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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, 2008 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

GRAPHIC

(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) 269-1040Securities 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 o (Do not check if a smaller
reporting company)

Smaller reporting company ý


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 19, 2009, $16.8 million of the Registrant's Common Stock, $1 par value per share, was held by non-affiliates of the Registrant.

As
of March 19, 2009, the Registrant had outstanding 2,603,044 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.



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DNB FINANCIAL CORPORATION
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Part IItem 1.

Business


1Item 1A.

Risk Factors


13Item 1B.

Unresolved Staff Comments


20Item 2.

Properties


20Item 3.

Legal Proceedings


21Item 4.

Submission of Matters to a Vote of Security Holders


21Part IIItem 5.

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


22Item 6.

Selected Financial Data


24Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations


25Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


52Item 8.

Financial Statements and Supplementary Data


53Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


87Item 9A.

Controls and Procedures


87Item 9B.

Other Information


87Part IIIItem 10.

Directors and Executive Officers of the Registrant


87Item 11.

Executive Compensation


87Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


88Item 13.

Certain Relationships and Related Transactions and Director Independence


88Item 14.

Principal Accounting Fees and Services


88Part IVItem 15.

Exhibits, Financial Statement Schedules


89SIGNATURES


90


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DNB FINANCIAL CORPORATION
FORM 10-K

Forward-Looking Statements

FORWARD-LOOKING STATEMENTS

This report contains statements which, to the extent that they are not recitations of historical fact may constitute forward-looking
statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include financial and other projections as well as statements
regarding DNB's future plans, objectives, performance, revenues, growth, profits, operating expenses or DNB's underlying assumptions. The words "may", "would", "could", "will", "likely", "expect,"
"anticipate," "intend", "estimate", "plan", "forecast", "project" and "believe" or other similar words and phrases may identify forward-looking statements. Persons reading this report are cautioned
that such statements are only predictions, and that DNB's actual future results or performance may be materially different.

Such
forward-looking statements involve known and unknown risks and uncertainties. A number of factors, many of which are beyond DNB's control, could cause our actual results, events or
developments, or industry results, to be materially different from any future results, events or developments expressed, implied or anticipated by such forward-looking statements, and so our business
and financial condition and results of operations could be materially and adversely affected. Such factors include, among others, our need for capital; the impact of economic conditions on our
business; changes in banking regulation and the possibility that any banking agency approvals we might require for certain activities will not be obtained in a timely manner or at all or will be
conditioned in a manner that would impair our ability to implement our business plans; our ability to attract and retain key personnel; competition in our marketplace; and other factors as described
in our securities filings. All forward-looking statements and information made herein are based on our current expectations as of the date hereof and speak only as of the date they are made. DNB does
not undertake to update forward-looking statements.

For
a complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review our filings with the Securities and Exchange Commission,
including this Form 10-K, as well as any changes in risk factors that we may identify in our quarterly or other reports filed with the SEC.

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, 2008, DNB had total consolidated assets, total liabilities and stockholders' equity of
$533.4 million, $503.4 million, and $30.0 million, respectively.

The
Bank was organized in 1860. 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

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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 subsidiaries are Downco, Inc. and DN Acquisition Company, Inc which were incorporated in December 1995 and December 2008,
respectively, for the purpose of acquiring and holding other real estate owned acquired through foreclosure or deed in-lieu-of foreclosure, as well as 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 segment financial information.

(c)
Narrative Description of Business

The
Bank's headquarters is located at 4 Brandywine Avenue, Downingtown, Pennsylvania. As of December 31, 2008, the Bank had total assets of $532.8 million, total deposits
of $408.7 million and total stockholders' equity of $38.9 million. The Bank's business is not seasonal in nature. The FDIC, to the extent provided by law, insures its deposits. At
December 31, 2008, the Bank had 114 full-time employees and 21 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 are 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.

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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. 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

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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.

Other Recent Legislation and Regulatory Actions

Recent market conditions have made it difficult or uneconomical to access the capital markets. As a result, the United States Congress,
the Treasury, and the FDIC have announced various programs designed to enhance market liquidity and bank capital.

In
response to the financial crisis affecting the banking system and financial markets, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 ("EESA") was signed
into law and established the Troubled Assets Relief Program ("TARP") administered by the U.S. Treasury Department. As part of TARP, the Treasury established the Capital Purchase Program ("CPP") to
provide up to $700 billion of funding to eligible financial institutions through the purchase of capital stock and other financial instruments for the purpose of stabilizing and providing
liquidity to the U.S. financial markets. In

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connection
with EESA, there have been numerous actions by the Federal Reserve Board, Congress, the Treasury, the FDIC, the SEC and others to further the economic and banking industry stabilization
efforts under EESA. It remains unclear at this time what further legislative and regulatory measures will be implemented under EESA affecting the Registrant.

As
further response to the economic crisis, the American Recovery and Reinvestment Act of 2009 ("ARRA"), more commonly known as the economic stimulus or economic recovery package, was
signed into law on February 17, 2009, by President Obama. ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health,
and education needs. In addition, ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients until they have repaid the Treasury, which
is now permitted under ARRA without penalty and without the need to raise new capital, subject to the Treasury's consultation with the recipient's appropriate regulatory agency.

On
January 30, 2009, the Registrant completed a preferred stock issuance under the U.S. Treasury Department's Capital Purchase Program (also called the CPP), which implements
provisions of the Emergency Economic Stabilization Act of 2008 (sometimes called EESA) and the Treasury Department's Troubled Asset Relief Program implementing parts of EESA (also called the TARP).
The CPP requires the Registrant to comply with executive compensation regulations issued by the Treasury Department in October 2008, including prohibitions on incentive compensation arrangements that
encourage unnecessary and excessive risks; reviews by the Registrant's Benefits & Compensation Committee of its incentive compensation arrangements, as well as the relationship between the
Registrant's risk management policies and practices and its senior executive officer incentive compensation arrangements; limitations on certain "golden parachute payments"; and limiting the
Registrant's Federal income tax deduction for compensation paid to any senior executive officer to $500,000 annually. Included within this limitation is deferred compensation earned by a senior
executive officer during a year in which the U.S. Treasury holds an equity interest.

On
February 4, 2009, the Treasury Department announced additional executive compensation guidelines containing expansive new restrictions on executive compensation for companies
participating in future federal programs such as the CPP. The Treasury Guidelines state that the new guidelines would not apply to CPP participants such as the Registrant unless they also participate
in a future exceptional assistance program or a future generally available capital access program. The Treasury Guidelines are general in nature and appear to contemplate new rulemaking by Treasury
before they become effective.

The
American Reinvestment and Recovery Act of 2009 (sometimes called ARRA), which became effective February 17, 2009, contains expansive new restrictions on executive compensation
for financial institutions such as the Registrant that participate in the CPP. ARRA amends EESA by continuing all the same compensation and governance restrictions. It also adds the following major
new requirements so long as the Registrant has any obligations under the CPP (other than the warrants to purchase our common stock issued to the Treasury): prohibition on payment of any "bonus,
retention award, or incentive compensation" to the Registrant's chief executive officer, other than bonus amounts payable pursuant to agreements in effect on or before February 11, 2009, but
permitting the Registrant to issue "long-term" restricted stock, with a value not exceeding one-third of the total amount of annual compensation of the employee receiving the
stock, and not fully vesting until after CPP obligations have been satisfied; requiring every company receiving CPP assistance to permit a non-binding shareholder vote to approve the
compensation of executives as disclosed in the Registrant's proxy statement; prohibiting any payment to a senior executive officer or any of the next five most highly-compensated employees for
departure from the Registrant for any reason, except for payments for services performed or benefits accrued; extending the EESA clawback of bonus or other incentive payment based on materially
inaccurate financial or other performance criteria to the next 20 most highly compensated employees in addition to the senior executive officers; prohibiting a CPP participant from implementing any
compensation plan that that would encourage manipulation of the reported earnings of the Registrant to enhance the compensation of any of its employees; requiring our Benefits & Compensation
Committee to meet at least semiannually to discuss

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and
evaluate employee compensation plans in light of an assessment of any risk to the Registrant posed by such plans; requiring the chief executive officer and chief financial officer to provide a
written certification of compliance with the executive compensation restrictions in ARRA in a registrant's annual filings with the SEC; and requiring each CPP participant to implement a
company-wide policy regarding excessive or luxury expenditures, including excessive expenditures on entertainment or events, office and facility renovations, aviation or other
transportation services. ARRA requires the Treasury Department and the SEC to issue rules to implement its new executive compensation restrictions. Until rules are finalized, many details relating to
the new rules described above will remain unclear.

Participation
in U.S. Treasury Capital Purchase Program

On
January 30, 2009, as part of the Capital Purchase Program administered by the United States Department of the Treasury, the Registrant entered into a Letter Agreement and a
Securities Purchase Agreement  Standard Terms attached thereto with the U.S. Treasury, pursuant to which the Registrant issued and sold on January 30, 2009, and the U.S. Treasury
purchased for cash on that date (i) 11,750 shares of the Registrant's Fixed Rate Cumulative Perpetual Preferred Stock, Series 2008A, par value $10.00 per share, having a liquidation
preference of $1,000 per share, and (ii) a ten-year warrant to purchase up to 186,311 shares of the Registrant's common stock, $1.00 par value, at an exercise price of $9.46 per
share, for an aggregate purchase price of $11,750,000 in cash (this is called the transaction). This transaction closed on January 30, 2009. The issuance and sale of these securities was a
private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.

The
preferred shares will qualify as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. Dividends are
payable on the preferred shares quarterly and are payable on February 15, May 15, August 15, and November 15 of each year. Should the Registrant fail to pay a total of six
dividend payments on the preferred shares, whether or not consecutive, the holders of the preferred shares will have the right to elect two directors to the Registrant's board of directors until the
Registrant has paid all such dividends that it had failed to pay. The preferred shares have no maturity date and rank senior to the Registrant's common stock with respect to the payment of dividends
and distributions and amounts payable upon liquidation, dissolution and winding up of the Registrant. The preferred shares are generally non-voting, but do have contingent rights to vote
on certain matters as more fully described in the Certificate of Designations for the preferred shares.

For
three years following the closing date, the Registrant may redeem the preferred shares only from the sale or sales of qualifying equity securities of the Registrant in a "Qualified
Equity Offering," as defined in the agreement, resulting in the aggregate of not less than 25% of the U.S. Treasury's purchase price. The agreement defines a "Qualified Equity Offering" as the sale
for cash by the Registrant, after the closing date, of shares of preferred stock or common stock that qualify as Tier I capital of the Registrant under the capital guidelines of the
Registrant's federal banking agency. After three years following the closing date, the Registrant may redeem the preferred shares in whole or in part at any time, or from time to time. All redemptions
are subject to the approval of the Board of Governors of the Federal Reserve System.

The
U.S. Treasury may not transfer a portion of the warrant with respect to, or exercise the warrant for more than one-half of, the 186,311 shares of the Registrant's common
stock issuable upon exercise of the warrant until the earlier of (i) the date on which the Registrant has received aggregate gross proceeds of not less than $11,750,000 from one or more
Qualified Equity Offerings and (ii) December 31, 2009. In the event the Registrant completes one or more Qualified Equity Offerings on or prior to December 31, 2009 that results
in the Registrant receiving aggregate gross proceeds of not less than $11,750,000, then the number of the shares of common stock underlying the portion of the warrant then held by the U.S. Treasury
will be reduced by one-half of the shares of common stock originally covered by the warrant. The company is obligated to register the resale of the preferred shares and the warrant, and
the issuance of shares of common stock upon exercise of the warrant, under certain circumstances including without limitation if the Registrant files another registration statement under which the
preferred shares, the

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warrant
or the common shares issuable on exercise of the warrant can be registered or if, under certain circumstances, the U.S. Treasury requests.

The
Securities Purchase Agreement pursuant to which the preferred shares and the warrant were sold contains limitations on the payment of dividends on common stock (other than regular
quarterly cash dividends of not more than $0.13 per share of common stock), junior preferred shares, and on other preferred shares. The ability to repurchase common stock, junior preferred shares, or
other preferred
shares is also restricted under the Securities Purchase Agreement, which provides that, prior to the earlier of January 30, 2012 and the date on which the preferred shares have been redeemed in
whole or the Treasury has transferred all of the preferred shares to third parties which are not affiliates of the Treasury, neither the Registrant nor any Registrant subsidiary shall, without the
consent of the Treasury, redeem, purchase or acquire any shares of the Registrant's common stock or other capital stock or other equity securities of any kind of the Registrant, or any trust preferred
securities issued by the Registrant or any affiliate of the Registrant, other than (A) redemptions, purchases or other acquisitions of the preferred shares, (B) redemptions, purchases or
other acquisitions of shares of common stock or other stock junior to the preferred shares in connection with the administration of any employee benefit plan in the ordinary course of business and
consistent with past practice, or (C) the acquisition by the Registrant, the Bank or any of the Registrant's other subsidiaries of record ownership for the beneficial ownership of any other
persons other than the Registrant or any Registrant subsidiary, including as trustees or custodians, and (D) certain exchanges or conversions of stock junior or parity with the preferred shares
or trust preferred securities for or into other parity stock (with the same or lesser aggregate liquidation amount) or stock junior to the preferred shares, as more fully described in the Securities
Purchase Agreement.

The
Securities Purchase Agreement also subjects the Registrant to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (the
"EESA"). In connection with the closing of the transaction, William S. Latoff, William J. Hieb, Gerald F. Sopp, Albert J. Melfi, Jr. and Bruce E. Moroney, the Registrant's senior executive officers as
defined in the Securities Purchase Agreement, executed a waiver voluntarily waiving any claim against the U.S. Treasury or the Registrant for any changes to compensation or benefits arrangements that
are required to comply with the regulation issued by the U.S. Treasury under the Treasury program and acknowledging that the regulation may require modification of the compensation, bonus, incentive,
and other benefit plans, arrangements, and policies and agreements as they relate to the period the U.S. Treasury holds any equity or debt securities of the Registrant acquired through the Treasury
program. As more fully described above under "Other Recent Legislation and Regulatory Actions," ARRA imposes additional requirements on the Registrant so long as the Registrant has any obligations
under the CPP (other than the warrants to purchase the Registrant's common stock issued to the Treasury).

Section 5.3
of the Securities Purchase Agreement states that the Securities Purchase Agreement and all related documents may be amended unilaterally by the U.S. Treasury to the
extent required to comply with any changes in applicable federal statutes after the execution thereof.

In
October 2008, the FDIC announced its temporary liquidity guarantee program ("TLPG") pursuant to which the FDIC will guarantee the payment of certain newly-issued senior unsecured debt
of insured depository institutions ("Debt Guarantee") and funds held at FDIC-insured depository institutions in non-interest-bearing transaction accounts in excess of the
current standard maximum deposit insurance amount of $250,000 ("Transaction Account Guarantee"). Both guarantees were provided to eligible institutions, including the Corporation, at no cost through
December 5, 2008. Participation in the TLPG subsequent to December 5, 2008 is optional.

The
Corporation has elected to participate only in the Transaction Account Guarantee portion of the TLPG subsequent to December 5, 2008. The Transaction Account Guarantee is
effective for the Corporation through January 1, 2010. Participants in the Transaction Account Guarantee Program will
be assessed an annualized fee of 10 basis points. To the extent that these initial assessments are insufficient to cover the expense or losses arising under TLPG, the FDIC is required to impose an
emergency special assessment on all FDIC-insured depository institutions as prescribed by the Federal Deposit Insurance Act.

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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

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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

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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.

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

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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.

FDIC Insurance Assessments.DNB pays deposit insurance premiums to the FDIC based on an assessment rate established by the FDIC. In 2006,
the FDIC enacted various rules to implement the provisions of the Federal Deposit Insurance Reform Act of 2005 (the "FDI Reform Act"). Pursuant to the FDI Reform Act, in 2006 the FDIC merged the Bank
Insurance Fund with the Savings Association Insurance Fund to create a newly named Deposit Insurance Fund (the "DIF") that covers both banks and savings associations. Effective January 1, 2007,
the FDIC revised the risk-based premium system under which the FDIC classifies institutions based on the factors described below and generally assesses higher rates on those institutions
that tend to pose greater risks to the DIF.

For
most banks and savings associations, including DNB, FDIC rates will depend upon a combination of CAMELS component ratings and financial ratios. CAMELS ratings reflect the applicable
bank regulatory agency's evaluation of the financial institution's capital, asset quality, management, earnings, liquidity and sensitivity to risk. For large banks and savings associations that have
long-term debt issuer ratings, assessment rates will depend upon such ratings and CAMELS component ratings.

On
February 27, 2009, the FDIC adopted changes to its base and risk-based deposit insurance assessment rates. Effective for the second quarter of 2009, a bank's annual
assessment base rates will be as follows, depending on the bank's risk category:

Risk CategoryIMinimum

Maximum

II

III

IVAnnual rates (in basis points)


12


16


22


32


45


The
base assessment rate can be adjusted downward based on a bank's unsecured debt and level of excess capital above the well capitalized threshold, or upward based on a
bank's secured liabilities including Federal Home Loan Bank advances and repurchase agreements, so that the total risk-based assessment rates will range as follows depending on a bank's
risk category:

Risk CategoryI

II

III

IVInitial base assessment rate

12 to 16

22

32

45Unsecured debt adjustment

5 to 0

5 to 0

5 to 0

5 to 0Secured liability adjustment

0 to 8

0 to 11

0 to 16

0 to 22.5Brokered deposit adjustment



0 to 10

0 to 10

0 to 10Total base assessment rate

7 to 24

17 to 43

27 to 58

40 to 77.5


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On
February 27, 2009, the FDIC adopted an interim rule that imposes a special assessment of 20 basis points as of June 30, 2009, which is to be collected on
September 30, 2009. Then, on March 5, 2009, FDIC Chairman Sheila Bair announced that if Congress adopts legislation expanding the FDIC's line of credit with Treasury from
$30 billion to $100 billion, the FDIC might have the flexibility to reduce the special emergency assessment, possibly from 20 to 10 basis points. Assuming that deposit levels remain
constant, we anticipate that the special assessment for the Bank would total approximately $818,000 at the 20 basis points level, but if the FDIC is able to reduce the special assessment to 10 basis
points, the Bank's assessment would total approximately $409,000.

Because
the rule has just been issued and is subject to some interpretation, management has not yet determined what the Bank's final risk-based assessment rate will be for
periods after the first quarter of 2009.

The
FDIA, as amended by the FDI Reform Act, requires the FDIC to set a ratio of deposit insurance reserves to estimated insured deposits, the designated reserve ratio (the "DRR"), for a
particular year within a range of 1.15% to 1.50%. For 2009, the FDIC has set the DRR at 1.25%, which is unchanged from 2008 levels. Under the FDI Reform Act and the FDIC's revised premium assessment
program, every FDIC-insured institution will pay some level of deposit insurance assessments
regardless of the level of the DRR. We cannot predict whether, as a result of an adverse change in economic conditions or other reasons, the FDIC will be required in the future to increase deposit
insurance assessments above current levels. The FDIC also adopted rules providing for a one-time credit assessment to each eligible insured depository institution based on the assessment
base of the institution on December 31, 1996. The credit may be applied against the institution's 2007 assessment, and for the three years thereafter the institution may apply the credit
against up to 90% of its assessment. DNB qualified for a credit of approximately $245,000, of which $170,000 was applied in 2007 and the remaining balance of $75,000 was applied in 2008, thereby
exhausting the credit.

In
addition, the Deposit Insurance Funds Act of 1996 authorized the Financing Corporation ("FICO") to impose assessments on DIF applicable deposits in order to service the interest on
FICO's bond obligations from deposit insurance fund assessments. The amount assessed on individual institutions by FICO will be in addition to the amount, if any, paid for deposit insurance according
to the FDIC's risk-related assessment rate schedules. FICO assessment rates may be adjusted quarterly to reflect a change in assessment base. The FICO annual assessment rate for the fourth
quarter of 2008 was 1.14 cents per $100 deposits and will be 1.04 cents per $100 deposits for the first quarter of 2009. DNB had a FICO assessment of $46,000 in FDIC deposit premiums in 2008.

Under
the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

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

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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:

Difficult economic conditions and market volatility have adversely impacted the banking industry and financial markets generally and may significantly affect our business, financial
condition, or results of operation.Our success depends, to a certain extent, upon economic and political conditions, local and national, as well as governmental
monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, money supply and other factors beyond our control may adversely affect our asset quality, deposit
levels and loan demand and, therefore, our earnings.

The
capital and credit markets have been experiencing unprecedented levels of volatility and disruption for more than a year. In some cases, the markets have produced downward pressure
on stock prices and credit availability for certain issuers without regard to those issuers' underlying financial strength. As a consequence of the recession that the United States now finds itself
in, business activity across a wide range of industries face serious difficulties due to the lack of consumer spending and the extreme lack of liquidity in the global credit markets. Unemployment has
also increased significantly.

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As
a result of the challenges presented by economic conditions, we may face the following risks in connection with these events:



Overall,
during the past year, the general business environment has had an adverse effect on our business, and there can be no assurance that the environment will improve in the near
term. Until conditions improve, we expect our businesses, financial condition and results of operations to be adversely affected.

There can be no assurance that the Emergency Economic Stabilization Act of 2008 and other recently enacted government programs will help stabilize the U.S. financial
system.On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008, as amended (the "EESA"). The legislation was
the result of a proposal by Treasury Secretary Henry Paulson to the U.S. Congress on September 20, 2008 in response to the financial crises affecting the banking system and financial markets
and going concern threats to investment banks and other financial institutions. The U.S. Treasury and federal banking regulators are implementing a number of programs under this legislation and
otherwise to address capital and liquidity issues in the banking system, including the CPP, in which DNB participated. In addition, other regulators have taken steps to attempt to stabilize and add
liquidity to the financial markets, such as the FDIC's TLGP.

On
February 10, 2009, Treasury Secretary Timothy Geithner announced the Financial Stability Plan, which earmarks the second $350 billion originally authorized under the
EESA. The Financial Stability Plan is intended to, among other things, make capital available to financial institutions, purchase certain legacy loans and assets from financial institutions, restart
securitization markets for loans to consumers and businesses and relieve certain pressures on the housing market, including the reduction of mortgage payments and interest rates.

In
addition, the American Recovery and Reinvestment Act of 2009 (the "ARRA"), which was signed into law on February 17, 2009, includes, among other things, extensive new
restrictions on the compensation arrangements of financial institutions participating in TARP.

There
can be no assurance, however, as to the actual impact that the EESA, as supplemented by the Financial Stability Plan, the ARRA and other programs will have on the financial
markets, including the extreme levels of volatility and limited credit availability currently being experienced. The failure of the EESA, the ARRA, the Financial Stability Plan and other programs to
stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our businesses, financial condition, results of operations,
and access to credit or the trading price of our common stock.

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The EESA, ARRA and the Financial Stability Plan are relatively new initiatives and, as such, are subject to change and evolving interpretation. There can be no
assurances as to the effects that any further changes will have on the effectiveness of the government's efforts to stabilize the credit markets or on our businesses, financial condition or results of
operations.

The limitations on incentive compensation contained in the ARRA may adversely affect DNB's' ability to retain its highest performing employees.In
the case of a company such as DNB that received CPP funds, the ARRA contains restrictions on bonus and other incentive compensation payable to certain executives. Depending upon the limitations placed
on incentive compensation by the final regulations issued under the ARRA, it is possible that DNB may be unable to create a compensation structure that permits DNB to retain its highest performing
employees. If this were to occur, DNB' businesses and results of operations could be adversely affected.

Current levels of market volatility are unprecedented.The capital and credit markets have been experiencing volatility and disruption
for more than
a year. In recent months, the volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain
issuers seemingly without regard to those issuers' underlying financial strength. If current levels of market disruption and volatility continue or worsen, there can be no assurance that DNB will not
experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations. Several factors could cause the market price
for our common shares to fluctuate substantially in the future, including:



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:

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, 2008, 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

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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.

Capital constraints could limit our growth.The Corporation and Bank, while considered "well capitalized" for regulatory capital
purposes, have seen
their capital ratios gradually decline recently due
to the market conditions and their consequences described above. The Corporation's ability to grow is contingent upon its ability to generate sufficient additional capital though earnings and or other
sources. The Corporation took steps to strengthening its capital position through its recent $11.8 million participation in the CPP. However, the Corporation may need additional capital to fund
further growth, possible acquisitions, and the repayment of the CPP funds it received. If the Corporation is unable to generate sufficient additional capital though its earnings or other sources, the
Corporation's ability to grow, make acquisitions and relieve itself of the cost of the CPP issuance may be hurt.

Federal Home Loan Bank of Pittsburgh suspends dividend and capital stock repurchase.On December 23, 2008, the Federal Home Loan
Bank of
Pittsburgh (also called the FHLBP) announced that it will indefinitely suspend dividend payments and repurchases of excess capital stock, due to low short-term interest rates, increased
costs of maintaining liquidity and constrained access to debt markets at attractive rates. The FHLBP is a primary source of liquidity for the Bank. While the Bank does have other available sources of
liquidity and credit, such as attracting additional deposits, the Federal Reserve window, and funding in the bank markets, if current economic conditions hurt the FHLBP's ability to provide liquidity
and credit to the Bank, the Bank's flexibility and ability to obtain liquidity and credit on favorable terms could be hurt, which could reduce our profitability.

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 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.

Current market developments may adversely affect our industry, businesses and results of operations.Dramatic declines in the housing
market during
2008, with falling home prices and increasing foreclosures and unemployment, have resulted in, and may continue to result in, significant write-downs of asset values by us and other financial
institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit

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default
swaps and other derivative securities, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail.
Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced, and in some cases, ceased to
provide funding to borrowers including financial institutions.

This
market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and
widespread reduction of business activity generally. The resulting lack of available credit, lack of confidence in the financial sector, increased volatility in the financial markets and reduced
business activity could materially and adversely affect our business, financial condition and results of operations.

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 second quarter of 2008, 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 plan 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 5, 2009, William S. Latoff, our Chairman and Chief Executive Officer, owned 154,553
shares of our
common stock, including 3,150 and 3,000 shares of unvested stock that will vest on November 28, 2010 and December 17, 2011, respectively. He can also obtain 53,622 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 7.38% 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 March 5, 2009 our directors and officers as a group own a total of 306,294 shares of our common stock,
including 20,401

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shares
of unvested stock that will vest in the future. They can also acquire 137,830 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.

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, 2008, the largest exposure we had to a group of related borrowers was $5.1 million. This equaled 11.2% 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, 2008, our total exposure to our
10 largest borrowing relationships was approximately $46.9 million. This was approximately 103% 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

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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 directly affect our business operations but could affect the value of an investment in DNB Common Stock:

Our participation in the U.S. Treasury's CPP imposes restrictions and obligations on us that limit our ability to increase dividends, repurchase shares of our common stock and access
the
equity capital markets.On January 30, 2009 DNB issued and sold preferred stock and a warrant to purchase our common stock to the U.S. Treasury as part of
its CPP. Prior to January 30, 2012, unless we have redeemed all of the preferred stock or the U.S. Treasury has transferred all of the preferred stock to a third party, the agreement pursuant
to which such securities were sold, among other things, limits the quarterly payment of dividends on our common stock to $0.13 per share (our current quarterly dividend rate is $.065 per share)
without prior regulatory approval, limits our ability to repurchase shares of our common stock (with certain exceptions, including the repurchase of our common stock to offset share dilution from
equity-based compensation awards), and grants the holders of such securities certain registration rights which, in certain circumstances, impose lock-up periods during which we would be
unable to issue equity securities.

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.

On a Liquidation or in Certain Other Cases, Our Debt Holders May Hold Rights Superior to Shareholders.We have issued cumulative
perpetual preferred
stock and 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

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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.

Current levels of market volatility may hurt the value of our stock.Due to the adverse market and economic conditions described above,
the market
price for our common shares may fluctuate substantially. This may prevent us from taking advantage of acquisition opportunities. It may also hurt our ability to attract and retain executive talent,
who are often provided incentive compensation related to our financial success.

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 Brandywine Avenue,
Downingtown. With the exception of the Chadds Ford office, West Goshen office, Exton office, West Chester office and limited service offices in Media and at the 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 $7.2 million including leasehold improvements at December 31, 2008. The
Bank's trust department and wealth management unit, operating under the name, "DNB Advisors," have offices in the Bank's Exton Office.

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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/LeasedCaln

1835 East Lincoln Highway, Coatesville

OwnedChadds Ford

300 Oakland Road, West Chester

LeasedEast End

701 East Lancaster Avenue, Downingtown

OwnedExton

410 Exton Square Parkway, Exton

LeasedKennett Square

215 E. Cypress Street, Kennett Square

OwnedLionville

Intersection of Route 100 and Welsh Pool Road, Exton

OwnedLittle Washington

Route 322 and Culbertson Run Road, Downingtown

OwnedLudwig's Corner

Intersection of Routes 100 and 401, Chester Springs

OwnedMedia

200 E. State Street, Suite 208, Media (Limited Service)

LeasedTel Hai

Tel Hai Retirement Community, Honey Brook (Limited Service)

LeasedWest Goshen

1115 West Chester Pike, West Chester

LeasedWest Chester

2 North Church Street, West Chester

Leased


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.

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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, par value $1.00 per share, is listed for trading on NASDAQ under the symbol DNBF. 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 1,100 stockholders who owned 2.6 million
shares of common stock outstanding at March 9, 2009. Quarterly high and low sales prices are set forth below:

2008

2007High

Low

High

LowFirst quarter

$
18.00

$
13.31

$
19.52

$
18.19Second quarter


15.00


13.75


19.52


18.70Third quarter


14.50


10.55


19.05


16.19Fourth quarter


11.25


8.00


18.57


14.50


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 24.

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 88.

(b)
Recent Sales of Unregistered Securities

On
January 30, 2009, as part of the CPP administered by the United States Department of the Treasury, DNB Financial Corporation entered into a Letter Agreement and a Securities
Purchase Agreement with the U.S. Treasury, pursuant to which the DNB issued and sold on January 30, 2009, and the U.S. Treasury purchased for cash on that date (i) 11,750 shares of the
DNB's Fixed Rate Cumulative Perpetual Preferred Stock, Series 2008A, par value $10.00 per share, having a liquidation preference of $1,000 per share, and (ii) a ten-year
warrant to purchase up to 186,311 shares of the DNB's common stock, $1.00 par value, at an exercise price of $9.46 per share, for an aggregate purchase price of $11,750,000 in cash. This transaction
closed on January 30, 2009. The issuance and sale of these securities was a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.

(c)
Purchases of Equity Securities by the Registrant and Affiliated Purchasers

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, 2008

Period

Total Number
Of Shares
Purchased

Average
Price Paid
Per Share

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs

Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs (a)October 1, 2008  October 31, 2008

300

$12.92

300

65,970November 1, 2008  November 30, 2008







65,970December 1, 2008  December 31, 2008

400

9.82

400

65,570Total

700

$11.15

700


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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. As more fully discussed beginning on page 2 in the "Supervision and Regulation"
section of Item 1. "Business" of this Annual Report on Form 10-K, the Company's ability to repurchase its common stock is limited by the terms of the Purchase Agreement
between DNB and the U.S. Treasury. Under the CPP, prior to the earlier of (i) January 30, 2012, or (ii) the date on which the Series A Preferred Stock is redeemed in whole
or the U.S. Treasury has transferred all of the Series A Preferred Stock to unaffiliated third parties, the consent of the U.S. Treasury is required to repurchase any shares of common stock
except in connection with benefit plans in the ordinary course of business and certain other limited exceptions.

(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 the S&P 500 Financial
Index for the 5 year period ended December 31, 2008. 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 PERFORMANCECOMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN  AMONG DNB FINANCIAL CORP., the S&P 500 INDEX & the S&P 500 FINANCIAL INDEX

GRAPHIC

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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)2008

2007

2006

2005

2004RESULTS OF OPERATIONSInterest income

$
28,262

$
30,237

$
28,249

$
23,427

$
20,233Interest expense


13,048


15,417


13,368


9,313


6,833Net interest income


15,214


14,820


14,881


14,114


13,400Provision for credit losses


2,018


60








Other non-interest income


4,408


4,003


3,414


2,356


2,940Other-than-temporary impairment charge














(2,349
)Total non-interest income


4,408


4,003


3,414


2,356


591Non-interest expense


16,731


16,589


16,507


14,411


13,189Income before income taxes


873


2,174


1,788


2,059


802Income tax expense (benefit)


64


372


41


(89
)

504Net income

$
809

$
1,802

$
1,747

$
2,148

$
298PER SHARE DATA*Basic earnings

$
0.31

$
0.69

$
0.67

$
0.92

$
0.12Diluted earnings


0.31


0.69


0.66


0.91


0.12Cash dividends


0.46


0.50


0.47


0.45


0.43Book value


11.53


12.55


11.94


11.83


10.34Weighted averageCommon shares outstanding  basic


2,602,902


2,614,417


2,625,182


2,332,552


2,292,473FINANCIAL CONDITIONTotal assets

$
533,447

$
545,840

$
525,242

$
473,046

$
441,059Loans and leases


336,454


309,342


329,466


288,130


232,577Allowance for credit losses


4,586


3,891


4,226


4,420


4,436Deposits


408,470


412,920


381,027


339,627


323,144Borrowings


90,123


89,877


110,538


99,880


90,643Stockholders' equity


30,058


32,635


31,411


30,186


24,738SELECTED RATIOSReturn on average stockholders' equity


2.51
%

5.96
%

5.73
%

8.31
%

1.16
%Return on average assets


0.15


0.36


0.35


0.48


0.07Average equity to average assets


5.98


6.02


6.18


5.77


6.05Loans to deposits


82.37


74.92


86.47


84.84


71.97Dividend payout ratio


146.56


72.17


71.37


49.39


334.34


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Table of Contents

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, 2008 include:



The
global and U.S. economies are experiencing significantly reduced business activity as a result of disruptions in the financial system during the past year. Dramatic declines in the
housing market during the past year, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions,
including government-sponsored entities and major commercial and investment banks. As a result of the recession, retail customers may delay borrowing from DNB as unemployment increases and the value
of existing homes decline and the availability to borrow against equity diminishes. As the U.S. economy moves through a period of recession, delinquencies will 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. As a result
of these negative trends in the economy and their impact on our borrowers' ability to repay their loans, DNB made a $2.0 million provision in 2008 in response to DNB's increased level of
non-performing assets which grew $5.8 million to $7.7 million at December 31, 2008, compared to $1.9 million at December 31, 2007. During the last
quarter of the year, management decided to reduce the size of DNB's balance sheet and increase the amount of its liquid assets to strengthen its financial position at a time of unprecedented economic
turmoil. Management reduced the size of the investment securities portfolio from $174.5 million at September 30, 2008 to $124.1 million at December 31, 2008. This resulted
in an increase in federal funds sold to $38.3 million at December 31,

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2008,
from $361,000 at September 30, 2008. In addition, DNB's net interest margin has been impacted by these changes in the economy. Management has been aggressive in managing our cost of funds
during the year by implementing carefully planned pricing strategies, designed to offset the decline in rates on earning assets, while matching liquidity needs. Our composite cost of funds for 2008
dropped 76 basis points to 2.86%, from 3.62% in 2007. Our net interest margin however declined from 3.14% in 2007 to 3.00% in 2008 because of falling short term rates and higher levels of
non-performing assets.

Earnings.For the year ended December 31, 2008, DNB reported net income of $809,000, a decrease of $993,000 from the $1.8 million
reported for the year ended December 31, 2007, or $0.31 per share versus $0.69 per share, respectively, on a fully diluted basis. DNB's earnings were impacted by higher provisions for credit
losses, which in 2008 totaled $2.0 million, compared to $60,000 in 2007. Also, economic conditions challenging all commercial banking institutions affected 2008 earnings  the
current recession, higher levels of non-performing assets and delinquencies, as well as continued 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
dividend paid in 2007.

Quarterly Financial Data(Dollars in thousands,
except per share data)

2008

2007Fourth
Quarter

Third
Quarter

Second
Quarter

First
Quarter

Fourth
Quarter

Third
Quarter

Second
Quarter

First
QuarterInterest income

$6,912

$7,194

$6,883

$7,272

$7,745

$7,533

$7,487

$7,472Interest expense

3,085

3,205

3,049

3,709

4,158

3,845

3,714

3,700Net interest income

3,827

3,989

3,834

3,563

3,587

3,688

3,773

3,772Provision for credit losses

777

727

454

60

60





Net interest income before credit losses

3,050

3,262

3,380

3,503

3,527

3,688

3,773

3,772Non-interest income

919

903

1,387

1,200

1,071

1,060

904

968Non-interest expense

4,275

4,031

4,231

4,194

4,079

4,154

4,225

4,131Income (loss) before income taxes

(306)

134

536

509

519

594

452

609Income tax expense (benefit)

(76)

(65)

105

100

104

120

74

74Net income (loss)

$(230)

$199

$431

$409

$415

$474

$378

$535Basic earnings (loss) per share

$(0.09)

$  0.08

$  0.17

$  0.16

$  0.16

$  0.18

$  0.14

$  0.20Diluted earnings (loss) per share

(0.09)

0.08

0.17

0.16

0.16

0.18

0.14

0.20Cash dividends per share

$0.065

$0.130

$0.130

$0.130

$0.124

$0.124

$0.124

$0.124


Asset Quality.Non-performing assets were $7.7 million at December 31, 2008 compared to $1.9 million at
December 31, 2007. As of December 31, 2008, the non-performing loans to total loans ratio increased to .81% compared to .60% at December 31, 2007. The
non-performing assets to total assets ratio increased to 1.45% at December 31, 2008, compared to .34% at December 31, 2007. The allowance for credit losses was
$4.6 million at December 31, 2008, compared to $3.9 million at December 31, 2007. The allowance to total loans was 1.36% at December 31, 2008 compared to 1.26% at
December 31, 2007. DNB's delinquency ratio (total delinquent loans and leases to total loans and leases) was 1.64% at December 31, 2008, up from 1.39% at December 31, 2007.
Delinquencies increased during 2008 in the residential mortgage and commercial loan portfolios. As the U.S. and global economies deal with the current recession, it is possible that delinquencies may
rise as the value of real estate declines further and DNB's borrowers experience

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financial
difficulty due to corporate downsizing, stock market declines, 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, 2008, DNB had consolidated assets of $533.4 million and a Tier I/Leverage Capital Ratio of 7.46%. Loans and leases comprise
67.4% of earning assets, while investments and federal funds sold constitute the remainder. During 2008, assets decreased $12.4 million to $533.4 million at December 31, 2008,
compared to $545.8 million at December 31, 2007. Investment securities decreased $46.8 million to $124.1 million, while the loan and lease portfolio increased
$27.1 million, or 8.76%, to $336.5 million. Deposits decreased $4.5 million to $408.5 million at December 31, 2008. 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 2008, falling short term rates contributed to
margin compression, and a higher provision for credit losses brought about by increased levels of non-performing assets, contributed to a lower level of earnings.

Comprehensive 5-Year Plan.During the second quarter of 2008, 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:



Strategic Plan Update.During 2008, management focused on expense control as well as strengthening DNB's capital and liquidity positions.
Non-interest expenses increased less than 1% year over year and Total Risk Based Capital stood at 12.05% at December 31, 2008. In addition, DNB grew loans by $27.1 million or
8.76% during 2008 and reduced its composite cost of funds from 3.26% in 2007 to 2.86% in 2008.

Management's
strategies are designed to direct DNB's tactical investment decisions and support financial objectives. DNB's most significant revenue source continues to be net interest
income, defined as total interest income less interest expense, which in 2008 accounted for approximately 77.5% 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.

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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.

On
January 30, 2009, as part of the CPP administered by the United States Department of the Treasury, DNB Financial Corporation entered into a Letter Agreement and a Securities
Purchase Agreement with the U.S. Treasury. The addition of the $11,750,000 in capital will enhance DNB's strong capital position and allow us to aid local communities by increasing our lending
capacity. (See additional discussion in Other Recent Legislation and Regulatory Actions, on page 4 of this Form 10-K).

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-eight 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 $229.0 million or 68.1% of total loans as of December 31, 2008.

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 economic
environment, demand for consumer home equity loan products has declined, however consumer loans grew 12.1% from the prior year due to a strategic loan purchase.

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 $820,000, $859,000 and $707,000 or 4.12%, 4.58% and 3.90% of total revenues for 2008, 2007 and 2006, respectively.

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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 52 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

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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 312008

2007

2006

2005

2004

2003Prime

3.25%

7.25%

8.25%

7.25%

5.25%

4.00%Federal Funds Sold ("FFS")

.25

4.25

5.25

4.25

2.25

1.006 month U.S. Treasury

.27

3.51

5.08

4.25

2.56

1.00




Historical Yield Spread
December 312008

2007

2006

2005

2004

2003FFS to 5 Year U.S. Treasury

1.30%

-0.62%

-0.56%

0.10%

1.38%

2.25%FFS to 10 Year U.S. Treasury

2.00

-0.04

-0.55

0.14

1.99

3.27


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 1.30% and 2.00%, respectively
at the end of 2008. 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 5 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 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.

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

Year Ended December 312008

2007

2006Average
Balance

Interest

Yield/
Rate

Average
Balance

Interest

Yield/
Rate

Average
Balance

Interest

Yield/
RateASSETSInterest-earning assets:Investment securities:Taxable

$
159,724

$
7,895


4.94
%
$
127,416

$
6,136


4.82
%
$
109,027

$
4,699


4.31
%Tax-exempt


4,527


263


5.81


15,014


906


6.04


31,989


1,924


6.01Total securities


164,251


8,158


4.97


142,430


7,042


4.94


141,016


6,623


4.70Cash and cash equivalents


30,576


468


1.53


23,566


849


3.60


13,853


347


2.51Total loans and leases


322,015


19,904


6.18


322,381


22,838


7.08


321,289


22,110


6.88Total interest-earning assets


516,842


28,530


5.52


488,377


30,729


6.29


476,158


29,080


6.11Non-interest-earning assets


21,633








19,447








17,297Total assets

$
538,475







$
507,824







$
493,455LIABILITIES AND STOCKHOLDERS' EQUITYInterest-bearing liabilities:Savings deposits

$
238,890

$
4,193


1.76
%
$
210,572

$
4,841


2.30
%
$
211,647

$
4,257


2.01
%Time deposits


128,158


4,704


3.67


131,133


6,172


4.71


96,964


3,870


3.99Total interest-bearing deposits


367,048


8,897


2.42


341,705


11,013


3.22


308,611


8,127


2.63Federal funds purchased


166


4


2.34


263


15


5.52


799


43


5.38Repurchase agreements


20,496


521


2.54


33,871


1,263


3.73


38,920


1,535


3.94FHLB advances


58,108


2,907


5.00


39,724


2,303


5.80


50,843


2,852


5.61Other borrowings


9,947


719


7.23


9,961


824


8.27


9,974


811


8.13Total interest-bearing liabilities


455,765


13,048


2.86


425,524


15,417


3.62


409,147


13,368


3.27Demand deposits


46,237








47,675








50,595Other liabilities


4,284








3,705








3,241Stockholders' equity


32,189








30,920








30,472Total liabilities and stockholders' equity

$
538,475







$
507,824







$
493,455Net interest income




$
15,482







$
15,312







$
15,712Interest rate spread








2.66
%







2.67
%







2.84
%Net interest margin








3.00
%







3.14
%







3.30
%


2.    Rate / Volume Analysis

During 2008, net interest income, before the provision for credit losses, increased $171,000 or 1.1% on a tax equivalent basis, to
$15.5 million, from $15.3 million in 2007. As shown in the Rate/Volume Analysis below, $108,000 was attributable to volume changes and $63,000 to rate changes. The volume changes were
mostly attributable to increased levels of investment securities of $988,000 and lower levels of repurchase agreements of $340,000, offset by increased levels of FHLB advances of $919,000 and
increased levels of savings deposits of $497,000. The average balance of investments securities was $164.3 million in 2008 compared to $142.4 million in 2007. The average balance of
repurchase agreements was $20.5 million in 2008 compared to $33.9 million in 2007. The average balance of FHLB advances was $58.1 million in 2008 compared to $39.7 million
in 2007. The average balance of savings deposits was $238.9 million in 2008 compared to $210.6 million in 2007. The decrease in yields on interest-bearing assets and the decrease in

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rates
on interest-bearing liabilities offset each other, resulting in a slight $63,000 difference. The tax equivalent yield on loans and leases in 2008 was 6.18%, compared to 7.08% in 2007. The tax
equivalent yield on securities was relatively flat at 4.97% in 2008 and 4.94% in 2007. The change due to rate on savings deposits was $1.1 million which had an average rate of 1.76% in 2008 and
2.30% in 2007. The change due to rate on time deposits was $1.4 million which had an average rate of 3.67% in 2008 and 4.71% in 2007. DNB's composite cost of funds decreased to 2.86% in 2008
compared to 3.62% in 2007.

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.

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 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.

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Table of Contents

Rate / Volume Analysis(Dollars in thousands)

2008 Versus 2007

2007 Versus 2006Change Due To

Change Due ToRate

Volume

Total

Rate

Volume

TotalInterest-earning assets:Loans and leases

$
(2,911
)
$
(23
)
$
(2,934
)
$
651

$
77

$
728Investment securities:Taxable


162


1,597


1,759


551


886


1,437Tax-exempt


(34
)

(609
)

(643
)

7


(1,025
)

(1,018
)Cash and cash equivalents


(488
)

107


(381
)

152


350


502Total


(3,271
)

1,072


(2,199
)

1,361


288


1,649Interest-bearing liabilities:Savings deposits


(1,145
)

497


(648
)

609


(25
)

584Time deposits


(1,359
)

(109
)

(1,468
)

694


1,608


2,302Federal funds purchased


(8
)

(2
)

(10
)

1


(30
)

(29
)Repurchase agreements


(403
)

(340
)

(743
)

(83
)

(188
)

(271
)FHLB advances


(315
)

919


604


94


(644
)

(550
)Other borrowings


(104
)

(1
)

(105
)

14


(1
)

13Total


(3,334
)

964


(2,370
)

1,329


720


2,049Net interest income

$
63

$
108

$
171

$
32

$
(432
)
$
(400
)


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 ($27.5 million at December 31, 2008) and callable FHLB advances ($35 million at
December 31, 2008) 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 52 of this Form 10-K.)

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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 moves through 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.    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, Credit Cards as well as Executive and employee packages. In addition, DNB has introduced
Remote Capture to our commercial customers to expedite their collection of funds.

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E.    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 2008, DNB continued its efforts to strengthen its BSA policies, procedures and systems to ensure compliance with OFAC regulations.

V.     Recent Developments

A.    Accounting Developments Affecting DNB

FASB Statement No. 157In 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. The adoption of SFAS No. 157 did not have a material impact on
DNB's consolidated financial statements.

FSP FAS No. 157-1 and FSP FAS No. 157-2In February 2008, the
FASB issued two Staff Positions (FSPs) on Statement No. 157: FSP 157-1 "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement Under Statement 13," and FSP 157-2, "Effective Date of FASB Statement
No. 157." FSP 157-1 excludes fair value measurements related to leases from the disclosure requirements of Statement No. 157. FSP 157-2 delays the effective date
of Statement No. 157 for all non-recurring fair value measurements of non-financial assets and non-financial liabilities until fiscal years beginning after
November 15, 2008. DNB is applying the deferral guidance in FSP 157-2, and accordingly, has not applied the non-recurring disclosure to non-financial assets
or non-financial liabilities valued at fair value on a non-recurring basis.

FSP FAS No. 157-3In October 2008, the FASB issued FSP FAS
No. 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active". FSP
FAS No. 157-3 clarifies the application of SFAS No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that financial asset is not active. This FSP was effective upon issuance, and was therefore effective for the consolidated financial
statements included in the Company's quarterly report for the period ended September 30, 2008. The adoption of FSP FAS No. 157-3 did not have a material impact on DNB's
consolidated financial statements.

FASB Statement No. 159In 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

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accounting
provisions. Statement 159 became effective January 1, 2008 and did not have a material impact on DNB's consolidated financial statements upon adoption.

FASB Statement No. 160In 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 does not expect that this statement will have a material impact on DNB's consolidated financial statements upon adoption.

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

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

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

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

SAB No. 109In November 2007, the SEC issued Staff Accounting Bulletin 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.

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SAB 109
retains the views in SAB No. 105 that internally developed intangible assets (such as client relationship intangible assets) should not be included in the fair value measurement
of derivative loan commitments. SAB 109 was effective on January 1, 2008. DNB concluded that SAB 109 did not have a material effect on its consolidated financial statements upon
adoption.

SAB No. 110In December 2007, the SEC issued Staff Accounting Bulletin No. 110,
"Certain Assumptions Used in Valuation Methods" ("SAB No. 110"), which extends the use of the "simplified" method, under certain circumstances, in developing an estimate of expected term of
"plain vanilla" share options in accordance with SFAS No. 123R.DNB determined SAB 110 did not affect DNB's consolidated financial statements upon adoption.

FSP FAS 132(R)-1In December 2008, the FASB issued FASB Staff Position
No. 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets" ("FSP 132(R)-1"). This FSP amends FASB Statement No. 132(R), "Employer's
Disclosures about Pensions and Other Postretirement Benefits" ("FAS 132(R)"), to require additional disclosures about assets held in an employer's defined benefit pension or other
postretirement plan. This FSP is applicable to an employer that is subject to the disclosure requirements of FAS 132(R) and is generally effective for fiscal years ending after
December 15, 2009. DNB is in the process of reviewing the potential impact of FSP 132(R)-1; however, the adoption of FSP 132(R)-1 is not expected to have a material
impact on DNB's consolidated financial statements.

VI.    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.

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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, 2008.

VIII.  2008 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 $140.3 million at December 31, 2008. Management believes that DNB has adequate resources to meet its short-term and long-term funding requirements.

As
of December 31, 2008, deposits totaled $408.5 million, down $4.5 million from $412.9 million at December 31, 2007. There were approximately
$128.2 million in certificates of deposit (including IRAs) scheduled to mature during the next twelve months. At December 31, 2008, DNB had $55.3 million in un-funded
loan commitments. In addition, there was $3.0 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 312008

2007

2006

2005

2004Non-interest-bearing deposits

$
45,503

$
48,741

$
50,852

$
51,407

$
53,402Interest-bearing deposits:NOW


106,623


82,912


82,579


78,664


79,527Money market


81,742


93,029


66,352


45,390


42,199Savings


32,895


38,362


54,956


77,216


77,897Certificates


124,665


133,530


108,970


70,621


53,558IRA


17,042


16,346


17,318


16,329


16,561Total deposits

$
408,470

$
412,920

$
381,027

$
339,627

$
323,144




Stockholders' equity was $30.1 million at December 31, 2008 compared to $32.6 million at December 31, 2007.
The decrease in stockholders' equity was primarily the result of a $1.3 million, net-of-tax adjustment on the available for sale investment securities portfolio,
unrealized actuarial losses on DNB's pension totaling $1.1 million and dividends on DNB's common stock totaling $1.2 million. These decreases were partially offset by
year-to-date earnings totaling $809,000.

Management
believes that the Corporation and the Bank have each met the definition of "well capitalized" for regulatory purposes on December 31, 2008. The Bank's capital category
is determined for

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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 Federal Reserve Bank's ("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 FRB's 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. Both DNB and the Bank would be deemed to be "well capitalized" for regulatory purposes.

On
January 30, 2009, as part of the CPP administered by the United States Department of the Treasury, DNB Financial Corporation entered into a Letter Agreement and a Securities
Purchase Agreement with the U.S. Treasury (see additional discussion in Other Recent Legislation and Regulatory Actions, on page 4 of this Form 10-K).

B.    Results of Operations

1.    Summary of Performance

(a)    Summary of Results

For
the year ended December 31, 2008, DNB reported net income of $809,000 versus $1.8 million for 2007. Per share earnings on a fully diluted basis were $0.31, down from
$0.69 for the prior year.

DNB's
earnings were impacted by the general economic conditions challenging all commercial banking institutions  the current global and U.S. recession, dramatic declines in
the housing market, falling home prices, increased foreclosures and unemployment. During the year, management focused on expense control and adherence to sound underwriting standards. In addition,
management decided to reduce the size of DNB's balance sheet and increase the amount of its liquid assets to
strengthen its financial position in a time of unprecedented economic turmoil. During 2008, DNB continued to recognize the benefits of the efficiency study it undertook in 2006 as operating expenses
increased only $142,000 or .86%. In addition, management restructured portions of DNB's investment portfolio and recognized $962,000 in net gains during 2008. Highlights for the year
include:



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

Some of DNB's significant events during 2008 include:



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(c)    Trends and Uncertainties

Please refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Introductory
Overview on page 25 of this Form 10-K

(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.

2008 Results Compared to 2007 Results

During 2008, DNB focused on loan growth and expense control as well as strengthening its capital and liquidity positions. DNB grew
loans by $27.1 million or 8.76% during 2008 and reduced its composite cost of funds from 3.26% in 2007 to 2.59%. DNB also made $2.0 million in provisions for credit losses during the
year in response to the deteriorating economy and its impact on certain of DNB's borrowers. Non-interest income increased $405,000 and non-interest expenses increased $142,000
or less than 1% year over year. At December 31, 2008, DNB's leverage ratio stood at 7.46% and its total risk-based capital ratio was 12.02%. In response to unprecedented economic
turmoil during the latter part of 2008, management decided to increase its liquid assets, primarily federal funds sold which totaled $38.3 million at December 31, 2008.

Interest
earned on loans and leases was $19.7 million for 2008 compared to $22.7 million for 2007. The average balance on loans and leases was $322.0 million with an
average yield of 6.18% in 2008

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compared
to an average balance of $322.4 million with an average yield of 7.08% in 2007. The decrease in yield was the result of lower interest rates on prime-based loans as well as a higher
level of non-performing assets year over year.

Interest
and dividends on investment securities was $8.1 million and $6.7 million for 2008 and 2007, respectively. The average balance on investment securities was
$164.3 million with an average yield of 4.97% in 2008 compared to $142.4 million with an average yield of 4.94% in 2007. Interest and dividends increased $1.3 million, primarily
due to a higher average balance of securities year over year. Total investment securities declined $46.8 million from December 31, 2007 to December 31, 2008, primarily due to
sales of securities of $59.2 million during the fourth quarter of 2008. These sales resulted in a gain of $195,000 for the quarter.

Interest
on deposits was $8.9 million for 2008 compared to $11.0 million for 2007. The average balance of interest-bearing deposits was $367.0 million with an
average rate of 2.42% for 2008 compared to $341.7 million with an average rate of 3.22% for 2007. The increase in average balance was primarily the result of our efforts to increase deposits.
The decrease in rate was primarily the result of a decrease in the cost of funds resulting from the lower interest rate environment during 2008.

Interest
on FHLB advances was $2.9 million for 2008 compared to $2.3 million for 2007. The average balance on FHLB advances was $58.1 million with an average rate of
5.00% for 2008 compared to $39.7 million with an average rate of 5.80% for 2007. DNB's management increased the level of such borrowings during 2008 due to the lower cost of such funding
relative to brokered deposits.

Interest
on repurchase agreements was $521,000 for 2008 compared to $1.3 million for 2007. The average balance on repurchase agreements was $20.5 million with an average
rate of 2.54% for 2008 compared to $33.9 million with an average rate of 3.73% for 2007. The decrease in the average balance was due to a lower level of customers employing these types of
accounts for their operating funds as short term rates fell and certain customers sought the safety of FDIC insured accounts during the turbulent economic environment experienced during the second
half of 2008. The decrease in rate was primarily the result of the lower interest rate environment during 2008.

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

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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.

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
$2.0 million provision made in 2008, compared to a $60,000 provision made in 2007. There were no provisions for credit losses made during the year ended December 31, 2006. Management
made a $2.0 million provision in 2008 primarily in response to DNB's increased level of non-performing assets which grew $5.8 million to $7.7 million at
December 31, 2008, compared to $1.9 million at December 31, 2007. 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.

2008 Results Compared to 2007 Results

Non-interest income was $4.4 million for 2008 compared to $4.0 million for 2007. This increase was primarily
due to the sale, redemption and calls of securities having a book value of $166.8 million during the year, resulting in $962,000 of net gains. The $962,000 of net gains on sales of securities
was $567,000 higher than the $395,000 recorded in 2007. This increase in gains was partially offset by declines in service charges on deposits, wealth management fees and income on BOLI policies. The
$23,000 decrease in service charges on deposits was primarily attributable to a year-over-year decrease in cycle charges and wire fees of $17,000 and $15,000 respectively,
offset by a year-over-year increase in business analysis charges of $10,000. Wealth management fees were $820,000 for 2008 compared to $859,000 for 2007. This decrease was
primarily the result of lower fee income from estate settlements from DNB Advisors.

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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 securities having a book value of $58.7 million 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.

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.

2008 Results Compared to 2007 Results

Non-interest expense was $16.7 million for 2008 compared to $16.6 million for 2007. The modest $142,000
increase year over year was due primarily to management's efforts to control expenses during 2008.

Salary and employee benefits.Salary and employee benefits were $8.9 million for 2008 compared to $9.2 million for 2007. The decrease was
attributable to lower levels of full-time equivalent employees year over year.

Furniture and equipment.Furniture and equipment expense was $1.7 million for 2008 compared to $1.6 million for 2007. The increase was
primarily attributable to branch renovations at DNB's Main, West Goshen and Little Washington offices.

Occupancy.Occupancy expense was $1.6 million in both 2008 and 2007. Higher depreciation expenses due to branch renovations completed in 2007 and
2008 were offset by lower expenditures for office building rental, repairs & maintenance and security.

Professional and consulting.Professional and consulting expenses were $1.3 million for 2008 compared to $1.2 million for 2007. The
primary reason for the slight increase was due to the higher legal costs associated with non-performing loans.

Other Expenses.Other expenses were $2.5 million for 2008 compared to $2.3 million for 2007. The primary reason for the increase was due
to the higher FDIC insurance expenses which increased from $67,000 in 2007 to $307,000 in 2008.

2007 Results Compared to 2006 Results

Non-interest expense was $16.6 million for 2007 compared to $16.5 million for 2006. The modest $82,000
increase year over year was due to management's efforts to control expenses and improve operational efficiencies during 2007.

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

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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.

6.    Income Taxes

2008 Results Compared to 2007 Results

Income tax expense was $64,000 for 2008 compared to $372,000 for 2007. 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 2008 was 7.3% and 17.1% in 2007. The higher effective tax in 2007 was due to higher levels of pre-tax income in 2007, compared to
2008.

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.

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.

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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 $120.1 million at December 31, 2008, down $47.4 million or 28% from $167.5 million at
December 31, 2007. On September 30, 2008, DNB reclassified its taxable municipal securities with a net carrying amount of $22.7 million from AFS to HTM. Reclassifying the taxable
municipal securities to HTM reduced the volatility and future negative effect on DNB's capital ratios, because HTM securities are not marked-to-market through other
comprehensive income, but carried at their amortized cost basis. In general, when securities are held in the HTM portfolio, they can not be sold. After this movement of securities, management
anticipated that it would have sufficient cash flow to meet all loan and deposit obligations.

However
disruptions in the financial system during the fourth quarter of 2008; the diminished availability of credit, low confidence in the financial sector, and higher levels of
volatility prompted management to bolster its normal liquidity position, which it felt was ample for normal operating conditions. Management reduced the size of the investment securities portfolio
from $174.5 million at September 30, 2008 to $124.1 million at December 31, 2008. This resulted in an increase in federal funds sold to $38.3 million at
December 31, 2008, from $361,000 at September 30, 2008. At December 31, 2008, approximately one half of DNB's investments were in the AFS portfolio and one half was in the HTM
portfolio. Investments consist mainly of MBS and Agency notes backed by government sponsored enterprises, such as FHLMC, FNMA and FHLB, as well as state and municipal securities. Management regularly
reviews its investment portfolio to determine whether any securities are other than temporarily impaired. DNB did not invest in securities backed by sub-prime mortgages. At
December 31, 2008, the combined AFS and HTM portfolios had an unrealized, pretax loss of approximately $2.8 million and no other than temporarily impaired securities.

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, 2008Held to Maturity

Less than
1 Year

1-5
Years

5-10
Years

Over
10 Years

No
Stated
Maturity

Total

YieldUS agency mortgage-backed securities

$
3,024

$
16,831

$
5,398

$
2,631

$


$
27,884


3.69
%Collateralized mortgage obligations








354


4,608





4,962


3.66State and municipal tax-exempt





1,491





3,022





4,513


5.93State and municipal taxable








10,713


11,323





22,036


5.95Total

$
3,024

$
18,322

$
16,465

$
21,584

$


$
59,395


4.63
%Percent of portfolio


5
%

31
%

28
%

36
%


%

100
%Weighted average yield


4.14
%

3.30
%

5.23
%

5.19
%


%

4.63
%


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Available for Sale

Less than
1 Year

1-5
Years

5-10
Years

Over
10 Years

No
Stated
Maturity

Total

YieldUS Government agency obligations

$


$
6,126

$


$


$


$
6,126


2.90
%Corporate bonds


1,938


9,165


5,932








17,035


5.37US agency mortgage-backed securities


3


14,447


2,765


15,164





32,379


4.10Collateralized mortgage obligations











5,105





5,105


5.49Equity securities














21


21


3.36Total

$
1,941

$
29,738

$
8,697

$
20,269

$
21

$
60,666


4.47
%Percent of portfolio


3
%

49
%

14
%

34
%


%

100
%Weighted average yield


2.60
%

3.84
%

6.03
%

4.95
%

3.36
%

4.47
%


Composition of Investment Securities(Dollars in thousands)

December 312008

2007Held to
Maturity

Available
for Sale

Held to
Maturity

Available
for SaleUS Government agency obligations

$


$
6,126

$
3,731

$
34,269Corporate bonds





17,035





US agency mortgage-backed securities


27,884


32,379


842


82,965Collateralized mortgage obligations


4,962


5,105


5,808


7,261State and municipal tax-exempt


4,513





4,540


State and municipal taxable


22,036








28,046Equity securities





21





29Total

$
59,395

$
60,666

$
14,921

$
152,570


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 $331.9 million at December 31, 2008, up $26.4 million or 8.6% from 2007. The increase was primarily the result of originations by our loan
officers, coupled with strategic purchases of Small Business Administration and United States Department of Agriculture guaranteed loans, as well as 2 pools of consumer loans. Commercial mortgage
loans increased $27.2 million or 24.3% to $138.9 million, consumer loans increased $6.8 million or 12.0% to $63.4 million and commercial loans increased $2.2 million
or 2.7% to $83.2 million. Commercial leases decreased $6.7 million or 49.3% to $6.9 million and residential mortgage loans decreased $2.4 million or 5.2% to
$44.1 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.

46

---



Table of Contents

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

December 312008

2007

2006

2005

2004Residential mortgages

$
44,052

$
46,448

$
52,636

$
43,738

$
18,677Commercial mortgages


138,897


111,727


99,333


88,921


87,795Commercial loans


83,186


81,021


99,732


83,156


63,595Commercial leases


6,919


13,593


22,994


23,934


19,300Consumer


63,400


56,553


54,771


48,381


43,210Total loans and leases


336,454


309,342


329,466


288,130


232,577Less allowance for credit losses


(4,586
)

(3,891
)

(4,226
)

(4,420
)

(4,436
)Net loans and leases

$
331,868

$
305,451

$
325,240

$
283,710

$
228,141


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, 2008Less than
1 Year

1-5 Years

Over 5 Years

TotalResidential mortgages

$
1,616

$
25,519

$
16,917

$
44,052Commercial mortgages


18,782


42,076


78,039


138,897Commercial term loans


31,024


16,612


35,550


83,186Commercial leases


879


6,040





6,919Consumer loans


1,651


21,862


39,887


63,400Total loans and leases


53,952


112,109


170,393


336,454Loans and leases with fixed interest rates


16,172


59,405


104,873


180,450Loans and leases with variable interest rates


37,780


52,704


65,520


156,004Total loans and leases

$
53,952

$
112,109

$
170,393

$
336,454


3.    Non-Performing Assets

Total non-performing assets increased $5.8 million to $7.7 million at December 31, 2008, compared to
$1.9 million at December 31, 2007. The increase was primarily attributable to $4.9 million of delinquent loans that were moved into OREO and $93,000 of other assets, primarily
commercial leases that were repossessed. In addition non-performing loans increased $2.7 million. The majority of non-performing loans are comprised of 3 residential
mortgages and 3 commercial loans. Of these 6 loans, 1 residential and 2 commercial loans were placed on non-accrual status during 2008. As a result of the increase in
non-performing loans, the non-performing loans to total loans ratio increased to .81% at December 31, 2008, up from .60% at December 31, 2007. The
non-performing assets to total assets ratio increased to 1.45% at December 31, 2008 from .34% at December 31, 2007. DNB continues to work diligently to improve asset quality
by adhering to strict 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 and leases, loans and leases delinquent over ninety days and still accruing, troubled debt restructurings
(TDRs") as well as Other Real Estate Owned ("OREO") and other repossessed assets. Non-accrual loans and leases are loans and leases for

47

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Table of Contents

which
the accrual of interest ceases when the collection of principal or interest payments is determined to be doubtful by management. It is the policy of DNB to discontinue the accrual of interest
when principal or interest payments are delinquent 90 days or more (unless the loan principal and interest are determined by management to be fully secured and in the process of collection), or
earlier if considered prudent. Interest received on such loans is applied to the principal balance, or may, in some instances, be recognized as income on a cash basis. A non-accrual loan
or lease may be restored to accrual status when management expects to collect all contractual principal and interest due and the borrower has demonstrated a sustained period of repayment performance
in accordance with the contractual terms. OREO consists of real estate acquired by foreclosure. Other repossessed assets are primarily assets from DNB's commercial lease portfolio that were
repossessed. OREO and other repossessed assets are carried at the lower of cost or estimated fair value, less estimated disposition
costs. Any significant change in the level of non-performing assets is dependent, to a large extent, on the economic climate within DNB's market area.

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, 2008, DNB had $15.5 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, 2007 was $5.6 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 as well as
other repossessed assets.

Non-Performing Assets(Dollars in thousands)

December 312008

2007

2006

2005

2004Non-accrual loans:Residential mortgages

$
362

$
697

$


$


$
117Commercial mortgages











5


25Commercial term loans


1,163





42


1,017


231Commercial leases


14


255


38


83


Consumer loans


286


569


635





16Total non-accrual loans


1,825


1,521


715


1,105


389Loans 90 days past due and still accruing


900


345


106


245


36Troubled debt restructurings














Total non-performing loans


2,725


1,866


821


1,350


425Other real estate owned & other repossessed property


4,997











Total non-performing assets

$
7,722

$
1,866

$
821

$
1,350

$
425Asset quality ratios:Non-performing loans to total loans


0.8
%

0.6
%

0.3
%

0.5
%

0.2
%Non-performing assets to total assets


1.45


0.34


0.16


0.29


0.10Allowance for credit losses to:Total loans and leases


1.36


1.26


1.28


1.53


1.91Non-performing loans and leases


168.3


208.5


514.7


327.3


1,043.8


48

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Table of Contents

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 1.36% at December 31, 2008 compared to 1.26% and 1.28% for the years ended December 31, 2007
and 2006, respectively. There was a $2.0 million provision made in 2008, compared to $60,000 in 2007. Net charge-offs were $1.3 million in 2008 compared to $395,000 and
$194,000 in 2007 and 2006, respectively. The percentage of net charge-offs to total average loans and leases were .41%, .13% and 0.06% during the same respective periods.

Analysis of Allowance for Credit Losses(Dollars in thousands)

Year Ended December 312008

2007

2006

2005

2004Beginning balance

$
3,891

$
4,226

$
4,420

$
4,436

$
4,559Provisions


2,018


60








Loans charged off:Real estate


(132
)










Commercial


(254
)

(1
)




(31
)

(8
)Leases


(287
)

(458
)

(360
)




(75
)Consumer


(608
)

(27
)

(5
)

(15
)

(105
)Deposit overdrafts


(120
)










Total charged off


(1,401
)

(486
)

(365
)

(46
)

(188
)Recoveries:Real estate


8


7


8


6


16Commercial





15


44


20


14Leases


28


62


117





Consumer


7


7


2


4


35Deposit overdrafts


35











Total recoveries


78


91


171


30


65Ending balance

$
4,586

$
3,891

$
4,226

$
4,420

$
4,436


49

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Table of Contents

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 312008

2007

2006

2005

2004Amount

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
LoansReal estate

$
1,456


54
%
$
1,320


51
%
$
954


46
%
$
927


46
%
$
1,033


46
%Commercial*


1,615


25


744


26


1,155


30


1,220


29


1,640


27Leases


450


2


680


4


1,191


7


1,132


8


952


8Consumer


407


19


821


18


347


17


305


17


310


19Unallocated


658





326





579





836





501


Total

$
4,586


100
%
$
3,891


100
%
$
4,226


100
%
$
4,420


100
%
$
4,436


100
%


* Includes commercial construction

5.    Certain Regulatory Matters

Recent market conditions have made it difficult or uneconomical to access the capital markets. As a result, the United States Congress,
the Treasury, and the FDIC have announced various programs designed to enhance market liquidity and bank capital. In response to the disruptions in the financial system during 2008, management
decreased the investment portfolio by $47.4 million in order to strengthen its liquidity positions. As a result, DNB had $48.1 million in cash and cash equivalents at December 31,
2008.

On
January 30, 2009, as part of the CPP administered by the United States Department of the Treasury, DNB Financial Corporation entered into a Letter Agreement and a Securities
Purchase Agreement with the U.S. Treasury (see additional discussion in Other Recent Legislation and Regulatory Actions, on page 4 of this Form 10-K).

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
$2.0 million for the year ended December 31, 2008. During 2008, the Bank paid $1.7 million to the Corporation. During 2009 the Bank will need to provide dividends to the
Corporation in connection with the $11,750,000 of Fixed Rate Cumulative Perpetual Preferred Stock sold on January 30, 2009 as part of the CPP administered by the United States Department of the
Treasury.

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 11 of this report. DNB's FDIC insurance expense was $307,000 in 2008

DNB
was well capitalized at December 31, 2008 and met all regulatory capital requirements. 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, 2008.

50

---



Table of Contents

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 $3.0 million and unfunded loan and lines of credit commitments totaling $55.3 million at
December 31, 2008.

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 $140.3 million. At December 31, 2008 DNB had borrowed $60.0 million
against available lines of credit.

Approximately
$39.3 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, 2008. 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 YearsContractual ObligationsFHLB advances

$
60,000

$
7,000

$
33,000

$
10,000

$
10,000Repurchase agreements


20,185


20,185








Capital lease obligations


660


18


44


58


540Operating lease obligations


2,752


515


587


330


1,320Junior subordinated debentures


9,279











9,279Total

$
92,876

$
27,718

$
33,631

$
10,388

$
21,139


51

---



Table of Contents



Expiration by Period(Dollars in thousands)

Total

Less than
1 Year

1-3
Years

3-5
Years

More than
5 YearsOff Balance Sheet ObligationsCommitments to extend credit

$
55,340

$
12,007

$
9,792

$
7,572

$
25,969Letters of credit


2,981


2,667


288





26Total

$
58,321

$
14,674

$
10,080

$
7,572

$
25,995


During
2009 the Bank will need to provide dividends to the Corporation in connection with the $11,750,000 of Fixed Rate Cumulative Perpetual Preferred Stock sold on January 30,
2009 as part of the CPP administered by the United States Department of the Treasury. These payments are not included in the table above.

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, 2008 and 2007, 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, 2008 and 2007 was within DNB's negative 25% guideline. (See additional discussion in Item 7a, Section IV, Material Challenges, Risks and
Opportunities on page 52 of this Form 10-K.)

(Dollars in thousands)

December 31, 2008

December 31, 2007Change in rates

Flat

-200bp

+200bp

Flat

-200bp

+200bpEVE

$
29,196

$
30,554

$
25,831

$
40,466

$
36,234

$
36,672Change





1,358


(3,365
)




(4,232
)

(3,793
)Change as a % of assets





0.3%


(0.6
)%




(0.8
)%

(0.7
)%Change as a % of PV equity





4.7%


(11.5
)%




(10.5
)%

(9.4
)%


52

---



Table of Contents

Item 8.        Financial Statements and Supplementary Data

DNB FINANCIALCORPORATION ANDSUBSIDIARIESConsolidated
Statements of Financial Condition(Dollars in thousands, except share data)

December 312008

2007AssetsCash and due from banks

$
9,780

$
12,858Federal funds sold


38,338


32,473Cash and cash equivalents


48,118


45,331AFS Investment securities, at fair value (amortized cost of $61,265 in 2008 and $151,848 in 2007)


60,666


152,570HTM Investment securities (fair value of $58,525 in 2008 and $14,593 in 2007)


59,395


14,921Other investment securities


4,065


3,418Total investment securities


124,126


170,909Loans and leases


336,454


309,342Allowance for credit losses


(4,586
)

(3,891
)Net loans and leases


331,868


305,451Office property and equipment, net


9,665


9,908Accrued interest receivable


2,127


2,610OREO & other repossessed property


4,997


Bank owned life insurance


7,580


7,321Core deposit intangible


259


308Net deferred taxes


3,496


2,163Other assets


1,211


1,839Total assets

$
533,447

$
545,840Liabilities and Stockholders' EquityLiabilitiesNon-interest-bearing deposits

$
45,503

$
48,741Interest-bearing deposits:NOW


106,623


82,912Money market


81,742


93,029Savings


32,895


38,362Time


141,707


149,876Total deposits


408,470


412,920FHLB advances


60,000


50,000Repurchase agreements


20,185


29,923Junior subordinated debentures


9,279


9,279Other borrowings


659


675Total borrowings


90,123


89,877Accrued interest payable


1,154


1,498Other liabilities


3,642


8,910Total liabilities


503,389


513,205Commitments and contingencies (Note 15)Stockholders' EquityPreferred stock, $10.00 par value; 1,000,000 shares authorized; none issued





Common stock, $1.00 par value; 10,000,000 shares authorized; 2,863,024 and 2,850,799 issued, respectively


2,867


2,860Treasury stock, at cost; 256,420 and 249,859 shares, respectively


(4,811
)

(4,757
)Surplus


35,082


34,888Accumulated deficit


(1,062
)

(771
)Accumulated other comprehensive (loss) income, net


(2,018
)

415Total stockholders' equity


30,058


32,635Total liabilities and stockholders' equity

$
533,447

$
545,840


See accompanying notes to consolidated financial statements.

53

---





Table of Contents

DNB FINANCIALCORPORATION ANDSUBSIDIARIESConsolidated
Statements of Operations(Dollars in thousands, except per share data)

Year Ended December 312008

2007

2006Interest Income:Interest and fees on loans and leases


$  19,725


$  22,652


$  21,930Interest and dividends on investment securities:Taxable


7,895


6,136


4,699Exempt from federal taxes


174


600


1,273Interest on cash and cash equivalents


468


849


347Total interest income


28,262


30,237


28,249Interest Expense:Interest on NOW, money market and savings


4,193


4,841


4,257Interest on time deposits


4,704


6,172


3,870Interest on FHLB advances


2,907


2,303


2,852Interest on repurchase agreements


521


1,263


1,535Interest on junior subordinated debentures


628


731


716Interest on other borrowings


95


107


138Total interest expense


13,048


15,417


13,368Net interest income


15,214


14,820


14,881Provision for credit losses


2,018


60


Net interest income after provision for credit losses


13,196


14,760


14,881Non-interest Income:Service charges


1,589


1,612


1,668Wealth management


820


859


707Increase in cash surrender value of BOLI


259


285


244Securities gains


962


395


13Other fees


778


852


782Total non-interest income


4,408


4,003


3,414Non-interest Expense:Salaries and employee benefits


8,868


9,246


9,139Furniture and equipment


1,750


1,605


1,380Occupancy


1,588


1,543


1,256Professional and consulting


1,263


1,222


1,606Marketing


509


375


494Printing and supplies


239


296


389Other expenses


2,514


2,302


2,243Total non-interest expense


16,731


16,589


16,507Income before income taxes


873


2,174


1,788Income tax expense


64


372


41Net Income


$  809


$  1,802


$  1,747Earnings per share:Basic


$  0.31


$  0.69


$  0.67Diluted


$  0.31


$  0.69


$  0.66Cash dividends per share


$  0.46


$  0.50


$  0.47Weighted average common shares outstanding:Basic


2,602,902


2,614,417


2,625,182Diluted


2,605,565


2,626,066


2,643,657


See accompanying notes to consolidated financial statements.

54

---





Table of Contents

DNB FINANCIALCORPORATION ANDSUBSIDIARIESConsolidated
Statements of Stockholders' Equity and Comprehensive Income(Dollars in thousands)

Compre-
hensive
Income

Common
Stock

Treasury
Stock

Surplus

Accumulated
Deficit

Accumulated
Other
Compre-
hensive
Income
(Loss)

TotalBalance at January 1, 2006




$
2,572

$
(4,253
)
$
34,802

$
(1,196
)
$
(1,739
)
$
30,186Comprehensive Income:Net income

$
1,747











1,747





1,747Other comprehensive income, net of tax:Unrealized gains on investments, net


222














222


222Total comprehensive income

$
1,969Release of unvested stock





4





128








132Cash 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


187Purchase of treasury shares








(310
)










(310
)Sale of treasury shares to 401-K plan








405


(12
)







393Exercise of stock options





7





61








68Stock compensation tax benefit











25








25Balance at December 31, 2006





2,712


(4,158
)

34,875


(688
)

(1,330
)

31,411Comprehensive Income:Net income

$
1,802











1,802





1,802Other comprehensive income, net of tax:Unrealized gains on investments, net


1,248














1,248


1,248Unrealized actuarial gains  pension, net


497














497


497Total comprehensive income

$
3,547Release of unvested stock





4





49








53Cash 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
)







261Exercise of stock options





9





108








117Adjustment to apply EITF 06-4, net of tax














(583
)




(583
)Balance at December 31, 2007





2,860


(4,757
)

34,888


(771
)

415


32,635Comprehensive Income:Net income

$
809











809





809Other comprehensive income, net of tax:Unrealized losses on investments, net


(1,322
)













(1,322
)

(1,322
)Unrealized actuarial losses  pension, net


(1,111
)













(1,111
)

(1,111
)Total comprehensive income

$
(1,624
)Release of unvested stock





7





226








233Cash dividends














(1,180
)




(1,180
)Purchase of treasury shares








(284
)










(284
)Sale of treasury shares to 401-K plan








230


(54
)







176Deferred Compensation Plan














80





80Stock compensation tax benefit











22








22Balance at December 31, 2008




$
2,867

$
(4,811
)
$
35,082

$
(1,062
)
$
(2,018
)
$
30,058


See accompanying notes to consolidated financial statements.

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Table of Contents

DNB FINANCIALCORPORATIONANDSUBSIDIARIESConsolidated Statements of Cash Flows(Dollars in thousands)

Year Ended December 312008

2007

2006Cash Flows From Operating Activities:Net income

$
809

$
1,802

$
1,747Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation, amortization and accretion


1,321


1,387


1,186Provision for credit losses


2,018


60


Unvested stock amortization


233


53


132Securities gains


(962
)

(395
)

(13
)Decrease (increase) in accrued interest receivable


483


(190
)

(286
)Decrease in other assets


321


311


152Increase in investment in BOLI


(259
)

(285
)

(244
)(Decrease) increase in interest payable


(344
)

437


122Deferred tax benefit


(233
)

(216
)

(384
)(Decrease) increase in other liabilities


(617
)

1,002


(80
)Net Cash Provided By Operating Activities


2,770


3,966


2,332Cash Flows From Investing Activities:Proceeds from maturities and paydowns  AFS securities


21,529


35,075


12,907Proceeds from maturities and paydowns  HTM securities


8,151


3,962


7,948Purchase of AFS securities


(117,313
)

(106,602
)

(28,287
)Purchase of HTM securities


(39,725
)




Proceeds from sale of AFS securities


167,853


58,727


Net (increase) decrease in other investments


(647
)

190


(241
)Net (increase) decrease in loans and leases


(33,432
)

19,729


(41,530
)Purchase of BOLI








(150
)Purchase of property and equipment


(1,076
)

(3,382
)

(1,930
)Net Cash Provided (Used) By Investing Activities


5,340


7,699


(51,283
)Cash Flows From Financing Activities:Net (decrease) increase in deposits


(4,450
)

31,893


41,400Increase (decrease) in FHLB advances


10,000


(5,450
)

1,600(Decrease) increase in short term repurchase agreements


(9,738
)

(15,197
)

9,070Decrease in other borrowings


(16
)

(14
)

(12
)Dividends paid


(1,011
)

(1,302
)

(1,239
)Proceeds from the issuance of common stock








Proceeds from issuance of stock under stock option plan





117


68Tax benefit on exercised stock options








25(Purchase) sale of treasury stock, net


(108
)

(608
)

83Net Cash (Used) Provided By Financing Activities


(5,323
)

9,439


50,995Net Change in Cash and Cash Equivalents


2,787


21,104


2,044Cash and Cash Equivalents at Beginning of Year


45,331


24,227


22,183Cash and Cash Equivalents at End of Year

$
48,118

$
45,331

$
24,227Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest

$
13,392

$
14,981

$
13,246Income taxes


678


411


153Supplemental Disclosure of Non-cash Flow Information:Change in unrealized losses on AFS securities

$
(2,003
)
$
1,891

$
337Change in deferred taxes due to change in unrealized gains on AFS securities


681


(643
)

(115
)Transfer securities from AFS to HTM, at fair value (amortized cost of $22,670)


21,987





Unsettled AFS securities purchased included in other liabilities


(5,940
)

5,940


Transfers from loans and leases to real estate owned and other repossessed property


4,997








See accompanying notes to consolidated financial statements.

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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 1860. 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.

In
preparing the consolidates financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the balance sheets, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Although our current estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that in 2009, actual conditions could be worse than anticipated
in those estimates, which could materially affect our results of operations and financial condition. Amounts subject to significant estimates are items such as the allowance for loan and lease losses
and lending related commitments, the fair value of repossessed assets, pension and post-retirement obligations, the fair value of financial instruments and
other-than-temporary impairments. Among other effects, such changes could result in future impairments of investment securities, and establishment of allowances for loan and
lease losses and lending related commitments as well as increased benefit plans' expenses.

The
more significant accounting policies are summarized below. Prior period amounts not affecting net income are reclassified when necessary to conform to current year classifications.
Included in 2008 net income is an increase in reported earnings of approximately $51,000 reflecting the immaterial correction of errors arising from 2007.

Principles of ConsolidationThe 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 BanksFor 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, 2008 and 2007 was approximately $250,000 and
$119,000 respectively.

Investment SecuritiesInvestment securities are classified and accounted for as follows:

Held-To-Maturity ("HTM")includes debt 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

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on
trading account securities included in the statement of operations. DNB did not have any securities classified as TA during 2008, 2007 or 2006.

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 Securitiesincludes investments in Federal Home Loan Bank of Pittsburgh (FHLBP), 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. On December 23, 2008, the FHLBP announced that it will indefinitely suspend dividend payments and repurchases of excess capital stock, due to low short-term interest
rates, increased costs of maintaining liquidity and constrained access to debt markets at attractive rates. Amortization of premiums and accretion of discounts for all types of securities are computed
using a method approximating a level-yield basis.

Loans and LeasesLoans 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 CostsLoan 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 LossesThe 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

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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, 2008.

Other Real Estate Owned & Other Repossessed PropertyOther real estate owned ("OREO") and
other repossessed property consists of properties acquired as a result of, or in-lieu-of, foreclosure as well as other repossessed assets. 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 had OREO and other repossessed property
totaling $5 million at December 31, 2008 and $0 at December 31, 2007.

Office Properties and EquipmentOffice 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 AssetsFinancing 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 TaxesDNB 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 PlanThe 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 PlanDNB 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

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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 2008, 2007 or 2006; therefore, DNB did not recognize any compensation cost related to
options in 2008, 2007 or 2006.

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 and 2006.

Trust AssetsAssets 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 FlowsFor 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. 157In 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. The adoption of SFAS No. 157 did not have a material impact on
DNB's consolidated financial statements.

FSP FAS No. 157-1 and FSP FAS No. 157-2In February 2008, the
FASB issued two Staff Positions (FSPs) on Statement No. 157: FSP 157-1 "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement Under Statement 13," and FSP 157-2, "Effective Date of FASB Statement
No. 157." FSP 157-1 excludes fair value measurements related to leases from the disclosure requirements of Statement No. 157. FSP 157-2 delays the effective date
of Statement No. 157 for all non-recurring fair value measurements of non-financial assets and non-financial liabilities until fiscal years beginning after
November 15, 2008. DNB is applying the deferral guidance in FSP 157-2, and accordingly, has not applied the non-recurring disclosure to non-financial assets
or non-financial liabilities valued at fair value on a non-recurring basis.

FSP FAS No. 157-3In October 2008, the FASB issued FSP FAS
No. 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active". FSP FAS No. 157-3 clarifies the application of SFAS
No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for
that financial asset is not active. This FSP was effective upon issuance, and was therefore effective for the consolidated financial statements included in the Company's quarterly report for the
period ended September 30, 2008. The adoption of FSP FAS No. 157-3 did not have a material impact on DNB's consolidated financial statements.

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FASB Statement No. 159In February 2007, the FASB issued FASB Statement No. 159
 "The Fair Value Option for Financial Assets and Liabilities  Including an Amendment of FASB Statement No. 115" ("Statement 159"). Statement 159 permits entities to
measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported
earnings without having to apply complex hedge accounting provisions. Statement 159 became effective January 1, 2008 and did not have a material impact on DNB's consolidated financial
statements upon adoption.

FASB Statement No. 160In 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 does not expect that this statement will have a material impact on DNB's consolidated financial statements upon adoption.

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

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

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

FIN 48In 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.

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

SAB No. 110In December 2007, the SEC issued Staff Accounting Bulletin No. 110,
"Certain Assumptions Used in Valuation Methods" ("SAB No. 110"), which extends the use of the "simplified" method, under certain circumstances, in developing an estimate of expected term of
"plain vanilla" share options in accordance with SFAS No. 123R.DNB determined SAB 110 did not affect DNB's consolidated financial statements upon adoption.

FSP FAS 132(R)-1In December 2008, the FASB issued FASB Staff Position
No. 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets" ("FSP 132(R)-1"). This FSP amends FASB Statement No. 132(R), "Employer's
Disclosures about Pensions and Other Postretirement Benefits" ("FAS 132(R)"), to require additional disclosures about assets held in an employer's defined benefit pension or other
postretirement plan. This FSP is applicable to an employer that is subject to the disclosure requirements of FAS 132(R) and is generally effective for fiscal years ending after
December 15, 2009. DNB is in the process of reviewing the potential impact of FSP 132(R)-1; however, the adoption of FSP 132(R)-1 is not expected to have a material
impact on DNB's consolidated financial statements.

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(2)    INVESTMENT SECURITIES

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

December 31, 2008(Dollars in thousands)

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Estimated
Fair ValueHeld To MaturityUS Government agency obligations

$


$


$


$
US agency mortgage-backed securities


27,884


447


(2
)

28,329Collateralized mortgage obligations


4,962


1


(111
)

4,852State and municipal tax-exempt bonds


4,513


50


(1
)

4,562State and municipal taxable bonds


22,036


78


(1,332
)

20,782Total

$
59,395

$
576

$
(1,446
)
$
58,525Available For SaleUS Government agency obligations

$
6,075

$
51

$


$
6,126US agency mortgage-backed securities


32,063


410


(94
)

32,379Collateralized mortgage obligations


5,011


94





5,105Corporate bonds


18,084


300


(1,349
)

17,035State and municipal taxable bonds











Equity securities


32





(11
)

21Total

$
61,265

$
855

$
(1,454
)
$
60,666




December 31, 2007(Dollars in thousands)

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Estimated
Fair ValueHeld To MaturityUS Government agency obligations

$
3,731

$


$
(19
)
$
3,712US agency mortgage-backed securities


842


9


(1
)

850Collateralized mortgage obligations


5,808





(340
)

5,468State and municipal tax-exempt bonds


4,540


25


(2
)

4,563Total

$
14,921

$
34

$
(362
)
$
14,593Available For SaleUS Government agency obligations

$
33,943

$
326

$


$
34,269US agency mortgage-backed securities


82,608


518


(161
)

82,965Collateralized mortgage obligations


7,213


48





7,261State and municipal taxable bonds


28,047


106


(107
)

28,046Equity securities


37





(8
)

29Total

$
151,848

$
998

$
(276
)
$
152,570


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Table of Contents

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, 2008 and 2007.

December 31, 2008(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 MonthsHeld To MaturityCollateralized mortgage obligations

$
4,246

$
(111
)
$


$


$
4,246

$
(111
)State and municipal tax-exempt


527


(1
)

527


(1
)




State and municipal taxable


13,018


(1,332
)

13,018


(1,332
)




US agency mortgage-backed securities


118


(2
)

118


(2
)




Total

$
17,909

$
(1,446
)
$
13,663

$
(1,335
)
$
4,246

$
(111
)Available For SaleCorporate Bonds

$
12,329

$
(1,349
)
$
12,329

$
(1,349
)
$


$
US agency mortgage-backed securities


7,161


(94
)

5,482


(61
)

1,679


(33
)Equity securities


21


(11
)







21


(11
)Total

$
19,511

$
(1,454
)
$
17,811

$
(1,410
)
$
1,700

$
(44
)




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 MonthsHeld To MaturityUS 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 SaleUS Government agency obligations

$
9,204

$
(107
)
$
9,204

$
(107
)
$


$
State and municipal tax-exempt


21,908


(161
)

6.581


(7
)

15,327


(154
)US agency mortgage-backed securities


29


(8
)

29


(8
)




Total

$
31,141

$
(276
)
$
15,814

$
(122
)
$
15,327

$
(154
)


DNB has $1.7 million in AFS securities and $4.2 million in HTM securities, which have had fair values below amortized cost for at
least twelve continuous months at December 31, 2008. The total unrealized loss of these securities was $44,000 and $111,000, respectively. The impaired securities consist of variable rate
government agency MBS securities, equity securities and collateralized mortgage backed securities. The unrealized losses on these debt securities 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, 2008, is only temporary because management
has both the intent and ability to hold these investments until they recover.

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The
amortized cost and estimated fair value of investment securities as of December 31, 2008, 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 ValueDue in one year or less

$
3,024

$
3,031

$
1,985

$
1,941Due after one year through five years


18,322


18,539


30,643


29,738Due after five years through ten years


16,465


16,034


8,544


8,697Due after ten years


21,584


20,921


20,061


20,269No stated maturity








32


21Total investment securities

$
59,395

$
58,525

$
61,265

$
60,666


DNB
sold $166.8 million, $58.7 million, and $0 securities from the AFS portfolio during 2008, 2007 and 2006. Gains and losses resulting from investment sales, redemptions
or calls were as follows:

Year Ended December 31(Dollars in thousands)

2008

2007

2006Gross realized gains

$
964

$
530

$
13Gross realized losses


2


135


Net realized gain

$
962

$
395

$
13


At
December 31, 2008 and 2007, investment securities with a carrying value of approximately $100 million and $81.4 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.

As
of September 30, 2008, DNB reclassified its taxable municipal securities with a book value (net carrying amount) of $22.7 million from
available-for-sale (AFS) to held-to-maturity (HTM). Reclassifying the taxable municipal securities to HTM will reduce the volatility and future negative
effect on DNB's capital ratios, because HTM securities are not marked-to-market through other comprehensive income, but carried at their amortized cost basis. The fair value of
our taxable municipal securities was $22.0 million at September 30, 2008, the date of their reclassification. The $683,000 difference between
their book value and their fair value will be treated like a discount and accreted into interest income over the remaining life of the security. The unrealized loss on these securities, which is in
accumulated other comprehensive income, will be amortized as an adjustment of yield in a manner consistent with the discount, thus offsetting or mitigating the effect on interest income of the
amortization of the discount.

65

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Table of Contents

(3)    LOANS AND LEASES

December 31(Dollars in thousands)

2008

2007Residential mortgage

$
44,052

$
46,448Commercial mortgage


138,897


111,727Commercial


83,186


81,021Leases


6,919


13,593Consumer


63,400


56,553Total loans and leases

$
336,454

$
309,342Less allowance for credit losses


(4,586
)

(3,891
)Net loans and leases

$
331,868

$
305,451


Included
in the loan portfolio are loans for which DNB has ceased the accrual of interest (i.e. non-accrual loans). Loans of approximately $1.8 million,
$1.5 million and $715,000 as of December 31, 2008, 2007 and 2006, respectively, were on a non-accrual basis. DNB also had loans of approximately $900,000, $345,000 and
$106,000 that were 90 days or more delinquent, but still accruing as of December 31, 2008, 2007 and 2006, 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)

2008

2007

2006Interest income which would have been recorded under original terms

$
121

$
109

$
56Interest income recorded during the year


(58
)

(70
)

(28
)Net impact on interest income

$
63

$
39

$
28


DNB
had $15.5 million of loans, which, although performing at December 31, 2008, 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 $5.6 million of such loans at December 31, 2007. The majority of these loans
are secured by commercial real estate with lesser amounts being secured by residential real estate, inventory and receivables.

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, 2008, except for loans of approximately $76.1 million relating to
commercial real estate buildings. See Footnote 7 regarding the use of certain loans as collateral.

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Table of Contents

(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)

2008

2007

2006Beginning balance

$
3,891

$
4,226

$
4,420Provision


2,018


60


Loans charged off


(994
)

(28
)

(5
)Leases charged off


(287
)

(458
)

(360
)Deposit overdrafts charged off


(120
)




Recoveries


78


91


171Net charge-offs


(1,323
)

(395
)

(194
)Ending balance

$
4,586

$
3,891

$
4,226


There
were $2.0 million, $60,000 and $0 provisions made during 2008, 2007 and 2006, respectively, based on management's analysis of the adequacy of the allowance for credit
losses.

Impaired
loans are loans individually evaluated for collectibility, and which will probably not be collected in accordance with their contractual terms. The average recorded investment
is higher than the total recorded investment in the table below due primarily to the transfer of loans to OREO totaling approximately $5.0 million during 2008, the majority being moved during
the fourth quarter. Information regarding impaired loans is presented as follows:

Year Ended December 31(Dollars in thousands)

2008

2007

2006Total recorded investment

$
1,163

$
2,274

$
641Average recorded investment


6,236


1,095


962Specific allowance allocation


120


485


76Total cash collected


313


344


1,145Interest income recorded


108


27


4


(5)    OFFICE PROPERTY AND EQUIPMENT

Estimated
Useful Lives

December 31(Dollars in thousands)

2008

2007Land




$
611

$
611Buildings


5-31.5 years


10,139


9,595Furniture, fixtures and equipment


2-20 years


12,826


12,294Total cost





23,576


22,500Less accumulated depreciation





(13,911
)

(12,592
)Office property and equipment, net




$
9,665

$
9,908


Amounts
charged to operating expense for depreciation for the years ended December 31, 2008, 2007 and 2006 amounted to $1.3 million, $1.2 million and $965,000,
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

67

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Table of Contents

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)

2008

2007Three months or less

$
17,693

$
31,119Over three through six months


33,488


35,877Over six through twelve months


15,411


6,427Over one year through two years


3,793


1,712Over two years


355


219Total

$
70,740

$
75,354


(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 $20.2 million of repurchase agreements at December 31, 2008 with an
average rate of 1.31%.

In
addition to short-term borrowings, 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 $140.3 million. DNB has a maximum
borrowing capacity at the FHLB of approximately $130.3 million. At December 31, 2008, DNB had $60.0 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, $45.0 million are convertible term advances and are callable, at
the FHLB's option, at various dates starting on January 20, 2009. 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, 2008(Dollars in thousands)

Weighted
Average Rate

AmountDue by December 31, 2009


4.43
%
$
7,000Due by December 31, 2010


5.34


28,000Due by December 31, 2011


5.46


5,000Thereafter


4.17


20,000Total


4.86
%
$
60,000


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Table of Contents

(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, 2008 the branch has a carrying amount of $439,000, net of accumulated depreciation of $311,000, 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, 2008:

(Dollars in thousands)Year ended December 31

Amount2009

$
1062010


1062011


1062012


1062013


106Thereafter


924Total minimum lease payments


1,454Less amount representing interest


(795
)Present value of net minimum lease payments

$
659


(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 IDNB'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 IIDNB'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.

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LimitationsFair 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 and Cash Equivalents, Investment Securities, Accrued Interest Receivable and Accrued Interest PayableThe carrying amounts for
short-term investments (cash and cash equivalents) and accrued interest receivable and payable approximate fair value. The fair value of investment securities are determined by an
independent third party ("preparer"). The preparer's evaluations are based on market data. They utilize evaluated pricing models that vary by asset and incorporate available trade, bid and other
market information. For securities that do not trade on a daily basis, their evaluated pricing applications apply available information such as benchmarking and matrix pricing. The market inputs
normally sought in the evaluation of securities include benchmark yields, reported trades, broker/dealer quotes (only obtained from market makers or broker/dealers recognized as market participants),
issuer spreads, two-sided markets, benchmark securities, bid, offers and reference data. For certain securities additional inputs may be used or some market inputs may not be applicable.
Inputs are prioritized differently on any given day based on market conditions.

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

LoansFair 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.

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Table of Contents

Deposits and BorrowingsThe 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, 2008 and 2007. 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 InstrumentsOff-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, 2008 and 2007,
un-funded loan commitments totaled $55.3 million and $60.6 million, respectively. Stand-by letters of credit totaled $3.0 million and $4.6 million
at December 31, 2008 and 2007, respectively.

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

December 312008

2007(Dollars in thousands)

Carrying
Amount

Estimated
Fair
Value

Carrying
Amount

Estimated
Fair
ValueFinancial assetsCash and cash equivalents

$
48,118

$
48,118

$
45,331

$
45,331AFS Investment securities


60,666


60,666


152,570


152,570HTM Investment securities


59,395


58,525


14,921


14,592Loans and leases


336,454


334,550


309,342


308,078Accrued interest receivable


2,127


2,127


2,610


2,610Financial liabilitiesDeposits


408,470


405,414


412,920


401,576Borrowings


90,123


91,266


89,877


91,731Accrued interest payable


1,154


1,154


1,498


1,498


(11)    FEDERAL INCOME TAXES

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

Year Ended
December 31(Dollars in thousands)

2008

2007

2006Current tax expense:Federal

$
291

$
586

$
425State


7


2


Deferred income tax (benefit):Federal


(234
)

(216
)

(384
)State








Income tax expense

$
64

$
372

$
41


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The
effective income tax rates of 7% for 2008, 17% for 2007 and 2% for 2006 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)

2008

2007

2006Federal income taxes at statutory rate

$
297

$
739

$
608Decrease resulting from:Low income housing credits


(36
)

(36
)

(36
)Tax-exempt interest and dividend preference


(161
)

(285
)

(498
)Change in valuation allowance





(11
)

29Bank owned life insurance


(88
)

(97
)

(83
)Other, net increase


52


62


21Income tax expense

$
64

$
372

$
41


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)

2008

2007Deferred tax assets:Allowance for credit losses

$
1,559

$
1,323Unrealized losses on securities


204


Unrealized loss on pension obligation


604


119AMT credit carry forward


357


314Low income housing tax credit carry forward


546


500Capital loss disallowance


443


443Unvested stock awards


30


94Deferred gain on sale / leaseback on buildings


104


159Deferred compensation (SERP)


256


141Non-accrued interest


69


39Charitable contributions carryover


44


81Joint venture difference


81


67Deferred compensation (BOLI)


252


270Accrued expenses


16


4Total gross deferred tax assets


4,565


3,554Deferred tax liabilities:Unrealized gains on securities available for sale





(245
)Depreciation


(191
)

(179
)Pension expense


(104
)

(140
)Tax bad debt reserve


(74
)

(130
)Bank shares tax credit


(68
)

(68
)Prepaid expenses


(189
)

(186
)Total gross deferred tax liabilities


(626
)

(948
)Valuation allowance


(443
)

(443
)Net deferred tax asset

$
3,496

$
2,163


As
of December 31, 2008, DNB had no material unrecognized tax benefits or accrued interest and penalties. It is the DNB's policy to account for interest and penalties accrued
relative to unrecognized tax

72

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Table of Contents

benefits
as a component of income tax expense. Federal and state tax years 2005 through 2008 were open for examination as of December 31, 2008.

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 2008,
there was no change to the valuation allowance.

During
2007 and 2008, DNB recorded an income tax benefit of $0 and $25,000, respectively, 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) carry forwards as of December 31, 2008 of $357,000 and $546,000, respectively.
The AMT credit carry forward has an indefinite life. The LIHC carry forward has a life of twenty years and will begin to expire in the year 2023, if not used. DNB also has a charitable contribution
carryover of $131,000 at December 31, 2008, which will begin to 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, 2008, there were 181,828 anti-dilutive stock options outstanding as well as 24,574 anti-dilutive
stock awards. At December 31, 2007, there were 224,487 anti-dilutive stock options outstanding and 13,093 anti-dilutive stock awards and at December 31, 2006
there were 120,962 anti-dilutive stock options and 14,204 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 312008

2007

2006(In thousands,
except share data)

Income

Shares

Amount

Income

Shares

Amount

Income

Shares

AmountBasic EPSIncome available to common stockholders

$
809


2,603

$
0.31

$
1,802


2,614

$
0.69

$
1,747


2,625

$
0.67Diluted EPSEffect of dilutive common stock awards





3








12








19


(.01
)Income available to common stockholders

$
809


2,606

$
0.31

$
1,802


2,626

$
0.69

$
1,747


2,644

$
0.66


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Table of Contents

(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
AmountYear Ended December 31, 2008:Unrealized losses on securities:Unrealized holding losses arising during the period

$
(1,041
)
$
354

$
(687
)Less reclassification for gains included in net income


(962
)

327


(635
)Unrealized actuarial losses  pension


(1,683
)

572


(1,111
)Other Comprehensive Loss

$
(3,686
)
$
1,253

$
(2,433
)Year Ended December 31, 2007:Unrealized losses on securities:Unrealized holding gains arising during the period

$
2,286

$
(777
)
$
1,509Less reclassification for gains included in net income


(395
)

134


(261
)Unrealized actuarial gains  pension


753


(256
)

497Other Comprehensive Income

$
2,644

$
(899
)
$
1,745Year Ended December 31, 2006:Unrealized losses on securities:Unrealized holding gains arising during the period

$
348

$
(118
)
$
230Less reclassification for losses included in net income


(13
)

5


(8
)Other Comprehensive Income

$
335

$
(113
)
$
222


(14)    BENEFIT PLANS

Pension PlanThe 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.

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The
following table sets forth the Plan's funded status, as of the measurement dates of December 31, 2008 and 2007 and amounts recognized in DNB's consolidated financial
statements at December 31, 2008 and 2007:

December 31(Dollars in thousands)

2008

2007Projected Benefit obligation

$
(6,428
)
$
(6,557
)Accumulated benefit obligation


(6,428
)

(6,557
)Fair value of plan assets


5,308


6,968Amounts recognized in the statement of financial position consist of:Assets




$
411Liabilities

$
(1,120
)

Funded status

$
(1,120
)
$
411Amounts recognized in accumulated other comprehensive income (loss) consist of:Net loss

$
1,776

$
349Net transition obligation (asset)





Total

$
1,776

$
349


The
amounts and changes in DNB's pension benefit obligation and fair value of plan assets for the years ended December 31, 2008 and 2007 are as follows:

Year ended December 31(Dollars in thousands)

2008

2007Change in benefit obligationBenefit obligation at beginning of year

$
6,557

$
6,850Interest cost


406


395Actuarial loss


(213
)

(388
)Benefits paid


(343
)

(321
)Service Cost


21


21Benefit obligation at end of year

$
6,428

$
6,557Change in plan assetsFair value of assets at beginning of year

$
6,968

$
6,866Actual return on plan assets


(1,317
)

423Employer contribution





Benefits paid


(343
)

(321
)Fair value of assets at end of year

$
5,308

$
6,968


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Table of Contents

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

December 312008

2007Cash and cash equivalents


21.6
%

17.2
%Equity securities


30.5


39.7Fixed income securities


47.9


43.1Total


100.0
%

100.0
%


Equity
securities consist mainly of equity common trust funds and mutual funds. Fixed income securities consist mainly of fixed income common trust funds and individual securities.
Pension plan assets are invested with a moderate growth objective, with target asset allocations of approximately 60 - 70% bonds and cash and approximately
30 - 40% in stocks. The trustees of the plan moved approximately 15% of the plan assets to cash and cash equivalents during the later part of 2007 as a hedge against an
increasingly volatile market.

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

Year Ended December 31(Dollars in thousands)

2008

2007

2006Service cost

$
21

$
21

$
16Interest cost


406


395


383Expected return on plan assets


(355
)

(400
)

(409
)Amortization of transition asset








Recognized net actuarial loss


32


86


111Net periodic cost

$
104

$
102

$
101Assumptions used:Discount rate


6.50
%

6.35
%

5.75
%Rate of increase in compensation level


N/A


N/A


N/AExpected long-term rate of return on assets


5.25


6.50


6.50


DNB's
estimated future benefit payments are as follows:

(Dollars in thousands)

Benefits2009

$
3812010


3822011


3632012


3762013


3832014-2018


2,131


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 reflected as Bank Owned Life

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Insurance
on the accompanying statements of financial condition is increased each period to the extent the cash surrender value of the policy increases. 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 estimated to be $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. In July 2008, DNB
commenced making monthly payments of $3,658 to the Executive. Since the annual payments of $43,896, which includes the tax gross-up, are less than the originally projected payments for the
Plan, DNB's liability under this plan was reduced from $566,613 to $477,323 at December 31, 2008.

Supplemental Executive Retirement Plan for Chairman and Chief Executive OfficerOn
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.

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On
December 8, 2008, DNB's Board of Directors approved an amendment to the existing SERP. The amendment amends the SERP's vesting schedule so that Mr. Latoff would be 76%
vested as of October 1, 2008, 85% vested as of November 1, 2008, 94% vested as of December 1, 2008, and that thereafter his interest under the SERP would vest in increments of
1.0% on the first of every month thereafter until 100% vested on June 1, 2009. DNB expensed an additional $33,332 in 2008 in relation to this acceleration of the vesting period.

401(k) Retirement Savings PlanDuring 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 591/2, 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 were $88,000, $93,000 and $94,000 in 2008, 2007 and 2006, respectively.

Profit Sharing PlanThe 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 $212,000, $226,000 and $252,000 in 2008, 2007 and 2006, respectively.

Stock Option PlanDNB 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 (as adjusted for subsequent stock dividends) shares of DNB's common stock could be issued to employees and directors.

Under
the plan, option exercise prices must equal the fair market value of the shares on the date of option grant and the option exercise period may not exceed ten years. Vesting of
options under the plan is determined by the Plan Committee. There were 201,335, 149,263 and 118,400 shares available for grant at December 31, 2008, 2007 and 2006, respectively.

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

78

---





Table of Contents

Number
Outstanding

Weighted Average
Exercise PriceOutstanding January 1, 2006


318,673

$
19.01Granted





Exercised


(7,355
)

9.13Forfeited


(27,548
)

20.39Outstanding December 31, 2006


283,770


19.13Granted





Exercised


(9,589
)

12.17Forfeited


(28,891
)

20.06Expired


(1,970
)

11.84Outstanding December 31, 2007


243,320


19.36Granted





Exercised





Forfeited


(22,852
)

19.20Expired


(29,221
)

21.64Outstanding December 31, 2008


191,247

$
19.03


The
weighted average price and weighted average remaining contractual life as of December 31, 2008 for outstanding options are listed below. All outstanding options are
exercisable.

Range of
Exercise
Prices



Weighted AverageNumber
OutstandingExercise Price

Remaining Contractual Life$  9.23-10.99


9,419

$
9.23

1.50 years11.00-13.99


9,414


11.16

2.50 years14.00-19.99


103,246


17.43

4.97 years20.00-22.99


21,127


22.78

5.98 years23.00-24.27


48,041


24.27

6.30 yearsTotal


191,247

$
19.03

5.12 years


Stock-Based CompensationDNB 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 2008, 2007 and
2006, DNB granted 9,900, 17,010, and 0 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 year, during which the shares may not be sold, pledged or otherwise disposed of. Prior to the vest
date and in the event the recipient terminates association with DNB for reasons other than death, disability or change in control, the recipient forfeits all rights to the shares that would otherwise
be issued under the grant. Share awards granted by the plan were recorded at the date of award based on the market value of shares. Awards are being amortized to expense over the
three-year cliff-vesting period. During this three-year period, DNB records compensation expense equal to the value of the shares being amortized. For the year ended
December 31, 2008, 2007 and 2006, $233,000, $53,000 and $133,000, respectively was amortized to expense. At December 31, 2008, 2007 and 2006, 205,441, 212,999 and 229,592 shares were
reserved for future grants under the plan.

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---



Table of Contents

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

SharesOutstanding  January 1, 2006


18,614Granted


Forfeited


(4,410
)Outstanding  December 31, 2006


14,204Granted


17,010Forfeited


(1,111
)Outstanding  December 31, 2007


30,103Granted


9,900Vested shares


(13,087
)Forfeited


(2,342
)Outstanding  December 31, 2008


24,574


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

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 in the amount of approximately $3.0 million and un-funded loan and lines of credit totaling
$55.3 million at December 31, 2008, of which, $52.4 million were variable rate and $5.9 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.

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.

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.

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 $140.3 million.

Approximately
$39.3 million of assets were held by DNB Advisors in a fiduciary, custody or agency capacity at December 31, 2008. These assets are not assets of DNB, and are
not included in the consolidated financial statements.

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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 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 312008

2007AssetsCash

$
205

$
440Investment securities


20


29Investment in subsidiary


39,181


41,631Other assets


142


147Total assets

$
39,548

$
42,247Liabilities and Stockholders' EquityLiabilitiesJunior subordinated debentures

$
9,279

$
9,279Other liabilities


211


333Total liabilities


9,490


9,612Stockholders' equity


30,058


32,635Total liabilities and stockholders' equity

$
39,548

$
42,247




Condensed Statements of Operations(Dollars in thousands)Year Ended December 312008

2007

2006Income:Equity in undistributed income of subsidiary

$
251

$
1,238

$
1,221Dividends from subsidiary


1,185


1,294


1,240Other income


1


1


Total income


1,437


2,533


2,461Expenses:Interest expense


628


731


714Other expenses








Total expense


628


731


714Net income

$
809

$
1,802

$
1,747


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Condensed Statements of Cash Flows(Dollars in thousands)Year Ended December 312008

2007

2006Cash Flows From Operating Activities:Net income

$
809

$
1,802

$
1,747Adjustments to reconcile net income to net cashprovided by operating activities:Equity in undistributed income of subsidiary


(421
)

(1,238
)

(1,221
)Unvested stock amortization


233


53


132Net change in other liabilities


(46
)

(5
)

11Net change in other assets


6


15


1Net Cash Provided by Operating Activities


581


627


670Cash Flows From Investing Activities:Payments for investments in and advances to subsidiaries


(233
)

(56
)

258Dividend from subsidiary


546


1,500


3Sale (purchase) of available for sale security


5





(1
)Net Cash Provided (Used) by Investing Activities


318


1,444


260Cash Flows From Financing Activities:Proceeds from advances from subsidiaries








Proceeds from issuance of common stock


233


378


485Purchase of treasury stock


(356
)

(872
)

(310
)Dividends paid


(1,011
)

(1,302
)

(1,239
)Net Cash (Used) Provided by Financing Activities


(1,134
)

(1,796
)

(1,064
)Net Change in Cash and Cash Equivalents


235


275


(134
)Cash at Beginning of Period


440


165


299Cash at End of Period

$
205

$
440

$
165


(17)    REGULATORY MATTERS

Recent market conditions have made it difficult or uneconomical to access the capital markets. As a result, the United States Congress,
the Treasury, and the FDIC have announced various programs designed to enhance market liquidity and bank capital.

In
response to the financial crisis affecting the banking system and financial markets, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 ("EESA") was signed
into law and established the Troubled Assets Relief Program ("TARP") administered by the U.S. Treasury Department. As part of TARP, the Treasury established the Capital Purchase Program ("CPP") to
provide up to $700 billion of funding to eligible financial institutions through the purchase of capital stock and other financial instruments for the purpose of stabilizing and providing
liquidity to the U.S. financial markets. In connection with EESA, there have been numerous actions by the Federal Reserve Board, Congress, the Treasury, the FDIC, the SEC and others to further the
economic and banking industry stabilization efforts under EESA. It remains unclear at this time what further legislative and regulatory measures will be implemented under EESA affecting the
Corporation.

On
January 30, 2009, as part of the CPP administered by the United States Department of the Treasury, DNB Financial Corporation entered into a Letter Agreement and a Securities
Purchase Agreement with the U.S. Treasury, pursuant to which the DNB issued and sold on January 30, 2009, and the U.S. Treasury purchased for cash on that date (i) 11,750 shares of the
company's Fixed Rate Cumulative Perpetual Preferred Stock, Series 2008A, par value $10.00 per share, having a liquidation

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---



Table of Contents

preference
of $1,000 per share, and (ii) a ten-year warrant to purchase up to 186,311 shares of the DNB's common stock, $1.00 par value, at an exercise price of $9.46 per share, for
an aggregate purchase price of $11,750,000 in cash. This transaction closed on January 30, 2009. The issuance and sale of these securities was a private placement exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933. During 2009 the Bank will need to provide dividends to the
Corporation in connection with the $11,750,000 of Fixed Rate Cumulative Perpetual Preferred Stock sold on January 30, 2009 as part of the CPP administered by the United States Department of the
Treasury.

As
further response to the economic crisis, the American Recovery and Reinvestment Act of 2009 ("ARRA"), more commonly known as the economic stimulus or economic recovery package, was
signed into law on February 17, 2009, by President Obama. ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health,
and education needs. In addition, ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients until they have repaid the Treasury, which
is now permitted under ARRA without penalty and without the need to raise new capital, subject to the Treasury's consultation with the recipient's appropriate regulatory agency.

Under
the Federal Reserve's Regulation H, DNB First, National Association may not, without regulatory approval, declare or pay a dividend to the Corporation if the total of all
dividends declared in a calendar year exceeds the total of (a) the Bank's net income for that year and (b) its retained net income for the preceding two calendar years, less any required
transfers to additional paid-in capital or to a fund for the retirement of preferred stock.

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

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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

RatioDNB Financial CorporationDecember 31, 2008:Total risk-based capital

$
45,516


12.02
%
$
30,306


8.00
%
$
37,883


10.00
%Tier 1 capital


40,802


10.77


15,153


4.00


22,730


6.00Tier 1 (leverage) capital


40,802


7.46


21,882


4.00


27,353


5.00December 31, 2007:Total risk-based capital

$
44,859


13.08
%
$
27,437


8.00
%
$
34,296


10.00
%Tier 1 capital


40,901


11.93


13,719


4.00


20,578


6.00Tier 1 (leverage) capital


40,901


7.77


21,061


4.00


26,326


5.00DNB First, N.A.December 31, 2008:Total risk-based capital

$
45,378


12.00
%
$
30,257


8.00
%
$
37,822


10.00
%Tier 1 capital


40,654


10.75


15,129


4.00


22,693


6.00Tier 1 (leverage) capital


40,654


7.44


21,862


4.00


27,328


5.00December 31, 2007:Total risk-based capital

$
44,581


13.02
%
$
27,385


8.00
%
$
34,231


10.00
%Tier 1 capital


40,624


11.87


13,692


4.00


20,539


6.00Tier 1 (leverage) capital


40,624


7.72


21,036


4.00


26,295


5.00


(18)    FAIR VALUE MEASUREMENT

FASB Statement No. 157 ("FAS 157"), Fair Value Measurement, became effective January 1, 2008.

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

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

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

These
investment securities are classified as available for sale.

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

Level 1
 Quoted prices in active markets for identical securities.

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

Level 3
 Instruments whose significant value drivers are unobservable.

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

December 31, 2008(Dollars in thousands)

Level 1

Level 2

Level 3

Assets at
Fair ValueAssets Measured at Fair Value on a Recurring BasisSecurities available for sale

$
21

$
60,645

$


$
60,666Total assets measured at fair value on a recurring basis

$
21

$
60,645

$


$
60,666Assets Measured at Fair Value on a Nonrecurring BasisImpaired loans

$


$
1,163

$


$
1,163OREO & other repossessed property





4,997





4,997Total assets measured at fair value on a nonrecurring basis

$


$
6,160

$


$
6,160


Impaired loans.Impaired loans, which are measured for impairment using the fair value of the collateral for collateral
dependent loans, had a carrying amount of $1.2 million at December 31, 2008. The valuation allowance on impaired loans was $120,000 as of December 31, 2008. During the twelve
months ended December 31, 2008, we recognized impairment charges of $840,000 related to approximately $4.8 million in loans.

Other Real Estate Owned & other repossessed property.Other real estate owned ("OREO") consists of properties acquired
as a result of, or in-lieu-of, foreclosure. Properties or other assets (primarily repossessed assets formerly leased) are classified as OREO and other repossessed property and
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 assets are capitalized and costs relating to holding
the assets are charged to expense. DNB had $5.0 million of such assets at December 31, 2008. This consisted of $4.9 million in OREO and $93,000 in other repossessed property.
Subsequent to the repossession of these assets, DNB wrote down their carrying values by $70,000, based on appraisals.

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

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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, 2008 and 2007,
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, 2008. 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, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, 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, 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, and FASB Statement No. 157, Fair Value Measurements, effective
January 1, 2008.

GRAPHIC

Philadelphia,
Pennsylvania
March 31, 2009

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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, 2008, the end of the period covered by this report, in accordance with the requirements of Exchange Act
Rule 240.13a-15(b). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that DNB's current disclosure controls and procedures are
effective and timely, providing them with material information relating to DNB and its subsidiaries required to be disclosed in the report DNB files under the Exchange Act.

Management'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, 2008. To make this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) inInternal Control  Integrated Framework. Management believes that, as of
December 31, 2008 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 7-43 of the
Registrant's Proxy Statement for the 2009 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 9 of the Registrant's Proxy Statement for the Annual Meeting of Shareholders. 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 27-31 of the Registrant's Proxy Statement for the 2009 Annual Meeting of
Shareholders.

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

(a) Information Regarding Equity Compensation Plans

The
information required herein is incorporated by reference to page 48 of the Registrant's Proxy Statement for the 2009 Annual Meeting of Shareholders.

(b)
The balance of the information required herein is incorporated by reference to Page 7 of the Registrant's Proxy Statement for the 2009 Annual Meeting of Shareholders.

Item 13.        Certain Relationships and Related Transactions and Director Independence

The information required herein is incorporated by reference to pages 42-43 of the Registrant's Proxy Statement for the 2009 Annual Meeting of
Shareholders.

Item 14.        Principal Accountant Fees and Services

The information required herein is incorporated by reference to page 50 of the Registrant's Proxy Statement for the 2009 Annual Meeting of Shareholders.

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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 31, 2009 with respect thereto, are set forth beginning at
page 53 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 91-93 of this report are incorporated by reference or filed or furnished herewith in response to this Item.

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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 CORPORATIONMarch 31, 2009BY:

/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 31, 2009/s/ GERALD F. SOPP Gerald F. Sopp
Chief Financial Officer
(Principal Accounting Officer)

March 31, 2009/s/ THOMAS A. FILLIPPO Thomas A. Fillippo
Director

March 31, 2009/s/ MILDRED C. JOYNER Mildred C. Joyner
Director

March 31, 2009/s/ JAMES J. KOEGEL James J. Koegel
Director

March 31, 2009/s/ ELI SILBERMAN Eli Silberman
Director

March 31, 2009/s/ JAMES H. THORNTON James H. Thornton
Vice-Chairman of the Board

March 31, 2009


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Index to Exhibits

Exhibit No.
Under Item 601
of Regulation S-K

Description of Exhibit and Filing Information3

(i)

Amended and Restated Articles of Incorporation, as amended effective December 8, 2008, filed herewith.(ii)

Bylaws of the Registrant as amended December 8, 2008, 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: 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.


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(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 17, 2008, 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.


92

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(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, as further amended by Amendment dated December 8, 2008, filed herewith.(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 March 28, 2008 as item 10(v) to Form 10-K for the fiscal year-ended December 31, 2007 (No. 0-16667) and
incorporated herein by reference.11



Registrant's Statement of Computation of Earnings Per Share is set forth in Footnote 12 to Registrant's consolidated financial statements at page 73 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.


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DNB FINANCIAL CORPORATIONCORPORATE HEADQUARTERS4 Brandywine Avenue
Downingtown, PA 19335
Tel. 610-269-1040 Fax 484-359-3176
Internet http://www.dnbfirst.com FINANCIAL INFORMATIONInvestors, brokers, security analysts and others desiring financial information should contact
Gerald F. Sopp at 484-359-3143 or
gsopp@dnbfirst.com AUDITORKPMG LLP
1601 Market Street
Philadelphia, PA 19103-2499 COUNSELStradley, Ronon, Stevens and
Young, LLP
30 Valley Stream Parkway
Malvern, PA 19355 REGISTRAR AND STOCK
TRANSFER AGENTRegistrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
800-368-5948
www.rtco.com MARKET MAKERSBoenning & Scattergood, Inc.
800-842-8928
Ferris, Baker Watts, Inc.
877-840-0012
Janney Montgomery Scott, Inc.
800-526-6397



DIRECTORSWilliam 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 EMERITUSRobert J. Charles
I. Newton Evans, Jr.
Vernon J. Jameson
Henry F. Thorne



EXECUTIVE OFFICERSWilliam S. Latoff
Chairman and Chief Executive Officer
William J. Hieb
President and Chief Operating Officer
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


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GRAPHIC

---