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By-laws Of - DNB FINANCIAL CORP /PA/ - 3-20-2002

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By-laws Of - DNB FINANCIAL CORP /PA/ - 3-20-2002 Powered By Docstoc
					BY-LAWS OF DNB FINANCIAL CORPORATION, AS AMENDED, AS OF DECEMBER 19, 2001

BY-LAWS of DNB FINANCIAL CORPORATION Article 1 CORPORATION OFFICE Section 1. 1 The Corporation shall have and continuously maintain in Pennsylvania a registered office which may, but need not, be the same as its place of business and at an address to be designated from time to time by the Board of Directors. Section 1. 2 The Corporation may also have offices at such other places as the Board of Directors may from time to time designate or the business of the Corporation may require. Article 2 SHAREHOLDERS MEETINGS Section 2.1 All meetings of the shareholders shall be held at such time and place as may be fixed from time to time by the Board of Directors. Section 2.2 The annual meeting of the shareholders shall be held no later than the thirty-first day of May in each year, when the shareholders shall elect members to the Board of Directors and transact such other business as may properly be brought before the meeting. Section 2.3 Special meetings of the shareholders may be called at any time by the President or a majority of the Board of Directors or of its Executive Committee. At any time, upon written request of any person who has called a special meeting, it shall be the duty of the Secretary to fix the time of the meeting which, if the meeting is called pursuant to a statutory right, shall be held not more than sixty (60) days after the receipt of the request. If the Secretary neglects or refuses to fix the time of the meeting, the person or persons calling the meeting may do so. Section 2.4 Written notice of all shareholder meetings (other than adjourned meetings of shareholders), shall state the place, date, hour, the purpose thereof and shall be served upon, or mailed, postage prepaid, or telegraphed, charges prepaid, at least ten days before such meeting, unless a greater period of notice is required by statute or by these By-laws, to each shareholder entitled to vote thereat at such address as appears on the transfer books for shares of the Corporation. Section 2.5 When a meeting of shareholders is adjourned, it shall not be necessary to give any notice of the adjourned meeting or of the business to be transacted at an adjourned meeting, other than by announcement at the meeting at which the adjournment is taken, unless the Board of Directors fixes a new record date for the adjourned meeting. -2-

Article 3 QUORUM OF SHAREHOLDERS Section 3.1 The presence, in person or by proxy, of shareholders entitled to cast at least a majority of the votes which all shareholders are entitled to cast on the particular matter shall constitute a quorum for purposes of considering such matter, and unless otherwise provided by statute the acts of such shareholders at a duly organized meeting shall be the acts of the shareholders. If, however, any meeting of shareholders cannot be organized because of lack of a quorum, those present, in person or by proxy, shall have the power, except as otherwise provided by statute, to adjourn the meeting to such time and place as they may determine, without notice other than an announcement at the meeting, until the requisite number of shareholders for a quorum shall be present, in person or by proxy, except that in the case of any meeting called for the election of directors such meeting may be adjourned only for periods not exceeding fifteen (15) days as the holders of a majority of the shares present, in person or by proxy, shall direct, and those who attend the second of such adjourned meetings, although less than a quorum, shall nevertheless constitute a quorum for the purpose of electing directors. At any adjourned meeting at which a quorum shall be present or so represented, any business may be transacted which might have been transacted at the original meeting if a quorum had been present. The shareholders present, in person or by proxy, at a duly organized meeting can continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Article 4 VOTING RIGHTS Section 4.1 Except as may be otherwise provided by statute or by the Articles of Incorporation, at every shareholders meeting, every shareholder entitled to vote thereat shall have the right to one vote for every share having voting power standing in his name on the transfer books for shares of the Corporation on the record date fixed for the meeting. No share shall be voted at any meeting if an installment is due and unpaid thereon. Section 4.2 When a quorum is present at any meeting the voice vote of the holders of a majority of the stock having voting power, present, in person or by proxy, shall decide any question brought before such meeting except as provided differently by statute or by the Articles of Incorporation. Section 4.3 Upon demand made by a shareholder entitled to vote at any election for directors before the voting begins, the election shall be by ballot. -3-

Article 5 PROXIES Section 5.1 Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy. Every proxy shall be executed in writing by the shareholder or his duly authorized attorney in fact and filed with the Secretary of the Corporation. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until notice thereof has been given to the Secretary of the Corporation. No unrevoked proxy shall be valid after eleven (11) months from the date of its execution, unless a longer time is expressly provided therein, but in no event shall a proxy, unless coupled with an interest, be voted after three years from the date of its execution. A proxy shall not be revoked by the death or incapacity of the maker, unless before the vote is counted or the authority is exercised, written notice of such death or incapacity is given to the Secretary of the Corporation. Article 6 RECORD DATE Section 6.1 The Board of Directors may fix a time, not more ninety (90) days prior to the date of any meeting of shareholders, or the date fixed for the payment of any dividend or distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or go into effect, as a record date for the determination of the shareholders entitled to notice of, and to vote at, any such meeting, or entitled to receive payment of any such dividend or distribution, or to receive any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares. In such case, only such shareholders as shall be shareholders of record on the date so fixed shall be entitled to notice of, or to vote at, such meeting or to receive payment of such dividend or distribution or to receive such allotment of rights or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the transfer books for shares of the Corporation after any record date fixed as aforesaid. The Board of Directors may close the transfer books for shares of the Corporation against transfers of shares during the whole or any part of such period, and in such case written or printed notice thereof shall be mailed at least ten (10) days before closing thereof to each shareholder of record at the address appearing on the records of the Corporation or supplied by him to the Corporation for the purpose of notice. While the transfer books for shares of the Corporation are closed, no transfer of shares shall be made thereon. If no record date is fixed by the Board of Directors for the determination of shareholders entitled to receive notice of, and vote at, a shareholders meeting, transferees of shares which are transferred on the books of the Corporation within ten (10) days next preceding the date of such meeting shall not be entitled to notice of or to vote at such meeting. -4-

Article 7 VOTING LISTS Section 7.1 The officer or agent having charge of the transfer books for shares of the Corporation shall make a complete list of the shareholders entitled to vote at any meeting of shareholders, arranged in alphabetical order, with the address of and the number of shares held by each. The list 'shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting for the purposes thereof except that, if the Corporation has 5,000 or more shareholders, in lieu of the making of the list the Corporation may make the information therein available at the meeting by any other means. Section 7.2 Failure to comply with the requirements of Section 7.1 shall not affect the validity of any action taken at a meeting prior to a demand at the meeting by any shareholder entitled to vote thereat to examine the list. The original share register or transfer book, or a duplicate thereof kept in the Commonwealth of Pennsylvania shall be prima facie evidence as to who are the shareholders entitled to examine the list or share register or transfer book or to vote an any meeting of shareholders. Article 8 JUDGES OF ELECTION Section 8.1 In advance of any meeting of shareholders, the Board of Directors may appoint judges of election, who need not be shareholders, to act at the meeting or any adjournment thereof. If judges of election are not so appointed, the presiding officer of the meeting may, and on the request of any shareholder shall, appoint judges of election at the meeting. The number of judges shall be one or three. A person who is a candidate for office to be filled at the meeting shall not act as a judge. Section 8.2 In case any person appointed as a judge fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the Board of Directors in advance of the convening of the meeting or at the meeting by the presiding officer thereof. Section 8.3 The judges of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, receive votes or ballots, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes, determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. The judges of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three judges of election, the decision, act or certificate of a majority shall be effective in all respects as the decision, act or certificate of all. -5-

Section 8.4 On request of the presiding officer of the meeting, or of any shareholder, the judges of election shall make a report in writing of any challenge or question or matter determined by them, and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts stated therein. Article 9 CONSENT OF SHAREHOLDERS IN LIEU OF MEETING Section 9.1 Any action required or permitted to be taken at a meeting of the shareholders, or of a class of shareholders, may be taken without a meeting, prior or subsequent to the action, if a consent or consents in writing setting forth the action so taken shall be signed by all of the shareholders who would be entitled to vote at a meeting for such purpose and shall be filed with the Secretary of the Corporation. Section 9.2 The consent or consents in writing required by this Article 9 may be given by proxy in accordance with Section 5.1 hereof. Article 10 DIRECTORS Section 10.1 Any shareholder who intends to nominate or to cause to have nominated any candidate for election to the Board of Directors (other than any candidate proposed by the Corporation's then existing Board of Directors) shall so notify the Secretary of the Corporation in writing not less than ninety (90) days prior to the date of any meeting of shareholders called for the election of directors. Such notification shall contain the following information to the extent known by the notifying shareholder. (a) the name and address of each proposed nominee; (b) the age of each proposed nominee; (c) the principal occupation of each proposed nominee; (d) the number of shares of the Corporation owned by each proposed nominee; (e) the total number of shares that to the knowledge of the notifying shareholder will be voted for each proposed nominee; (f) the name and residence address of the notifying shareholder; and (g) the number of shares of the Corporation owned by the notifying shareholder. -6-

Any nomination for director not made in accordance with this Section shall be disregarded by the presiding officer of the meeting, and votes cast for each such nominee shall be disregarded by the judges of election. In the event that the same person is nominated by more than one shareholder, if at least one nomination for such person complies with this Section, the nomination shall be honored and all votes cast for such nominee shall be counted. Section 10.2 The number of directors that shall constitute the whole Board of Directors shall be not less than three. The Board of Directors shall be classified into three classes, each class to be elected for a term of three years. The terms of the respective classes shall expire in successive years as provided in Section 10.3 hereof. Within the foregoing limits, the Board of Directors may from time to time fix the number of directors and their respective classifications. The Directors shall be natural persons of full age and need not be residents of Pennsylvania. Each Director shall own, from time to time, the minimum qualifying interest in the Corporation required under applicable law and regulations. No person who is seventy-three (73) years of age or older shall be elected a director, except to the extent the Board of Directors shall make exception to this requirement by resolution. Section 10.3 At the 1990 annual meeting of shareholders of the Corporation, the shareholders shall elect three Class A directors to serve until the 1993 annual meeting of shareholders. At each annual meeting of shareholders thereafter successors to the class of directors whose term shall then expire shall be elected to hold office for a term of three years so that the term of office of one class of directors shall expire in each year. Section 10.4 The Board of Directors may declare vacant the office of a director who has been judicially declared of unsound mind or who has been convicted of an offense punishable by imprisonment f or a term of more than one year or f or any other proper cause which these By-laws may specify or if, within sixty (60) days or such other time as these By-laws may specify after notice of his selection, he does not accept the office either in writing or by attending a meeting of the Board of Directors and fulfill such other requirements of qualification as these By-laws may specify. Section 10.5 Upon application of any shareholder or director, the court may remove from office any director in case of fraudulent or dishonest acts, or gross abuse of authority or discretion with reference to the Corporation, or for any other proper cause, and may bar from office any director so removed for period prescribed by the court. The Corporation shall be made party to the action and, as a prerequisite to the maintenance of an action under this Section 10.5, a shareholder shall comply with Section 1782 of the Business Corporation Law of 1988, and any amendments or supplements thereto. Section 10.6 An act of the Board of Directors done during the period when a director has been suspended or removed f or cause shall not be impugned or invalidated if the suspension or removal is thereafter rescinded by the shareholders or by the Board of Directors or by the final judgment of a court. Section 10.7 The Board of Directors may appoint a person who previously held the position of director to be a director emeritus. A director emeritus may attend meetings of the Board of Directors. A director emeritus may advise the Board of Directors on any proposed corporate action but shall not have voting rights. The compensation of a director emeritus shall be determined from time to time by resolution of the Board of Directors. -7-

Article 11 VACANCIES ON BOARD OF DIRECTORS Article 11.1 Vacancies on the Board of Directors, including vacancies resulting from an increase in the number of directors, shall be filled by a majority of the remaining members of the Board of Directors, though less than a quorum, and each person so appointed shall be a director until the expiration of the term of office of the class of directors to which he was appointed. Article 12 POWERS OF BOARD OF DIRECTORS Section 12. 1 The business and affairs of the Corporation shall be managed by its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these By-laws directed or required to be exercised and done by the shareholders. Section 12.2 A director of that Corporation who is present at a meeting of the Board of Directors, or of a Committee of the Board of Directors, at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent is entered in the minutes of the meeting or unless he files his written dissent to the action with the Secretary of the Corporation before the adjournment thereof or transmits the dissent in writing to the Secretary of the Corporation immediately after the adjournment of the meeting. The right to dissent shall not apply to a director who voted in favor of the action. Nothing in this Section 12.2 shall bar a director from asserting that minutes of any meeting incorrectly omitted his dissent if, promptly upon receipt of a copy of such minutes, he notifies the Secretary of the Corporation, in writing, of the asserted omission or inaccuracy. Article 13 MEETINGS OF THE BOARD OF DIRECTORS Section 13.1 An organization meeting may be held immediately following the annual shareholders meeting without the necessity of notice to the directors to constitute a legally convened meeting, or the directors may meet at such time and place as may be fixed by either a notice or waiver of notice or consent signed by all of such directors. Section 13.2 Regular meetings of the Board of Directors shall be held not less often than semi-annually at a time and place determined by the Board of Directors at the preceding meeting. One or more directors may participate in any meeting of the Board of Directors, or of any committee thereof, by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear one another. -8-

Section 13.3 Special meetings of the Board of Directors may be called by the President on one day's notice to each director, either personally or in the manner set forth under Article 34 hereof; special meetings shall be called by the Chairperson of the Board or the President in like manner and on like notice upon the written request of three directors. Section 13.4 At all meetings of the Board of Directors of a majority of the directors shall constitute a quorum for the transaction of business, and the acts of a majority of the directors present at a meeting in person or by conference telephone or similar communications equipment at which a quorum is present in person or by such communications equipment shall be the acts of the Board of Directors, except as may be otherwise specifically provided by statute or by the Articles of Incorporation or by these By-laws. If a quorum shall not be present in person or by communications equipment at any meeting of the directors, the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or as permitted herein. Article 14 INFORMAL ACTION BY THE BOARD OF DIRECTORS Section 14.1 Any action required or permitted to be taken at a meeting of the directors may be taken without a meeting if, prior or subsequent to the action, a consent or consents thereto by all of the directors in office is filed with the Secretary of the Corporation. Article 15 COMPENSATION OF DIRECTORS Section 15.1 Directors, as such, may receive a stated salary for their services or a fixed sum and expenses for attendance at regular and special meetings, or any combination of the foregoing as may be determined from time to time by resolution of the Board of Directors, and nothing contained herein shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Article 16 OFFICERS Section 16.1 The officers of the Corporation shall be elected by the Board of Directors at its organization meeting and shall be a President, a Secretary and a Treasurer. At its option, the Board of Directors may elect a Chairperson of the Board. The Board of Directors may also elect one or more Vice Presidents and such other officers and appoint such agents as it shall deem necessary, who shall hold their offices for such terms, have such authority and perform such duties as may from time to time be prescribed by the Board of Directors. Any number of offices may be held by the same person. -9-

Section 16.2 The compensation of all officers of the Corporation shall be fixed by the Board of Directors. Section 16.3 Each officer shall hold office for a term of one year and until his successor has been selected and qualified or until his earlier death, resignation or removal. Any officer may resign at any time upon written notice to the Corporation. The resignation shall be effective upon receipt thereof by the Corporation or at such subsequent time as may be specified in the notice of resignation. The Corporation may secure the fidelity of any or all of the officers by bond or otherwise. Section 16.4 Any officer or agent of the Corporation may be removed by the Board of Directors with or without cause. The removal shall be without prejudice to the contract rights, if any, of any person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. Section 16.5 An officer shall perform his duties as an officer in good faith, in a manner he reasonably believes to be in the best interests of the Corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. A person who so performs his duties shall not be liable by reason of having been an officer of the Corporation. Article 17 THE CHAIRPERSON OF THE BOARD Section 17.1 The Chairperson of the Board shall preside at all meetings of the shareholders and directors. He shall supervise the carrying out of the policies adopted or approved by the Board of Directors. He shall also have and may exercise such further powers and duties as from time to time may be conferred upon or assigned to him by the Board of Directors. Article 18 THE PRESIDENT Section 18.1 The President shall be the chief executive officer of the Corporation; shall have general and active management of the business of the Corporation; shall see that all orders and resolutions of the Board of Directors are put into effect, subject, however, to the right of the Board of Directors to delegate any specific powers, except such as may be by statute exclusively conferred on the President, or to any other officer or officers of the Corporation. The President shall execute bonds, mortgages and other contracts requiring a seal under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. in the absence or incapacity of the Chairperson of the Board, the President shall preside at meetings of the shareholders and the directors. If there is no Chairperson of the Board, the President shall have and exercise all powers conferred by these By-laws or otherwise on the Chairperson of the Board. -10-

Article 19 THE VICE PRESIDENT Section 19.1 The Vice President or, if more than one, the Vice Presidents in the order established by the Board of Directors shall, in the absence or incapacity of the President, exercise all powers and perform the duties of the President. The Vice Presidents, respectively, shall also have such other authority and perform such other duties as may be provided in these By-laws or as shall be determined by the Board of Directors or the President. Any Vice President may, in the discretion of the Board of Directors, be designated as "executive," "senior", or by departmental or functional classification. Article 20 THE SECRETARY Section 20.1 The Secretary shall attend all meetings of the Board of Directors and of the shareholders and keep accurate records thereof in one or more minute books kept for that purpose and shall perform the duties customarily performed by the secretary of a corporation and such other duties as may be assigned to him by the Board of Directors or the President. Article 21 THE TREASURER Section 21.1 The Treasurer shall have the custody of the corporate funds and securities; shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall perform such other duties as may be assigned to him by the Board of Directors or the President. He shall give bond in such sum and with such surety as the Board of Directors may from time to time direct. Article 22 ASSISTANT OFFICERS Section 22. 1 Each assistant officer shall assist in the performance of the duties of the officer to whom he is assistant and shall perform such duties in the absence of the officer. He shall perform such additional duties as the Board of Directors, the President or the officer to whom he is assistant may from time to time assign him. Such officers may be given such functional titles as the Board of Directors shall from time to time determine. -11-

Article 23 INDEMNIFICATION OF OFFICERS AND EMPLOYEES Section 23.1 The Corporation shall indemnify any officer and/or employee, or any former officer and/or employee, who was or is a party to, or is threatened to be made a party to, or who is called to be a witness in connection with, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was an officer and/or employee of the corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of a corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. Section 23.2 The Corporation shall indemnify any officer and/or employee, who was or is a party to, or is threatened to be made a party to, or who is called as a witness in connection with, any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the f act that such person is or was a director, officer, and/or employee or agent of a corporation, partnership, joint venture, trust or other enterprise against amounts paid in settlement and expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of, or serving as a witness in, such action or suit if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation and except that no indemnification shall be made in respect of any such claim, issue or matter as to which such person shall have been adjudged to be liable for misconduct in the performance of his duty to the Corporation. Section 23.3 Except as may be otherwise ordered by a court, there shall be a presumption that any officer and/or employee is entitled to indemnification as provided in Sections 23.1 and 23.2 of this Article unless either a majority of the directors who are not involved in such proceedings ("disinterested directors") or, if there are less than three disinterested directors, then the holders of one-third of the outstanding shares of the Corporation determine that the person is not entitled to such presumption by certifying such determination in writing to the Secretary of the Corporation. In such event the disinterested director(s) or, in the event of certification by shareholders, the Secretary of the Corporation shall request of independent counsel, who may be the outside general counsel of the Corporation, a written opinion as to whether or not the parties involved are entitled to indemnification under Sections 23.1 and 23.2 of this Article. -12-

Section 23.4 Expenses incurred by an officer and/or employee in defending a civil or criminal action, suit or proceeding may he paid by the Corporation in advance of the final disposition of such action., suit or proceeding as authorized in the manner provided under Section 23.3 of this Article upon receipt of an undertaking by or on behalf of the officer and/or employee to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation. Section 23.5 The indemnification provided by this Article shall not be deemed exclusive of any other rights to which a person seeking indemnification may be entitled under any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity while serving as an officer and/or employee and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be an officer and/or employee and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 23.6 The Corporation may create a fund of any nature, which may, but need not be, under the control of a trustee, or otherwise secure or insure in any manner its indemnification obligations arising under this Article. Section 23.7 The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was an officer and/or employee of the Corporation, or is or was serving at the request of the Corporation as an officer and/or employee of a corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article. Section 23.8 Indemnification under this Article shall not be made in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness. Article 24 INDEMNIFICATION OF DIRECTORS Section 24.1 A director of this Corporation shall stand in a fiduciary relation to the Corporation and shall perform his duties as a director, including his duties as a member of any committee of the board upon which he may serve, in good faith, in a manner he reasonably believes to be in the best interests of the Corporation, and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. In performing his duties, a director shall be entitled to rely in good faith on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following: (a) One or more officers or employees of the Corporation whom the director reasonably believes to be reliable and competent in the matters presented. -13-

(b) Counsel, public accountants or other persons as to matters which the director reasonably believes to be within the professional or expert competence of such person. (c) A committee of the board upon which he does not serve, duly designated in accordance with law, as to matters within its designated authority, which committee the director reasonably believes to merit confidence. A director shall not be considered to be acting in good faith if he has knowledge concerning the matter in question that would cause his reliance to be unwarranted. Section 24.2 In discharging the duties of their respective positions, the board of directors, committees of the board, and individual directors may, in considering the best interests of the Corporation, consider the effects of any action upon employees, upon suppliers and customers of the Corporation and upon communities in which offices or other establishments of the Corporation are located, and all other pertinent factors. The consideration of those factors shall not constitute a violation of Section 24.1. Section 24.3 Absent a breach of fiduciary duty, lack of good faith or self-dealing, actions taken as a director or any failure to take any action shall be presumed to be in the best interests of the Corporation. Section 24.4 A director of this Corporation shall not be personally liable for monetary damages as such for any action taken or for any failure to take any action, unless: (a) the director has breached or failed to perform the duties of his office under the provisions of Sections 24. 1 and 24.2, and (b) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. Section 24.5 The provisions of Section 24.4 shall not apply to: (a) the responsibility or liability of a director pursuant to a criminal statute, or (b) the liability of a director for the payment of taxes pursuant to local, state or federal law. Section 24.6 The Corporation shall indemnify any director, or any former director who was or is a party to, or is threatened to be made a party to, or who is called to be a witness in connection with, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was a director of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of a corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not of itself create _a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. -14-

Section 24.7 The Corporation shall indemnify any director who was or is a party to, or is threatened to be made a party to, or who is called as a witness in connection with, any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer and/or employee or agent of a corporation, partnership, joint venture, trust or other enterprise against amounts paid in settlement and expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of, or serving as a witness in, such action or suit if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation and except that no indemnification shall be made in respect of any such claim, issue or matter as to which such person shall have been adjudged to be liable for misconduct in the performance of his duty to the Corporation. Section 24.8 Except as may be otherwise ordered by a court, there shall be a presumption that any director is entitled to indemnification as provided in Sections 24.6 and 24.7 of this Article unless either a majority of the directors who are not involved in such proceedings ("disinterested directors") or, if there are less than three disinterested directors, then the holders of one-third of the outstanding shares of the Corporation determine that the person is not entitled to such presumption by certifying such determination in writing to the Secretary of the Corporation. In such event the disinterested director(s) or, in the event of certification by shareholders, the Secretary of the Corporation shall request of independent counsel, who may be the outside general counsel of the Corporation, a written opinion as to whether or not the parties involved are entitled to indemnification under Sections 24.6 and 24.7 of this Article. Section 24.9 Expenses incurred by a director in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized in the manner provided under Section 24.8 of this Article upon receipt of an undertaking by or on behalf of the director, officer and/or employee to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article. Section 24.10 The indemnification provided by this Article shall not be deemed exclusive of any other rights to which a person seeking indemnification may be entitled under any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity while serving as a director and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director and shall inure to the benefit of the heirs, executors and administrators of such a person. -15-

Section 24.11 The Corporation may create a fund of any nature, which may, but need not be, under the control of a trustee, or otherwise secure or insure in any manner its indemnification obligations arising under this Article. Section 24.12 The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director or is or was serving at the request of the corporation as a director, officer, employee or agent of a corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article. Section 24.13 Indemnification under this Article shall not be made in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness. Article 25 COMMITTEES OF THE BOARD OF DIRECTORS Section 25.1 The Board of Directors may, by resolution adopted by a majority of the directors in office, establish one or more committees to consist of one or more directors of the Corporation. Any committee, to the extent provided in the resolution of the Board of Directors or in these By-laws, shall have and may exercise all of the powers and authority of the Board of Directors, except that a committee shall not have any power or authority as to the following: (a) The submission to shareholders of any action requiring approval of shareholders under applicable law, the Articles of Incorporation or these By-laws. (b) The creation or filling of vacancies in the Board of Directors. (c) The adoption, amendment or repeal of these By-laws. (d) The amendment or repeal of any resolution of the Board of Directors that by its terms is amendable or repealable only by the Board of Directors. (e) Action on matters committed by these By-laws or resolution of the Board of Directors to another committee of the Board of Directors. Section 25.2 The Board of Directors may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee or for the purposes of any written action by the committee. In the absence or disqualification of a member and alternate member or members of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another director to act at the meeting in the place of the absent or disqualified member. -16-

Section 25.3 Each committee of the Board of Directors shall serve at the pleasure of the Board of Directors. The term "Board of Directors", when used in any provision of this Article 25 relating to the organization or procedures of or the manner of taking action by the Board of Directors, shall be construed to include and refer to any executive or other committee of the Board of Directors. Any provision of this Article 25 relating or referring to action to be taken by the Board of Directors or the procedure required therefor shall be satisfied by the taking of corresponding action by a committee of the Board of Directors to the extent authority to take the action has been delegated to the committee pursuant to this Article 25. Article 26 SHARE CERTIFICATES Section 26.1 The share certificates of the Corporation shall be numbered and registered in a share register as they are issued; shall bear the name of the registered holder, the number and class of shares represented thereby, the par value of each share or a statement that such shares are without par value, as the case may be; shall be signed by the President or a Vice President and the Secretary or the Treasurer or any other person properly authorized by the Board of Directors, and shall bear the corporate seal, which seal may be a facsimile engraved or printed. Where the certificate is signed by a transfer agent or a registrar, the signature of any corporate officer on such certificate may be a facsimile engraved or printed. In case any officer who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer because of death, resignation or otherwise before the certificate is issued, it may be issued by the Corporation with the same effect as if the officer had not ceased to be such at the date of its issue. Article 27 TRANSFER OF SHARES Section 27.1 Upon surrender to the Corporation of a share certificate duly endorsed by the person named in the certificate or by attorney duly appointed in writing and accompanied where necessary by proper evidence of succession, assignment or authority to transfer, a new certificate shall be issued to the person entitled thereto and the old certificate cancelled and the transfer recorded upon the transfer books for shares of the Corporation. No transfer shall be made if it would be inconsistent with the provisions of Article 8 of the Pennsylvania Uniform Commercial Code. Article 28 LOST CERTIFICATES Section 28.1 Where a shareholder of the corporation alleges the loss, theft or destruction of one or more certificates for shares of the Corporation and requests the issuance of a substitute certificate therefor, the Board of Directors may direct a new certificate of the same tenor and for the same number of shares to be issued to such person upon such person's making of an affidavit in form satisfactory to the Board of Directors setting forth the facts in connection therewith, provided that prior to the receipt of such request the Corporation shall not have either registered a transfer of such certificate or received notice that such certificate has been acquired by a bona fide purchaser. When authorizing such issue of a new certificate the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his heirs or legal representatives, as the case may be, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such form and with surety or sureties, with fixed or open penalty, as shall be satisfactory to the Board of Directors, as indemnity for any liability or expense which it may incur by reason of the original certificate remaining outstanding. -17-

Article 29 DIVIDENDS Section 29.1 The Board of Directors may, from time to time, at any duly convened regular or special meeting or by unanimous consent in writing, declare and pay dividends upon the outstanding shares of capital stock of the Corporation in cash, property or shares of the Corporation, as long as any dividend shall not be in violation of law and the Articles of Incorporation. Section 29.2 Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purposes as, the Board of Directors shall believe to be for the best interests of the Corporation, and the Board of Directors may reduce or abolish any such reserve in the manner in which it was created. Article 30 FINANCIAL REPORT TO SHAREHOLDERS Section 30.1 The President and the Board of Directors shall present prior to each annual meeting of the shareholders a full and complete statement of the business and affairs of the Corporation for the preceding year. Article 31 INSTRUMENTS Section 31.1 Any note, mortgage, evidence of indebtedness, contract or other document, or any assignment or endorsement thereof, executed or entered into between the corporation and any other person, when signed by one or more -18-

officers or agents having actual or apparent authority to sign it, or by the President or a Vice President and Secretary or Assistant Secretary or Treasurer or Assistant Treasurer of the Corporation, shall be held to have been properly executed for and in behalf of the corporation. Section 31.2 The affixation of the corporate seal shall not be necessary to the valid execution, assignment or endorsement by the Corporation of any instrument or other document. Article 32 FISCAL YEAR Section 32.1 The fiscal year of the Corporation shall be the calendar year. Article 33 SEAL Section 33.1 The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Pennsylvania". Such seal may be used by causing it or a facsimile thereof to be impressed or affixed in any manner reproduced. Article 34 NOTICES AND WAIVERS THEREOF Section 34.1 Whenever written notice is required to be given to any person under the provisions of applicable law, by the Articles of Incorporation or of these By-laws, it may be given to the person either personally or by sending a copy thereof by first class or express mail, postage prepaid, or by telegram (with messenger service specified), telex or TWX (with answerback received) or courier service, charges prepaid, or by telecopier, to his address (or to his telex, TWX, telecopier or telephone number) appearing on the books of the Corporation or, in the case of directors, supplied by him to the Corporation for the purpose of notice. If the notice if sent by mail, telegraph or courier service, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office or courier service for delivery to that person or, in the case of telex or TWX, when dispatched. A notice of meeting shall specify the place, day and hour of the meeting and any other information required by any other provision of these By-laws. Section 34.2 Whenever any written notice is required to be given under the provisions of applicable law, the Articles of Incorporation or of these By-laws, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of the notice. Except as otherwise required by these By-laws, neither the business to be transacted at, nor the purpose of, a meeting need be specified in the waiver of notice of the meeting. In the case of a special meeting of shareholders, the waiver of notice shall specify the general nature of the business to be transacted. -19-

Section 34.3 Attendance of a person at any meeting shall constitute a waiver of notice of the meeting except where a person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Section 34.4 Whenever any notice or communication is required to be given to any person under the provisions of applicable law, the Articles of Incorporation, these By-laws, the terms of any agreement and any other instrument or as a condition precedent to taking any corporate action, and communication with that person is then unlawful, the giving of the notice or communication to that person shall not be required and there shall be no duty to apply for a license or other permission to do so. Any action or meeting that is taken or held without notice or communication to that person shall have the same validity as if the notice or communication had been duly given. If the action taken is such as to require the filing of any document with respect thereto under any provision of law or any agreement or other instrument, it shall be sufficient, if such is the fact and if notice or communication in required, to state therein that notice or communication was given to all persons entitled to receive notice or communication except persons with whom communication was unlawful. Section 34.5 Section 34.4 shall also be applicable to any shareholder with whom the Corporation has been unable to communicate for more than twenty-four (24) consecutive months because communications to the shareholder are returned unclaimed or the shareholder has otherwise failed to provide the Corporation with a current address. Whenever the shareholder provides the Corporation with a current address, Section 34.4 shall cease to be applicable to the shareholder under this Section 34.5. Article 35 EMERGENCIES Section 35.1 The Board of Directors may adopt emergency By-laws, subject to repeal or change by action of the shareholders, which shall, notwithstanding any different provisions of law, of the Articles of Incorporation or of these By-laws, be effective during any emergency resulting from an attack on the United States, a nuclear disaster or another catastrophe as a result of which a quorum of the Board of Directors cannot readily be assembled. The emergency By-laws may make any provision that may be appropriate for the circumstances of the emergency including, procedures for calling meetings of the Board of Directors, quorum requirements for meetings and procedures for designating additional or substitute directors. Section 35.2 The Board of Directors, either before or during any emergency, may provide, and from time to time modify, lines of succession in the event that during the emergency any or all officers or agents of the Corporation shall for any reason be rendered incapable of discharging their duties and may, effective in the emergency, change the head offices or designate several alternative head offices or regional offices of the Corporation or authorize the officers to do so. -20-

Section 35.3 A representative of the Corporation acting in accordance with any emergency By-laws shall not be liable except for willful misconduct and shall not be liable for any action taken by him in good faith in an emergency in furtherance of the ordinary business affairs of the Corporation even though not authorized by the emergency or other By-laws then in effect. Section 35.4 To the extent not inconsistent with any emergency By-laws so adopted, the By-laws of the Corporation shall remain in effect during any emergency and, upon its termination, the emergency By-laws shall cease to be effective. Section 35.5 Unless otherwise provided in emergency By-laws, notice of any meeting of the Board of Directors during an emergency shall be given only to those directors to whom it is feasible to reach at the time and by such means as are feasible at the time, including publication, radio or television. To the extent required to constitute a quorum at any meeting of the Board of Directors during any emergency, the officers of the Corporation who are present shall, unless otherwise provided in emergency By-laws, be deemed, in order of rank and within the same rank in order of seniority, directors for the meeting. Article 36 AMENDMENTS Section 36.1 These By-laws may be altered, amended or repealed by the affirmative vote of the holders of twothirds of the outstanding shares of Common Stock at any regular or special meeting duly convened after notice to the shareholders of that purpose, or by a majority, vote of the members of the Board of Directors at any regular or special meeting thereof duly convened after notice to the directors of that purpose, subject always to the power of the shareholders to change such action of the Board of Directors by the affirmative vote of the holders of two-thirds of the outstanding shares of Common Stock. Article 37 OPT OUT AND NONAPPLICABLILITY OF SUBCHAPTER G AND SUBCHAPTER H OF CHAPTER 25 OF THE BUSINESS CORPORATION LAW OF 1988, AS ADDED AND AMENDED BY ACT 36 OF 1990. Section 37.1. Opt Out and Nonapplicability of Subchapters G and H. This Corporation specifically opts out and shall not be governed by Subchapter G, Control-share Acquisitions, and Subchapter H, Disgorgement by Certain Controlling Shareholders Following Attempts to Acquire Control, of Chapter 25 of the Business Corporation Law of 1988, as added and amended by Act 36 of 1990. Subchapter G, Control-share Acquisitions, and Subchapter H, Disgorgement by Certain Controlling Shareholders Following Attempts to Acquire Control, of Chapter 25 of the Business Corporation Law of 1988, as added and amended by Act 36 of 1990, shall not be applicable to the Corporation. -21-

07/18/90 Article 38 NEW BUSINESS PROPOSALS Section 38.1 Proposals for any new business to be taken up at any annual or special meeting of shareholders may be made by the board of directors of the Corporation or by any shareholder of the Corporation entitled to vote generally in the election of directors. In order for a shareholder of the Corporation to make any such proposal, he or she shall give notice thereof in writing, delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the Corporation not less than thirty days nor more than sixty days prior to the date of any such meeting. Section 38.2 Each such notice given by a shareholder to the Secretary with respect to business proposals to be brought before a meeting shall set forth in writing as to each matter: (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting; (ii) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business; (iii) the class and number of shares of the Corporation which are beneficially owned by the shareholder; and (iv) any material interest of the shareholder in such business. Notwithstanding anything in these Bylaws to the contrary, no new business shall be conducted at the meeting except in accordance with the procedures set forth in this Article 38. Section 38.3 The Chairman of the annual or special meeting of shareholders may, if the facts warrant, determine and declare to such meeting that a proposal was not made in accordance with the foregoing procedure, and, if he should so determine, he shall so declare to the meeting and the defective proposal shall be disregarded and laid over for action at the next succeeding special or annual meeting of the shareholders taking place thirty days or more thereafter. This provision shall not require the holding of any adjourned or special meeting of shareholders for the purpose of considering such defective proposal. As amended to 12/19/2001 -22-

DEATH BENEFIT AGREEMENT THIS AGREEMENT is made and entered into as of the 24th day of November 1999, between DOWNINGTOWN NATIONAL BANK, a national banking association with its main office in Downingtown, Pennsylvania (the "Bank") and Henry F. Thorne, an individual residing in the Commonwealth of Pennsylvania (the "Executive"). WITNESSETH: WHEREAS, Executive is a valued employee of the Bank; and WHEREAS, as an inducement to Executive to continue this valuable relationship, and to provide some key employee protection to the Bank in the event of Executive's untimely death, the Bank finds it necessary and desirable to assist Executive with his personal life insurance program and to participate therein. NOW THEREFORE, in consideration of the premises and the mutual covenants contained in this Agreement and intending to be legally bound, the parties hereby agree as follows: I. Definitions The terms set forth below shall have the meanings indicated for purposes of this Agreement, unless the context in which used requires a different meaning: A. "Cash Value" shall mean the cash surrender value of the Policy, as defined by the terms thereof. B. "Cause" shall mean termination for personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, conviction of a felony, suspension or removal from office or prohibition from participation in the conduct of Holding Company's or Bank's affairs pursuant to a notice or other action by any regulatory agency, or willful violation of any law, rule or regulation or final cease-and-desist order which in the reasonable judgment of the Board of Directors of the Holding Company or the Bank will probably cause substantial economic damages to the Holding Company or the Bank, willful or intentional breach or neglect by Executive of his duties, or material breach of any material provision of this Agreement. For purposes of this paragraph, no act, or failure to act on Executive's part shall be considered "willful" unless done, or omitted to be done, by him without good faith and without reasonable belief that this action or omission was in the best interest of the Holding Company or the Bank; provided that any act or omission to act by Executive in reliance upon an approving opinion of counsel to the Holding Company or the Bank or counsel to the Executive shall not be deemed to be willful. The terms "incompetence" and "misconduct" shall be defined with reference to standards generally prevailing in the banking industry. In determining incompetence and misconduct, the Bank shall have the burden of proof with regard to the acts or omission of Executive and the standards prevailing in the banking industry. C. "Holding Company" shall mean DNB Financial Corporation, the Bank's sole shareholder. D. "Policy" shall mean the insurance policy on the life of Executive to which this Agreement relates and which is identified in Schedule "A" attached hereto. II. Policies Covered by Agreement Executive will contemporaneously (with the execution of this Agreement) purchase the Policy from the issuer. The parties hereto agree that they will take all necessary action to cause the issuer to issue the Policy, and shall take any further action which may be necessary to cause the Policy to conform to the provisions of this Agreement. The parties hereto agree that the Policy shall be subject to the terms and conditions of this Agreement and of the collateral assignment filed with the issuer relating to the Policy.

III. Ownership of Policies A. Except as may otherwise be provided herein, Executive shall be the sole and absolute owner of the Policy, and may exercise all ownership rights granted to the owner thereof by the term of the Policy. B. To secure the repayment to the Bank of the amount of the premiums on the Policy paid by it hereunder, Executive has, contemporaneously herewith, assigned the Policy to the Bank as collateral. The collateral assignment of the Policy to the Bank hereunder shall not be terminated, altered or amended by the Executive, without the express written consent of the Bank, except as otherwise provided herein. The parties hereto agree to take all action necessary to cause such collateral assignment to conform to the provisions of this Agreement. IV. Allocation of Premium Payments A. On or before the due date of each Policy premium, or within the grace period provided therein, the Bank shall pay the full amount of the premium to the issuer, and shall, upon request, promptly furnish the Executive evidence of timely payment of such premium. B. Executive shall reimburse the Bank through payroll deduction for that portion of the total annual premiums payable on the Policy which is equal to the amount (as determined under Subparagraph C, below) that would be includible in the Executive's gross income for federal income tax purposes if the Bank had paid the entire annual premium. For purposes of this Agreement, therefore, the portion of the annual premium equal to this amount shall be treated as paid by the Executive, and the balance of the annual premium shall be treated as paid by the Bank. C. For purposes of this Agreement, the amount that would be taxable to Executive from payment of the annual premiums by the Bank shall be equal to the annual cost of current life insurance protection on the life of Executive, measured by the lower of the PS 58 rate, set forth in Rev. Rul. 55-747, 1955-2 C.B. 228 (or the corresponding applicable provision of any future Revenue Ruling), or the issuer's current published premium rate for annually renewable term insurance for standard risks. D. Executive shall receive supplemental cash compensation from the Bank for each regular payroll period for which an amount is deducted from his salary pursuant to Subparagraph A, above. The amount of such supplemental compensation shall be equal to the quotient obtained by dividing the amount required to be deducted from his salary pursuant to Subparagraph A, above, by sixty-four one-hundredths (0.64). V. Rights in the Policy Proceeds A. Upon the first to occur of the events described below, this Agreement and the collateral assignment of the Policy to the Bank shall terminate, subject to distribution of the appropriate amounts set forth below. (1) Upon the death of the Executive prior to termination of this Agreement, (i) the Bank shall receive the proceeds of the Policy up to the portion of the cumulative Policy premiums paid by the Bank, (ii) the Executive's designated beneficiary (or beneficiaries) under the Policy shall be paid a death benefit of $750,000, and (iii) the balance of the proceeds of the Policy shall be paid to the Bank. (2) Upon termination of the Executive's employment prior to the Executive's 65th birthday for any reason, the Executive shall pay to the Bank, or shall cause to be paid to the Bank from the Policy, the lesser of the Cash Value or the portion of the cumulative Policy premiums paid by the Bank as of the effective date of the Executive's termination of employment.

(3) Upon termination of the Executive's employment by the Bank for Cause, the Executive shall pay to the Bank, or shall cause to be paid to the Bank from the Policy to the extent of the Cash Value, the portion of the cumulative Policy premiums paid by the Bank as of the effective date of the Executive's termination of employment. To the extent that such Cash Value is less than the cumulative Policy premiums paid by the Bank as of such date, the Executive shall be liable for the balance. (4) Upon the fifteenth (15th) anniversary of the Effective Date, the Executive shall pay to the Bank, or shall cause to be paid to the Bank from the Policy, the lesser of the Cash Value or the portion of the cumulative Policy premiums paid by the Bank as of such anniversary. B. Upon payment of the amount to the Bank set forth in Subparagraph A(2), (3) or (4), above, as applicable, the Executive will thereafter own the Policy so purchased free from the terms of this Agreement. The Bank shall execute such documents or take such other action as may be necessary to vest full and unrestricted ownership of the Policy in Executive. VI. Assignment Neither party may assign this Agreement without the express written consent of the other party, except that Executive may assign his interest in the Policies and in this Agreement with respect thereto to his spouse, children or lineal descendants, or to a trust for the benefit of one or more of such persons. In such event, the assignee or transferee shall succeed to all of Executive's rights in the Policy and this Agreement with respect thereto, including the right to receive a designated portion of the proceeds upon Executive's death. Executive shall give written notice of any such assignment to the Bank and to the insurance companies involved. Notwithstanding the foregoing, the assignee or transferee shall not be required to consent to any amendment, modification or the termination of this Agreement by the Bank and Executive during his lifetime. VII. Administration A. The Bank is hereby designated as the named fiduciary under this Agreement. The named fiduciary shall have authority to control and manage the operation and administration of this Agreement, and it shall be responsible for establishing and carrying out a funding policy and method consistent with the objectives of this Agreement. B. If the Executive, or any heir or beneficiary of the Executive, believes that he or she is being denied a benefit to which he or she is entitled under this Agreement (hereinafter referred to as a "Claimant"), the Claimant may file a written request for such benefit with the Bank, setting forth his or her claim. The request must be addressed to the President of the Bank at its then principal place of business. C. Upon receipt of a claim, the Bank shall advise the Claimant that a reply will be forthcoming within ninety (90) days and shall, in fact, deliver such reply within such period. The Bank may, however, extend the reply period for an additional ninety (90) days for reasonable cause. If the claim is denied in whole or in part, the Bank shall adopt a written opinion, using language calculated to be understood by the Claimant, setting forth: (a) the specific reason or reasons for such denial; (b) the specific reference to pertinent provisions of this Agreement on which such denial is based; (c) a description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation why such material or such information is necessary; (d) appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and (e) the time limits for requesting a review under subsection (3) and for review under subsection (4) hereof. D. Within sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Bank review its determination. Such request must be addressed to the President of the Bank, at its then principal place of business. The Claimant or his or her duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Bank. If the Claimant does not request a review of the Bank's initial determination within such sixty (60) day period, he or she shall be barred and estopped from challenging the Bank's determination.

E. Within sixty (60) days after the Bank's receipt of a request for review, it shall reconsider its initial determination. After considering all materials presented by the Claimant, the Bank will render a written opinion, written in a manner calculated to be understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Agreement on which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Bank will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review. VIII. Miscellaneous Provisions A. This Agreement sets forth the entire Agreement of the parties relating to the subject matter and supersedes any other agreements or understandings, written or oral. B. This Agreement may be amended or modified only by a written instrument signed by the parties hereto. C. This Agreement shall be binding upon the heirs, personal representatives, successors and permitted assigns of the parties hereto. D. This Agreement shall be governed by the laws of the Commonwealth of Pennsylvania, to the extent such laws are not superseded or preempted by laws of the United States. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals on the day and year first above written. DOWNINGTOWN NATIONAL BANK
Attest: /s/Ronald K. Dankanich ----------------------By: /s/Robert J. Charles -----------------------------Chairman, Board of Directors /s/Henry F. Thorne -----------------------------HENRY F. THORNE

Witness:

/s/Bruce E. Moroney ----------------------

SCHEDULE "A"
Policy No. ---------6,214,709 Insurance Company ----------------General American Insurance Amount ---------------$4,600,749 Annual Premium -------------$1,500,000

Letter to Shareholders Building our Future... "Building our future" defined our strategic initiatives in 2001. Our ability to embrace change without compromising our core values and strengths is a testament to the dedication of our employees and Board of Directors. We are pleased with the very significant progress we have made in improving our infrastructure and we will continue to invest in and grow our highly valued business lines like DNB Advisors, DNB Financial Services and DNB Leasing. We continued to expand our presence and grow market share in Chester County by opening our ninth branch location in Exton, at the former site of the "Guernsey Cow". The Exton branch provided us with a new office location for our wealth management group, comprised of DNB Advisors and DNB Financial Services, while enabling us to preserve a structure of historic significance. We introduced our newest business line, DNB Leasing and we have been successful in providing our commercial customers with additional options to meet their financing needs. We also launched both consumer and commercial Internet Banking capabilities and we continued to improve our internal technology platform. While we have implemented strategies intended to deliver more consistent, higher-quality customer service, we have not lost sight of our most important asset -- our employees. To this end, we have implemented sales and service training programs, which were designed and delivered by our own employees. Additionally, 25% of our retail employees voluntarily opted to obtain their Health and Life insurance licenses. By dedicating a significant portion of their time to studying and learning about our new insurance-based products, they have expanded their career opportunities with the Bank. Early in the year, we conducted internal focus groups with more than half of our employees to improve communication at all levels of the organization and to learn first-hand how we can better serve our customers and our community. Our mission has not changed over the past 141 years -- to help our customers become successful by providing them with a comprehensive array of financial products and services delivered through caring, knowledgeable bankers. Building Financial Strength... One of the Bank's key strategic objectives is to reduce our reliance on net interest income and we are making progress in this endeavor. We are seeing encouraging signs that our efforts to offer non-traditional banking services, such as annuities, insurance and mutual funds, are meeting with success. We plan to continue our efforts to market these services, along with our investment management and trust services, by presenting ourselves as a trusted advisor to our customers. Our core business growth in loans and deposits remained essentially flat during 2001, due primarily to eleven

Federal Reserve interest rate cuts. These unprecedented rate cuts made managing our net interest margin a significant challenge. One of our difficult choices was how rapidly to reduce interest rates on our deposit products. We tried to balance our responsibilities to our customers and to our shareholders and we believe we have been largely successful. As was true last year, branch expansion, continued investment in technology, along with key additions to staff caused an unfavorable impact on earnings. However, we remain confident that these investments in our future will result in revenue growth that will greatly exceed our expenses, especially now that our largest capital expenditures are behind us. In July, the Board of Directors authorized the buyback of up to 175,000 shares of common stock over an indefinite period. We believe our shares represent an attractive investment for our Company, especially at its current market valuation. The buyback, if fully completed, will reduce the number of outstanding shares by approximately 10%. We also completed a $5 million Trust Preferred Securities offering, issued through our subsidiary DNB Capital Trust I. The bulk of the net proceeds will be invested in the Bank to increase capital levels and to provide the resources required to support our business strategies. Building Our Team... In keeping with another key strategic objective of growing our commercial and small business lending, we have separated our Credit Services Division into a Business Development Group and a Credit Support Group. This reorganization will enable us to focus our efforts on meeting the needs of our commercial and small business customers. In April of 2001, Kristen LaDow joined the Bank as Senior Vice President and Senior Loan Officer to lead our commercial business development efforts. Kristen, along with our Commercial Loan Officers and a new business development officer, Mike Rist, have been focusing their efforts on growing the small to mid-size business segment by offering competitive products and services delivered in a customer-focused manner. In January 2002, we hired an experienced small business lending specialist, Jenny Vanwijk, to work with our Branch Managers to improve service delivery to our small business customers. In July 2001, Andrew Mone, Vice President and Financial Consultant, joined DNB Advisors as a business development officer bringing his 18 years of experience selling investment management, insurance and brokerage services to strengthen our efforts to grow fee income. Finally, Sandy Mattern, a Branch Manager with 36 years of local financial services experience and a strong sales background, joined us at our West Goshen Branch. Building Success... We look forward to 2002 with excitement and optimism. We are evolving our own unique sales culture, developing high-growth business lines and carefully monitoring these endeavors to ensure shareholder value. We will aggressively continue to grow our customer base by offering additional products and services to our existing customers and to develop new customer relationships. Our goal is simple -- to be the Bank of choice in Chester County. In short, our future is deeply rooted in our 141 years of service to our community, where we have worked to earn the trust and confidence of our customers. Going forward, we expect to build on that trust and confidence to meet the needs of our customers and shareholders. 2001, the first year of the new Millennium, brought unprecedented historical changes. The tragic events of September 11th, which left our Nation shocked and irrevocably changed, has impacted Downingtown National Bank; not just as a community bank, but also as a community citizen. While we often speak about our global community, never has this phrase held so much relevance. We now fully understand how changes in the world's economy directly affect all of us. Perhaps, one of the best changes we have experienced this year is a renewed sense of patriotism, community pride, family values and an appreciation of tradition and stability. Downingtown National Bank was founded on and continues to be committed to these values. On behalf of the entire DNB family, we thank you for your continued confidence. Sincerely,
/s/ Henry F. Thorne Henry F. Thorne President & Chief Executive Officer

DNB Financial Corporation and Subsidiaries Table of Contents 1 Selected Financial Data 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Market for Common Stock 19 Consolidated Financial Statements and Notes 40 Independent Auditors' Report 41 Corporate Information

DNB FINANCIAL CORPORATION AND SUBSIDIARIES Selected Financial Data (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
At or For the Year Ended December 31 2001 2000 1999 1998 --------------------------------------------------------------------------------------------------------RESULTS OF OPERATIONS Interest income $24,389 $23,752 $20,500 $17,903 Interest expense 13,109 12,790 9,825 8,266 --------------------------------------------------------------------------------------------------------Net interest income 11,280 10,962 10,675 9,637 Provision for loan losses ----Non-interest income 2,303 1,740 1,634 1,506 Non-interest expense 9,894 8,931 8,231 6,969 --------------------------------------------------------------------------------------------------------Income before income taxes 3,689 3,771 4,078 4,174 --------------------------------------------------------------------------------------------------------Income tax expense Net income PER SHARE DATA* Basic earnings Diluted earnings Cash dividends Book value Weighted average Common shares outstanding FINANCIAL CONDITION Total assets Loans, less unearned income Allowance for loan losses Deposits Stockholders' equity 967 $ 2,722 1,063 $ 2,708 1,246 $ 2,832 1,252 $ 2,922

$ 1.53 1.50 0.50 14.24 1,776,084

$ 1.52 1.50 0.47 13.08 1,776,051

$ 1.60 1.55 0.45 11.62 1,768,056

$ 1.66 1.59 0.39 11.68 1,764,782

$389,404 186,050 4,809 293,383 25,288

$356,670 191,201 4,917 290,791 23,230

$301,349 171,456 5,085 254,881 20,538

$265,418 148,726 5,205 225,373 20,606

SELECTED RATIOS Return on average stockholders' equity 10.97% 12.64% 13.66% 15.13% Return on average assets 0.74 0.83 0.99 1.22 Average equity to average assets 6.76 6.60 7.28 8.07 Loans to deposits 63.42 65.75 67.27 65.99 Dividend payout ratio 32.32 30.93 28.07 23.85 --------------------------------------------------------------------------------------------------------* Per share data and shares outstanding have been adjusted for the 2 for 1 stock split in September 1997 and for the 5% stock dividends in December of 2001, 2000, 1999, 1998 and 1997. ---------------------------------------------------------------------------------------------------------

Downingtown Natio

Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion provides an overview of the financial condition and results of operations of DNB Financial Corporation (the "Corporation" or "DNB") and its wholly owned subsidiaries, Downingtown National Bank (the "Bank") and DNB Capital Trust I (the "Trust"). The Bank is a community bank providing personal and business banking services as well as trust services, which is managed as a single operating segment. This discussion should be read in conjunction with the Corporation's consolidated financial statements presented elsewhere in this annual report. Results of Operations Summary of Performance For the year ended December 31, 2001, DNB reported net income of $2.7 million or $1.50 per share on a diluted basis. This represents a $14,000 increase from $2.7 million or $1.50 per share in 2000. For the year ended December 31, 1999, net income was $2.8 million or $1.55 per share. Interest income grew $637,000 or 3% to $24.4 million for the year ended December 31, 2001, compared to $23.8 million for the year ended December 31, 2000. Significant growth in commercial mortgage loans and investments contributed to the increase year over year. Total interest expense increased $319,000 or 2% to $13.1 million for the year ended December 31, 2001, from $12.8 million for the year ended December 31, 2000. Interest expense from FHLB advances increased $1.4 million in 2001, reflecting an average balance increase of $25.1 million year over year. This increase was largely offset by lower levels of deposit expense, resulting from lower rates on certificate and money market products. Net interest income increased by $318,000 or 3% to $11.3 million in 2001, compared to $11.0 million in 2000. Net interest income was $10.7 million in 1999. Non-interest income was $2.3 million for the year ended December 31, 2001. Non-interest income for 2000 and 1999 was $1.7 million and $1.6 million, respectively. The $563,000 or 32% increase in 2001 was due to higher levels of service charges and other fee income, as well as an increase in the cash surrender value of bank owned life insurance policies and gains on investments. Non-interest expense was $9.9 million for the year ended December 31, 2001. This represented a $963,000 or 11% increase from $8.9 million in 2000. Non-interest expense in 1999 was $8.2 million. The majority of the increase can be attributed to salary & employee benefits, professional & consulting, occupancy and other expenses. Salaries & employee benefits expense increased $543,000 or 11% year over year. The increase in this category reflects staff additions relating to the reorganization of our Credit Services Division which included two new business development officers, as well as employees hired for our new Exton branch. Professional & consulting expense increased $182,000 or 34%, due to legal fees relating to the formation of a new subsidiary, as well as consultant fees incurred for employee training and DNB's Wealth Management group. Occupancy expenses rose $87,000 or 14%, with notable increases in rental, depreciation, repairs, maintenance and real estate tax expenses. Other expenses increased $97,000 or 7%, reflecting higher levels of MAC expense, underwriting costs and other less significant expenditures. Net Interest Income DNB's earnings performance is primarily dependent upon its level of net interest income, which is the excess of interest revenue over interest expense. Interest revenue includes interest earned on loans (net of interest reversals on non-performing loans), investments, Federal funds sold and interest-earning cash, as well as net loan fee amortization and dividend income. Interest expense includes the interest cost for deposits, FHLB advances, Federal funds purchased and other borrowings. During 2001, net interest income increased $482,000 or 4.3% on a tax equivalent basis, to $11.7 million, from $11.2 million in 2000. As shown in the Rate/Volume Analysis below, the increase in net interest income during 2001 was due to the positive effects of changes in volume, which was partially offset by the negative effects of rate changes. Average loan balances for 2001 rose

Downingtown National Bank [LOGO] 2

Management's Discussion and Analysis $13.3 million and average investment securities rose $17.9 million. The impact from higher volumes of earning assets amounted to an increase of $2.9 million in interest income. Average NOW, money market and savings accounts increased a total of $16.8 million. Average time deposits decreased $4.5 million and borrowings increased on average $27.0 million (FHLB advances, Junior subordinated debentures and Federal funds purchased). The impact of higher volumes of interest-bearing liabilities amounted to an increase of $2.1 million in interest expense. The net impact from volume changes amounted to a positive $766,000. The overall impact of rate changes amounted to a negative $284,000, reflecting the Federal Reserves' unprecedented lowering of rates to stimulate the economy, as well as continued strong competition for loans and deposits. During 2000, net interest income increased $329,000 or 3% to $11.2 million on a tax equivalent basis, from $10.9 million in 1999. As shown in the Rate/Volume Analysis below, the increase in net interest income during 2000 was due to the positive effects of changes in volume, which was partially offset by the negative effects of rate changes. The increased volume resulted from significant loan, investment and Federal funds growth, which exceeded interest-bearing liability growth by $1.7 million. Average loan balances for 2000 rose $15.1 million and average investment securities rose $21.9 million. The impact from higher volumes of earning assets amounted to an increase of $3.3 million in interest income. Average NOW, money market and savings accounts increased a total of $10.9 million. Average time deposits increased $14.7 million ($8.0 million from deposits over $100,000) and borrowings increased on average $9.4 million (FHLB advances and Federal funds purchased). The net impact on earnings of higher volumes of interest-bearing liabilities amounted to $1.7 million, partially offsetting the impact from the increased volume of interest-earning assets. The overall impact of rate changes amounted to a negative $713,000, reflecting strong competition for loans as well as deposits. Rising interest rates negatively impacted earnings as DNB's deposits repriced earlier, while loans and investments lagged. As a result of these rate pres-

Rate / Volume Analysis (Dollars in thousands)

2001 Versus 2000

2000 Vers

Change Due To Change Rate Volume Total Rate Volu --------------------------------------------------------------------------------------------------------Interest-earning assets: Loans $ (652) $ 900 $ 248 $ (48) $1,2 Investment securities: Taxable (1,303) 1,210 (93) 523 1,2 Tax-exempt (21) (8) (29) (6) Tax-preferred DRD (11) 688 677 -1 Federal funds sold (125) 123 (2) 84 ( --------------------------------------------------------------------------------------------------------Total $(2,112) $2,913 $ 801 $ 553 $2,7 --------------------------------------------------------------------------------------------------------Interest-bearing liabilities: Time deposits $ (393) $ (252) $ (645) $ 550 $ 8 NOW, money market and savings deposits (1,376) 778 (598) 532 3 FHLB advances (56) 1,444 1,388 184 4 Federal funds purchased (3) (2) (5) -Junior subordinated debentures -180 180 -Other borrowings -(1) (1) ---------------------------------------------------------------------------------------------------------Total (1,828) 2,147 319 1,266 1,6 --------------------------------------------------------------------------------------------------------Net interest income $ (284) $ 766 $ 482 $ (713) $1,0 --------------------------------------------------------------------------------------------------------Downingtown Nationa

Management's Discussion and Analysis sures, DNB experienced declines in both its net interest spread and net interest margin. The table on the preceding page set 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 during 2001 and 2000 (tax-exempt yields and yields on agency-preferred stock that have a 70% dividend received deduction ("DRD") have been adjusted to a tax equivalent basis using a 34% tax rate). 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 old rate). The net change attributable to the combined

Average Balances, Rates, and Interest Income and Expense (Dollars in thousands)
Year Ended December 31 2001 2000

Average Yield/ Average Yield/ Average Balance Interest Rate Balance Interest Rate Balance --------------------------------------------------------------------------------------------------------ASSETS Interest-earning assets: Investment securities: Taxable $121,241 $ 7,548 6.23% $112,629 $ 7,641 6.78% $ 93,441 Tax-exempt 10,392 715 6.88 10,502 744 7.08 9,423 Tax-preferred DRD 11,026 812 7.36 1,677 135 8.05 ---------------------------------------------------------------------------------------------------------Total securities 142,659 9,075 6.36 124,808 8,520 6.83 102,864 Federal funds sold 10,366 446 4.30 7,114 448 6.30 7,572 Total loans 191,456 15,304 7.99 178,190 15,056 8.45 163,053 --------------------------------------------------------------------------------------------------------Total interest-earning assets 344,481 24,825 7.21 310,112 24,024 7.75 273,489 Non-interest-earning assets 22,794 14,643 11,376 --------------------------------------------------------------------------------------------------------Total assets $367,275 $324,755 $284,865 --------------------------------------------------------------------------------------------------------LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Savings deposits $137,869 $ 3,641 2.64% $121,037 $ 4,239 3.50% $110,180 $ Time deposits 112,015 6,106 5.45 116,465 6,751 5.80 101,741 --------------------------------------------------------------------------------------------------------Total interest-bearing deposits 249,884 9,747 3.90 237,502 10,990 4.63 211,921 Federal funds purchased 131 4 3.05 171 9 5.26 -FHLB advances 52,644 3,078 5.85 27,913 1,690 6.05 18,901 Junior subordinated debentures 2,264 180 7.95 ----Other borrowings 738 100 13.55 743 101 13.59 569 --------------------------------------------------------------------------------------------------------Total interest-bearing liabilities 305,661 13,109 4.29 266,329 12,790 4.80 231,391 Demand deposits 35,255 35,390 31,379 Other liabilities 1,544 1,604 1,362 Stockholders' equity 24,815 21,432 20,733 --------------------------------------------------------------------------------------------------------Total liabilities and stockholders' equity $367,275 $324,755 $284,865 --------------------------------------------------------------------------------------------------------Net interest income $11,716 $11,234 --------------------------------------------------------------------------------------------------------Interest rate spread Net interest margin 2.92% 3.40% 2.95% 3.62%

Downingtown National Bank [LOGO] 4

Management's Discussion and Analysis impact of rate and volume has been allocated proportionately to the change due to rate and the change due to volume. The table on the preceding page provides, for the periods indicated, information regarding: (i) DNB's average balance sheet; (ii) the total dollar amounts of interest income from interest-earning assets and the resulting average yields (tax-exempt yields and yields on agency preferred stock that have a 70% dividend received deduction ("DRD") have been adjusted to a tax equivalent basis using a 34% tax rate); (iii) the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs; (iv) net interest income; (v) net interest rate spread; and (vi) net interest margin. Average balances were calculated based on daily balances. Nonaccrual loan balances are included in total loans. Loan fees and costs are included in interest on total loans. Provision for Loan Losses To provide for known and inherent losses in the loan portfolio, DNB maintains an allowance for loan losses. There were no provisions for loan losses made during the three years ended December 31, 2001, since management determined the allowance for loan losses was adequate based on its analysis. Net loan charge-offs were $108,000 in 2001, compared to $168,000 and $120,000 in 2000 and 1999, respectively. The percentage of net charge-offs to total average loans was 0.06%, 0.09% and 0.07% during the same respective periods. Another measure of the adequacy of the allowance is the coverage ratio of the allowance to non-performing loans, which was 150% at December 31, 2001. Non-Interest Income Total non-interest income includes service charges on deposit products; fees in connection with the sale of nondepository products and services, including fiduciary and investment advisory services offered through DNB Advisors; securities brokerage products and services and insurance brokerage products and services offered through DNB Financial Services; and other sources of income such as increases in the cash surrender value of bank owned life insurance, net gains on sales of investment securities and other real estate owned ("OREO") properties. In addition, DNB receives fees for cash management, merchant services, debit cards, safe deposit box rentals, lockbox services and similar activities. Non-interest income was $2.3 million in 2001, compared to $1.7 million in 2000 and $1.6 million in 1999. Service charges on deposit accounts increased $281,000 or 37% to $1.0 million in 2001, from $755,000 in 2000 and $627,000 in 1999. Most of the increase in this category came from non-sufficient funds ("NSF") fees, which rose $257,000, due to an increase in the volume of accounts as well as a concerted effort by management to reduce the percentage of fees waived on deposit account overdrafts. Income from DNB Advisors (the Bank's Trust & Investment Group) was $404,000 in 2001, compared to $448,000 in 2000 and $399,000 in 1999. The $44,000 or 10% decrease in 2001 was due to a lower volume of commissions earned on estate settlements. DNB earns income on its investments in bank owned life insurance policies. During the year ended December 31, 2001, income from these policies amounted to $194,000 versus $58,000 in 2000. The increase in this category resulted from an average balance increase of $2.9 million year over year. There was no such income in 1999. Other non-interest income rose by $190,000 or 40% to $669,000 for the year ended Decem-ber 31, 2001, from $479,000 in 2000. Other non-interest income was $608,000 in 1999. $101,000 of the increase in 2001 can be attributed to gains on sales of investment securities along with gains on sales of OREO properties. Gains in these two categories totaled $15,000 in 2000 and $159,000 in 1999. In addition to these gains, fees from other services, such as cash management, debit cards, and mortgage correspondent fees increased a combined $89,000. 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 sig-

Downingtown National Bank [LOGO] 5

Management's Discussion and Analysis nificant expense items. Non-interest expenses were $9.9 million in 2001, compared to $8.9 million and $8.2 million in 2000 and 1999, respectively. The $963,000 or 11% increase in 2001 reflects the overall growth of DNB, with higher levels of expenditures in nearly all categories. The most significant increase occurred in salaries & employee benefits expense which totaled $5.3 million in 2001, compared to $4.7 million in 2000 and $4.3 million in 1999. Salary & employee benefits expense for 2001 reflects increased staffing at the branch level, as well as additional investments in several lines of business, most notably DNB Advisors, DNB Leasing, as well as DNB's Business Lending Development group. This was in addition to the normal merit increases and increased expenditures for medical insurance. The increase in salary & employee benefits expense in 2000 over 1999 resulted from more full-time equivalent employees, due to the two new branches which opened in 1999. Furniture & equipment expense includes depreciation, rent, maintenance and miscellaneous purchases of office equipment and furniture. Furniture & equipment expense increased $40,000 or 4% to $1.1 million during 2001, compared to $1.0 million in 2000 and $927,000 in 1999. The increase in 2001 related to a partial year of depreciation on fixed asset purchases for the new Exton branch, the relocation of DNB Advisors, as well as continued software upgrades. The increase in 2000 was attributable to a full year's depreciation on several key hardware and software upgrades as well as the added repairs and miscellaneous purchases associated with maintaining two additional branch offices. Occupancy expense includes office building depreciation, rent, taxes, maintenance and utilities. Occupancy expense totaled $709,000 in 2001, compared to $622,000 in 2000 and $519,000 in 1999. Similar to the furniture and equipment expense, the increase in this category over the past three years is directly related to the three new offices. DNB experienced, and will continue to experience higher levels of utility usage, real estate taxes, maintenance, security and other costs associated with maintaining these additional buildings. Professional & consulting expense includes fees for legal, audit & accounting and asset/liability management services, as well as consulting fees for technology, human resources and other special projects. Professional & consulting expense for 2001 was $715,000, compared to $533,000 in 2000 and $492,000 in 1999. The $182,000 increase in this category comes from legal expenses incurred in forming a new subsidiary, as well as consulting services for our Wealth Management group and training programs for all employees. Marketing expense increased $50,000 or 18% to $325,000 in 2001, primarily due to expenditures for branch and Wealth Management advertising. Marketing expense decreased $77,000 to $275,000 for the year ended December 31, 2000, compared to $352,000 in 1999. Expenditures in 1999 included approximately $74,000 associated with branch grand opening celebrations, direct mailings and new brochures. Printing & supplies declined $36,000 to $242,000 in 2001. The decrease from 2000 relates to fewer promotions, direct mailings and brochure printing expenses in 2001. In 1999, printing and supplies included added expenditures for flyers, posters, mailers and other items related to the new branch openings, as well as new brochures for retail products. Other expenses include such items as postage, insurance, director fees, appraisal fees, telephone and other miscellaneous expenses. Other expenses increased $97,000 or 7% to $1.5 million in 2001. This compares to $1.4 million and $1.3 million in 2000 and 1999. The largest single increase in this category during 2001 was MAC and other bank charges which increased $47,000 as a result of increased levels of system transactions. The increase in 2000 over 1999 relates to the aforementioned technology upgrades and branch expansion. Income Taxes Income tax expense was $1.0 million in 2001, $1.1 million in 2000 and $1.2 million in 1999. DNB's effective tax rate was 26%, 28%, and 31% for the three years, respectively. The effective tax rates were less than the statutory rate due to Downingtown National Bank [LOGO] 6

Management's Discussion and Analysis the effect of increasing amounts of tax exempt income, tax credits recognized on a low-income housing limited partnership and DNB's ownership of bank-owned life insurance investments. Financial Condition Analysis Investment Securities DNB's investment portfolio consists of US Treasury, US agency securities, mortgage-backed securities issued by US Government agencies, corporate bonds, collateralized mortgage obligations, asset-backed securities, state and municipal securities, agency and bank stocks, certificates of deposit 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 expects to realize all of its investment upon the maturity of such instruments, and believes that any market value decline is temporary in nature. 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.

Investment Maturity Schedule, Including Weighted Average Yield (Dollars in thousands)
December 31, 2001 Less than Over No Stated Held to Maturity 1 Year 1-5 Years 5-10 Years 10 Years Maturity Tot --------------------------------------------------------------------------------------------------------US Government agency obligations $-$-$4,997 $ 4,155 $-$ 9 Collateralized mortgage obligations ---10,905 -10 US agency mortgage-backed securities -131 18 3,619 -3 Equity securities ----4,265 4 Other securities 4,000 --999 -4 --------------------------------------------------------------------------------------------------------Total $4,000 $ 131 $5,015 $19,678 $ 4,265 $ 33 --------------------------------------------------------------------------------------------------------Percent of portfolio 12% 1% 15% 59% 13% Weighted average yield 5.7% 7.6% 8.0% 6.0% 6.2% Less than Over No Stated Available for Sale 1 Year 1-5 Years 5-10 Years 10 Years Maturity Tot --------------------------------------------------------------------------------------------------------US Treasury $4,624 $-$-$-$-$ 4 US Government agency obligations --3,647 10,209 -13 Corporate bonds 1,248 6,674 -25,343 -33 Collateralized mortgage obligations---13,340 -13,340 State and municipal tax-exempt --504 9,590 -10 US agency mortgage-backed securities -12,082 874 34,726 -47 DRD agency preferred stock ----12,485 12 Other securities -273 -----------------------------------------------------------------------------------------------------------Total $5,872 $19,029 $5,025 $93,208 $12,485 $135 --------------------------------------------------------------------------------------------------------Percent of portfolio 4% 14% 4% 69% 9% --------------------------------------------------------------------------------------------------------Weighted average yield 1.9% 4.9% 5.3% 5.4% 7.1%

Downingtown

Management's Discussion and Analysis
Composition of Investment Securities (Dollars in thousands) 2001

December 31 200

Held to Available Held to Maturity for Sale Maturity --------------------------------------------------------------------------------------------------------US Treasury $ -$ 4,624 $ -US Government agency obligations 9,152 13,856 19,805 Corporate bonds -33,265 -Collateralized mortgage obligations 10,905 13,340 16,047 State and municipal tax-exempt -10,094 -US agency mortgage-backed securities 3,768 47,682 2,161 DRD agency preferred stock -12,485 -Equity securities 4,265 -3,316 Other securities 4,999 273 999 --------------------------------------------------------------------------------------------------------Total $33,089 $135,619 $42,328 ---------------------------------------------------------------------------------------------------------

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 $168.7 million at December 31, 2001, up 31% from $128.4 million at December 31, 2000. The growth in the investment portfolio was funded by increased deposits and borrowings during the year. DNB had certain private label CMOs which represented a significant concentration (greater than 10% of stockholders' equity) as follows:
2001 -------------------------Amortized Estimated (Dollars in thousands) Cost Fair Value -------------------------------------------------------Credit Suisse First Boston Mortgage Securities Corp. $2,777 $2,782 -------------------------------------------------------2000 -------------------------Amortized Estimated Cost Fair Value -------------------------------------------------------Chase Mortgage Finance Corp. $3,011 $2,987 Bear Stearns Mortgage Securities, Inc. 2,489 2,479 --------------------------------------------------------

The table on the previous page sets forth information regarding the composition, stated maturity and average yield of DNB's investment security portfolio as of December 31, 2001 (tax-exempt yields and yields on agencypreferred stock that have a 70% dividend received deduction ("DRD") have been adjusted to a tax equivalent basis using a 34% tax rate). This table does not include amortization or anticipated prepayments on mortgagebacked securities. Callable securities are included at their stated maturity dates. Loans The loan portfolio consists primarily of commercial and residential real estate loans, commercial loans and lines of credit (including commercial construction), and consumer loans. The loan portfolio provides a stable source of interest income, monthly amortization of principal and, in the case of adjustable rate loans, repricing opportunities. Net loans were $181.2 million at December 31, 2001, down $5.1 million or 3% from 2000. Commercial

mortgage loans increased $3.0 million or 4% to $70.3 million, consumer loans decreased $5.3 million or 13% to $34.4 million, and residential loans decreased $3.9 million or 9% to $39.3 million. The increase in the commercial and commercial mortgage portfolios continues to reflect DNB's commitment to commercial development in Chester County and northern Delaware. The decreases in the consumer and residential mortgage portfolios are a result of the low interest rate environment in 2001, that prompted many of DNB's customers to refinance their first and second mortgages. Downingtown National Bank [LOGO] 8

Management's Discussion and Analysis Non-Performing Assets Total non-performing assets increased $1.2 million to $3.2 million at December 31, 2001, compared to $2.0 million and $2.1 million at December 31, 2000 and 1999, respectively. The increase in 2001 was attributable to two loans to a single borrower which were placed on nonaccrual/cash basis in accordance with DNB's policy, set forth below. The loans are fully guaranteed and no loss is expected. DNB, which has a significant level of commercial, and commercial real estate loans, continues to work diligently to improve asset quality and position itself for possible economic downturns by tightening underwriting standards and improving lending policies and procedures. Non-performing assets have, and will continue to have, an impact on earnings, therefore management intends to continue working aggressively to reduce the level of such assets. Non-performing assets are comprised of nonaccrual loans, loans delinquent over ninety days and still accruing, troubled debt restructurings ("TDRs") and other real estate owned ("OREO"). Nonaccrual loans are loans on which the accrual of interest ceases when the collection of principal or interest payments is determined to be doubtful by management. It is the policy of DNB to discontinue the accrual of interest The following table sets forth information concerning the composition of total loans outstanding, net of the allowance for loan losses, as of the dates indicated.

Total Loans Outstanding, Net of Allowance for Loan Losses (Dollars in thousands) December 31

2001 2000 1999 1998 --------------------------------------------------------------------------------------------------------Residential mortgage $ 39,298 $ 43,227 $ 39,873 $ 29,656 Commercial mortgage 70,282 67,302 57,656 51,434 Commercial 42,081 41,000 38,734 35,549 Consumer 34,389 39,672 35,193 32,087 --------------------------------------------------------------------------------------------------------Total loans, net of unearned income 186,050 191,201 171,456 148,726 Less allowance for loan losses (4,809) (4,917) (5,085) (5,205) --------------------------------------------------------------------------------------------------------Net loans $181,241 $186,284 $166,371 $143,521 ---------------------------------------------------------------------------------------------------------

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 Maturities

December 31, 2001

(Dollars in thousands) Less than 1 Year 1-5 Years Over 5 Years --------------------------------------------------------------------------------------------------------Real estate $13,237 $37,253 $59,090 Commercial 38,202 3,700 179 Consumer 5,438 9,814 19,137 --------------------------------------------------------------------------------------------------------Total loans, net of unearned income 56,877 50,767 78,406 --------------------------------------------------------------------------------------------------------Loans with predetermined interest rates 17,985 26,867 77,232 Loans with variable interest rates 38,892 23,900 1,174 --------------------------------------------------------------------------------------------------------Total loans, net of unearned income $56,877 $50,767 $78,406 ---------------------------------------------------------------------------------------------------------

Downingtown Nationa

Management's Discussion and Analysis when principal or interest payments are delinquent 90 days or more (unless the loan principal and interest are determined by management to be fully secured and in the process of collection), or earlier, if considered prudent. Interest received on such loans is applied to the principal balance, or may in some instances be recognized as income on a cash basis. OREO includes both real estate obtained as a result of, or in lieu of, foreclosure. Any significant change in the level of non-performing assets is dependent, to a large extent, on the economic climate within DNB's market area. DNB's Special Assets Committee monitors the performance of the loan 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. DNB had $4.0 million of loans which, although performing at December 31, 2001, 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, 2000 was $8.0 million. The majority of the loans are secured by commercial real estate, with lesser amounts being secured by residential real estate, inventory and receivables. Allowance for Loan Losses The allowance for loan losses is increased by the provision for loan losses which is charged to operations. Loan losses are charged directly against the allowance and recoveries on previously charged-off loans are added to the allowance. In establishing its allowance for loan losses, management considers the size and risk exposure of each segment of the loan portfolio, past loss experience,

The following table sets forth those assets that are: (i) placed on nonaccrual 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.
December 31 2001 2000 1999 1998 --------------------------------------------------------------------------------------------------------Nonaccrual loans: Residential mortgage $ 224 $ 137 $-$ 250 Commercial mortgage 567 157 361 1,063 Commercial 1,964 573 674 990 Consumer 301 317 292 114 --------------------------------------------------------------------------------------------------------Total nonaccrual loans 3,056 1,184 1,327 2,417 Loans 90 days past due and still accruing 155 609 694 699 Troubled debt restructurings -40 ----------------------------------------------------------------------------------------------------------Total non-performing loans 3,211 1,833 2,021 3,116 Other real estate owned -183 83 139 --------------------------------------------------------------------------------------------------------Total non-performing assets $3,211 $2,016 $2,104 $3,255 --------------------------------------------------------------------------------------------------------Asset quality ratios: Non-performing loans to total loans 1.72% 0.96% 1.17% 2.10% Non-performing assets to total assets 0.82 0.57 0.69 1.23 Allowance for loan losses to: Total loans 2.58 2.56 2.96 3.50 Non-performing loans 149.77 268.10 251.61 167.04 ---------------------------------------------------------------------------------------------------------

Downingtown National Bank [LOGO] 10

Management's Discussion and Analysis present indicators of risk such as delinquency rates, levels of nonaccruals, and other relevant factors. Management's evaluation of the loan portfolio generally includes reviews, on a sample basis, of individual borrowers of $350,000 or greater and reviews of problem borrowers of $100,000 or greater. Consideration is also given to examinations performed by regulatory agencies, primarily the Office of the Comptroller of the Currency ("OCC"). In determining the allowance, DNB utilizes a methodology which includes an analysis of 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. In addition, specific allocations are estabThe following table sets forth the changes in DNB's allowance for loan losses for the years indicated. Real estate includes both residential and commercial real estate.
Analysis of Allowance for Loan Losses (Dollars in thousands) Year Ended December 31

2001 2000 1999 1998 --------------------------------------------------------------------------------------------------------Beginning balance $4,917 $5,085 $5,205 $5,281 Provisions ----Loans charged off: Real estate (209) (138) (171) (59) Commercial (66) (65) (35) (233) Consumer (9) (21) (10) (11) --------------------------------------------------------------------------------------------------------Total charged off (284) (224) (216) (303) --------------------------------------------------------------------------------------------------------Recoveries: Real estate 132 13 21 144 Commercial 36 33 68 71 Consumer 8 10 7 12 --------------------------------------------------------------------------------------------------------Total recoveries 176 56 96 227 --------------------------------------------------------------------------------------------------------Ending balance $4,809 $4,917 $5,085 $5,205 ---------------------------------------------------------------------------------------------------------

Composition of Allowance for Loan Losses (Dollars in thousands) December 31 2001 2000 1999 1998

Percent of Percent of Percent of Percent of Loan Type to Loan Type to Loan Type to Loan Type to Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amo --------------------------------------------------------------------------------------------------------Real estate $1,685 59% $1,449 58% $1,272 57% $1,537 54% $1, Commercial* 1,609 23 1,555 21 1,275 23 1,192 24 1, Consumer 145 18 270 21 199 20 185 22 164 Unallocated 1,370 -1,643 -2,339 -2,291 -2, --------------------------------------------------------------------------------------------------------Total $4,809 100% $4,917 100% $5,085 100% $5,205 100% $5, --------------------------------------------------------------------------------------------------------*includes commercial construction Downingtown Nationa

Management's Discussion and Analysis lished for loans where loss is probable and reasonably identifiable, based on management's judgment and an evaluation of the individual credit, which includes various factors mentioned above. The allocated portion of the reserve is then determined as a result of an analysis of the loan pools and specific allocations. The table on the previous page sets forth the composition of DNB's allowance for loan losses at the dates indicated. The portion allocated to each category is generally not the total amount available for future losses that might occur within such categories. The allocation of the allowance should also not be interpreted as an indication that charge-offs will occur in these amounts or proportions. The specific allocations in any particular category may prove excessive or inadequate and consequently may be reallocated in the future to reflect current conditions. Accordingly, management considers the entire allowance to be available to absorb losses in any category. In establishing and reviewing the allowance for adequacy, emphasis has been placed on utilizing the methodology prescribed in the OCC's Handbook (which utilizes BC 201 qualitative risk factors). As a result, management has taken into consideration factors and variables which influence the risk of loss within the loan portfolio, including: (i) trends in delinquency and nonaccrual 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/quality of loan review; (v) national and local economic trends and conditions; (vi) concentrations of credit; and (vii) effect of external factors on estimated credit losses. The unallocated portion of the allowance is intended to provide for probable losses that are not otherwise identifiable using the BC 201 risk factors such as (i) the effect of expansion into new markets or lines of business that are not as familiar as DNB's current market or business lines; (ii) the effect of receiving incomplete, inaccurate or misleading information from our borrowers; and (iii) the nonqualifiable impact that a terrorist action or threat of action has on a particular industry. Liquidity and Capital Resources Management maintains liquidity to meet depositors' needs for funds, to satisfy or fund loan commitments, and for other operating purposes. DNB's foundation for liquidity is a stable and loyal customer deposit base 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. DNB's primary source of liquidity is dependent upon its ability to maintain and expand its customer deposit base. As of December 31, 2001, deposits totaled $293.4 million, up modestly from $290.8 million at December 31, 2000. Certificates of deposit de-

The following table sets forth the composition of DNB's deposits at the dates indicated.
Deposits By Major Classification (Dollars in thousands) December 31

2001 2000 1999 1998 --------------------------------------------------------------------------------------------------------Non-interest-bearing deposits $ 40,355 $ 38,898 $ 31,864 $ 30,001 Interest-bearing deposits: NOW 46,346 44,450 39,501 37,075 Money market 64,491 59,250 47,517 32,582 Savings 34,480 29,811 30,199 28,321 Certificates 90,387 101,794 89,691 82,424 IRA 17,324 16,588 16,109 14,970 --------------------------------------------------------------------------------------------------------Total deposits $293,383 $290,791 $254,881 $225,373 ---------------------------------------------------------------------------------------------------------

Downingtown National Bank [LOGO] 12

Management's Discussion and Analysis creased $11.4 million to $90.4 million, while money market, savings, NOW and non-interest-bearing accounts increased $5.2 million, $4.7 million, $1.9 million and $1.5 million, respectively. The flow of deposits from certificates to transaction accounts reflects our customers' liquidity preferences in the current low-interest rate environment. DNB maintains borrowing arrangements with a correspondent bank and the Federal Home Loan Bank of Pittsburgh, as well as access to the discount window at the Federal Reserve Bank of Philadelphia, to meet shortterm liquidity needs. Through these relationships, DNB has additional available short-term credit of approximately $102.7 million. The following table sets forth certain information relating to DNB's financial instruments that are sensitive to changes in interest rates and categorized by expected maturity or repricing.
Interest Rate Sensitivity Analysis (Dollars in thousands) December 31, 2001 More Than More Than More Than More Than More Tha One Year Two Years Three Years Four Years Five Year Under One Through Through Through Through and Year Two Years Three Years Four Years Five Years Non-repric --------------------------------------------------------------------------------------------------------ASSETS Cash and due from banks and Federal funds sold $ 9,888 $-$-$-$-$ 8,740 Investments 74,373 36,656 12,613 10,305 6,419 28,342 Commercial loans 31,949 3,876 2,743 1,086 268 2,369 Mortgage loans 20,867 18,296 12,114 10,473 8,312 39,915 Consumer loans 10,404 4,380 3,794 3,042 2,327 9,836 Other assets -----16,017 --------------------------------------------------------------------------------------------------------Total assets $147,481 $63,208 $31,264 $24,906 $ 17,326 $105,219 --------------------------------------------------------------------------------------------------------LIABILITIES AND EQUITY Non-interest-bearing demand $-$-$-$ 6,726 $ 6,726 $ 26,903 NOW 13,904 4,635 9,269 4,635 4,635 9,269 Money market 58,166 3,162 3,162 ---Savings 8,620 5,172 6,896 3,448 3,448 6,896 Certificates and IRAs less than $100,000 56,182 16,686 3,522 211 454 -Certificates and IRAs at or more than $100,000 26,474 3,019 -262 827 74 --------------------------------------------------------------------------------------------------------Total deposits 163,346 32,674 22,849 15,282 16,090 43,142 Borrowings 5,000 3,000 6,000 9,000 17,000 23,735 Junior subordinated debentures 5,000 -----Other liabilities -----1,998 Stockholders' equity -----25,288 --------------------------------------------------------------------------------------------------------Total liabilities and equity $173,346 $35,674 $28,849 $24,282 $ 33,090 $ 94,163 --------------------------------------------------------------------------------------------------------Gap $ (25,865) $27,534 $ 2,415 $ 624 $(15,764) $ 11,056 --------------------------------------------------------------------------------------------------------Cumulative gap $ (25,865) $ 1,669 $ 4,084 $ 4,708 $(11,056) $-Cumulative gap to total assets (6.64%) 0.43% 1.05% 1.21% (2.84%) ---------------------------------------------------------------------------------------------------------

Downingtown Nationa

Management's Discussion and Analysis At December 31, 2001, DNB has $18.1 million in commitments to fund commercial real estate, construction and land development loans. In addition, there are $5.1 million in unfunded home equity lines of credit and $14.4 million in other unused loan commitments. Management anticipates the majority of these commitments will be funded by means of normal cash flows. There are approximately $82.7 million in certificates of deposit scheduled to mature during the twelve months ending December 31, 2002. To meet its funding needs, DNB maintains assets which comprise its primary liquidity totaling $155.3 million on December 31, 2001. Primary liquidity includes Federal funds sold, investments and interest-bearing cash balances, less pledged securities. DNB also anticipates scheduled payments and prepayments on its loan and mortgage-backed securities portfolios. 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 composed 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 repricing of assets and liabilities, loan prepayments, deposit withdrawals, and differences in lending and funding rates. The Asset-Liability Committee ("ALCO") actively seeks to monitor and control the mix of interest rate-sensitive assets and interest rate-sensitive liabilities. One measure of interest rate risk is the gap ratio, which is defined as the difference between the dollar volume of interest-earning assets and interest-bearing liabilities maturing or repricing within a specified period of time as a percentage of total assets. A positive gap results when the volume of interest rate-sensitive assets exceeds that of interest rate-sensitive liabilities within comparable time periods. A negative gap results when the volume of interest rate-sensitive liabilities exceeds that of interest rate-sensitive assets within comparable time periods. As indicated in the table on the previous page, the one year gap position at December 31, 2001 was a negative 6.6%. Generally, a financial institution with a negative gap position will most likely experience decreases in net interest income during periods of rising rates and increases in net interest income during periods of falling interest rates. The negative gap was due largely to customer preferences for short-term and floating rate deposit products and fixed rate loans which caused interest-rate sensitive liabilities to exceed interest- rate sensitive assets during the earlier time periods presented. While gap analysis represents a useful asset/liability management tool, it does not necessarily indicate the effect of general interest rate movements on DNB's net interest income, due to discretionary repricing of assets and liabilities, and other competitive pressures. DNB reports its callable agency, callable corporate notes and callable municipal investments ($55.0 million at December 31, 2001) at their Option Adjusted Spread ("OAS") modified duration date, as opposed to the call or maturity date. In management's opinion, using modified duration dates on callable securities 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. Included in the analysis of the gap position are certain savings and demand accounts which are less sensitive to fluctuations in interest rates than other interest-bearing sources of funds. In determining the sensitivity of such deposits, management reviews the movement of its deposit rates relative to changes in market rates. The ALCO has estimated that these deposits are approximately 25-75% sensitive to interest rate changes (i.e., if short term rates were to increase 100 basis points, the interest rate on such deposits would increase 25-75 basis points). DNB continually evaluates interest rate risk management opportunities, including the use of derivative financial instruments. Management beDowningtown National Bank [LOGO] 14

Management's Discussion and Analysis lieves 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. In addition to utilizing the gap ratio for interest rate risk management, the ALCO utilizes simulation analysis whereby the model estimates the variance in net interest income with a change in interest rates of plus or minus 300 basis points over a twelve and twenty-four month period. Given today's low interest rate environment, our simulation model measures the effect of a 150 basis point decline in earnings, versus the 300 basis points decline used historically. Recent simulations indicate that net interest income would be within policy guidelines regardless of the direction of market rates. Market Risk Analysis To measure the impacts of longer-term asset and liability mismatches beyond two years, DNB utilizes Modified Duration of Equity and Economic Value of Portfolio Equity ("EVPE") models. The modified duration of equity measures the potential price risk of equity to changes in interest rates. A longer modified duration of equity indicates a greater degree of risk to rising interest rates. Because of balance sheet optionality, an EVPE 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 as interest rates change. Results falling outside prescribed ranges require action by the ALCO. At December 31, 2001 and 2000, 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 is within DNB's negative 3% policy guideline, as shown in the tables below. The market capitalization of DNB should not be equated to the EVPE, which only deals with the valuation of balance sheet cash flows using conservative assumptions. Calculated core deposit premiums may be less than what is available in an outright sale. The model does not consider potential premiums on floating rate loan sales, the impact of overhead expense, non-interest income, taxes, industry market price multiples and other factors reflected in the market capitalization of a company.
Market Risk Analysis (Dollars in thousands) December 31, 2001 Change in Rates Flat -200 bp +200 bp -----------------------------------------------------------------------EVPE $29,379 $25,078 $24,237 Change (4,301) (5,142) Change as a % of assets (1.10%) (1.32%) ------------------------------------------------------------------------

December 31, 2000 Change in Rates Flat -200 bp +200 bp -----------------------------------------------------------------------EVPE $28,870 $27,205 $23,082 Change (1,665) (5,788) Change as a % of assets (0.47%) (1.62%) ------------------------------------------------------------------------

Capital Resources Stockholders' equity increased to $25.3 million at December 31, 2001. Net income of $2.7 million was supplemented by the net year over year unrealized gain in the available-for-sale investment portfolio ($490,000) and offset by dividends paid ($880,000), as well as the purchase of treasury stock ($266,000). Management believes that the Corporation and the Bank have each met the definition of "well capitalized" for regulatory purposes on December 31, 2001. The Bank's capital category is determined for the purposes of applying the

bank regulators' "prompt corrective action" regulations and for determining levels of deposit insurance assessments and may not constitute an accurate representation of the Corporation's or the Bank's overall financial condition or prospects. The Corporation's capital exceeds the FRB's minimum leverage ratio requirements for bank holding companies (see additional discussion in Regulatory Matters -- Footnote 17). Regulatory Matters Dividends payable to the Corporation by the Bank are subject to certain regulatory limitations. Under normal circumstances, the payment of dividends in any year without regulatory permission Downingtown National Bank [LOGO] 15

Management's Discussion and Analysis is limited to the net profits (as defined for regulatory purposes) for that year, plus the retained net profits for the preceding two calendar years, which amounted to $5.9 million for the year ended December 31, 2001. Forward-Looking Statements Certain statements in this report, including any which are not statements of historical fact, may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Without limiting the foregoing, the words "expect", "anticipate", "plan", "believe", "seek", "estimate", "predict", "internal" and similar words are intended to identify expressions that may be forwardlooking statements. Forward-looking statements involve certain risks and uncertainties, and actual results may differ materially from those contemplated by such statements. For example, actual results may be adversely affected by the following possibilities: (1) competitive pressures among financial institutions may increase; (2) changes in interest rates may reduce banking interest margins; (3) general economic conditions and real estate values may be less favorable than contemplated; (4) adverse legislation or regulatory requirements may be adopted; (5) other unexpected contingencies may arise. Many of these factors are beyond DNB's ability to control or predict. Readers of this report are accordingly cautioned not to place undue reliance on forward-looking statements. DNB disclaims any intent or obligation to update publicly any of the forward-looking statements herein, whether in response to new information, future events or otherwise. Recent Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"), which was subsequently amended. This statement standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and those used for hedging activities, by requiring that an entity recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. SFAS No. 133 generally provides for matching of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, so long as the hedge is effective. SFAS No. 133 was adopted on January 1, 2001 and there was no impact on operations, financial condition, equity or comprehensive income. DNB currently has no derivatives covered by this statement and currently conducts no hedging activities. In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS No. 140"). This statement supercedes and replaces the guidance in Statement 125. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, although it carries over most of Statement 125's provisions without reconsideration. The Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000. This statement is to be applied prospectively with certain exceptions. Other than those exceptions, earlier or retroactive application of its accounting provisions is not permitted. SFAS No. 140 was adopted by DNB during the fiscal year ended December 31, 2001. There was no impact of this statement on DNB's financial condition, equity, results of operations or disclosures. In June 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS No. 141"). This Statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All Business combinations in the scope of the Statement are to be accounted for using the purchase method. The provisions of the Statement apply to all Business combinations initiated after June 30, 2001. The Statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. SFAS No. 141 was adopted by DNB on July 1, 2001. There was no Downingtown National Bank [LOGO] 16

Management's Discussion and Analysis impact of this statement on DNB's financial condition, equity, results of operations or disclosures. In June 2001, the FASB issued SFAS No. 142, Goodwill and other Intangible Assets ("SFAS No. 142"). This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. The Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of the statement are required to be applied starting with fiscal years beginning after December 15, 2001, except that goodwill and intangible assets acquired after June 30, 2001, will be subject immediately to the nonamortization and amortization provisions of the Statement. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously been issued. The Statement is required to be applied at the beginning of an entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. DNB expects any impact from the adoption of this statement to be immaterial to its financial condition, equity, results of operations and disclosures. In June 2001, the FASB issued SFAS No. 143 Accounting for Asset Retirement Obligation. ("SFAS No. 143"). This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. As used in this Statement, a legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This Statement amends FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies, and it applies to all entities. It is effective for financial statements issued for fiscal years beginning after June 15, 2002. Earlier application is encouraged. DNB expects that there will be no impact of this statement on its financial condition, equity, results of operations or disclosures when adopted. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Asset. ("SFAS No. 144"). This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. However, the Statement retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. This Statement supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, this Statement retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in distribution to owners) or is classified as held for sale. This Statement also amends ARB No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a temporarily controlled subsidiary. The provisions of this Downingtown National Bank [LOGO] 17

Management's Discussion and Analysis Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with earlier application encouraged. The provisions of this Statement generally are to be applied prospectively. DNB expects that there will be no impact of this statement on its financial condition, equity, results of operations or disclosures when adopted. Market for Common Stock DNB Financial Corporation's common stock is listed under the symbol "DNBF" on the Over The Counter Electronic Bulletin Board, an automated quotation service, made available through and governed by the NASDAQ system. Current price information is available from account executives at most brokerage firms as well as the firms listed at the back of this report who are market makers of DNB's common stock. There were approximately 900 stockholders who owned 1.8 million shares of common stock outstanding at December 31, 2001. The following table sets forth the quarterly high and low prices for a share of DNB's common stock during the periods indicated. Prices for the sale of stock are based upon transactions reported by the brokerage firms of F. J. Morrissey & Co., Inc. and Ferris, Baker Watts, Inc. The quoted high and low bids prices are limited only to those transactions known by management to have occurred and there may, in fact, have been additional transactions of which management is unaware. Prices have been adjusted for stock dividends.
2001 2000

High Low High Low ----------------------------------------------------------First quarter $14.64 $13.33 $15.19 $11.79 Second quarter 15.86 14.64 13.61 12.02 Third quarter 19.37 15.33 14.74 12.36 Fourth quarter 21.75 18.37 14.63 13.33 -----------------------------------------------------------

The following table sets forth selected quarterly financial data and earnings per share for the periods indicated. Per share data have been adjusted for the five percent (5%) stock dividends declared in 2001 and 2000.
Quarterly Financial Data (Dollars in thousands, except per share data) 2001 2000

Fourth Third Second First Fourth Third Seco Quarter Quarter Quarter Quarter Quarter Quarter Quar --------------------------------------------------------------------------------------------------------Interest income $5,897 $6,093 $6,169 $6,230 $6,433 $6,166 $5,6 Interest expense 2,922 3,205 3,406 3,576 3,675 3,429 2,9 --------------------------------------------------------------------------------------------------------Net interest income 2,975 2,888 2,763 2,654 2,758 2,737 2,7 Provision for loan losses ------Non-interest income 738 582 526 457 490 438 4 Non-interest expense 2,593 2,609 2,448 2,244 2,265 2,284 2,2 --------------------------------------------------------------------------------------------------------Income before income taxes 1,120 861 841 867 983 891 9 Income tax expense 223 249 233 262 219 266 2 --------------------------------------------------------------------------------------------------------Net income $ 897 $ 612 $ 608 $ 605 $ 764 $ 625 $ 6 --------------------------------------------------------------------------------------------------------Basic earnings per share $ 0.50 $ 0.34 $ 0.34 $ 0.34 $ 0.43 $ 0.35 $ 0. Diluted earnings per share 0.49 0.34 0.34 0.34 0.42 0.35 0. --------------------------------------------------------------------------------------------------------Cash dividends per share $0.124 $0.124 $0.124 $0.124 $0.118 $0.118 $0.1 ---------------------------------------------------------------------------------------------------------

Downingtown National Bank [LOGO] 18

DNB FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Financial Condition
December 31 2001 --------------------------------------------------------------------------------------------------------Assets Cash and due from banks $ 11,466 Federal funds sold 7,162 --------------------------------------------------------------------------------------------------------Cash and cash equivalents 18,628 --------------------------------------------------------------------------------------------------------Investment securities available for sale, at market value 135,619 Investment securities (market value $33,618 in 2001 and $42,358 in 2000) 33,089 Loans, net of unearned income 186,050 Allowance for loan losses (4,809) --------------------------------------------------------------------------------------------------------Net loans 181,241 --------------------------------------------------------------------------------------------------------Office property and equipment 7,701 Accrued interest receivable 2,230 Bank owned life insurance 5,203 Deferred income taxes 1,213 Other real estate owned -Other assets 4,480 --------------------------------------------------------------------------------------------------------Total assets $389,404 --------------------------------------------------------------------------------------------------------Liabilities and Stockholders' Equity Liabilities Non-interest-bearing deposits $ 40,355 Interest-bearing deposits: NOW 46,346 Money market 64,491 Savings 34,480 Time 107,711 --------------------------------------------------------------------------------------------------------Total deposits 293,383 --------------------------------------------------------------------------------------------------------Borrowings 63,735 Junior subordinated debentures 5,000 Accrued interest payable 1,455 Other liabilities 543 --------------------------------------------------------------------------------------------------------Total liabilities 364,116 --------------------------------------------------------------------------------------------------------Commitments and contingencies (note 15) Stockholders' Equity Preferred stock, $10.00 par value; 1,000,000 shares authorized; none issued -Common stock, $1.00 par value; 10,000,000 shares authorized; 1,785,595 and 1,691,575 issued and outstanding, respectively 1,786 Treasury stock, at cost (14,854 shares) (266) Surplus 21,292 Retained earnings 3,235 Accumulated other comprehensive loss (759) --------------------------------------------------------------------------------------------------------Total stockholders' equity 25,288 --------------------------------------------------------------------------------------------------------Total liabilities and stockholders' equity $389,404 --------------------------------------------------------------------------------------------------------See accompanying notes to consolidated financial statements. Downingtown Nationa

DNB FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations
Year Ended December 2001 2000

Interest Income: Interest and fees on loans $15,304 $15,057 Interest and dividends on investment securities: Taxable 7,548 7,641 Exempt from Federal taxes 494 512 Tax-preferred 597 94 Interest on Federal funds sold 446 448 --------------------------------------------------------------------------------------------------------Total interest income 24,389 23,752 --------------------------------------------------------------------------------------------------------Interest Expense: Interest on NOW, money market and savings 3,641 4,239 Interest on time deposits 6,106 6,751 Interest on FHLB advances 3,078 1,690 Interest on other borrowings 284 110 --------------------------------------------------------------------------------------------------------Total interest expense 13,109 12,790 --------------------------------------------------------------------------------------------------------Net interest income 11,280 10,962 Provision for loan losses ----------------------------------------------------------------------------------------------------------Net interest income after provision for loan losses 11,280 10,962 --------------------------------------------------------------------------------------------------------Non-interest Income: Service charges 1,036 755 DNB Advisors 404 448 Increase in cash surrender value of BOLI 194 58 Gains on sales of investment securities 85 15 Other 584 464 --------------------------------------------------------------------------------------------------------Total non-interest income 2,303 1,740 --------------------------------------------------------------------------------------------------------Non-interest Expense: Salaries and employee benefits 5,315 4,772 Furniture and equipment 1,069 1,029 Occupancy 709 622 Professional and consulting 715 533 Marketing 325 275 Printing and supplies 242 278 Other 1,519 1,422 --------------------------------------------------------------------------------------------------------Total non-interest expense 9,894 8,931 --------------------------------------------------------------------------------------------------------Income before income taxes 3,689 3,771 Income tax expense 967 1,063 --------------------------------------------------------------------------------------------------------Net Income $ 2,722 $ 2,708 --------------------------------------------------------------------------------------------------------Earnings per share: Basic $1.53 $1.52 Diluted 1.50 1.50 Cash dividends per share $0.50 $0.47 Weighted average common shares outstanding: Basic 1,776,084 1,776,051 Diluted 1,813,220 1,800,614 ---------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.

Downingtown National Bank [LOGO] 20

DNB FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity and Comprehensive Income
Accumula Other Comprehensive Common Treasury Retained Comprehen Income Stock Stock Surplus Earnings Income (L --------------------------------------------------------------------------------------------------------Balance at January 1, 1999 $1,524 $-$17,105 $1,924 $ 53 Comprehensive Income: Net income $2,832 ---2,832 -Other comprehensive income, net of tax, relating to net unrealized losses on investments (2,108) ----(2,108) Total comprehensive income 724 Cash dividends ---(795) -Issuance of stock dividends 76 -1,450 (1,526) -Cash payment for fractional shares ---(6) -Exercise of stock options 9 ------------------------------------------------------------------------------------------------------------Balance at December 31, 1999 1,609 -18,555 2,429 (2,055) Comprehensive Income: Net income 2,708 ---2,708 -Other comprehensive income, net of tax, relating to net unrealized gains on investments 806 ----806 Total comprehensive income 3,514 Cash dividends ---(838) -Issuance of stock dividends 80 -1,103 (1,183) -Cash payment for fractional shares ---(5) -Exercise of stock options 3 -18 ----------------------------------------------------------------------------------------------------------Balance at December 31, 2000 Comprehensive Income: Net income Other comprehensive income, net of tax, relating to net unrealized gains on investments 1,692 2,722 ---19,676 -3,111 2,722 (1,249) --

490

--

--

--

--

490

Total comprehensive income 3,212 Cash dividends ---(880) -Issuance of stock dividends 84 -1,627 (1,711) -Purchase of treasury shares -(266) ---Cash payment for fractional shares ---(7) -Exercise of stock options 10 -(11) ----------------------------------------------------------------------------------------------------------Balance at December 31, 2001 $1,786 $(266) $21,292 $3,235 $ (759) --------------------------------------------------------------------------------------------------------See accompanying notes to consolidated financial statements.

Downingtown Nationa

DNB FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows
Year Ended December 31 2001 2000 --------------------------------------------------------------------------------------------------------Cash Flows From Operating Activities: Net income $ 2,722 $ 2,708 Adjustments to reconcile net income to net cash (used) provided by operating activities: Depreciation, amortization and accretion 1,137 702 Gains on sale of OREO (31) -Net gain on sale of securities (85) (15) Increase (decrease) in interest receivable 350 (776) Increase in other assets (1,798) (234) Increase in investment in BOLI (3,345) (193) Increase in interest payable 5 372 (Decrease) increase in current taxes payable (69) 13 Decrease in deferred income tax expense 18 198 Increase (decrease) in other liabilities 153 (663) --------------------------------------------------------------------------------------------------------Net Cash (Used) Provided By Operating Activities (943) 2,112 --------------------------------------------------------------------------------------------------------Cash Flows From Investing Activities: Proceeds from maturities and paydowns - AFS securities 33,835 7,954 Proceeds from maturities and paydowns - HTM securities 17,284 9,161 Purchase of AFS securities (97,633) (42,273) Purchase of HTM securities (8,160) (10,869) Proceeds from sale of securities - AFS 14,767 12,466 Proceeds from sale of OREO 214 -Net decrease (increase) in loans 5,043 (20,012) Purchase of bank property and equipment (2,565) (800) --------------------------------------------------------------------------------------------------------Net Cash Used By Investing Activities (37,215) (44,373) --------------------------------------------------------------------------------------------------------Cash Flows From Financing Activities: Net increase in deposits 2,592 35,910 Increase in FHLB advances greater than ninety days 23,000 17,000 Proceeds from issuance of junior subordinated debentures 5,000 -(Decrease) increase in lease obligations (5) (5) Dividends paid (887) (838) Proceeds from issuance of stock under stock option plan -16 Purchase of treasury stock (266) ---------------------------------------------------------------------------------------------------------Net Cash Provided By Financing Activities 29,434 52,083 --------------------------------------------------------------------------------------------------------Net Change in Cash and Cash Equivalents (8,724) 9,822 Cash and Cash Equivalents at Beginning of Period 27,352 17,530 --------------------------------------------------------------------------------------------------------Cash and Cash Equivalents at End of Period $18,628 $27,352 --------------------------------------------------------------------------------------------------------Supplemental Disclosure Of Cash Flow Information: Cash paid during the period for: Interest $13,104 $12,418 Income taxes 750 825 Supplemental Disclosure Of Non-cash Flow Information: Net transfer of loans to OREO $-$ 99 Change in unrealized gains (losses) on securities - AFS 686 1,184 Change in deferred taxes due to change in unrealized gains or losses on securities - AFS (196) (378) --------------------------------------------------------------------------------------------------------See accompanying notes to consolidated financial statements.

Downingtown National Bank [LOGO] 22

Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DNB Financial Corporation (the "Corporation" or "DNB") through its wholly owned subsidiary, Downingtown National Bank (the "Bank"), has been serving individuals and small to medium sized businesses of Chester County, Pennsylvania since 1861. DNB Capital Trust I (the "Trust") is a special purpose Delaware business trust (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 nine 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 generally accepted accounting principles applicable to the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and affect revenues and expenses for the period. Actual results could differ significantly from those estimates. The material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses. In connection with the determination of the allowance for losses on loans, independent appraisals for significant properties are obtained when practical. The more significant accounting policies are summarized below. Prior period amounts not affecting net income are reclassified when necessary to conform with current year classifications. Principles of Consolidation -- The accompanying consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiary, the Bank. All significant intercompany transactions have been eliminated. Cash and Due From Banks -- DNB is required to maintain certain daily reserve balances in accordance with Federal Reserve Board requirements. The average reserve balance maintained in accordance with such requirements for the years ended December 31, 2001 and 2000 was approximately $868,000 and $1.6 million, respectively. Investment Securities -- Investment securities are classified and accounted for as follows: Held-To-Maturity ("HTM") -- includes debt and non-readily marketable equity securities that DNB has the positive intent and ability to hold to maturity. Debt securities are reported at cost, adjusted for amortization of premiums and accretion of discounts. Non-readily marketable equity securities are carried at cost, which approximates liquidation value. Trading Account ("TA") -- includes securities which are generally held for a short term in anticipation of market gains. Such securities would be carried at fair value with realized and unrealized gains and losses on trading account securities included in the statement of operations. DNB did not have any securities classified as TA during 2001, 2000, or 1999. 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. Amortization of premiums and accretion of discounts for all types of securities are computed using a method approximating a level-yield basis. Loans -- Loans are stated net of unearned discounts, unamortized net loan origination fees and the allowance for loan losses. Interest income is recognized on the accrual basis. The accrual of interest on loans is generally

discontinued when loans become 90 days past due or Downingtown National Bank [LOGO] 23

Notes to Consolidated Financial Statements earlier when, in management's judgment, it is determined that a reasonable doubt exists as to its collectibility. When a loan is placed on nonaccrual, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Additional interest payments on such loans are applied to principal or recognized in income on a cash basis. A nonaccrual loan 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 -- Loan origination and commitment fees and related direct-loan origination costs of completed loans are deferred and accreted to income as a yield adjustment over the life of the loan using the level-yield method. The accretion to income is discontinued when a loan is placed on nonaccrual 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 Loan Losses -- The allowance for loan losses ("allowance") is based on a periodic evaluation of the portfolio and is maintained at a level that represents management's best estimate of known and inherent losses in the portfolio. Management considers a variety of factors when establishing the allowance, recognizing that an inherent risk of loss always exists in the lending process. Consideration is given to the impact of current economic conditions, diversification of the loan portfolio, historical loss experience, delinquency statistics, results of detailed loan reviews, borrowers' financial and managerial strengths, the adequacy of underlying collateral, and other relevant factors. While management utilizes the latest available information to determine the likelihood for losses on loans, future additions to the allowance may be necessary based on changes in economic conditions as well as adverse changes in the financial condition of borrowers. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance. Such agencies may require DNB to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. The allowance is increased by the provision for loan losses, which is charged to operations. Loan losses are charged directly against the allowance and recoveries on previously charged-off loans are added to the allowance. For purposes of applying the measurement criteria for impaired loans, DNB excludes large groups of smallerbalance homogeneous loans, primarily consisting of residential real estate loans and consumer loans, as well as commercial loans with balances less than $100,000. For applicable loans, management evaluates the need for impairment recognition when a loan becomes nonaccrual, or earlier, if based on an assessment of the relevant facts and circumstances, it is probable that DNB will be unable to collect all proceeds due according to the contractual terms of the loan agreement. DNB's policy for the recognition of interest income on impaired loans is the same as for nonaccrual loans. Impairment is charged to the allowance when management determines that foreclosure is probable or the fair value of the collateral is less than the recorded investment of the impaired loan. Other Real Estate Owned -- Other real estate owned ("OREO") consists of properties acquired as a result of, or in-lieu-of, foreclosure. Properties classified as OREO are reported at the lower of carrying value or fair value, less estimated costs to sell. Costs relating to the development or improvement of the properties are capitalized and costs relating to holding the properties are charged to expense. Office Properties and Equipment -- Office properties and equipment are recorded at cost. Depreciation is computed using the straight-line method over the expected useful lives of the assets. The costs of maintenance and repairs are expensed as they are incurred; renewals and betterments are capitalized. All long-lived assets are reviewed for impairment, based on the fair value of the asset. In addition, long-lived assets to be disposed of are generally reported at the lower of carrying amount or fair value, less costs Downingtown National Bank [LOGO] 24

Notes to Consolidated Financial Statements to sell. Gains or losses on disposition of premises and equipment are reflected in operations. Other Assets -- Financing costs related to the issuance of DNB's junior subordinated debentures are being amortized over the life of the debentures and are included in other assets. Federal Income Taxes -- DNB accounts for income taxes in accordance with 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 of 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 Bank. Pension Plan -- The Bank maintains a noncontributory defined benefit pension plan covering substantially all employees over the age of 21 with one year of service. Plan benefits are based on years of service and the employee's monthly average compensation for the highest five consecutive years of their last ten years of service. Stock Option Plan -- SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), permits entities to recognize as expense over the vesting period, the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and subsequent years as if the fair-value-based method defined in SFAS No. 123 had been applied. DNB has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. Earnings Per Share -- Basic earnings per share is computed based on the weighted average number of common shares outstanding during the year. Diluted earnings per share reflects the potential dilution that could occur from the conversion of common stock equivalents and is computed using the treasury stock method. Earnings per share, dividends per share and weighted average shares outstanding have been adjusted to reflect the effects of the 5% stock dividends paid in December 2001, 2000 and 1999 and the September 1997 two-for-one stock split, effected in the form of a 100% dividend. Trust Assets -- Assets held by DNB Advisors in fiduciary or agency capacities are not included in the consolidated financial statements since such items are not assets of DNB. Operating income and expenses of DNB Advisors are included in the consolidated statements of operations and are recorded on an accrual basis. Statements of Cash Flows -- For purposes of the statements of cash flows, DNB considers cash in banks, amounts due from banks, and Federal funds sold to be cash equivalents. Generally, Federal funds are sold for one-day periods. Recent Accounting Pronouncements -- In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"), which was subsequently amended. This statement standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and those used for hedging activities, by requiring that an entity recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. SFAS No. 133 generally provides for matching of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, so long as the hedge is effective. SFAS No. 133 was adopted on January 1, 2001 and there was no impact on operations, financial condition, equity or compreDowningtown National Bank [LOGO] 25

Notes to Consolidated Financial Statements hensive income. DNB currently has no derivatives covered by this statement and currently conducts no hedging activities. In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS No. 140"). This statement supercedes and replaces the guidance in Statement 125. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, although it carries over most of Statement 125's provisions without reconsideration. The Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000. This statement is to be applied prospectively with certain exceptions. Other than those exceptions, earlier or retroactive application of its accounting provisions is not permitted. SFAS No. 140 was adopted by DNB during the fiscal year ended December 31, 2001. There was no impact of this statement on DNB's financial condition, equity, results of operations or disclosures. In June 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS No. 141"). This Statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All Business combinations in the scope of the Statement are to be accounted for using the purchase method. The provisions of the Statement apply to all Business combinations initiated after June 30, 2001. The Statement also applies to business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. SFAS No. 141 was adopted by DNB on July 1, 2001. There was no impact of this statement on DNB's financial condition, equity, results of operations or disclosures. In June 2001, the FASB issued SFAS No. 142, Goodwill and other Intangible Assets ("SFAS No. 142"). This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. The Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of the statement are required to be applied starting with fiscal years beginning after December 15, 2001, except that goodwill and intangible assets acquired after June 30, 2001, will be subject immediately to the non-amortization and amortization provisions of the Statement. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously been issued. The Statement is required to be applied at the beginning of an entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. DNB expects any impact from the adoption of this statement to be immaterial to its financial condition, equity, results of operations and disclosures. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligation. ("SFAS No. 143"). This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. As used in this Statement, a legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Downingtown National Bank [LOGO] 26

Notes to Consolidated Financial Statements The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This Statement amends FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies, and it applies to all entities. It is effective for financial statements issued for fiscal years beginning after June 15, 2002. Earlier application is encouraged. DNB expects that there will be no impact of this statement on its financial condition, equity, results of operations or disclosures when adopted. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. However, the Statement retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. This Statement supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, this Statement retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in distribution to owners) or is classified as held for sale. This Statement also amends ARB No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a temporarily controlled subsidiary. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with earlier application encouraged. The provisions of this Statement generally are to be applied prospectively. DNB expects that there will be no impact of this statement on its financial condition, equity, results of operations or disclosures when adopted. Downingtown National Bank [LOGO] 27

Notes to Consolidated Financial Statements (2) INVESTMENT SECURITIES Amortized cost and estimated fair values of investment securities, as of the dates indicated, are summarized as follows:
December 31, 2001 Amortized Unrealized Unrealized Held to Maturity Cost Gains Losses --------------------------------------------------------------------------------------------------------US Government agency obligations $ 9,152 $291 $ (3) Collateralized mortgage obligations 10,905 168 -US agency mortgage-backed securities 3,768 53 (3) Equity securities 4,265 --Other securities 4,999 23 ---------------------------------------------------------------------------------------------------------Total investment securities $ 33,089 $535 $ (6) ---------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------Amortized Unrealized Unrealized Available for Sale Cost Gains Losses --------------------------------------------------------------------------------------------------------US Treasury $ 4,624 $-$ (1) US Government agency obligations 13,709 178 (30) US agency mortgage-backed securities 47,473 219 (10) Corporate bonds 34,161 222 (1,118) Collateralized mortgage obligations 13,339 68 (67) State and municipal tax-exempt 10,680 30 (616) DRD agency preferred stock 12,513 58 (86) Other securities 273 ----------------------------------------------------------------------------------------------------------Total investment securities $136,772 $775 $(1,928) ---------------------------------------------------------------------------------------------------------

December 31, 2000 Amortized Unrealized Unrealized Held to Maturity Cost Gains Losses --------------------------------------------------------------------------------------------------------US Government agency obligations $ 19,805 $182 $ (21) Collateralized mortgage obligations 16,047 19 (118) US agency mortgage-backed securities 2,161 3 (26) Equity securities 3,316 --Other securities 999 -(9) --------------------------------------------------------------------------------------------------------Total investment securities $ 42,328 $204 $ (174) ---------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------Amortized Unrealized Unrealized Available for Sale Cost Gains Losses --------------------------------------------------------------------------------------------------------US Treasury $ 1,000 $-$ (1) US Government agency obligations 26,501 104 (41) US agency mortgage-backed securities 5,417 36 (19) Corporate bonds 31,893 129 (1,577) State and municipal tax-exempt 10,146 -(422) DRD agency preferred stock 6,014 8 (2) Other securities 6,956 1 (55) --------------------------------------------------------------------------------------------------------Total investment securities $ 87,927 $278 $(2,117) ---------------------------------------------------------------------------------------------------------

Downingtown National Bank [LOGO] 28

Notes to Consolidated Financial Statements The amortized cost and estimated fair value of investment securities as of December 31, 2001, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid without penalties.
Investment Securities Held to Maturity Investmen Availabl

Amortized Estimated Amortized (Dollars in thousands) Cost Fair Value Cost --------------------------------------------------------------------------------------------------------Due in one year or less $ 4,000 $ 4,000 $ 5,868 Due after one year through five years 131 135 18,816 Due after five years through ten years 5,015 5,199 5,022 Due after ten years 19,678 20,019 94,553 No stated maturity 4,265 4,265 12,513 Total investment securities $33,089 $33,618 $136,772

DNB sold $14.8 million and $12.5 million of securities from the AFS portfolio during 2001 and 2000. No securities were sold during 1999. Gains and losses from sales of investment securities were as follows:
Year Ended December 31 (Dollars in thousands) 2001 2000 1999 -----------------------------------------------------------Gross realized gains $129 $ 56 $-Gross realized losses 44 41 ------------------------------------------------------------Net realized gain $ 85 $ 15 $-------------------------------------------------------------

At December 31, 2001 and 2000, investment securities with a carrying value of approximately $29.1 million and $39.3 million, respectively, were pledged to secure public funds and for other purposes as required by law. (3) LOANS
December 31 (Dollars in thousands) 2001 2000 -----------------------------------------------------------Residential mortgage $ 39,298 $ 43,227 Commercial mortgage 70,282 67,302 Commercial 42,081 41,000 Consumer 34,389 39,672 -----------------------------------------------------------Total loans 186,050 191,201 -----------------------------------------------------------Less allowance for loan losses (4,809) (4,917) -----------------------------------------------------------Net loans $181,241 $186,284 ------------------------------------------------------------

Included in the loan portfolio are loans for which DNB has ceased the accrual of interest. Loans of approximately $3.1 million, $1.2 million and $1.3 million were on a nonaccrual basis as of December 31, 2001, 2000 and 1999, respectively. DNB also had loans of approximately $155,000, $609,000 and $694,000 that were more than 90 days delinquent, but still accruing as of December 31, 2001, 2000 and 1999, respectively. If contractual interest income had been recorded on nonaccrual loans, interest would have been increased as shown in the following table:
Year Ended December 31

(Dollars in thousands) 2001 2000 1999 -----------------------------------------------------------Interest income which would have been recorded under original terms $220 $ 98 $105 Interest income recorded during the year (111) (21) (21) -----------------------------------------------------------Net impact on interest income $109 $ 77 $ 84 ------------------------------------------------------------

DNB had $4.0 million of loans which, although performing at December 31, 2001, 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 $8.0 million of such loans at December 31, 2000. The majority of these loans are secured by commercial real estate with lesser amounts being secured by residential real estate, inventory and receivables. Although DNB has a significant concentration of residential and commercial mortgage loans Downingtown National Bank [LOGO] 29

Notes to Consolidated Financial Statements collateralized by first mortgage liens located in Chester County, DNB has no concentration of loans to borrowers engaged in similar activities which exceed 10% of total loans at December 31, 2001, except for loans of approximately $44.1 million relating to local multi-unit office buildings. (4) ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses, for the years indicated, are as follows:
Year Ended December 31 (Dollars in thousands) 2001 2000 1999 -----------------------------------------------------------Beginning balance $4,917 $5,085 $5,205 Provisions ---Loans charged off (284) (224) (216) Recoveries 176 56 96 -----------------------------------------------------------Net charge-offs (108) (168) (120) -----------------------------------------------------------Ending balance $4,809 $4,917 $5,085 ------------------------------------------------------------

At December 31, 2001, 2000 and 1999, DNB had impaired loans with total recorded investments of $1.2 million, $651,000 and $715,000 and average recorded investments of $1.1 million, $693,000 and $1.0 million for the years ended December 31, 2001, 2000, and 1999. Total cash collected on impaired loans was credited to the outstanding principal balance in the amounts of $3,000, $25,000 and $113,000 during the same respective periods. No interest income was recorded on such loans during the three years ended December 31, 2001. (5) OFFICE PROPERTY AND EQUIPMENT
December 31 Estimated (Dollars in thousands) Useful Lives 2001 2000 --------------------------------------------------------------Land $ 935 $ 935 Buildings 25-33 years 6,568 4,905 Furniture, fixtures and equipment 5-20 years 7,580 6,800 --------------------------------------------------------------Total cost 15,083 12,640 Less accumulated depreciation (7,382) (6,751) --------------------------------------------------------------Office property and equipment, net $ 7,701 $ 5,889 ---------------------------------------------------------------

Amounts charged to operating expense for depreciation for the years ended December 31, 2001, 2000 and 1999 amounted to $753,000, $687,000 and $637,000, respectively. (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) 2001 2000 ------------------------------------------------------------

Three months or less $13,338 $10,118 Over three through six months 9,619 8,934 Over six through twelve months 3,517 6,419 Over one year through two years 3,019 4,184 Over two years 1,163 106 -----------------------------------------------------------Total $30,656 $29,761 ------------------------------------------------------------

(7) FHLB ADVANCES AND SHORT TERM BORROWED FUNDS DNB's short-term borrowed funds consist of Federal funds purchased which generally represent one-day borrowings. DNB had an average of $186,000 and $171,000 outstanding in short-term borrowed funds during 2001 and 2000, respectively. In addition to Federal funds purchased, DNB maintains borrowing arrangements with a correspondent bank and the Federal Home Loan Bank (FHLB) of Pittsburgh. As of September 30, 2001, DNB has a maximum borrowing capacity at the FHLB of approximately $158 million. Advances totaled $63 million at December 31, 2001 ($50 million-Convertible term advances and $13 million-Fixed rate advances). These advances mature at various dates through the year ended December 31, 2011, as shown in the table below. Convertible term advances are callable, at the FHLB's option, at various dates starting on January 25, 2002 and ending on January 25, 2006. If an advance is called by the FHLB, DNB has the option of repaying the borrowing, or it may continue to borrow at three month Libor plus 10-14 basis points. FHLB advances are collateralized by a pledge of the Bank's entire portfolio of unenDowningtown National Bank [LOGO] 30

Notes to Consolidated Financial Statements cumbered investment securities, certain mortgage loans and a lien on the Bank's FHLB stock.
(Dollars in thousands) December 31, 2001 -----------------------------------------------------------Due by Weighted December 31st Average Rate Amount -----------------------------------------------------------2006 4.99% $16,000 Thereafter 5.82 47,000 -----------------------------------------------------------Total 5.61% $63,000 ------------------------------------------------------------

(8) CAPITAL LEASE OBLIGATIONS Included in other borrowings is a long-term capital lease agreement, which relates to DNB's West Goshen branch. As of December 31, 2001 the branch has a carrying amount of $662,000, net of accumulated depreciation of $88,000, 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, 2001:
(Dollars in thousands) Year ending December 31 Amount -----------------------------------------------------------2002 $ 81 2003 84 2004 86 2005 89 2006 92 Thereafter 1,767 -----------------------------------------------------------Total minimum lease payments 2,199 -----------------------------------------------------------Less amount representing interest (1,464) -----------------------------------------------------------Present value of net minimum lease payments $ 735 ------------------------------------------------------------

(9) JUNIOR SUBORDINATED DEBENTURES In July 2001, DNB issued $5.0 million of floating rate (6 month Libor plus 3.75%) junior subordinated debentures (the "debentures") to DNB Capital Trust I (the "Trust"), a Delaware business trust, in which DNB owns all of the common equity. The debentures are the sole asset of the Trust. The Trust issued $5.0 million preferred securities to investors. DNB's obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by DNB of the Trust's obligation under the preferred securities. The preferred securities are redeemable by DNB on or after July 25, 2006, 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 July 25, 2031. (10) FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value assumptions, methods, and estimates are set forth below for DNB's financial instruments. Limitations Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one

time DNB's entire holdings of a particular financial instrument. Because no market exists for a significant portion of DNB's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The following methods and assumptions were used to estimate the fair value of each class of financial instruments. Cash, Federal Funds Sold and Investment Securities The carrying amounts for short-term investments (cash and Federal funds sold) approximate fair value. The fair value of investment securities is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The carrying amount of non-readily marketable equity securities approximates liquidation value. Downingtown National Bank [LOGO] 31

Notes to Consolidated Financial Statements Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial mortgages, residential mortgages, consumer and student loans, and nonaccrual 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 nonaccrual 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 nonaccrual loans, based on the probability of loss and the expected time to recovery. Deposits and Borrowings The fair value of deposits with no stated maturity, such as non-interest-bearing deposits, savings, NOW and money market accounts, is equal to the amount payable on demand as of December 31, 2001 and 2000. The fair values of certificates of deposit and borrowings are based on the present value of contractual cash flows. The discount rates used to compute present values are estimated using the rates currently offered for deposits of similar maturities in DNB's marketplace and rates currently being offered for borrowings of similar maturities. Off-balance-sheet Instruments Off-balance-sheet instruments are primarily comprised of loan commitments which are generally priced at market at the time of funding. Fees on commitments to extend credit and standby 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, 2001 and 2000, loan commitments were $37.6 million and $28.6 million, respectively. Stand-by letters of credit were $5.5 million and $5.8 million at December 31, 2001 and 2000, respectively. The following table summarizes information for all on-balance-sheet financial instruments.
December 31 2001 2000 -----------------------------------------------------------------------------------------Estimated Estimated Carrying Fair Carrying Fair (Dollars in thousands) Amount Value Amount Value -----------------------------------------------------------------------------------------Financial assets Cash and Federal funds sold $ 18,628 $ 18,628 $ 27,352 $ 27,352 Investment securities, AFS 135,619 135,619 86,088 86,088 Investment securities, HTM 33,089 33,618 42,328 42,358 Net loans 181,241 182,893 186,284 184,875 Accrued interest receivable 2,230 2,230 2,580 2,580 Financial liabilities

Deposits 293,383 295,274 290,791 291,365 Borrowings 63,735 70,432 40,741 42,729 Junior subordinated debentures 5,000 5,009 --Accrued interest payable 1,455 1,455 1,450 1,450 ------------------------------------------------------------------------------------------

Downingtown National Bank [LOGO] 32

Notes to Consolidated Financial Statements (11) FEDERAL INCOME TAXES Income tax expense was comprised of the following:
Year Ended December 31 (Dollars in thousands) 2001 2000 1999 -----------------------------------------------------------Current tax expense: Federal $ 944 $ 865 $1,220 State 5 --Deferred income tax expense 18 198 26 -----------------------------------------------------------Income tax expense $ 967 $1,063 $1,246 ------------------------------------------------------------

The effective income tax rates of 26% for 2001, 28% for 2000, and 31% for 1999 were less than the applicable statutory Federal income tax rate. The reason for these differences follows:
Year Ended December 31 (Dollars in thousands) 2001 2000 1999 -----------------------------------------------------------Federal income taxes at statutory rate $1,254 $1,282 $1,386 State income taxes, net 4 --Decrease resulting from: Low income housing credits (23) (24) -Tax-exempt interest and dividend preference (299) (160) (147) Bank owned life insurance (66) (20) -Other, net 97 (15) 7 -----------------------------------------------------------Income tax expense $ 967 $1,063 $1,246 ------------------------------------------------------------

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below. Based upon DNB's current and historical tax history and the anticipated level of future taxable income, management believes the existing net deferred tax asset will, more likely than not, be realized based on future taxable income.
December 31 (Dollars in thousands) 2001 2000 -----------------------------------------------------------Deferred tax assets: Allowance for loan losses $1,635 $1,672 Valuation adjustment for debt securities 394 590 Other 152 99 -----------------------------------------------------------Total gross deferred tax assets2,181 2,361 Deferred tax liabilities: Depreciation Pension expense Tax bad debt reserve Other

(240) (421) (143) (164)

(210) (412) (142) (170)

-----------------------------------------------------------Total gross deferred tax liabilities (968) (934) -----------------------------------------------------------Net deferred tax asset $1,213 $1,427 ------------------------------------------------------------

(12) EARNINGS PER SHARE The following is a reconcilement of net income and the weighted average number of shares outstanding for basic and diluted EPS:
Year Ended December 31 2001 2000 1 --------------------------------------------------------------------------------------------------------Income Shares Amount Income Shares Amount Income Sh --------------------------------------------------------------------------------------------------------Basic EPS Income available to common stockholders $2,722 1,776 $ 1.53 $2,708 1,776 $ 1.52 $2,832 1, Effect of dilutive common stock equivalents stock options -37 (0.03) -25 (0.02) ---------------------------------------------------------------------------------------------------------Diluted EPS Income available to common stockholders after assumed conversions $2,722 1,813 $ 1.50 $2,708 1,801 $ 1.50 $2,832 1, ---------------------------------------------------------------------------------------------------------

Downingtown National Bank [LOGO] 33

Notes to Consolidated Financial Statements (12) EARNINGS PER SHARE Options to purchase 29,957 shares of common stock at $15.87 per share have been outstanding since June 30, 1997. These share were included in the computation of diluted EPS during 2001, but were not included in the computation of diluted EPS for 2000 because these options were anti-dilutive during such period. The options, which expire on June 30, 2007, were still outstanding at December 31, 2001. Options to purchase 33,895 shares of common stock in 2001, 2000 and 1999 at $29.00 per share have been outstanding since June 30, 1998, but were not included in the computation of diluted EPS for 2001 and 2000 because these options were anti-dilutive during such periods. The options, which expire on June 30, 2008, were still outstanding at December 31, 2001. Also, options to purchase 28,418 shares of common stock in 2001, 2000 and 1999 at $23.32 per share have been outstanding since June 30, 1999, but were not included in the computation of diluted EPS for 2001 and 2000 because these options were anti-dilutive during such periods. These options, which expire on June 30, 2009, were still outstanding at December 31, 2001. (13) OTHER COMPREHENSIVE INCOME The tax effects allocated to each component of "Other Comprehensive Income" are as follows:
Tax Before-Tax (Expense) Net-of-Tax (Dollars in thousands) Amount Benefit Amount --------------------------------------------------------------------------Year Ended December 31, 2001: Unrealized gains on securities: Unrealized holding gains arising during the period $ 771 $ (225) $ 546 Less reclassification for gains included in net income (85) 29 (56) --------------------------------------------------------------------------Other Comprehensive Income $ 686 $ (196) $ 490 --------------------------------------------------------------------------Year Ended December 31, 2000: Unrealized gains on securities: Unrealized holding gains arising during the period $ 1,199 $ (383) $ 816 Less reclassification for gains included in net income (15) 5 (10) --------------------------------------------------------------------------Other Comprehensive Income $ 1,184 $ (378) $ 806 --------------------------------------------------------------------------Year Ended December 31, 1999: Unrealized losses on securities: Unrealized holding losses arising during the period $(3,098) $ 990 $(2,108) Less reclassification for gains included in net income -----------------------------------------------------------------------------Other Comprehensive Income $(3,098) $ 990 $(2,108) --------------------------------------------------------------------------(14) BENEFIT PLANS

Pension Plan

The Bank maintains a qualified 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. Downingtown National Bank [LOGO] 34

Notes to Consolidated Financial Statements The following table sets forth the Plan's funded status, as of the measurement dates of December 31, 2001 and 2000 and amounts recognized in DNB's consolidated financial statements at December 31, 2001 and 2000:
December 31 (Dollars in thousands) 2001 2000 -------------------------------------------------------------------------Actuarial present value of benefit obligation: Vested benefit obligation $(3,678) $(3,955) -------------------------------------------------------------------------Accumulated benefit obligation (3,749) (4,037) -------------------------------------------------------------------------Plan assets at fair value 5,785 6,243 Projected benefit obligation (5,179) (4,427) -------------------------------------------------------------------------Plan assets over projected benefit obligation 606 1,816 Unrecognized net asset at January 1, 1987 being amortized over 17 years (57) (75) Unrecognized net loss (gain) 690 (523) -------------------------------------------------------------------------Prepaid pension cost included in other assets $ 1,239 $ 1,218 --------------------------------------------------------------------------

Net periodic pension benefits for the years indicated include the following components:
Year Ended December 31 (Dollars in thousands) 2001 2000 1999 -------------------------------------------------------------------------Service cost-benefits earned during the period $ 216 $ 199 $ 183 Interest cost on projected benefit obligation 304 302 297 Actual return on plan assets 290 (563) (230) Asset (loss) gain (813) 74 (247) Amortization of unrecognized net asset at transition (19) (19) (19) -------------------------------------------------------------------------Net pension benefit $ (22) $ (7) $ (16) -------------------------------------------------------------------------Assumptions used: Discount rate 7.00% 7.00% 7.00% Rate of increase in compensation level 5.00 5.00 5.00 Expected long-term rate of return on assets 8.50 8.50 8.50 --------------------------------------------------------------------------

The Pension Plan's assets are invested using an asset allocation strategy in units of certain equity, bond, real estate and money market funds. DNB adopted an arrangement for supplemental compensation (the "Supplemental Plan") for its Chief Executive Officer (the "Executive") during 1999. The Supplemental Plan provides 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 "Split-dollar Policy") and provides for additional compensation to the Executive, equal to any income tax consequences related to the Supplemental Plan until retirement. The Split-dollar 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 Split-dollar Policy. In addition, the Split-dollar Policy is intended to

provide the Executive with a projected death benefit of $750,000. Neither the insurance company nor DNB has guaranteed any minimum cash value under the Supplemental Plan. To fund the annual premium on the Split-dollar Policy and mitigate the obligations under this Plan, the Bank has purchased an additional life insurance policy on the Executive's life (the "BOLI Policy") with an initial deposit of $1.5 million ($1.7 million market value at December 31, 2001). The amount of the BOLI Policy has been calculated so that the projected increases in its cash surrender value will substantially offset the Bank's expense related to the Split-dollar Policy. 401(k) Retirement Savings Plan The Bank's retirement savings plan enables employees to become eligible to participate after six months of service, and will thereafter participate in the 401(k) plan for any year in which they have been employed for at least 501 hours. In general, amounts held in a participant's account are not distributable until the participant terminates employment, reaches age 59 1/2, dies or becomes permanently disabled. Downingtown National Bank [LOGO] 35

Notes to Consolidated Financial Statements Participants are permitted to authorize pre-tax savings 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 matching contributions to the 401(k) plan were $47,000, $41,000 and $35,000 in 2001, 2000 and 1999, respectively. Stock Option Plan DNB has a Stock Option Plan for employees and directors. Under the plan, options (both qualified and nonqualified) to purchase a maximum of 298,686 shares of DNB's common stock could be issued to employees and directors. On February 24, 1999, the Board of Directors of the Corporation amended and restated DNB Financial Corporation's 1995 Stock Option Plan (the "Plan"), to increase by 100,000 the number of shares for which options may be issued under the Plan. This amendment was approved by shareholders at the April 27, 1999 Annual Meeting. 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 65,124 and 91,121 shares available for grant at December 31, 2001 and 2000, respectively. At December 31, 2001 and 2000, the number of options exercisable was 197,802 and 176,103, respectively, and the weighted average exercise price of those options was $17.21 and $17.54, respectively. The per share weighted-average fair value of stock options granted during 2001, 2000 and 1999 was $2.86, $3.03 and $7.57 on the date of grant using the Black Scholes option-pricing model with the following weightedaverage assumptions: for 2001-expected dividend yield of 3.11%, risk-free interest rate of 5.00%, expected life of 9.5 years and an expected volatility of stock over the expected life of the options was 15%; for 2000expected dividend yield of 3.48%, risk-free interest rate of 5.02%, expected life of 9.5 years and an expected volatility of stock over the expected life of the options of 24%; for 1999-expected dividend yield of 1.88%, riskfree interest rate of 6.44%, expected life of 9.5 years and an expected volatility of stock over the expected life of the options of 16%. DNB applies APB Opinion No. 25 in accounting for its Stock Option Plan, and accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had DNB determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, DNB's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Year Ended December 31 2001 2000 1999 -----------------------------------------------------------Net income As reported $2,722 $2,708 $2,832 Pro forma 2,625 2,615 2,617 Diluted net income per share As reported $1.50 $1.50 $1.55 Pro forma 1.45 1.45 1.43 ------------------------------------------------------------

Stock option activity is indicated below. Shares have been adjusted for the 2 for 1 stock split in September 1997 and the 5% stock dividends in December of 2001, 2000 and 1999.
Number Weighted Average Outstanding Exercise Price -----------------------------------------------------------Outstanding January 1, 1999 151,259 $17.66 Granted 30,948 23.32 Exercised (15,581) 8.09 Terminated (1,824) 29.00

-----------------------------------------------------------Outstanding December 31, 1999 164,802 18.86 Granted 31,222 12.36 Exercised (2,069) 8.09 Terminated (9,049) 23.15 -----------------------------------------------------------Outstanding December 31, 2000 184,906 17.68 Granted 34,026 14.95 Exercised (21,130) 9.33 -----------------------------------------------------------Outstanding December 31, 2001 197,802 $17.21 ------------------------------------------------------------

Downingtown National Bank [LOGO] 36

Notes to Consolidated Financial Statements The weighted average price and weighted average remaining contractual life for the outstanding options are listed below for the dates indicated. All outstanding options are exercisable. December 31, 2001 Range of Number Weighted Average Exercise Prices Outstanding Remaining Contractual Life
41,583 4.0 years 29,957 5.5 years 33,895 6.5 years 28,418 7.5 years 63,949 9.0 years -----------------197,802 7.0 years -----------------------------------------------------------$8.09-$10.91 15.88 29.00 23.32 12.36-14.95

December 31, 2000 Range of Number Weighted Average Exercise Prices Outstanding Remaining Contractual Life
61,414 5.0 years 29,957 6.5 years 33,895 7.5 years 28,418 8.5 years 31,222 9.5 years -----------------184,906 7.0 years -----------------------------------------------------------$8.09-$10.91 15.88 29.00 23.32 12.36-14.95

(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 standby letters of credit in the amount of approximately $5.5 million and unfunded loan and lines of credit commitments in the amount of approximately $37.6 million at December 31, 2001. Of the $37.6 million, $31.8 million was for variable rate loans and $5.8 million was for fixed rate loans. 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 standby 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. Standby letters of credit are conditional commitments issued by DNB to guarantee the performance 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 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 short-term credit of approximately $102.7 million. Approximately $101.7 million of assets are held by DNB Advisors in a fiduciary or agency capacity. These assets are not assets of DNB, and are not included in the consolidated financial statements. 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. Downingtown National Bank [LOGO] 37

Notes to Consolidated Financial Statements (16) PARENT COMPANY FINANCIAL INFORMATION Condensed financial information of DNB Financial Corporation (parent company only) follows: Condensed Statements of Financial Condition
December 31 (Dollars in thousands) 2001 2000 ---------------------------------------------------------Assets US Treasury securities $ 4,625 $ -Investment in subsidiary 25,888 23,230 Other assets 180 ----------------------------------------------------------Total assets $30,693 $23,230 ---------------------------------------------------------Liabilities and Stockholders' Equity Liabilities Junior subordinated debentures $ 5,155 $ -Other liabilities 250 ----------------------------------------------------------Total liabilities 5,405 ----------------------------------------------------------Stockholders' Equity Total stockholders' equity 25,288 23,230 ---------------------------------------------------------Total liabilities and stockholders' equity $30,693 $23,230 ----------------------------------------------------------

Condensed Statements of Operations Year Ended December 31 (Dollars in thousands) 2001 2000 1999 -----------------------------------------------------------------Income: Dividends from subsidiary $ 880 $ 838 $ 801 Interest income 1 --Interest expense (177) --Other expenses (3) --Equity in undistributed income of subsidiary 2,021 1,870 2,031 -----------------------------------------------------------------Net income $ 2,722 $ 2,708 $ 2,832 ------------------------------------------------------------------

Condensed Statements of Cash Flows Year Ended December 31 (Dollars in thousands) 2001 2000 1999 -------------------------------------------------------------------------Cash Flows From Operating Activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiary Net change in other liabilities 250 Net change in other assets

$ 2,722

$ 2,708

$ 2,832

(2,021) -(335)

(1,870) ---

(2,031) --

-------------------------------------------------------------------------Net Cash Provided by Operating Activities 616 838 801 -------------------------------------------------------------------------Cash Flows From Investing Activities: Purchase of AFS security (4,625) --Purchase of Bank subsidiary stock -(16) (9) -------------------------------------------------------------------------Net Cash Used In Investing Activities (4,625) (16) (9) -------------------------------------------------------------------------Cash Flows From Financing Activities: Proceeds from issuance of junior subordinated debentures 5,155 --Payment to repurchase common stock (266) --Dividends paid (880) (838) (801) Proceeds from issuance of stock under Stock Option Plan -16 9 -------------------------------------------------------------------------Net Cash Provided by (Used) in Financing Activities 4,009 (822) (792) -------------------------------------------------------------------------Net Change in Cash and Cash Equivalents $-$-$---------------------------------------------------------------------------

Downingtown National Bank [LOGO] 38

Notes to Consolidated Financial Statements (17) REGULATORY MATTERS Dividends payable to the Corporation by the Bank are subject to certain regulatory limitations. Under normal circumstances, the payment of dividends in any year without regulatory permission is limited to the net profits (as defined for regulatory purposes) for that year, plus the retained net profits for the preceding two calendar years, which amounted to $5.9 million for the year ended December 31, 2001. Federal banking agencies impose three minimum capital requirements -- Total risk-based, Tier 1 and leverage capital. The risk-based capital ratios measure the adequacy of a bank's capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for "prompt corrective action" or other regulatory enforcement action. In assessing a bank's capital adequacy, regulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level of earnings; concentrations of credit, quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management's overall ability to monitor and control risks. Quantitative measures established by regulation to ensure capital adequacy require DNB to maintain certain minimum amounts and ratios as set forth below. Management believes that DNB and the Bank meet all capital adequacy requirements to which they are subject. The Bank is considered "Well Capitalized" under the regulatory framework for prompt corrective action. To be categorized as Well Capitalized, the Bank must maintain minimum ratios as set forth below. There are no conditions or events since that notification, that management believes would have changed the Bank's category. Actual capital amounts and ratios are presented below.
To Capita For Capital Prompt Actual Adequacy Purposes Action --------------------------------------------------------------------------------------------------------Amount Ratio Amount Ratio Amount --------------------------------------------------------------------------------------------------------DNB Financial Corporation December 31, 2001: Total risk-based capital $33,693 12.96% $20,802 8.00% $26,002 Tier 1 capital 30,424 11.70 10,401 4.00 15,601 Tier 1 (leverage) capital 30,424 8.05 15,126 4.00 18,908 --------------------------------------------------------------------------------------------------------December 31, 2000: Total risk-based capital $26,975 10.78% $20,016 8.00% $25,020 Tier 1 capital 23,825 9.52 10,008 4.00 15,012 Tier 1 (leverage) capital 23,825 6.90 13,805 4.00 17,256 --------------------------------------------------------------------------------------------------------Downingtown National Bank December 31, 2001: Total risk-based capital $29,137 11.21% $20,793 8.00% $25,992 Tier 1 capital 25,869 9.95 10,397 4.00 15,595 Tier 1 (leverage) capital 25,869 6.85 15,107 4.00 18,884 --------------------------------------------------------------------------------------------------------December 31, 2000: Total risk-based capital $26,975 10.78% $20,016 8.00% $25,020 Tier 1 capital 23,825 9.52 10,008 4.00 15,012 Tier 1 (leverage) capital 23,825 6.90 13,805 4.00 17,256 ---------------------------------------------------------------------------------------------------------

Downingtown National Bank [LOGO] 39

Independent Auditors' Report KPMG 1600 Market Street Philadelphia, PA 19103-7212 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 as of December 31, 2001 and 2000, 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, 2001. 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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP January 25, 2002 Philadelphia, PA

KPMG LLP. KPMG LLP, a U.S. limited liability partnership, is a member of KPMG International, a Swiss association. Downingtown National Bank [LOGO] 40

DNB Financial Corporation and Subsidiaries Dnb Financial Corporation Directors Robert J. Charles Chairman Vernon J. Jameson Vice Chairman Thomas R. Greenleaf William S. Latoff Joseph G. Riper Louis N. Teti Henry F. Thorne James H. Thornton Directors Emeritus Ellis Y. Brown, III Paul F. DiMatteo I. Newton Evans, Jr. Ilario S. Polite Officers Henry F. Thorne President and CEO Ronald K. Dankanich Secretary Bruce E. Moroney Chief Financial Officer Downingtown National Bank Officers Henry F. Thorne President and CEO Richard L. Bergey Senior Vice President/ Senior Credit Officer Charles E. Bradford Senior Vice President Director - DNB Advisors Ronald K. Dankanich Senior Vice President/ Operations and Secretary Eileen M. Knott Senior Vice President/ Audit and Compliance Officer Kristen LaDow

Senior Vice President/ Senior Loan Officer Bruce E. Moroney Senior Vice President and CFO Joseph M. Stauffer Senior Vice President/ Retail Banking and Marketing Departments Elizabeth B. Barr Vice President/Construction Lending David L. Binder Vice President/Commercial Lending William W. Brown Vice President/Data Processing Elizabeth A. Cook Asst. Vice President/Marketing Manager Lisa A. Donnon Asst. Vice President/Commercial Lending Dominick A. Frederick Vice President/Central Operations Charles H. Fulton Asst. Vice President/Consumer Lending Michelle L. Griffith Assistant Controller Marilyn K. Harris Asst. Vice President/Lending Timothy J. Mahan Asst. Vice President/ Loan Operations Manager Debora A. Micka Vice President/Commercial Lending Charles S. Moore Vice President/Commercial Lending Tracy E. Panati Asst. Vice President/Human Resources M. Esther Popjoy Vice President/Reconcilements Michael Rist Commercial Loan Officer Barry A. Schmidt

Vice President/Commercial Lending and Cash Management Kimberly L. Schneider Asst. Vice President/Lending Jenn Vanwijk Commercial Loan Officer Charles E. Wuertz Vice President/Commercial Lending Downingtown National Bank [LOGO] 41

DNB Financial Corporation and Subsidiaries Corporate Headquarters 4 Brandywine Avenue Downingtown, PA 19335 Tel. 610-269-1040 Fax 610-873-5298 Internet http://www.dnb4you.com Financial Information Investors, brokers, security analysts and others desiring financial information should contact Bruce Moroney at 610-873-5253 or bmoroney@dnb4you.com Auditors KPMG LLP 1600 Market Street Philadelphia, PA 19103-7212 Counsel Stradley, Ronon, Stevens and Young, LLP 30 Valley Stream Parkway Malvern, PA 19355 Registrar and Stock Transfer Agent Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016 800-368-5948 Market Makers Boenning & Scattergood, Inc. 800-883-1212 Ferris, Baker Watts, Inc. 410-659-4616 F. J. Morrissey & Company, Inc. 800-842-8928
Herzog, Heine, Geduld, Inc. 215-972-0860 Janney Montgomery Scott, Inc. 800-526-6397 Ryan Beck & Company 800-223-8969 DNB Leasing 610-873-4025 Kenneth R. Kramer Vice President

DNB Advisors 610-269-4657 Charles E. Bradford Sr.Vice President & Director Cheryl T. Burkey Vice President/Trust Officer

Jennifer C. Calabro Financial Relationship Manager Jan L. Jandrlich Trust Officer

Drew J. Mone Vice President, Financial Consultant Community Offices Main Office 610-269-1040 Wanda G. Mize Vice President and Manager Caln Office 610-383-7562 Robin M. DiMattei Manager East End Office 610-269-3800 Christine M. Yohn Assistant Vice President and Manager Kennett Square Office 610-444-4350 C. Ray Cornell Assistant Vice President and Manager Lionville Office 610-363-7590
Joseph J. Bucciaglia Vice President and Manager Little Washington Office 610-942-3666 John R. Rode Vice President and Manager Ludwig's Corner Office Dorothy A. Cook Manager West Goshen Office Sandra L. Mattern 610-458-5100

610-429-5860

Assistant Vice President and Manager Exton Office 610-363-7098 Clifford S. Purse Assistant Vice President and Manager

EX-21
List of Subsidiaries Name ---Downingtown National Bank DNB Capital Trust I DOWNCO, Inc. DNB Financial Services, Inc. Jurisdiction -----------National Bank, PA DE PA PA

EX-23 [KPMG LLP Letterhead] The Board of Directors and Stockholders DNB Financial Corporation: We consent to incorporation by reference in the registration statement (No. 333-78913) on Form S-8 of DNB Financial Corporation of our report dated January 25, 2002, relating to the consolidated statements of financial condition of DNB Financial Corporation and subsidiary as of December 31, 2001 and 2000, 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, 2001, which report appears in the December 31, 2001 annual report incorporated by reference in the Form 10-K of DNB Financial Corporation.
/s/ KPMG LLP KPMG LLP March 19, 2002