UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended: September 30, 2004
or

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from                     to                    

Commission File Number: 0-16667

DNB Financial Corporation

4 Brandywine Avenue — Downingtown, PA 19335
(Address of principal executive offices and Zip Code)

(610) 269-1040
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

[X] Yes [ ] No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

[ ] Yes [X] No

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

DNB FINANCIAL CORPORATION AND SUBSIDIARY

INDEX

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PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

DNB FINANCIAL CORPORATION

See accompanying notes to consolidated financial statements

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DNB FINANCIAL CORPORATION

See accompanying notes to consolidated financial statements

4

DNB FINANCIAL CORPORATION

See accompanying notes to consolidated financial statements.

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DNB FINANCIAL CORPORATION AND SUBSIDIARY

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of DNB Financial Corporation (referred to herein as the “Corporation” or “DNB”) and its subsidiary, DNB First, National Association (the “Bank”) have been prepared in accordance with the instructions for Form 10-Q and therefore do not include certain information or footnotes necessary for the presentation of financial condition, statement of operations and statement of cash flows required by generally accepted accounting principles. However, in the opinion of management, the consolidated financial statements reflect all adjustments (which consist of normal recurring adjustments) necessary for a fair presentation of the results for the unaudited periods. Prior amounts not affecting net income are reclassified when necessary to conform with current period classifications. The results of operations for the nine months ended September 30, 2004, are not necessarily indicative of the results, which may be expected for the entire year. The consolidated financial statements should be read in conjunction with the Annual Report and report on Form 10-K for the year ended December 31, 2003.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure (“SFAS 148”). This statement amends SFAS 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This Statement announces that “in the near future, the Financial Accounting Standards Board plans to consider whether it should propose changes to the U.S. standards on accounting for stock-based compensation”. DNB has complied with the disclosure requirements of this statement. It is expected that SFAS No. 148 will require the expensing of all stock-based compensation at some point in the future. 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:

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NOTE 2: EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed based on the weighted average number of common shares outstanding during the period. Diluted EPS reflect the potential dilution that could occur from the conversion of common stock equivalents (i.e. stock options) and is computed using the treasury stock method. For the three and nine months ended September 30, 2004, 32,258 outstanding stock options were not included in the EPS calculation because such options were anti-dilutive. For the three and nine months ended September 30, 2003, 37,369 and 41,267 stock options were not included in the earnings per share calculation because such options were anti-dilutive. EPS, dividends per share and weighted average shares outstanding have been adjusted to reflect the effects of the 5% stock dividend paid in December 2003. Net income and the weighted average number of shares outstanding for basic and diluted EPS for the three and nine months ended September 30, 2004 and 2003 are reconciled as follows:

NOTE 3: COMPREHENSIVE INCOME

Comprehensive income includes all changes in stockholders’ equity during the period, except those resulting from investments by owners and distributions to owners. Comprehensive income for all periods consisted of net income and other comprehensive income relating to the change in unrealized (losses) gains on investment securities available for sale, as shown in the following table:

NOTE 4: COMPOSITION OF LOAN AND LEASE PORTFOLIO

The following table sets forth information concerning the composition of total loans and leases outstanding, as of the dates indicated.

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NOTE 5: JUNIOR SUBORDINATED DEBENTURES

DNB’s junior subordinated debentures (the “debentures”) are floating rate and were issued by DNB on July 20, 2001 to DNB Capital Trust I (the “Trust”), a Delaware business trust in which DNB owns all of the common equity. The Trust issued $5.0 million of floating rate (6 month Libor plus 3.75%, with a cap of 12%) capital preferred securities (“TruPS”) to a qualified institutional buyer. The proceeds of these securities were used by the Trust, along with DNB’s capital contribution, to purchase the $5.2 million principal amount of DNB’s floating rate junior subordinated debentures. 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. Effective March 31, 2004, as a result of the adoption of FIN 46, DNB deconsolidated the Trust, resulting in a change in the characterization of the underlying consolidated debt obligations from the previous trust preferred securities to junior subordinated debentures. The result was an increase in junior subordinated debentures of $155,000. The junior subordinated debentures qualify as a component of capital for regulatory purposes.

NOTE 6: RECENT ACCOUNTING PRONOUNCEMENTS

In December 2003, the FASB issued Revised SFAS No. 132, Employers’ Disclosures About Pensions and Other Postretirement Benefits (“SFAS No. 132”). This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, Employers’ Accounting for Pensions, No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. This Statement retains the disclosure requirements contained in FASB Statement No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits, which it replaces. It requires additional disclosures to those in the original Statement 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information should be provided separately for pension plans and for other postretirement benefit plans. This Statement is effective for financial statements with fiscal years ending after December 15, 2003, except for disclosure of estimated future benefit payments, which become effective for fiscal years ending after June 15, 2004. DNB has complied with the annual disclosure requirements of this statement.

In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (“FIN 46R”), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“VIE”), which was issued in January 2003. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The adoption of FIN 46R resulted in the deconsolidation of DNB Capital Trust I. The result was an increase in junior subordinated debentures of $155,000 and an increase in other assets of $155,000 for the investment in the trust.

In September 2004, the Emerging Issues Task Force (EITF) issued Financial Accounting Standards Board (FASB) Staff Position (FSP) EITF Issue No. 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The proposed FSP would provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary impairment under paragraph 16 of EITF Issue No. 03-1. The Board has directed the FASB staff to delay the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of EITF Issue No. 03-1. This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The delay of the effective date for paragraphs 10-20 of EITF Issue No. 03-1 will be superseded concurrent with the final issuance of proposed FSP EITF Issue No. 03-1-a, Implication Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The disclosure guidance in paragraphs 21 and 22 of EITF Issue No. 03-1 remains effective. The Corporation will evaluate any potential impact of this revised proposed statement when it is available.

In March 2004, the FASB issued an exposure draft, Share-Based Payment — An Amendment of Statements No. 123 and 95 that addresses the accounting for equity-based compensation arrangements, including employee stock options. Upon implementation of the changes proposed in this statement, entities would no longer be able to account for equity-based compensation using the intrinsic value method under Opinion No. 25. Entities would be required to measure the cost of employee services received in exchange for awards of equity instruments at the grant date of the award using a fair value based method. The comment period for this proposed statement ended on June 30, 2004. In October 2004, FASB announced that for public entities, this proposed statement would apply prospectively for reporting periods beginning after June 15, 2005 as if all equity-based compensation awards granted, modified or settled after December 15, 1994 had been accounted for using a fair value based method of accounting. DNB is currently evaluating the potential impact of the proposed statement. See Note 1 to the Financial Statements for DNB’s disclosure of the retrospective impact of fair value accounting for stock options.

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ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

DESCRIPTION OF DNB’S BUSINESS AND BUSINESS STRATEGY

DNB Financial Corporation is a bank holding company whose bank subsidiary, DNB First, National Association, is a nationally chartered commercial bank with trust powers, and a member of the FDIC. DNB provides a broad range of banking services to individual and corporate customers through its nine full service community offices located throughout Chester County, Pennsylvania. DNB is a community bank that focuses its lending and other services on businesses and consumers in the local market area. DNB funds all these activities with retail and business deposits and borrowings. Through its DNB Advisors division, the Bank provides wealth management and trust services to individuals and businesses. The Bank and its subsidiary, DNB Financial Services, Inc., make available certain non-depository products and services, such as securities brokerage, mutual funds, life insurance and annuities.

DNB has embarked on a strategy called “Helping Our Customers Succeed”. The key goal of this strategy is to become the “Bank of Choice” in Chester County by delivering consistent, high quality customer service to businesses and individuals. We focus our efforts on assisting our customers in ways that will help them become successful. To that end, DNB continues to make appropriate investments in all areas of our business, including people, technology, facilities and marketing. Customers may also visit DNB on its website at http://www.dnbfirst.com.

On March 29, 2004, DNB announced that the Bank is changing its trading name to “DNB First.” A new logo, new signage, and new services were unveiled at branches during the second quarter of 2004. A variety of “grand opening” events were held to promote the name change. Effective April 27, 2004, the legal name of the Bank was changed to DNB First, National Association. Management believes that the new name will allow the Bank, with a new logo and presentation, to promote itself more effectively beyond DNB’s traditional market area. Management also believes the new name will allow the Bank to communicate the full range of its financial services capabilities.

RECENT DEVELOPMENTS

National and local market indicators are showing signs that the economy, which slipped into a recession in late 2001, may slowly be improving. The most recent Federal Reserve Board report as of September 8, 2004 suggested that the nation’s economy continued to expand in July and August, although several districts indicated that the pace has slowed since their last reports.

National Trends

Household spending was reported to have softened in many parts of the nation, reflecting lackluster retail sales and some cooling in new and existing home sales. Residential construction activity remained at high levels but slowed a bit in some regions; nonresidential construction remained tepid, as did demand for commercial and industrial space. Agricultural conditions were mixed and generally tied to weather. Demand for consumer loans softened somewhat, but several districts noted increased commercial lending. Employers in most districts continued to expand payrolls, though districts reported some unevenness across sectors. Consumer prices were generally flat or up modestly, although there were noticeable price increases for energy and some material inputs.

Local Trends

Business conditions in the Third District (Philadelphia) improved modestly in August. Manufacturers reported modest increases in orders and shipments during the same period. Retailers indicated that sales of general merchandise rose in August compared to same period in 2003, although the year-over-year gain was slight. Banks and other lending institutions reported that overall lending continued on an upward trend, although some noted that mortgage activity has eased. Sales of existing homes have been steady, but sales of new homes have slowed somewhat. There have been indications that demand for office and industrial space might be turning up in some parts of the region, but overall the commercial real estate market remains soft. Contacts in the Third District business community generally expect economic activity in the region to expand through the fall and winter, but most do not expect strong growth. Bankers expect overall lending to increase, primarily as a result of gains in consumer lending. Real estate agents and home builders expects home sales to remain strong, although sales rates going forward could be slower than what it has been for the year so far. Contacts in commercial real estate anticipate a slight increase in demand for space during the rest of the year.

During the second half of 2003, management announced that it had developed a comprehensive plan designed to reposition its balance sheet and improve core earnings. As part of the plan, management announced its intentions to substantially reduce the size of its investment portfolio and expand its loan portfolio through new originations, increased loan participations, as well as strategic loan and lease receivable purchases. Management also intends to reduce the absolute level of borrowings with cash flows from existing loans and investments as well as from new core deposit growth.

During 2004, DNB grew its loan portfolio, increased deposits and reduce overall borrowings in a continuing effort to reposition its

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balance sheet. The loan portfolio grew $22.9 million or 11.5% over the amount of total loans at December 31, 2003, with positive growth in both the commercial and consumer sectors. DNB’s deposit base grew $12.2 million or 4.2%, which was primarily the result of a special Platinum account promotion that attracted a significant number of new customers to the Bank. FHLB advances decreased $16.0 million or 19.3%.

As a result of these balance sheet changes, total assets grew $24.3 million or 5.9% to $433.3 million at September 30, 2004, compared to $409.0 million at December 31, 2003. In June 2004, DNB announced plans to expand its Cash Management Services by offering commercial customers the ability to sell excess funds to DNB through repurchase agreements. This will augment DNB’s existing sweep arrangements. At September 30, 2004, $27.7 million of these low cost borrowings were added to DNB’s balance sheet.

DNB’s financial objectives are focused on earnings per diluted share growth and return on average equity. In order to achieve its financial objectives, DNB completed a 5-Year Strategic Plan and has defined the following strategies:

o

Grow loans and diversify the mix

o

Reduce the size of the investment portfolio

o

Reduce the absolute level of borrowings

o

Enhance the branch network and alternative delivery options

o

Focus on profitable customer segments

o

Grow and diversify non-interest income

Management’s strategies are designed to direct DNB’s tactical investment decisions and support financial objectives. DNB’s most significant revenue source continues to be net interest income, defined as total interest income less interest expense, which in 2003 accounted for approximately 82% of total revenue. To produce net interest income and consistent earnings growth over the long-term, DNB must generate loan and deposit growth at acceptable economic spreads within its market area. To generate and grow loans and deposits, DNB must focus on a number of areas including, but not limited to, the economy, branch expansion, sales practices, customer satisfaction and retention, competition, customer behavior, technology, product innovation and credit performance of its customers.

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

MATERIAL CHALLENGES, RISKS AND OPPORTUNITIES

The following is a summary of changes to material challenges, risks and opportunities DNB has faced during the first nine months of 2004.

Interest Rate Risk Management. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. DNB considers interest rate risk a predominant risk in terms of its potential impact on earnings. Interest rate risk can occur for any one or more of the following reasons: (a) assets and liabilities may mature or re-price at different times; (b) short-term or long-term market rates may change by different amounts; or (c) the remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change. One of the most critical challenges DNB faced during the past few years has been the impact of historically low interest rates. During 2004, management has focused its efforts on positioning the balance sheet for increased rates. In anticipation of higher rates, management has attempted to shorten the duration of its investment portfolio and lengthen the maturity of DNB’s deposit base. In total, management reduced its one-year GAP position from a negative 6.6% at December 31, 2003 to a negative 1.7% at September 30, 2004. These balance sheet changes improved DNB’s simulation results and reduced the potential negative impact on the Economic Value of Portfolio Equity.

Liquidity and Market Risk Management. The objective of DNB’s asset/liability management function is to maintain consistent growth in net interest income within DNB’s policy limits. This objective is accomplished through the management of liquidity and interest rate risk, as well as customer offerings of various loan and deposit products. DNB maintains adequate liquidity to meet daily funding requirements, anticipated deposit withdrawals, or asset opportunities in a timely manner. Liquidity is also necessary to meet obligations during unusual, extraordinary and adverse operating circumstances, while avoiding a significant loss or cost. DNB’s foundation for liquidity is a stable deposit base as well as a marketable investment portfolio that provides cash flow through regular maturities or that can be used for collateral to secure funding in an emergency. As part of its liquidity management, DNB maintains

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assets, which comprise its primary liquidity (Federal funds sold, investments and interest-bearing cash balances, less pledged securities), which totaled $115.2 million and $129.8 million as of September 30, 2004 and December 31, 2003, respectively. DNB’s primary liquidity ratio (primary liquidity as a percent of assets) was 26.6% and 31.7% for the same respective dates.

Credit Risk Management. DNB defines credit risk as the risk of default by a customer or counter-party. The objective of DNB’s credit risk management strategy is to quantify and manage credit risk on an aggregate portfolio basis as well as to limit the risk of loss resulting from an individual customer default. Credit risk is managed through a combination of underwriting, documentation and collection standards. DNB’s credit risk management strategy calls for regular credit examinations and quarterly management reviews of large credit exposures and credits experiencing credit quality deterioration. DNB’s loan review procedures provide objective assessments of the quality of underwriting, documentation, risk grading and charge-off procedures, as well as an assessment of the ALLL reserve analysis process. During 2004, management continued to improve its credit quality monitoring by refining its exception tracking system, which will allow DNB’s loan officers to monitor their individual portfolio more effectively. As a result, DNB’s non-performing loans to total loans ratio decreased from 1.5% at December 31, 2003 to .2% at September 30, 2004. Additionally, DNB’s allowance for credit losses to total loans ratio increased from 150.5% at December 31, 2003 to 1,094.6% at September 30, 2004.

Competition. In addition to the challenges related to the interest rate environment, community banks in Chester County have been experiencing increased competition from large regional and international banks entering DNB’s marketplace through mergers and acquisitions. Competition for loans and deposits has negatively affected DNB’s net interest margin. To compensate for the increased competition, DNB, along with other area community banks, has aggressively sought and marketed customers who have been disenfranchised by these mergers. To attract these customers, DNB introduced new deposit products, such as the “Platinum” account and “Money Market IRAs.” In addition, DNB has introduced Market Managers and Personal Bankers to serve the special banking needs of its clients. During 2004, DNB attracted $20.8 million into its new Platinum Savings account. In addition, DNB has introduced new packaged accounts to attract new retail and business customers.

Material Trends and Uncertainties. The industry is experiencing an on-going and widespread trend of consolidation in response to shrinking margins, as well as competitive and economic challenges. In an effort to broaden market share by capitalizing on operational efficiencies, larger institutions have been acquiring smaller regional and community banks and thrifts. Chester County has witnessed many recent mergers due to attractive demographics, commercial expansion and other growth indicators. As a result of these factors, the operating environment is very competitive as Chester County hosts over 40 banks, thrifts and credit unions. In addition, brokerage firms, mutual fund companies and boutique investment firms are prevalent, given the county’s attractive demographics. This intense competition continually puts pressures on DNB’s margins and operating results as competitors offer a full range of loan, deposit and investment products and services. In addition, many of these competitors are much larger than DNB and consistently outspend the Bank in marketing to attract new customers and buy market share. DNB anticipates these pressures will continue to adversely affect operating results.

Other Material Challenges, Risks and Opportunities. As a financial institution, DNB’s earnings are significantly affected by general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the United States economy and local economics in which we operate. For example, an economic downturn, increase in unemployment, or other events that negatively impact household and/or corporate incomes could decrease the demand for DNB’s loan and non-loan products and services and increase the number of customers who fail to pay interest or principal on their loans. Geopolitical conditions can also affect DNB’s earnings. Acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and our military conflicts including the aftermath of the war with Iraq, could impact business conditions in the United States.

CRITICAL ACCOUNTING POLICIES

The following discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principals generally accepted in the United States of America. Generally accepted accounting principles are complex and require management to apply significant judgment to various accounting, reporting and disclosure matters. Management must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. Actual results may differ from these estimates under different assumptions or conditions.

In management’s opinion, the most critical accounting policies and estimates impacting DNB’s consolidated financial statements are listed below. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. For a complete discussion of DNB’s significant accounting policies, see the footnotes to DNB Consolidated Financial Statements for the fiscal year ended December 31, 2003 (the “Annual Financial Statements”), incorporated in DNB’s 10-K for the year ended December 31, 2003.

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

Management uses significant estimates to determine the allowance for credit losses. Because the allowance for credit losses is dependent, to a great extent, on conditions that may be beyond DNB’s control, management’s estimate of the amount necessary to absorb allowance for credit losses and actual credit losses could differ. DNB’s current judgment is that the valuation of the allowance for credit losses remains appropriate at September 30, 2004. For a description of DNB’s accounting policies in connection with its allowance for credit losses, see, “Allowance for Credit Losses,” in Management’s Discussion and Analysis.

Realization of deferred income tax items. Estimates of deferred tax assets and deferred tax liabilities make up the asset category titled “net deferred taxes”. These estimates involve significant judgments and assumptions by management, which may have a material impact on the carrying value of net deferred tax assets for financial reporting purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance would be established against deferred tax assets when in the judgment of management, it is more likely than not that such deferred tax assets will not become available. For a more detailed description of these items, refer to Footnote 11 (Federal Income Taxes) in DNB’s Annual Report (10-K) filed on March 29, 2004, for the fiscal year ended December 31, 2003.

The Footnotes to DNB’s Consolidated Financial Statements set forth in DNB’s Annual Financial Statements identify other significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of DNB and its results of operations.

FINANCIAL CONDITION

DNB’s total assets were $433.3 million at September 30, 2004 compared to $409.0 million at December 31, 2003.

Investment Securities. Investment securities (Available-For-Sale and Held-To-Maturity) increased $3.9 million to $178.3 million at September 30, 2004 compared to $174.4 million at December 31, 2003. The increase in investment securities was primarily due to the purchase of $53.2 million in securities offset by $41.4 and $7.5 million in normal principal pay-downs and maturities, and investment sales, respectively. There was an additional decrease of $400,000 resulting from premium amortization. As a continuation of its previously announced comprehensive plan designed to reposition its balance sheet and improve core earnings, DNB continued to restructure its investment portfolio in anticipation of a higher rate environment by selling longer term securities and reinvesting the proceeds in securities with 3-5 year average lives. These securities provide increased cash flow for reinvestment and reduce the potential for market depreciation in a higher rate environment.

Loan and Lease Portfolio. One of DNB’s primary strategic goals is to grow loans and leases. At September 30, 2004, DNB’s total loan and lease portfolio was $221.9 million, compared to $199.0 million at December 31, 2003. DNB made progress towards its goal as the portfolio increased by $22.9 million during 2004. The increase in the portfolio was primarily the result of emphasis placed on increasing commercial lending, leasing and consumer relationships. The commercial loan portfolio increased $5.7 million or 4.0%, the commercial leasing portfolio grew $5.7 million or 67.9%, and the consumer loan portfolio increased $8.6 million or 24.16%. The growth in these portfolios can be attributed, in part, to product redesign and enhancements, coupled with increased advertising and more aggressive pricing in some of the shorter-term and adjustable rate products.

Deposits. At September 30, 2004, deposits were $304.6 million compared to $292.4 million at December 31, 2003. Total deposits grew $12.2 million or 4.2% in 2004. Most of this growth emanated from a special Platinum account promotion that attracted a significant number of new customers to the Bank. During 2004, savings deposits grew $22.8 million or 48.9% and NOW accounts grew $2.5 million or 3.7%, while non-interest bearing deposits, money market accounts and time deposits decreased $5.1 million, $10.0 million and $2.0 million, respectively.

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FHLB Advances. FHLB advances totaled $67.0 million at September 30, 2004 and $83.0 million at December 31, 2003. During 2004, DNB paid off $6.0 million of borrowings that would have matured on various dates throughout 2004 and replaced these borrowings with 3-month borrowings. DNB paid an $81,000 prepayment penalty and reduced its anticipated interest expense for the remainder of 2004 by roughly the same amount. During the first nine months of 2004, an additional $10.0 million of overnight FHLB advances were repaid.

Stockholder’s Equity. Stockholders’ equity was $25.8 million or $13.81 per share at September 30, 2004, compared to $25.4 million or $13.35 per share at December 31, 2003. The increase in stockholder’s equity was primarily a result of year-to-date earnings, cash proceeds received on the issuance of common stock resulting from stock option exercises and a decrease in accumulated other comprehensive loss, offset by the purchase of treasury stock and cash dividends paid. The increase in the per-share equity value from $13.35 to $13.93 was primarily attributable to year-to-date earnings and the decrease in accumulated other comprehensive loss offset by reductions in the number of shares outstanding resulting from the purchase of treasury stock. The Corporation’s common equity position at September 30, 2004 exceeds the regulatory required minimums.

RESULTS OF OPERATIONS

NET INTEREST INCOME

DNB’s earnings performance is primarily dependent upon its level of net interest income, which is the excess of interest income over interest expense. Interest income includes interest earned on loans, investments and federal funds sold and interest-earning cash, as well as loan fees and dividend income earned on investment securities. Interest expense includes interest on deposits, federal funds purchased, FHLB advances and other borrowings.

On a tax-equivalent basis, net interest income increased $515,000 to $5.4 million for the three months ended September 30, 2004 and $1.1 million to $15.5 million for the nine months ended September 30, 2004, compared to the same periods in 2003. DNB’s net interest margin increased to 3.47% and 3.48% for the three and nine months ended September 30, 2004, compared to 3.25% and 3.09% for the same periods in 2003, respectively.

For the three months ended September 30, 2004, the effect of volume changes was a $792,000 increase to net interest income, which was offset by a $249,000 decrease in net interest income relating to rate changes. The increase in net interest income relating to volume was primarily attributable to strong loan and lease growth. The decrease in net interest income relating to rate was primarily due to the run-off of higher yielding assets being replaced with lower yielding assets. As a result, the decline in rate on interest- earning assets outpaced the decline in rate on interest-bearing liabilities.

For the nine months ended September 30, 2004, the effect of volume changes was a $1.9 million increase to net interest income, which was offset by a $123,000 decrease in net interest income relating to rate changes. The increase in net interest income relating to volume was primarily attributable to strong loan and lease growth. The decrease in net interest income relating to rate was primarily due to run-off of higher yielding assets being replaced with lower yielding assets. As a result, the decline in rate on interest earning assets outpaced the decline in rate on interest bearing liabilities.

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The following tables 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 the three and nine months ended September 30, 2004 compared to the same periods in 2003 (tax-exempt yields and yields on agency-preferred stock that have a 70% dividend received deduction have been adjusted to a tax equivalent basis using a 34% tax rate). For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (i) changes in rate (change in rate multiplied by old volume) and (ii) changes in volume (change in volume multiplied by old rate). The net change attributable to the combined impact of rate and volume has been allocated proportionately to the change due to rate and the change due to volume.

The amount of tax beneficial income for the three months ended September 30, 2004 was $182,000 compared to $124,000 for the same period in 2003.

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The amount of tax beneficial income for the nine months ended September 30, 2004 was $500,000 compared to $309,000 for the same period in 2003.

ALLOWANCE FOR CREDIT LOSSES

To provide for known and inherent losses in the loan and lease portfolios, DNB maintains an allowance for credit losses. Provisions for credit losses are charged against income to increase the allowance when necessary. Loan and lease losses are charged directly against the allowance and recoveries on previously charged-off loans and leases are added to the allowance. In establishing its allowance for credit losses, management considers the size and risk exposure of each segment of the loan and lease portfolio, past loss experience, present indicators of risk such as delinquency rates, levels of non-accruals, the potential for losses in future periods, and other relevant factors. Management’s evaluation of the loan and lease portfolio generally includes reviews, on a sample basis, of individual borrowers regardless of size 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 established for loans and leases 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.

In establishing and reviewing the allowance for adequacy, Management establishes the allowance for credit losses in accordance with generally accepted accounting principles in the United States and the guidance provided in the Securities and Exchange Commission’s Staff Accounting Bulletin 102 (SAB 102). Its methodology for assessing the appropriateness of the allowance consists of several key elements which include: specific allowances for identified problem loans; formula allowances for commercial and commercial real estate loans; and allowances for pooled homogenous loans. As a result, management has taken into consideration factors and variables which may influence the risk of loss within the loan portfolio, including: (i) trends in delinquency and non-accrual loans; (ii) changes in the nature and volume of the loan portfolio; (iii) effects of any changes in lending policies; (iv) experience, ability, and depth of management/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 BC201 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 risk that the information we receive from our

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borrowers is inaccurate or misleading and (iii) the non-quantifiable impact that a terrorist action or threat of action may have on a particular industry.

DNB’s percentage of allowance for loan and lease loss reserves to total loans and leases was 1.96% at September 30, 2004. There were no provisions made during the three and nine months ended September 30, 2004, and 2003 since management determined the allowance for credit losses was adequate and provided for known and inherent credit losses as of September 30, 2004.

The following table summarizes the changes in the allowance for credit losses for the periods indicated. Real estate includes both residential and commercial real estate.

NON-INTEREST INCOME

Total non-interest income includes service charges on deposit products; fees received in connection with the sale of non-depository products and services, including fiduciary and investment advisory services offered through DNB Advisors; securities brokerage products and services and insurance brokerage products and services offered through DNB Financial Services; and other sources of income such as increases in the cash surrender value of bank owned life insurance (“BOLI”), net gains on sales of investment securities and other real estate owned (“OREO”) properties. In addition, DNB receives fees for cash management, merchant services, debit cards, safe deposit box rentals, check cashing, lockbox services and similar activities.

Total non-interest income was $707,000 and $2.3 million for the three and nine months ended September 30, 2004 compared to $356,000 and $1.9 million for the same periods in 2003. The increase in non-interest income year-over-year was primarily due to:

	-		gain of $259,000 recognized during 2004 on the sale of land adjacent to DNB’s Ludwig’s Corner Branch
	-		a $76,000 increase in service charges on deposits year-over-year
	-		an increase of $20,000 in revenues generated from DNB’s wealth management group year-over-year

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a decrease in investment losses of $315,000 in 2004. During the first nine months in 2004, DNB recognized $22,000 of investment losses, compared to $337,000 of losses for the same period in 2003

The increases were offset as follows:

	-		a $86,000 loss recognized in 2004 on the disposal of signs in relation to the Bank’s name change
	-		a one time dividend of $90,000 received on bank owned life insurance in 2003

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NON-INTEREST EXPENSE

Non-interest expense includes salaries & employee benefits, furniture & equipment, occupancy, professional & consulting fees as well as printing & supplies, marketing and other less significant expense items. Total non-interest expense was $3.3 million and $9.6 million for the three and nine months ended September 30, 2004, compared to $3.7 million and $9.5 million for the same periods in 2003, respectively. The increase in non-interest expense year-over-year is discussed below.

Marketing. DNB incurred $220,000 of costs during the first nine months of 2004 for promoting its new corporate identity as well as substantial expenses for promoting new loan and deposit products.

Salaries and Employee Benefits. DNB’s compensation costs were $1.8 million and $5.3 million for the three and nine months ended September 30, 2004 compared to $2.1 million and $5.3 million for the same periods in 2003, respectively. This decrease in compensation costs for the three month period was primarily related to a one time pension expense of $387,000 recognized during the third quarter of 2003. For the nine months ended September 30, 2004, DNB’s compensation costs remained relatively consistent as compared to the same period in 2003. During 2004, DNB incurred an increase in compensation expense relating to an increase in full-time equivalent employees, normal merit increases as well as contributions to DNB’s new Profit Sharing Plan during 2004. A portion of the increase was as a result of DNB’s continuing assessment of strategic goals and operating objectives when two key additions were made to DNB’s management team in 2003. William J. Hieb joined DNB as Executive Vice President and Chief Operating Officer in April 2003. Richard M. Wright joined DNB in September 2003 to head up the Bank’s retail network. In addition to these two important changes, management is in the process of expanding its lending and support staff to facilitate loan growth as part of its balance sheet restructuring plan. DNB believes that these changes will be integral to achieving its long-term strategic goals. During the third quarter of 2003, DNB froze its existing pension plan which resulted in a one time expense of $387,000 and took steps to make its retirement benefits more cost-efficient and predictable going forward. As such, DNB instituted a Profit Sharing Plan in 2004. The nine month expense for this plan was $127,000 and it is anticipated that the annual cost in 2004 will be approximately $168,000. The cost of DNB’s Pension Plan was $440,000 in 2003.

Furniture and Equipment. Expenses relating to furniture and equipment were $310,000 and $956,000 for the three and nine months ended September 30, 2004, compared to $426,000 and $1.2 million for the same periods in 2003, respectively. The decrease in furniture and equipment expense was primarily due to a decrease in depreciation expense year-over-year.

Other. Other expenses were $518,000 and $1.6 million for the three and nine months ended September 30, 2004, respectively, compared to $497,000 and $1.4 million for the same periods in 2003. This increase is primarily due to an $81,000 prepayment penalty. During 2004, DNB prepaid $6.0 million in borrowings scheduled to mature on various dates throughout 2004 and replaced these borrowings with 3-month borrowings. DNB paid a prepayment penalty and reduced its anticipated interest expense for the remainder of 2004 by roughly the same amount.

INCOME TAXES

Income tax expense was $161,000 and $500,000 for the three and nine months ended September 30, 2004 compared to a $272,000 tax benefit and $75,000 tax benefit for the same periods in 2003, respectively. The effective tax rate was 18.2% and 19.2% for the three and nine months ended September 30, 2004 compared to (72.7)% and (10.0)% for the same periods in 2003. The effective tax rates differs from the statutory rate of 34% primarily due to income from tax-exempt investments, tax credits associated with low-income housing and income from bank-owned life insurance.

ASSET QUALITY

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

The following table sets forth those assets that are on non-accrual status or contractually delinquent by 90 days or more and still

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accruing for the periods presented. DNB had no OREO at the end of all reported periods.

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

If interest income had been recorded on non-accrual loans, interest would have increased as shown in the following table:

Information regarding impaired loans is as follows:

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LIQUIDITY AND CAPITAL RESOURCES

For a financial institution, liquidity is a measure of the ability to fund customers’ needs for loans and deposit withdrawals. Management regularly evaluates economic conditions in order to maintain a strong liquidity position. One of the most significant factors considered by management when evaluating liquidity requirements is the stability of DNB’s core deposit base. In addition to cash, DNB maintains a portfolio of short-term investments to meet its liquidity requirements. DNB has historically relied on cash flow from operations and other financing activities. Liquidity is provided by investing activities, including the repayment and maturing of loans and investment securities.

At September 30, 2004 DNB had $43.0 million in un-funded loan commitments. Management anticipates these commitments will be funded by means of normal cash flows. Certificates of deposit that are scheduled to mature in one year or less from September 30, 2004 totaled $44.7 million. Management believes that the majority of such deposits will be reinvested with DNB and that certificates that are not renewed will be funded by a reduction in Federal funds sold or by pay-downs and maturities of loans and investments.

Effective March 31, 2004, DNB deconsolidated DNB Capital Trust I, resulting in a change in the characterization of the underlying consolidated debt obligations from the previous trust preferred securities to junior subordinated debentures. While the junior subordinated debentures do not quality as Tier I capital for risk-based, they continue to qualify as a component of capital for purposes of calculating total risk-based capital.

On May 6, 2004, the Federal Reserve Board proposed formally to allow the continued inclusion of outstanding and prospective issuances of trust preferred securities in the tier 1 capital of bank holding companies, subject to stricter quantitative limits and qualitative standards. The Board also proposed to revise the quantitative limits applied to the aggregate amount of cumulative perpetual preferred stock, trust preferred securities, and minority interests in the equity accounts of certain consolidated subsidiaries (collectively, restricted core capital elements) included in the tier 1 capital of bank holding companies. The quantitative limits would become effective after a three-year transition period. In addition, the Board proposed to revise the qualitative standards for capital instruments included in regulatory capital consistent with longstanding Board policies. These proposals were intended to address supervisory concerns, competitive equity considerations, and changes in generally accepted accounting principles. Management does not anticipate that the Federal Reserve Board’s proposal will have a material adverse impact on DNB, the Bank or their regulatory capital ratio compliance.

The following table summarizes data and ratios pertaining to the Corporation and the Bank’s capital structure.

In addition, the Federal Reserve Bank (the “FRB”) leverage ratio rules require bank holding companies to maintain a minimum level of “primary capital” to total assets of 5.5% and a minimum level of “total capital” to total assets of 6%. For this purpose, (i) “primary capital” includes, among other items, common stock, certain perpetual debt instruments such as eligible Trust preferred securities, contingency and other capital reserves, and the allowance for loan losses, (ii) “total capital” includes, among other things, certain subordinated debt, and “total assets” is increased by the allowance for loan losses. DNB’s primary capital ratio and its total capital ratio are both well in excess of FRB requirements.

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REGULATORY MATTERS

Dividends payable to the Corporation by the Bank are subject to certain regulatory limitations. Under normal circumstances, the payment of dividends in any year without regulatory permission is limited to the net profits (as defined for regulatory purposes) for that year, plus the retained net profits for the preceding two calendar years.

FORWARD-LOOKING STATEMENTS

This report may contain statements that are not of historical facts and may pertain to future operating results or events or management’s expectations regarding those results or events. These are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements may include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements contained in this report that are not historical facts. When used in this report, the words “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, or words of similar meaning, or future or conditional verbs, such as “will”, “would”, “should”, “could”, or “may” are generally intended to identify forward-looking statements. Forward-looking statements involve certain risks and uncertainties, and actual results may differ materially from those contemplated by such statements. For example, actual results may be adversely affected by the following possibilities: (1) competitive pressures among financial institutions may increase; (2) changes in interest rates may reduce banking interest margins; (3) general economic conditions and real estate values may be less favorable than contemplated; (4) adverse legislation or regulatory requirements may be adopted; (5) other unexpected contingencies may arise; (6) DNB may change one or more strategies described in this document; or (7) management’s evaluation of certain facts, circumstances or trends and the appropriate responses to them may change. These forward-looking statements are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are either beyond our control or not reasonably capable of predicting at this time. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Actual results may differ materially from the results discussed in these forward-looking statements. Readers of this report are accordingly cautioned not to place undue reliance on forward-looking statements. DNB disclaims any intent or obligation to update publicly any of the forward-looking statements herein, whether in response to new information, future events or otherwise. With regard to DNB’s balance sheet repositioning, the degree to which these steps can be accomplished will depend on a number of factors, including changes in the interest rate environment for loans, investments and deposits, loan prepayments, market opportunities for new loan and participation originations, and the availability of loan and lease receivables for purchase at attractive prices and yields, as well as management’s assessment of the timing of each of these opportunities and steps in light of future, unknown developments affecting DNB’s business generally.

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

To measure the impacts of longer-term asset and liability mismatches beyond two years, DNB utilizes Modified Duration of Equity and Economic Value of 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 if rates change. Results falling outside prescribed ranges require action by management. At September 30, 2004 and December 31, 2003, DNB’s variance in the economic value of equity as a percentage of assets with an instantaneous and sustained parallel shift of 200 basis points was within its negative 3% guideline, as shown in the table below. The change as a percentage of the present value of equity with a 200 basis point increase or decrease at September 30, 2004 and December 31, 2003, was within DNB’s negative 25% guideline.

ITEM 4 — CONTROLS AND PROCEDURES

DNB’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 15d-14(c) as of September 30, 2004 in accordance with the requirements of Exchange Act Rule 240.15d-15(b). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that DNB’s current disclosure controls and procedures are effective and timely, providing them with material information relating to DNB and its subsidiaries required to be disclosed in the report DNB files under the Exchange Act.

DNB’s conducted an evaluation of internal control over financial reporting to determine whether any changes occurred during the quarter ended September 30, 2004, that have materially affected, or are reasonably likely to materially affect, DNB’s internal control over financial reporting. Based on this evaluation, there has been no such change during the nine months ended September 30, 2004.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not Applicable

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

The following table provides information on repurchases by DNB of its common stock in each month of the quarter ended September 30, 2004:

	(a)		On July 25, 2001, DNB authorized the buyback of up to 175,000 shares of its common stock over an indefinite period.
	(b)		On August 27, 2004, DNB increased the buyback from 175,000 to 325,000 shares of its common stock over an indefinite period.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

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

Not Applicable

ITEM 5. OTHER INFORMATION

Not Applicable

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ITEM 6. EXHIBITS

	3(i)		Amended and Restated Articles of Incorporation, as amended effective June 15, 2001, filed on August 14, 2001, as Item 6(a) to Form 10-Q (No. 0-16667) and incorporated herein by reference.
	(ii)		By-laws of the Registrant as amended December 19, 2001, filed on March 24, 2002 at Item 3b to Form 10-Q (No. 0-16667) and incorporated herein by reference.
	10(a)		Employment Agreement between Downingtown National Bank and Henry F. Thorne dated December 31, 1996 filed on March 26, 1999 at Item 10.l to Form K for the fiscal year ended December 31, 1998 (No. 0-16667) and incorporated herein by reference.
	(b)		Form of Change of Control Agreements (i) dated May 5, 1998 between DNB Financial Corporation and Downingtown National Bank and the following executive officers: Ronald K. Dankanich, Eileen M. Knott and Bruce E. Moroney and (ii) dated July 18, 2000, April 28, 2003 and September 22, 2003 between DNB Financial Corporation and Downingtown National Bank and William J. Hieb and Richard M. Wright, respectively, each in the form filed on March 26, 1999 at Item 10.2 to Form 10-K for the fiscal year ended December 31, 1998 (No. 0-16667), and incorporated herein by reference.
	(c)		1995 Stock Option Plan of DNB Financial Corporation (as amended and restated, effective as of April 27, 2004), filed as Appendix A to the Company’s Proxy Statement filed April 27, 2004 (File No. 000-50567.
	(d)		Death Benefit Agreement between Downingtown National Bank and Henry F. Thorne dated November 24, 1999, filed March 20, 2002 as Item 10(d) to Form 10-K for the fiscal year ended December 31, 2001 (No. 0-16667) and incorporated herein by reference.
	(e)		Form of Change of Control Agreements, as amended November 10, 2003, between DNB Financial Corporation and Downingtown National Bank and each of the following Directors: William S. Latoff, James H. Thornton, James J. Koegel, Eli Silberman and Henry F. Thorne, filed on November 14, 2003 as Item 10(e) to Form 8-K (No. 0-16667) and incorporated herein by reference.
	(f)		Retirement and Change of Control Agreement dated as of February 27, 2002, between DNB Financial Corporation and Downingtown National Bank and Thomas R. Greenleaf, a Director, filed on November 14, 2003 as Item 10(f) to Form 8-K (No. 0-16667) and incorporated herein by reference.
	(g)		First Amendment to Employment Agreement of Henry F. Thorne dated December 23, 2003, filed on March 29, 2004 at Item 10(g) to Form 10-K for the fiscal year ended December 31, 2003 (No. 0-16667) and incorporated herein by reference.
	(h)		Retirement and Death Benefit Agreement between Downingtown National Bank and Henry F. Thorne dated December 23, 2003, filed on March 29, 2004 at Item 10(h) to Form 10-K for the fiscal year ended December 31, 2003 (No. 0-16667) and incorporated herein by reference.
	11		Computation of Earnings per Common Share. The information for this Exhibit is incorporated by reference to pages 6 and 7 of this Form 10-Q.
	31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Chief Executive Officer.
	31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Chief Financial Officer.
	32.1		Certification of Chief Executive Officer pursuant to Section 906.
	32.2		Certification of Chief Financial Officer pursuant to Section 906.

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SIGNATURES

Pursuant to the requirements of The Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DNB FINANCIAL CORPORATION
(Registrant)

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