements , effective January 1, 2007.

Philadelphia, Pennsylvania
March 27, 2008

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

Item 9A. 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 December 31, 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's Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management assessed the effectiveness of the Corporation's internal control over financial reporting at December 31, 2007. To make this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework . Management believes that, as of December 31, 2007 the Corporation's internal control over financial reporting was effective. This annual report on Form 10-K does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report.

Item 9B. Other Information

None

Part III

Item 10. Directors and Executive Officers of the Registrant

The information required herein with respect to Registrant's directors and officers is incorporated by reference to pages 7-22 of the Registrant's Proxy Statement for the 2008 Annual Meeting of Stockholders, and the information required herein with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to page 7 of the Registrant's Proxy Statement for the Annual Meeting of Stockholders. The Registrant has adopted a Code of Ethics that applies to the Registrant's principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The Registrant's current Code of Ethics is incorporated herein by reference as Exhibit 14 to this report.

Item 11. Executive Compensation

The information required herein is incorporated by reference to pages 14-18 of the Registrant's Proxy Statement for the 2008 Annual Meeting of Stockholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

(a) Information Regarding Equity Compensation Plans

The following table summarizes certain information relating to equity compensation plans maintained by the Registrant as of December 31, 2007:

Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column)
Equity compensation plans approved by security holders:
	1995 Stock Option Plan	243,320	$	19.36	149,263
	2004 Incentive Equity and Deferred Compensation Plan	30,103		N/A	212,999
Equity compensation plans not approved by security holders		—		—	—

Total		273,423		N/A	362,262

(b) The balance of the information required herein is incorporated by reference to page 6 of the Registrant's Proxy Statement for the 2008 Annual Meeting of Stockholders.

Item 13. Certain Relationships and Related Transactions

The information required herein is incorporated by reference to pages 28-29 of the Registrant's Proxy Statement for the 2008 Annual Meeting of Stockholders.

Item 14. Principal Accountant Fees and Services

The information required herein is incorporated by reference to page 30 of the Registrant's Proxy Statement for the 2008 Annual Meeting of Stockholders.

Part IV

Item 15. Exhibits, Financial Statement Schedules.

(a)(1) Financial Statements.

The consolidated financial statements listed below, together with an opinion of KPMG LLP dated March 27, 2008 with respect thereto, are set forth beginning at page 46 of this report under Item 8, "Financial Statements and Supplementary Data."

Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Selected Quarterly Financial Data (Unaudited)

(a)(2) Not applicable

(a)(3) Exhibits, pursuant to Item 601 of Regulation S-K.

The exhibits listed on the Index to Exhibits on pages 82 – 84 of this report are incorporated by reference or filed or furnished herewith in response to this Item.

SIGNATURES

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
March 27, 2008
	BY:	/s/ William S. Latoff William S. Latoff, Chairman of the Board and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ William J. Hieb William J. Hieb, President and Chief Operating Officer		March 27, 2008
/s/ Gerald F. Sopp Gerald F. Sopp Chief Financial Officer (Principal Accounting Officer)		March 27, 2008
/s/ Thomas A. Fillippo Thomas A. Fillippo Director		March 27, 2008
/s/ Mildred C. Joyner Mildred C. Joyner Director		March 27, 2008
/s/ James J. Koegel James J. Koegel Director		March 27, 2008
/s/ Eli Silberman Eli Silberman Director		March 27, 2008
/s/ James H. Thornton James H. Thornton Vice-Chairman of the Board		March 27, 2008

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)	Bylaws of the Registrant as amended December 19, 2007, filed herewith.
4		Registrant has certain debt obligations outstanding, for none of which do the instruments defining holders rights authorize an amount of securities in excess of 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. Registrant agrees to furnish copies of such agreements to the Commission on request.
10	(a)*	Amended and Restated Change of Control Agreements dated December 20, 2006 between DNB Financial Corporation and DNB First, N.A. and the following executive officers, each in the form filed March 26, 2007 as item 10(a) to Form 10-K for the fiscal year-ended December 31, 2006 (No. 0-16667) and incorporated herein by reference: Ronald K. Dankanich, Bruce E. Moroney, C. Tomlinson Kline III, and Richard J. Hartmann.
	(b)**	1995 Stock Option Plan of DNB Financial Corporation (as amended and restated, effective as of April 27, 2004), filed on March 29, 2004 as Appendix A to Registrant's Proxy Statement for its Annual Meeting of Stockholders held April 27, 2004, and incorporated herein by reference.
	(c)*	Form of Change of Control Agreements, as amended November 10, 2003, filed on November 14, 2003 as Item 10(e) to Form 8-K (No. 0-16667) and incorporated herein by reference between DNB Financial Corporation and DNB First, N.A. and each of the following Directors: (i) dated November 10, 2005 with James H. Thornton, James J. Koegel and Eli Silberman, and (ii) dated February 23, 2005 with Mildred C. Joyner, and dated February 22, 2006 with Thomas A. Fillippo.
	(d)***	DNB Financial Corporation Incentive Equity and Deferred Compensation Plan filed March 10, 2005 as item 10(i) to Form 10-K for the fiscal year-ended December 31, 2004 (No. 0-16667) and incorporated herein by reference.
	(e)*	Amended and Restated Change of Control Agreement among DNB Financial Corporation, DNB First, N.A. and William S. Latoff, dated December 20, 2006, filed March 26, 2007 as item 10(e) to Form 10-K for the fiscal year-ended December 31, 2006 (No. 0-16667) and incorporated herein by reference.
	(f)*	Agreement of Lease dated February 10, 2005 between Headwaters Associates, a Pennsylvania general partnership, as Lessor, and DNB First, National Association as Lessee for a portion of premises at 2 North Church Street, West Chester, Pennsylvania, filed March 10, 2005 as Item 10(l) to Form 10-K for the fiscal year ended December 31, 2004 (No. 0-16667) and incorporated herein by reference, as amended by Addendum to Agreement of Lease dated as of November 15, 2005, filed March 23, 2006 as Item 10(l) to Form 10-K for the fiscal year ended December 31, 2005 (No. 0-16667) and incorporated herein by reference, and as further amended by Second Addendum to Agreement of Lease dated as of May 25, 2006, filed August 14, 2006 as Item 10(l) to Form 10-Q for the fiscal quarter ended June 30, 2006 (No. 0-16667) and incorporated herein by reference.

	(g)		Marketing Services Agreement between TSG, Inc., a Pennsylvania business corporation (the "Service Provider") for which Eli Silberman, a Director of Registrant, is the President and owner dated December 19, 2007, filed herewith.
	(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.
	(v)***	Form of Restricted Stock Award Agreement dated November, 28, 2007, filed herewith.
11		Registrant's Statement of Computation of Earnings Per Share is set forth in Footnote 12 to Registrant's consolidated financial statements at page 66 of this Form 10-K under Item 8, "Financial Statements and Supplementary Data," and is incorporated herein by reference.
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.
21		List of Subsidiaries, filed herewith.
23		Consent of KPMG LLP, filed herewith.
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.

DNB FINANCIAL CORPORATION
CORPORATE HEADQUARTERS
4 Brandywine Avenue
Downingtown, PA 19335
Tel. 610-269-1040 Fax 484-359-3176
Internet http://www.dnbfirst.com
FINANCIAL INFORMATION
Investors, brokers, security analysts and others desiring financial information should contact
Gerald F. Sopp at 484-359-3143 or
gsopp@dnbfirst.com
AUDITORS
KPMG LLP
1601 Market Street
Philadelphia, PA 19103-2499
COUNSEL
Stradley, Ronon, Stevens and
Young, LLP
30 Valley Stream Parkway
Malvern, PA 19355
REGISTRAR AND STOCK
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
800-368-5948
www.rtco.com
MARKET MAKERS
Boenning & Scattergood, Inc.
800-842-8928
Ferris, Baker Watts, Inc.
877-840-0012
Janney Montgomery Scott, Inc.
800-526-6397

DIRECTORS
William S. Latoff
Chairman and Chief Executive Officer
James H. Thornton
Vice Chairman
Thomas A. Fillippo, Sr.
William J. Hieb
Mildred C. Joyner
James J. Koegel
Eli Silberman
DIRECTORS EMERITUS
Ellis Y. Brown III
Robert J. Charles
I. Newton Evans, Jr.
Vernon J. Jameson
Henry F. Thorne
DNB FIRST, N.A.
DIRECTORS
William S. Latoff
Chairman and Chief Executive Officer
William J. Hieb
President and Chief Operating Officer
Thomas A. Fillippo
Mildred C. Joyner
James J. Koegel
Eli Silberman
James H. Thornton

EXECUTIVE OFFICERS
William S. Latoff
Chairman and Chief Executive Officer
William J. Hieb
President and Chief Operating Officer
Ronald K. Dankanich
Executive Vice President
Operations, IT and HR
Richard J. Hartmann
Executive Vice President
Retail Banking and Marketing
Albert J. Melfi, Jr.
Executive Vice President
Chief Lending Officer
Bruce E. Moroney
Executive Vice President
Chief Accounting Officer
Gerald F. Sopp
Executive Vice President
Chief Financial Officer

QuickLinks

DNB FINANCIAL CORPORATION Table of Contents
DNB FINANCIAL CORPORATION FORM 10-K
Forward-Looking Statements
Part I

Item 1. Business

Supervision and Regulation - Registrant
Federal Banking Laws
Bank Holding Company Act - Financial Holding Companies
Change in Bank Control Act
Pennsylvania Banking Laws
Environmental Laws
Supervision and Regulation - Bank

Item 1A. Risk Factors

Item 1B. Unresolved Staff Comments

Item 2. Properties

Item 3. Legal Proceedings

Item 4. Submission of Matters to a Vote of Security Holders

Part II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

CORPORATION PERFORMANCE COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG DNB FINANCIAL CORP., the S&P INDEX & the S&P FINANCIAL INDEX

Item 6. Selected Financial Data

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

2007 Results Compared to 2006 Results
2006 Results Compared to 2005 Results
2007 Results Compared to 2006 Results
2006 Results Compared to 2005 Results
2007 Results Compared to 2006 Results
2006 Results Compared to 2005 Results
2007 Results Compared to 2006 Results
2006 Results Compared to 2005 Results
Financial Condition Analysis

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Management's Report on Internal Control Over Financial Reporting

Item 9B. Other Information

Part III

Item 10. Directors and Executive Officers of the Registrant

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions

Item 14. Principal Accountant Fees and Services

Part IV

Item 15. Exhibits, Financial Statement Schedules.

SIGNATURES
Index to Exhibits

Exhibit 3.(ii)

AMENDED AND RESTATED BYLAWS

DNB FINANCIAL CORPORATION

(Amended and restated as of December 19, 2007)

Article 1

CORPORATION OFFICE

Section 1. 1 The Corporation shall have and continuously maintain in Pennsylvania a registered office which may, but need not, be the same as its place of business and at an address to be designated from time to time by the Board of Directors.

Section 1. 2 The Corporation may also have offices at such other places as the Board of Directors may from time to time designate or the business of the Corporation may require.

Article 2

SHAREHOLDERS MEETINGS

Section 2.1 All meetings of the shareholders shall be held at such time and place as may be fixed from time to time by the Board of Directors.

Section 2.2 The annual meeting of the shareholders shall be held no later than the thirty-first day of May in each year, when the shareholders shall elect members to the Board of Directors and transact such other business as may properly be brought before the meeting.

Section 2.3 Special meetings of the shareholders may be called at any time by the Chairperson of the Board, the President, or the chief executive officer, or a majority of the Board of Directors, or a majority of its Executive Committee. At any time, upon written request of any person who has called a special meeting, it shall be the duty of the Secretary to fix the time of the meeting which, if the meeting is called pursuant to a statutory right, shall be held not more than sixty (60) days after the receipt of the request. If the Secretary neglects or refuses to fix the time of the meeting, the person or persons calling the meeting may do so.

Section 2.4 Written notice of all shareholder meetings (other than adjourned meetings of shareholders), shall state the place, date, hour, the purpose thereof and shall be served upon, or mailed, postage prepaid, or telegraphed, charges prepaid, at least ten days before such meeting, unless a greater period of notice is required by statute or by these Bylaws, to each shareholder entitled to vote thereat at such address as appears on the transfer books for shares of the Corporation.

Section 2.5 When a meeting of shareholders is adjourned, it shall not be necessary to give any notice of the adjourned meeting or of the business to be transacted at an adjourned meeting, other than by announcement at the meeting at which the adjournment is taken, unless

the Board of Directors fixes a new record date for the adjourned meeting.

Article 3

QUORUM OF SHAREHOLDERS

Section 3.1 The presence, in person or by proxy, of shareholders entitled to cast at least a majority of the votes which all shareholders are entitled to cast on the particular matter shall constitute a quorum for purposes of considering such matter, and unless otherwise provided by statute the acts of such shareholders at a duly organized meeting shall be the acts of the shareholders. If, however, any meeting of shareholders cannot be organized because of lack of a quorum, those present, in person or by proxy, shall have the power, except as otherwise provided by statute, to adjourn the meeting to such time and place as they may determine, without notice other than an announcement at the meeting, until the requisite number of shareholders for a quorum shall be present, in person or by proxy, except that in the case of any meeting called for the election of directors such meeting may be adjourned only for periods not exceeding fifteen (15) days as the holders of a majority of the shares present, in person or by proxy, shall direct, and those who attend the second of such adjourned meetings, although less than a quorum, shall nevertheless constitute a quorum for the purpose of electing directors. At any adjourned meeting at which a quorum shall be present or so represented, any business may be transacted which might have been transacted at the original meeting if a quorum had been present. The shareholders present, in person or by proxy, at a duly organized meeting can continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum.

Article 4

VOTING RIGHTS

Section 4.1 Except as may be otherwise provided by statute or by the Articles of Incorporation, at every shareholders meeting, every shareholder entitled to vote thereat shall have the right to one vote for every share having voting power standing in his or her name on the transfer books for shares of the Corporation on the record date fixed for the meeting. No share shall be voted at any meeting if an installment is due and unpaid thereon.

Section 4.2 Except to the extent applicable law or the Articles of Incorporation provide otherwise, when a quorum is present at any meeting, a majority of the votes cast shall decide any question, other than the election of directors, brought before such meeting.

Section 4.3 Upon demand made by a shareholder entitled to vote at any election for directors before the voting begins, the election shall be by ballot.

Article 5

PROXIES

Section 5.1 Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him or her by proxy. Every proxy shall be executed in writing by the shareholder or his or her duly authorized attorney in fact and filed with the Secretary of the Corporation. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until notice thereof has been given to the Secretary of the Corporation. No unrevoked proxy shall be valid after eleven (11) months from the date of its execution, unless a longer time is expressly provided therein, but in no event shall a proxy, unless coupled with an interest, be voted after three years from the date of its execution. A proxy shall not be revoked by the death or incapacity of the maker, unless before the vote is counted or the authority is exercised, written notice of such death or incapacity is given to the Secretary of the Corporation.

Article 6

RECORD DATE

Section 6.1 The Board of Directors may fix a time, not more ninety (90) days prior to the date of any meeting of shareholders, or the date fixed for the payment of any dividend or distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or go into effect, as a record date for the determination of the shareholders entitled to notice of, and to vote at, any such meeting, or entitled to receive payment of any such dividend or distribution, or to receive any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares. In such case, only such shareholders as shall be shareholders of record on the date so fixed shall be entitled to notice of, or to vote at, such meeting or to receive payment of such dividend or distribution or to receive such allotment of rights or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the transfer books for shares of the Corporation after any record date fixed as aforesaid. The Board of Directors may close the transfer books for shares of the Corporation against transfers of shares during the whole or any part of such period, and in such case written or printed notice thereof shall be mailed at least ten (10) days before closing thereof to each shareholder of record at the address appearing on the records of the Corporation or supplied by him or her to the Corporation for the purpose of notice. While the transfer books for shares of the Corporation are closed, no transfer of shares shall be made thereon. If no record date is fixed by the Board of Directors for the determination of shareholders entitled to receive notice of, and vote at, a shareholders meeting, transferees of shares which are transferred on the books of the Corporation within ten (10) days next preceding the date of such meeting shall not be entitled to notice of or to vote at such meeting.

Article 7

VOTING LISTS

Section 7.1 The officer or agent having charge of the transfer books for shares of the Corporation shall make a complete list of the shareholders entitled to vote at any meeting of shareholders, arranged in alphabetical order, with the address of and the number of shares held by each. The list shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting for the purposes thereof except that, if the Corporation has 5,000 or more shareholders, in lieu of the making of the list the Corporation may make the information therein available at the meeting by any other means.

Section 7.2 Failure to comply with the requirements of Section 7.1 shall not affect the validity of any action taken at a meeting prior to a demand at the meeting by any shareholder entitled to vote thereat to examine the list. The original share register or transfer book, or a duplicate thereof kept in the Commonwealth of Pennsylvania shall be prima facie evidence as to who are the shareholders entitled to examine the list or share register or transfer book or to vote an any meeting of shareholders.

Article 8

JUDGES OF ELECTION

Section 8.1 In advance of any meeting of shareholders, the Board of Directors may appoint judges of election, who need not be shareholders, to act at the meeting or any adjournment thereof. If judges of election are not so appointed, the presiding officer of the meeting may, and on the request of any shareholder shall, appoint judges of election at the meeting. The number of judges shall be one or three. A person who is a candidate for office to be filled at the meeting shall not act as a judge.

Section 8.2 In case any person appointed as a judge fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the Board of Directors in advance of the convening of the meeting or at the meeting by the presiding officer thereof.

Section 8.3 The judges of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum , the authenticity, validity and effect of proxies, receive votes or ballots, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes, determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. The judges of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three judges of election, the decision, act or certificate of a majority shall be effective in all respects as the decision, act or certificate of all.

Section 8.4 On request of the presiding officer of the meeting, or of any shareholder, the

judges of election shall make a report in writing of any challenge or question or matter determined by them, and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts stated therein.

Article 9

CONSENT OF SHAREHOLDERS IN LIEU OF MEETING

Section 9.1 Any action required or permitted to be taken at a meeting of the shareholders, or of a class of shareholders, may be taken without a meeting, prior or subsequent to the action, if a consent or consents in writing setting forth the action so taken shall be signed by all of the shareholders who would be entitled to vote at a meeting for such purpose and shall be filed with the Secretary of the Corporation.

Section 9.2 The consent or consents in writing required by this Article 9 may be given by proxy in accordance with Section 5.1 hereof.

Article 10

DIRECTORS

Section 10.1 Any shareholder who intends to nominate or to cause to have nominated any candidate for election to the Board of Directors (other than any candidate proposed by the Corporation’s then existing Board of Directors) shall so notify the Secretary of the Corporation in writing not less than ninety (90) days prior to the date of any meeting of shareholders called for the election of directors. Such notification shall contain the following information to the extent known by the notifying shareholder.

(a) the name and address of each proposed nominee;

(b) the age of each proposed nominee;

(d) the number of shares of the Corporation owned by each proposed nominee;

(e) the total number of shares that to the knowledge of the notifying shareholder will be voted for each proposed nominee;

(f) the name and residence address of the notifying shareholder; and

(g) the number of shares of the Corporation owned by the notifying shareholder.

Any nomination for director not made in accordance with this Section shall be disregarded by the presiding officer of the meeting, and votes cast for each such nominee shall be disregarded by the judges of election. In the event that the same person is nominated by more

than one shareholder, if at least one nomination for such person complies with this Section, the nomination shall be honored and all votes cast for such nominee shall be counted.

Section 10.2 The number of directors that shall constitute the whole Board of Directors shall be not less than three. The Board of Directors shall be classified into three classes, each class to be elected for a term of three years. The terms of the respective classes shall expire in successive years as provided in Section 10.3 hereof. Within the foregoing limits, the Board of Directors may from time to time fix the number of directors and their respective classifications. The Directors shall be natural persons of full age and need not be residents of Pennsylvania. Each Director shall own, from time to time, the minimum qualifying interest in the Corporation required under applicable law and regulations. No person who will be sixty-nine (69) years of age or older at the time of his or her election shall be elected a director, except to the extent the Nominating and Corporate Governance Committee (or a committee performing the functions of a board governance or nominating committee at the time) unanimously recommends to the Board, and the Board unanimously approves, a resolution making an exception to this requirement in each particular case.

Section 10.3 At the 1990 annual meeting of shareholders of the Corporation, the shareholders shall elect three Class A directors to serve until the 1993 annual meeting of shareholders. At each annual meeting of shareholders thereafter successors to the class of directors whose term shall then expire shall be elected to hold office for a term of three years so that the term of office of one class of directors shall expire in each year.

Section 10.4 The Board of Directors may declare vacant the office of a director who has been judicially declared of unsound mind or who has been convicted of an offense punishable by imprisonment for a term of more than one year or for any other proper cause which these Bylaws may specify or if, within sixty (60) days or such other time as these Bylaws may specify after notice of his or her selection, he or she does not accept the office either in writing or by attending a meeting of the Board of Directors and fulfill such other requirements of qualification as these Bylaws may specify.

Section 10.5 Upon application of any shareholder or director, the court may remove from office any director in case of fraudulent or dishonest acts, or gross abuse of authority or discretion with reference to the Corporation, or for any other proper cause, and may bar from office any director so removed for a period prescribed by the court. The Corporation shall be made party to the action and, as a prerequisite to the maintenance of an action under this Section 10.5, a shareholder shall comply with Section 1782 of the Business Corporation Law of 1988, and any amendments or supplements thereto.

Section 10.6 An act of the Board of Directors done during the period when a director has been suspended or removed for cause shall not be impugned or invalidated if the suspension or removal is thereafter rescinded by the shareholders or by the Board of Directors or by the final judgment of a court.

Section 10.7 The Board of Directors may appoint a person who previously held the position of director to be a director emeritus. A director emeritus may attend meetings of the

Board of Directors. A director emeritus may advise the Board of Directors on any proposed corporate action but shall not have voting rights. The compensation of a director emeritus shall be determined from time to time by resolution of the Board of Directors.

Article 11

VACANCIES ON BOARD OF DIRECTORS

Article 11.1 Vacancies on the Board of Directors, including vacancies resulting from an increase in the number of directors, shall be filled by a majority of the remaining members of the Board of Directors, though less than a quorum, and each person so appointed shall be a director until the expiration of the term of office of the class of directors to which he or she was appointed.

Article 12

POWERS OF BOARD OF DIRECTORS

Section 12. 1 The business and affairs of the Corporation shall be managed by its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these Bylaws directed or required to be exercised and done by the shareholders.

Section 12.2 A director of that Corporation who is present at a meeting of the Board of Directors, or of a Committee of the Board of Directors, at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his or her dissent is entered in the minutes of the meeting or unless he or she files his or her written dissent to the action with the Secretary of the Corporation before the adjournment thereof or transmits the dissent in writing to the Secretary of the Corporation immediately after the adjournment of the meeting. The right to dissent shall not apply to a director who voted in favor of the action. Nothing in this Section 12.2 shall bar a director from asserting that minutes of any meeting incorrectly omitted his or her dissent if, promptly upon receipt of a copy of such minutes, he or she notifies the Secretary of the Corporation, in writing, of the asserted omission or inaccuracy.

Article 13

MEETINGS OF THE BOARD OF DIRECTORS

Section 13.1 An organization meeting may be held immediately following the annual shareholders meeting without the necessity of notice to the directors to constitute a legally convened meeting, or the directors may meet at such time and place as may be fixed by either a notice or waiver of notice or consent signed by all of such directors.

Section 13.2 Regular meetings of the Board of Directors shall be held not less often than semi-annually at a time and place determined by the Board of Directors at the preceding meeting. One or more directors may participate in any meeting of the Board of Directors, or of any

committee thereof, by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear one another.

Section 13.3 Special meetings of the Board of Directors may be called by the Chairperson of the Board, the President or the chief executive officer on one day’s notice to each director, either personally or in the manner set forth under Article 34 hereof; special meetings shall be called by the Chairperson of the Board in like manner and on like notice upon the written request of three directors.

Section 13.4 At all meetings of the Board of Directors, a majority of the directors shall constitute a quorum for the transaction of business, and the acts of a majority of the directors present at a meeting in person or by conference telephone or similar communications equipment at which a quorum is present in person or by such communications equipment shall be the acts of the Board of Directors, except as may be otherwise specifically provided by statute or by the Articles of Incorporation or by these Bylaws. If a quorum shall not be present in person or by communications equipment at any meeting of the directors, the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or as permitted herein.

Article 14

INFORMAL ACTION BY THE BOARD OF DIRECTORS

Section 14.1 Any action required or permitted to be taken at a meeting of the directors may be taken without a meeting if, prior or subsequent to the action, a consent or consents thereto by all of the directors in office is filed with the Secretary of the Corporation.

Article 15

COMPENSATION OF DIRECTORS

Section 15.1 Directors, as such, may receive a stated salary for their services or a fixed sum and expenses for attendance at regular and special meetings, or any combination of the foregoing as may be determined from time to time by resolution of the Board of Directors, and nothing contained herein shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor.

Article 16

OFFICERS

Section 16.1 The officers of the Corporation shall be elected by the Board of Directors at its organization meeting and shall be a President, a Secretary and a chief financial officer. At its option, the Board of Directors may elect a Chairperson of the Board. The Board of Directors may also elect a chief executive officer, a chief operating officer, one or more Vice Presidents and such other officers and appoint such assistant officers, acting officers and other agents as it

shall deem necessary, who shall hold their offices for such terms, have such authority and perform such duties as may from time to time be prescribed by the Board of Directors. Any number of offices may be held by the same person.

Section 16.2 The compensation of all officers of the Corporation shall be fixed by the Board of Directors.

Section 16.3 Each officer shall hold office for a term of one year and until his or her successor has been selected and qualified or until his or her earlier death, resignation or removal. Any officer may resign at any time upon written notice to the Corporation. The resignation shall be effective upon receipt thereof by the Corporation or at such subsequent time as may be specified in the notice of resignation. The Corporation may secure the fidelity of any or all of the officers by bond or otherwise.

Section 16.4 Any officer or agent of the Corporation may be removed by the Board of Directors with or without cause. The removal shall be without prejudice to the contract rights , if any, of any person so removed. Election or appointment of an officer or agent shall not of itself create contract rights.

Section 16.5 An officer shall perform his or her duties as an officer in good faith, in a manner he or she reasonably believes to be in the best interests of the Corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. A person who so performs his or her duties shall not be liable by reason of having been an officer of the Corporation.

Article 17

THE CHAIRPERSON OF THE BOARD

Section 17.1 The Chairperson of the Board shall preside at all meetings of the shareholders and directors. He or she shall supervise the carrying out of the policies adopted or approved by the Board of Directors. He or she shall also have and may exercise such further powers and duties as from time to time may be conferred upon or assigned to him or her by the Board of Directors.

Article 18

PRESIDENT AND CHIEF EXECUTIVE OFFICER

Section 18.1 The President shall be the chief executive officer of the Corporation unless the Board of Directors shall have appointed a separate chief executive officer. The President and any chief executive officer shall, each have general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are put into effect, subject, however, to the right of the Board of Directors to distribute the foregoing powers between the President and any chief executive officer and to delegate any specific powers, except such as may be by statute exclusively conferred on the President, or to any other officer or

officers of the Corporation. The President and the chief executive officer shall each have authority to execute bonds, notes, mortgages, evidences of indebtedness, contracts or other document, or any assignment or endorsement thereof, and other contracts requiring a seal under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. In the absence or incapacity of the Chairperson of the Board, the chief executive officer or, in his or her absence, the President shall preside at meetings of the shareholders and the directors. If there is no Chairperson of the Board, the chief executive officer or, in his or her absence, the President shall have and exercise all powers conferred by these Bylaws or otherwise on the Chairperson of the Board.

Article 19

THE VICE PRESIDENTS

Section 19.1 The Vice President or, if more than one, the Vice Presidents in the order established by the Board of Directors shall, in the absence or incapacity of the President, exercise all powers and perform the duties of the President. The Vice Presidents, respectively, shall also have such other authority and perform such other duties as may be provided in these Bylaws or as shall be determined by the Board of Directors or the President. Any Vice President may, in the discretion of the Board of Directors, be designated as “executive,” “senior”, or by departmental or functional classification.

Article 20

THE SECRETARY

Section 20.1 The Secretary shall attend all meetings of the Board of Directors and of the shareholders and keep accurate records thereof in one or more minute books kept for that purpose and shall perform the duties customarily performed by the secretary of a corporation and such other duties as may be assigned to him or her by the Board of Directors, the chief executive officer or the President. The Chairperson of the Board (for meetings of the shareholders and meetings of the Board of Directors) and the chair of each committee (for committee meetings) shall have authority to appoint an acting secretary for each such meeting, who shall carry out the responsibilities of the Secretary with respect to such meeting.

Article 21

THE CHIEF FINANCIAL OFFICER

Section 21.1 The chief financial officer shall have the custody of the corporate funds and securities; shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall perform such other duties as may be assigned to him or her by the Board of Directors or the chief executive officer. He or she shall give bond in such sum and with such surety as the Board of Directors may from time to time direct.

Article 22

ASSISTANT OFFICERS

Section 22. 1 Each assistant officer shall assist in the performance of the duties of the officer to whom he or she is assistant and shall perform such duties in the absence of the officer. He or she shall perform such additional duties as the Board of Directors, the chief executive officer, the President or the officer to whom he or she is assistant may from time to time assign him or her. Such officers may be given such functional titles as the Board of Directors shall from time to time determine.

Article 23

INDEMNIFICATION OF OFFICERS AND EMPLOYEES

Section 23.1 The Corporation shall indemnify any officer and/or employee, or any former officer and/or employee, who was or is a party to, or is threatened to be made a party to, or who is called to be a witness in connection with, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was an officer and/or employee of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of a corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was unlawful.

Section 23.2 The Corporation shall indemnify any officer and/or employee, who was or is a party to, or is threatened to be made a party to, or who is called as a witness in connection with, any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, and/or employee or agent of a corporation, partnership, joint venture, trust or other enterprise against amounts paid in settlement and expenses (including attorneys’ fees) actually and reasonably incurred by him or her in connection with the defense or settlement of, or serving as a witness in, such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation and except that no indemnification shall be made in respect of any such claim, issue or matter as to which such person shall have been adjudged to be liable for misconduct in the performance of his or her

duty to the Corporation.

Section 23.3 Except as may be otherwise ordered by a court, there shall be a presumption that any officer and/or employee is entitled to indemnification as provided in Sections 23.1 and 23.2 of this Article unless either a majority of the directors who are not involved in such proceedings (“disinterested directors”) or, if there are less than three disinterested directors, then the holders of one-third of the outstanding shares of the Corporation determine that the person is not entitled to such presumption by certifying such determination in writing to the Secretary of the Corporation. In such event the disinterested director(s) or, in the event of certification by shareholders, the Secretary of the Corporation shall request of independent counsel, who may be the outside general counsel of the Corporation, a written opinion as to whether or not the parties involved are entitled to indemnification under Sections 23.1 and 23.2 of this Article.

Section 23.4 Expenses incurred by an officer and/or employee in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized in the manner provided under Section 23.3 of this Article upon receipt of an undertaking by or on behalf of the officer and/or employee to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation.

Section 23.5 The indemnification provided by this Article shall not be deemed exclusive of any other rights to which a person seeking indemnification may be entitled under any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his or her official capacity while serving as an officer and/or employee and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be an officer and/or employee and shall inure to the benefit of the heirs, executors and administrators of such a person.

Section 23.6 The Corporation may create a fund of any nature, which may, but need not be, under the control of a trustee, or otherwise secure or insure in any manner its indemnification obligations arising under this Article.

Section 23.7 The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was an officer and/or employee of the Corporation, or is or was serving at the request of the Corporation as an officer and/or employee of a corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Article.

Section 23.8 Indemnification under this Article shall not be made in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness.

Article 24

INDEMNIFICATION OF DIRECTORS

Section 24.1 A director of this Corporation shall stand in a fiduciary relation to the Corporation and shall perform his or her duties as a director, including his or her duties as a member of any committee of the board upon which he or she may serve, in good faith, in a manner he or she reasonably believes to be in the best interests of the Corporation, and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. In performing his or her duties, a director shall be entitled to rely in good faith on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following:

(a) One or more officers or employees of the Corporation whom the director reasonably believes to be reliable and competent in the matters presented.

(b) Counsel, public accountants or other persons as to matters which the director reasonably believes to be within the professional or expert competence of such person.

(c) A committee of the board upon which he or she does not serve, duly designated in accordance with law, as to matters within its designated authority, which committee the director reasonably believes to merit confidence.

A director shall not be considered to be acting in good faith if he or she has knowledge concerning the matter in question that would cause his or her reliance to be unwarranted.

Section 24.2 In discharging the duties of their respective positions, the Board of Directors, committees of the board, and individual directors may, in considering the best interests of the Corporation, consider the effects of any action upon employees, upon suppliers and customers of the Corporation and upon communities in which offices or other establishments of the Corporation are located, and all other pertinent factors. The consideration of those factors shall not constitute a violation of Section 24.1.

Section 24.3 Absent a breach of fiduciary duty, lack of good faith or self-dealing, actions taken as a director or any failure to take any action shall be presumed to be in the best interests of the Corporation.

Section 24.4 A director of this Corporation shall not be personally liable for monetary damages as such for any action taken or for any failure to take any action, unless:

(a) the director has breached or failed to perform the duties of his or her office under the provisions of Sections 24. 1 and 24.2, and

(b) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness.

Section 24.5 The provisions of Section 24.4 shall not apply to:

(a) the responsibility or liability of a director pursuant to a criminal statute, or

(b) the liability of a director for the payment of taxes pursuant to local, state or federal law.

Section 24.6 The Corporation shall indemnify any director, or any former director who was or is a party to, or is threatened to be made a party to, or who is called to be a witness in connection with, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was a director of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of a corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was unlawful.

Section 24.7 The Corporation shall indemnify any director who was or is a party to, or is threatened to be made a party to, or who is called as a witness in connection with, any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer and/or employee or agent of a corporation, partnership, joint venture, trust or other enterprise against amounts paid in settlement and expenses (including attorneys’ fees) actually and reasonably incurred by him or her in connection with the defense or settlement of, or serving as a witness in, such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation and except that no indemnification shall be made in respect of any such claim, issue or matter as to which such person shall have been adjudged to be liable for misconduct in the performance of his or her duty to the Corporation.

Section 24.8 Except as may be otherwise ordered by a court, there shall be a presumption that any director is entitled to indemnification as provided in Sections 24.6 and 24.7 of this Article unless either a majority of the directors who are not involved in such proceedings (“disinterested directors”) or, if there are less than three disinterested directors, then the holders of one-third of the outstanding shares of the Corporation determine that the person is not entitled to such presumption by certifying such determination in writing to the Secretary of the Corporation. In such event the disinterested director(s) or, in the event of certification by shareholders, the Secretary of the Corporation shall request of independent counsel, who may be

the outside general counsel of the Corporation, a written opinion as to whether or not the parties involved are entitled to indemnification under Sections 24.6 and 24.7 of this Article.

Section 24.9 Expenses incurred by a director in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized in the manner provided under Section 24.8 of this Article upon receipt of an undertaking by or on behalf of the director, officer and/or employee to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation as authorized in this Article.

Section 24.10 The indemnification provided by this Article shall not be deemed exclusive of any other rights to which a person seeking indemnification may be entitled under any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his or her official capacity while serving as a director and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director and shall inure to the benefit of the heirs, executors and administrators of such a person.

Section 24.11 The Corporation may create a fund of any nature, which may, but need not be, under the control of a trustee, or otherwise secure or insure in any manner its indemnification obligations arising under this Article.

Section 24.12 The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director or is or was serving at the request of the Corporation as a director, officer, employee or agent of a corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Article.

Section 24.13 Indemnification under this Article shall not be made in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness.

Article 25

COMMITTEES OF THE BOARD OF DIRECTORS

Section 25.1 The Board of Directors may, by resolution adopted by a majority of the directors in office, establish one or more committees to consist of one or more directors of the Corporation. Any committee, to the extent provided in the resolution of the Board of Directors or in these Bylaws, shall have and may exercise all of the powers and authority of the Board of Directors, except that a committee shall not have any power or authority as to the following:

(a) The submission to shareholders of any action requiring approval of shareholders under applicable law, the Articles of Incorporation or these Bylaws.

(b) The creation or filling of vacancies in the Board of Directors.

(d) The amendment or repeal of any resolution of the Board of Directors that by its terms is amendable or repealable only by the Board of Directors.

(e) Action on matters committed by these Bylaws or resolution of the Board of Directors to another committee of the Board of Directors.

Section 25.2 The Board of Directors may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee or for the purposes of any written action by the committee. In the absence or disqualification of a member and alternate member or members of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another director to act at the meeting in the place of the absent or disqualified member.

Section 25.3 Each committee of the Board of Directors shall serve at the pleasure of the Board of Directors. The term “Board of Directors”, when used in any provision of this Article 25 relating to the organization or procedures of, or the manner of taking action by the Board of Directors, shall be construed to include and refer to any executive or other committee of the Board of Directors. Any provision of this Article 25 relating or referring to action to be taken by the Board of Directors or the procedure required therefor shall be satisfied by the taking of corresponding action by a committee of the Board of Directors to the extent authority to take the action has been delegated to the committee pursuant to this Article 25.

Section 25.4 Except in such cases, approved by Board of Directors resolution from time to time, as may be permitted by applicable law, the Articles of Incorporation and the applicable rules of any exchange or market on which the Corporation’s shares are traded or transactions in the Corporation’s shares are reported, all of the members of the following committees of the Board of Directors (or any committees performing similar functions), if such committees exist, shall be “independent” within the meaning of that term as applied by the Corporation to its directors from time to time consistent with applicable law:

· Audit Committee

· Benefits & Compensation Committee

· Corporate Governance Committee

· Nominating Committee

Article 26

SHARE CERTIFICATES

Section 26.1 The share certificates of the Corporation shall be numbered and registered in a share register as they are issued; shall bear the name of the registered holder, the number and

class of shares represented thereby, the par value of each share or a statement that such shares are without par value, as the case may be; shall be signed by two officers: the chief executive officer, the President or a Vice President, and by the Secretary or the chief financial officer or any other person properly authorized by the Board of Directors; and shall bear the corporate seal, which seal may be a facsimile engraved or printed. Where the certificate is signed by a transfer agent or a registrar, the signature of any corporate officer on such certificate may be a facsimile engraved or printed. In case any officer who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer because of death, resignation or otherwise before the certificate is issued, it may be issued by the Corporation with the same effect as if the officer had not ceased to be such at the date of its issue.

Article 27

TRANSFER OF SHARES

Section 27.1 Upon surrender to the Corporation of a share certificate duly endorsed by the person named in the certificate or by attorney duly appointed in writing and accompanied where necessary by proper evidence of succession, assignment or authority to transfer, a new certificate shall be issued to the person entitled thereto and the old certificate cancelled and the transfer recorded upon the transfer books for shares of the Corporation. No transfer shall be made if it would be inconsistent with the provisions of Article 8 of the Pennsylvania Uniform Commercial Code.

Article 28

LOST CERTIFICATES

Section 28.1 Where a shareholder of the Corporation alleges the loss, theft or destruction of one or more certificates for shares of the Corporation and requests the issuance of a substitute certificate therefor, the Board of Directors may direct a new certificate of the same tenor and for the same number of shares to be issued to such person upon such person’s making of an affidavit in form satisfactory to the Board of Directors setting forth the facts in connection therewith, provided that prior to the receipt of such request the Corporation shall not have either registered a transfer of such certificate or received notice that such certificate has been acquired by a bona fide purchaser. When authorizing such issue of a new certificate the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his or her heirs or legal representatives, as the case may be, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such form and with surety or sureties, with fixed or open penalty, as shall be satisfactory to the Board of Directors, as indemnity for any liability or expense which it may incur by reason of the original certificate remaining outstanding.

Article 29

DIVIDENDS

Section 29.1 The Board of Directors may, from time to time, at any duly convened regular or special meeting or by unanimous consent in writing, declare and pay dividends upon the outstanding shares of capital stock of the Corporation in cash, property or shares of the Corporation, as long as any dividend shall not be in violation of law and the Articles of Incorporation.

Section 29.2 Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purposes as, the Board of Directors shall believe to be for the best interests of the Corporation, and the Board of Directors may reduce or abolish any such reserve in the manner in which it was created.

Article 30

FINANCIAL REPORT TO SHAREHOLDERS

Section 30.1 The chief executive officer and the Board of Directors shall present prior to each annual meeting of the shareholders a full and complete statement of the business and affairs of the Corporation for the preceding year.

Article 31

INSTRUMENTS

Section 31.1 Any bonds, notes, mortgages, evidences of indebtedness, contracts or other document, or any assignment or endorsement thereof, and other contracts requiring a seal under the seal of the Corporation, executed or entered into between the Corporation and any other person, when signed by the chief executive officer, the President, any Executive Vice President, or one or more other officers or agents having actual or apparent authority to sign it, shall be held to have been properly executed for and in behalf of the Corporation.

Section 31.2 The affixation of the corporate seal shall not be necessary to the valid execution, assignment or endorsement by the Corporation of any instrument or other document.

Article 32

FISCAL YEAR

Section 32.1 The fiscal year of the Corporation shall be the calendar year.

Article 33

SEAL

Section 33.1 The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words “Corporate Seal, Pennsylvania”. Such seal may be used by causing it or a facsimile thereof to be impressed or affixed in any manner reproduced.

Article 34

NOTICES AND WAIVERS THEREOF

Section 34.1 Whenever written notice is required to be given to any person under the provisions of applicable law, by the Articles of Incorporation or of these Bylaws, it shall be valid if given to the person either personally or by sending a copy thereof (i) by first class or express mail, postage prepaid, (ii) electronically, including without limitation by e-mail, telecopier, TWX or telegram (with evidence of receipt), or (iii) by courier service, charges prepaid, to his or her current address or number appearing on the books of the Corporation or, in the case of directors, supplied by him or her to the Corporation for the purpose of notice. If the notice if sent by mail, postage prepaid and properly addressed, it shall be deemed to have been given to the person when deposited in the United States mail, and in all other cases when actually delivered to the address or number described above. A notice of meeting shall specify the place, day and hour of the meeting and any other information required by any other provision of applicable law or these Bylaws.

Section 34.2 Whenever any written notice is required to be given under the provisions of applicable law, the Articles of Incorporation or of these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of the notice. Except as otherwise required by these Bylaws, neither the business to be transacted at, nor the purpose of, a meeting need be specified in the waiver of notice of the meeting. In the case of a special meeting of shareholders, the waiver of notice shall specify the general nature of the business to be transacted.

Section 34.3 Attendance of a person at any meeting shall constitute a waiver of notice of the meeting except where a person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened.

Section 34.4 Whenever any notice or communication is required to be given to any person under the provisions of applicable law, the Articles of Incorporation, these Bylaws, the terms of any agreement and any other instrument or as a condition precedent to taking any corporate action, and communication with that person is then unlawful, the giving of the notice or communication to that person shall not be required and there shall be no duty to apply for a license or other permission to do so. Any action or meeting that is taken or held without notice or communication to that person shall have the same validity as if the notice or communication had been duly given. If the action taken is such as to require the filing of any document with respect

thereto under any provision of law or any agreement or other instrument, it shall be sufficient, if such is the fact and if notice or communication in required, to state therein that notice or communication was given to all persons entitled to receive notice or communication except persons with whom communication was unlawful.

Section 34.5 Section 34.4 shall also be applicable to any shareholder with whom the Corporation has been unable to communicate for more than twenty-four (24) consecutive months because communications to the shareholder are returned unclaimed or the shareholder has otherwise failed to provide the Corporation with a current address. Whenever the shareholder provides the Corporation with a current address, Section 34.4 shall cease to be applicable to the shareholder under this Section 34.5.

Article 35

EMERGENCIES

Section 35.1 The Board of Directors may adopt emergency Bylaws, subject to repeal or change by action of the shareholders, which shall, notwithstanding any different provisions of law, of the Articles of Incorporation or of these Bylaws, be effective during any emergency resulting from an attack on the United States, a nuclear disaster or another catastrophe as a result of which a quorum of the Board of Directors cannot readily be assembled. The emergency Bylaws may make any provision that may be appropriate for the circumstances of the emergency including, procedures for calling meetings of the Board of Directors, quorum requirements for meetings and procedures for designating additional or substitute directors.

Section 35.2 The Board of Directors, either before or during any emergency, may provide, and from time to time modify, lines of succession in the event that during the emergency any or all officers or agents of the Corporation shall for any reason be rendered incapable of discharging their duties and may, effective in the emergency, change the head offices or designate several alternative head offices or regional offices of the Corporation or authorize the officers to do so.

Section 35.3 A representative of the Corporation acting in accordance with any emergency Bylaws shall not be liable except for willful misconduct and shall not be liable for any action taken by him or her in good faith in an emergency in furtherance of the ordinary business affairs of the Corporation even though not authorized by the emergency or other Bylaws then in effect.

Section 35.4 To the extent not inconsistent with any emergency Bylaws so adopted, the Bylaws of the Corporation shall remain in effect during any emergency and, upon its termination, the emergency Bylaws shall cease to be effective.

Section 35.5 Unless otherwise provided in emergency Bylaws, notice of any meeting of the Board of Directors during an emergency shall be given only to those directors to whom it is feasible to reach at the time and by such means as are feasible at the time, including publication, radio or television. To the extent required to constitute a quorum at any meeting of the Board of

Directors during any emergency, the officers of the Corporation who are present shall, unless otherwise provided in emergency Bylaws, be deemed, in order of rank and within the same rank in order of seniority, directors for the meeting.

Article 36

AMENDMENTS

Section 36.1 These Bylaws may be altered, amended or repealed by the affirmative vote of the holders of two-thirds of the outstanding shares of Common Stock at any regular or special meeting duly convened after notice to the shareholders of that purpose, or by a majority vote of the members of the Board of Directors at any regular or special meeting thereof duly convened after notice to the directors of that purpose, subject always to the power of the shareholders to change such action of the Board of Directors by the affirmative vote of the holders of two-thirds of the outstanding shares of Common Stock.

Article 37

OPT OUT AND NONAPPLICABLILITY OF SUBCHAPTER G AND SUBCHAPTER H OF CHAPTER 25 OF THE BUSINESS CORPORATION LAW OF 1988, AS ADDED AND AMENDED BY ACT 36 OF 1990.

Section 37.1. Opt Out and Nonapplicability of Subchapters G and H. This Corporation specifically opts out and shall not be governed by Subchapter G, Control-share Acquisitions, and Subchapter H, Disgorgement by Certain Controlling Shareholders Following Attempts to Acquire Control, of Chapter 25 of the Business Corporation Law of 1988, as added and amended by Act 36 of 1990. Subchapter G, Control-share Acquisitions, and Subchapter H, Disgorgement by Certain Controlling Shareholders Following Attempts to Acquire Control, of Chapter 25 of the Business Corporation Law of 1988, as added and amended by Act 36 of 1990, shall not be applicable to the Corporation. (This Section was adopted on 07/18/90)

Article 38

NEW BUSINESS PROPOSALS

Section 38.1 Proposals for any new business to be taken up at any annual or special meeting of shareholders may be made by the Board of Directors of the Corporation or by any shareholder of the Corporation entitled to vote generally in the election of directors. In order for a shareholder of the Corporation to make any such proposal, he or she shall give notice thereof in writing to the Secretary of the Corporation (i) in the case of a proposal to be considered at an annual meeting of shareholders, not less than ninety (90) days prior to the date of any such meeting, and (ii) in the case of a proposal eligible for consideration at a special meeting of shareholders, not later than one (1) week after notice of such special meeting shall have been given to shareholders.

Section 38.2 Each such notice given by a shareholder to the Secretary with

respect to business proposals to be brought before a meeting shall set forth in writing as to each matter: (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting; (ii) the name and address, as they appear on the Corporation’s books, of the shareholder proposing such business; (iii) the class and number of shares of the Corporation which are beneficially owned by the shareholder; and (iv) any material interest of the shareholder in such business. Notwithstanding anything in these Bylaws to the contrary, no new business shall be conducted at the meeting except in accordance with the procedures set forth in this Article 38.

Section 38.3 The Chairperson of the annual or special meeting of shareholders may, if the facts warrant, determine and declare to such meeting that a proposal was not made in accordance with the foregoing procedure, and, if he or she should so determine, he or she shall so declare to the meeting and the defective proposal shall be disregarded and laid over for action at the next succeeding special or annual meeting of the shareholders taking place thirty days or more thereafter. This provision shall not require the holding of any adjourned or special meeting of shareholders for the purpose of considering such defective proposal.

Section 38.4 Each shareholder request to include matters in the Corporation’s proxy material for a meeting shall be handled in accordance with applicable law. Shareholder requests to include matters in the proxy material for an annual meeting must be received at the Corporation’s principal executive offices not less than 120 calendar days before the date of the Corporation’s proxy statement released to shareholders in connection with the previous year’s annual meeting. If the Corporation did not hold an annual meeting the previous year, or if the date of the annual meeting at which the proposal is to be presented has been changed by more than 30 days from the date of the previous year’s meeting, or if the proposal is being submitted for a meeting of shareholders other than a regularly scheduled annual meeting, then the deadline for a shareholder to request inclusion of a proposal in the proxy material for that meeting shall be a reasonable time before the Corporation begins to print and send its proxy materials.

Exhibit 10 (g)

MARKETING SERVICES AGREEMENT

THIS MARKETING SERVICES AGREEMENT is made as of December 19, 2007 between DNB FIRST, NATIONAL ASSOCIATION, a national banking association with an address at 4 Brandywine Avenue, Downingtown, PA 19335 (“DNB”) and TSG, INC., a Pennsylvania business corporation with an address at P.O. Box 156, 1212 Scott Road, Unionville, PA 19375 (“Service Provider”).

Background:

A. DNB does not presently have sufficient staff to provide all of the “Marketing Services” referred to below for itself.

B. Eli Silberman, the principal of Service Provider, is uniquely situated to assist DNB with the Marketing Services because of his marketing industry knowledge and experience, and his knowledge of DNB.

In consideration of the premises and mutual obligations contained herein, and intending to be legally bound, the parties hereto agree as follows:

1. Marketing Services . Service Provider shall provide consulting services and assist DNB in the execution of its branding strategy for the purpose of successfully differentiating DNB’s products and services. To achieve that goal, Service Provider shall consult with and assist DNB in the development of the 2007 Annual Report. Service provider shall also provide occasional consulting services on creative and or advertising concepts or programs.

The foregoing services shall produce the deliverables, and be consistent with, the documented discussions DNB and Service Provider have had to date, and shall be subject to such performance measures for each stage of performance as the parties shall identify prior to commencement of each stage of services. The foregoing are sometimes referred to in this Agreement as the “Marketing Services.” The Marketing Services shall be provided within such deadlines as the parties may mutually agree from time to time, but shall in all events be consistent with DNB’s marketing requirements.

2. Compensation . In consideration for Service Provider rendering the Marketing Services, DNB shall (i) reimburse Service Provider its reasonable out-of-pocket expenses in providing the Marketing Services. All such expenses are subject to prior approval by DNB’s Retail Banking Division’s Executive Vice President; and (ii) pay Service Provider a monthly retainer of $2,500.00 per month for each calendar month in 2008 for each month that this Agreement remains in effect.

3. Regulatory Compliance . This Agreement shall in all events be subject to all applicable banking laws and regulations. The performance of Marketing Services by the Service Provider is subject to examination oversight by DNB’s applicable banking regulators. Without limiting the foregoing, the provision of Marketing Services and the payment of compensation therefor shall be on terms and at compensation rates that are substantially the same, or at least as favorable to DNB, as those available to DNB for comparable services from other nonaffiliated service providers. The parties agree to modify this

Agreement and the compensation payable hereunder from time to time to conform to any applicable regulatory requirements. Service Provider shall each be subject to examination by DNB’s regulators to the extent deemed appropriate or necessary by such regulators in connection with this Agreement.

4. Intellectual Property . Any work product and intellectual property, such as DNB’s name, logo, trademark, and copyrighted material, shall be the sole property of DNB.

5. Confidentiality; Preservation and Disposition of Confidential Information . All information relating to DNB, including without limitation relating to its products, services, methods, branding and other business strategies, product designs, and customers and consumers, and all information relating to any DNB customers or consumers, shall be confidential (collectively “Confidential Information”) and shall not be disclosed by Service Provider to any third party without DNB’s prior written consent. Service Provider shall, consistent with DNB’s policies and procedures and laws and regulations applicable to DNB: (a) establish policies, safeguards, methods and procedures to ensure the confidentiality of Confidential Information; (b) establish policies, safeguards, methods and procedures for disposing of Confidential Information; (c) establish policies, safeguards, methods, and procedures consistent with DNB policies and procedures and the laws and regulations applicable to DNB to assure, to DNB’ s reasonable satisfaction, that no third party will gain unauthorized access to any Confidential Information; and (d) upon completion of the engagement for Marketing Services, take such steps as DNB may request to turn over to DNB or destroy all Confidential Information.

6. Business Resumption and Contingency Plans . Service Provider shall be responsible for backing up and otherwise protecting all program and data files of Service Provider relating to DNB and the Marketing Services, for protecting any equipment used in providing the Marketing Services, and for maintaining disaster recovery and contingency plans reasonably acceptable to DNB, including plans and procedures for testing of those plans and providing results to DNB when requested.

7. Termination . This Agreement will expire on December 31, 2008; however, either party may terminate this Agreement prior to such date by written notice of termination upon sixty (60) days written notice. Upon such termination, the parties’ relative rights and obligations shall be governed by this Agreement and applicable law, but notwithstanding any termination, the provisions of Sections 3, 4 and 5 of this Agreement shall survive and continue to bind both parties.

8. Authorization . Service Provider and DNB each respectively represents and warrants, one to the other, that this Agreement has been duly authorized by their respective boards of directors and that a copy of this Agreement, fully executed, shall be continuously maintained hereafter as a part of its corporate records.

9. Assignment . This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by any of the parties hereto without the prior written consent of the other parties.

10. Entire Agreement . This agreement embodies the entire agreement and understanding of the parties with respect to the transactions contemplated hereby and supersedes all prior written or oral commitments, arrangements or understandings with respect thereto. There are no restrictions, agreements, promises, warranties, covenants or undertakings with respect to the transactions contemplated hereby other than those expressly set forth herein or therein.

11. Counterparts . This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and each of which shall be deemed an original.

12. Governing Law . This Agreement shall be governed by the internal laws of the Commonwealth of Pennsylvania (regardless of the laws that might be applicable under principles of conflicts of law) as to all matters, including but not limited to matters of validity, construction, effect and performance, except to the extent such laws are pre-empted by applicable federal laws or regulations.

13. Severability . If any one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions of this Agreement shall not be affected thereby. To the extent permitted by applicable law, each party waives any provision of law, which renders any provision of this Agreement invalid, illegal or unenforceable in any respect.

14. Amendments . This Agreement may not be changed, modified or amended except by written agreement signed by all parties hereto.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written.

DNB FIRST, NATIONAL ASSOCIATION		TSG, INC.


By:	/s/ Richard J. Hartmann	By:	/s/ Eli Silberman
	Richard J. Hartmann,		President
	Executive Vice President

Exhibit 10 (v)

RESTRICTED STOCK AWARD AGREEMENT

THIS AGREEMENT is made as of this 28th day of November 2007 (the “Grant Date”), by and between DNB Financial Corporation (“Holding Company”) and (“Grantee”).

Background:

Grantee is a valued employee or director of the Holding Company and/or DNB First, National Association (the “Bank”) (the Holding Company and the Bank are collectively referred to herein as the “Company”). The Holding Company’s Board of Directors adopted the DNB Financial Corporation Incentive Equity and Deferred Compensation Plan on November 24, 2004 (“Plan”). As additional compensation for Grantee’s past and future services to the Company, and to induce the Grantee to continue Grantee’s efforts to enhance the value of the Company for shareholders, generally, the Company wishes to conditionally transfer rights to receive shares of Common Stock of the Holding Company to Grantee pursuant to the terms of the Plan, subject to the additional terms and conditions of this Agreement.

NOW, THEREFORE, the Company and Grantee hereby agree as follows, intending to be legally bound:

1. Subject to and as soon as practicable following the satisfaction of the vesting condition set forth in Paragraph 2, below, the Company agrees to transfer to Grantee on the “Vesting Date” (defined below) November 28, 2010, shares of the Holding Company’s common stock, par value $1.00 per share (“Award Shares”), minus that number of Award Shares, if any, required to pay taxes as more fully described in Paragraph 3, below (such shares actually transferred to Grantee are sometimes hereinafter referred to as “Transferred Shares”), subject to the transfer restrictions in this Agreement and the Plan. The number of Award Shares is subject to adjustment as provided in Section 10.1 of the Plan.

2. Grantee shall first be entitled to the Award Shares on a date (the “Vesting Date”) that shall be the earlier of the third (3rd) anniversary of the Grant Date or the date on which a “Change in Control” (as hereinafter defined) of the Company first occurs, subject to such further terms and conditions of the Plan as may be applicable. For this purpose, “Change in Control” shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), provided that a “Change in Control” shall nevertheless be deemed to have occurred if either (a) any “persons” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act in effect on the Grant Date), other than the Company or any “person” who on the date hereof is a director of officer of the Company, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities, or (b) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board of Directors cease for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period. If Grantee’s employment as an employee and service as a director (collectively, “Service”) with the Company, terminates for any reason (including but not limited to Grantee’s death or disability or voluntary or involuntary termination of Service) prior to the Vesting Date, this Agreement shall automatically terminate, the Grantee shall forfeit all rights hereunder, and no shares of common stock or other consideration shall be transferred to Grantee pursuant to this Agreement.

3. At Grantee’s written election, to be provided in writing to the Company on or prior to the Vesting Date together with the cash necessary for such payment, Grantee shall pay to the Company in cash an amount sufficient to fund all of the Federal, state and local taxes the Company may be required to withhold with respect to the Award Shares. To the extent that the Grantee shall not so have elected and paid the necessary amount on or prior to the Vesting Date, the Company may reduce the Award Shares by that

number of shares having an aggregate Fair Market Value, as of the Vesting Date, equal to the aggregate amount of Federal, state and local taxes required to be withheld with respect to the Award Shares.

4. Grantee shall not sell, assign, pledge, gift, encumber or otherwise alienate or dispose of any of the Transferred Shares for one (1) year from the Vesting Date. Each certificate for t he Transferred Shares shall bear the following legend :

“Sale, assignment, pledge, gift, encumbrance or other alienation or disposition of the shares represented by this certificate may be restricted as provided under applicable federal and state securities laws, and are also restricted and prohibited until November 28, 2011 pursuant to the terms of a Restricted Stock Award Agreement dated November 28, 2007, between DNB Financial Corporation and the holder of the shares named on this certificate, and the provisions of the DNB Financial Corporation Incentive Equity and Deferred Compensation Plan approved on November 24, 2004, each of which may be examined at the principal office of the Company, and any subsequent transfer is subject to the terms and conditions of such Agreement and Plan.”

5. As a condition to any transfer, encumbrance or other alienation of any of the Transferred Shares, Grantee shall provide the Company and/or any transfer agent or broker upon request with such certifications, legal opinions and other documents as they may request with respect to applicable securities and tax laws.

6. Nothing in this Agreement confers on Grantee any right to continue as an employee or director of the Company or any affiliate or interfere with or restrict in any way the rights of the Company or its affiliates to terminate Grantee’s employment or other Service at any time.

7. Transfer of rights under this Agreement are further restricted as provided in the Plan. Grantee acknowledges receipt of a copy of the Plan, which is incorporated into this Agreement. Capitalized terms not otherwise defined in this Agreement shall have the respective meanings, if any, assigned to such terms in the Plan. This Agreement is an “Award Agreement” under the Plan.

8. This Agreement is governed by the internal laws of Pennsylvania, without giving effect to the choice of law or conflict of laws principles, subject to pre-emption by applicable federal law and regulations.

The parties hereby have duly entered into this Agreement as of the first date set forth above.

ATTEST:		DNB FINANCIAL CORPORATION

		By:
Print Name:		Print Name:
Title:		Title:

Witness:		GRANTEE

		(Signature)
		Print Name:
		Address:

Exhibit 21

Subsidiary List

Name		Jurisdiction
DNB First, National Association		PA

DNB Capital Trust I		DE

DNB Capital Trust II		DE

DOWNCO, Inc.		PA

DNB Financial Services		PA

Exhibit 23

Consent of Independent Registered Public Accounting Firm

The Board of Directors

DNB Financial Corporation:

We consent to the incorporation by reference in Registration Statement Nos. 333-78913, 333-121145, 333-125999, 333-126610 and 333-138214 on Form S-8 and 333-131954 on Form S-3 of DNB Financial Corporation and subsidiaries of our report dated March 27, 2008, with respect to the consolidated statements of financial condition of DNB Financial Corporation and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2007, which report appears in the December 31, 2007 annual report on Form 10-K of DNB Financial Corporation.

Our report on the consolidated financial statements refers to the adoption of by DNB Financial Corporation of FASB Statement No. 123(revised), Share-Based Payment, a revision of FASB Statement No.123, Accounting for Stock-Based Compensation, effective January 1, 2006, and Emerging Issues Task Force Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements, effective January 1, 2007.

(signed) KPMG LLP

Philadelphia, Pennsylvania

March 27, 2008

Exhibit 31.1

RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, William S. Latoff, certify that:

1. I have reviewed this annual report on Form 10-K of DNB Financial Corporation (the “Registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not

misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

/s/ William S. Latoff
William S. Latoff
Chairman and Chief Executive Officer
March 27, 2008

Exhibit 31.2

RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, Gerald F. Sopp, certify that:

1. I have reviewed this annual report on Form 10-K of DNB Financial Corporation (the “Registrant”);

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

/s/ Gerald F. Sopp
Gerald F. Sopp
Chief Financial Officer
March 27, 2008

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of DNB Financial Corporation (the “Registrant”) on Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William S. Latoff, Chairman and Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

/s/ William S. Latoff
William S. Latoff
Chairman and Chief Executive Officer
March 27, 2008

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of DNB Financial Corporation (the “Registrant”) on Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gerald F. Sopp, Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act

of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

/s/ Gerald F. Sopp
Gerald F. Sopp
Chief Financial Officer
March 27, 2008