NOTE 3: INVESTMENT SECURITIES

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



		June 30, 2013
		Amortized		Unrealized		Unrealized
(Dollars in thousands)		Cost		Gains		Losses		Fair Value
Held To Maturity
US Government agency obligations	$	7,379	$	257	$	-	$	7,636
Government Sponsored Entities (GSE) mortgage-backed securities		7,026		220		(5)		7,241
Corporate bonds		6,389		295		(3)		6,681
Collateralized mortgage obligations GSE		5,857		43		(64)		5,836
State and municipal tax-exempt		40,623		174		(2,044)		38,753
Total	$	67,274	$	989	$	(2,116)	$	66,147

Available For Sale
US Government agency obligations	$	40,894	$	28	$	(405)	$	40,517
GSE mortgage-backed securities		24,455		153		(371)		24,237
Collateralized mortgage obligations GSE		26,816		91		(625)		26,282
Corporate bonds		35,138		403		(359)		35,182
State and municipal tax-exempt		4,185		1		(23)		4,163
Certificates of deposit		1,250		4		(8)		1,246
Equity securities		27		1		(12)		16
Total	$	132,765	$	681	$	(1,803)	$	131,643



		December 31, 2012
		Amortized		Unrealized		Unrealized
(Dollars in thousands)		Cost		Gains		Losses		Fair Value
Held To Maturity
US Government agency obligations	$	7,266	$	563	$	-	$	7,829
Government Sponsored Entities (GSE) mortgage-backed securities		9,135		435		-		9,570
Corporate bonds		6,500		371		(11)		6,860
Collateralized mortgage obligations GSE		7,204		185		-		7,389
State and municipal tax-exempt		35,919		759		(19)		36,659
Total	$	66,024	$	2,313	$	(30)	$	68,307

Available For Sale
US Government agency obligations	$	35,424	$	133	$	(18)	$	35,539
GSE mortgage-backed securities		21,885		507		-		22,392
Collateralized mortgage obligations GSE		21,526		151		(27)		21,650
Corporate bonds		41,005		772		(330)		41,447
State and municipal tax-exempt		3,195		1		(11)		3,185
Asset-backed securities		9,723		90		-		9,813
Certificates of deposit		1,250		3		(5)		1,248
Equity securities		27		-		(13)		14
Total	$	134,035	$	1,657	$	(404)	$	135,288

Included in unrealized losses are market losses on securities that have been in a continuous unrealized loss position for twelve months or more and those securities that have been in a continuous unrealized loss position for less than twelve months. The table below details the aggregate unrealized losses and aggregate fair value of the underlying securities whose fair values are below their amortized cost at June 30, 2013 and December 31, 2012.



		June 30, 2013
						Fair Value		Unrealized		Fair Value		Unrealized
				Total		Impaired		Loss		Impaired		Loss
		Total		Unrealized		Less Than		Less Than		More Than		More Than
(Dollars in thousands)		Fair Value		Loss		12 Months		12 Months		12 Months		12 Months
Held To Maturity
GSE mortgage-backed securities	$	314	$	(5)	$	314	$	(5)	$	-	$	-
Corporate bonds		512		(3)		512		(3)		-		-
Collateralized mortgage obligations GSE		680		(64)		680		(64)		-		-
State and Municipal tax-exempt		26,208		(2,044)		26,208		(2,044)		-		-
Total	$	27,714	$	(2,116)	$	27,714	$	(2,116)	$	-	$	-
Available For Sale
US Government agency obligations	$	25,201	$	(405)	$	25,201	$	(405)	$	-	$	-
GSE mortgage-backed securities		17,557		(371)		17,557		(371)		-		-
Collateralized mortgage obligations GSE		19,245		(625)		19,245		(625)		-		-
Corporate bonds		14,339		(359)		9,939		(259)		4,400		(100)
State and Municipal tax-exempt		2,079		(23)		1,304		(7)		775		(16)
Certificates of deposit		742		(8)		742		(8)		-		-
Equity securities		11		(12)		-		-		11		(12)
Total	$	79,174	$	(1,803)	$	73,988	$	(1,675)	$	5,186	$	(128)



		December 31, 2012
						Fair Value		Unrealized		Fair Value		Unrealized
				Total		Impaired		Loss		Impaired		Loss
		Total		Unrealized		Less Than		Less Than		More Than		More Than
(Dollars in thousands)		Fair Value		Loss		12 Months		12 Months		12 Months		12 Months
Held To Maturity
Corporate bonds	$	2,587	$	(11)	$	2,587	$	(11)	$	-	$	-
State and municipal tax-exempt		8,690		(19)		8,690		(19)		-		-
Total	$	11,277	$	(30)	$	11,277	$	(30)	$	-	$	-
Available For Sale
US Government agency obligations	$	10,238	$	(18)	$	10,238	$	(18)	$	-	$	-
Collateralized mortgage obligations GSE		4,703		(27)		4,703		(27)		-		-
Corporate bonds		15,989		(330)		12,604		(215)		3,385		(115)
State and municipal tax-exempt		1,095		(11)		1,095		(11)		-		-
Certificates of deposits		745		(5)		745		(5)		-		-
Equity securities		14		(13)		-		-		14		(13)
Total	$	32,784	$	(404)	$	29,385	$	(276)	$	3,399	$	(128)

As of June 30, 2013, there were eleven mortgage-backed securities, eleven corporate bonds, seventeen U.S. agency obligations, fourteen collateralized mortgage obligations, forty-two tax-exempt municipalities, three certificates of deposit, and five equity securities which were in an unrealized loss position. DNB does not intend to sell these securities and management of DNB does not expect to be required to sell any of these securities prior to a recovery of its cost basis. Management does not believe any individual unrealized loss as of June 30, 2013 represents an other-than-temporary impairment. There were two tax-exempt municipalities, three corporate bonds, and five equity securities that were impaired for more than 12 months, none of which had an unrealized loss greater than 10% of the book value. There were fourteen tax-exempt municipal securities and one collateralized mortgage obligation that had an unrealized loss greater than 10% of the book value, but were impaired for less than 12 months. DNB reviews its investment portfolio on a quarterly basis judging each investment for other-than-temporary impairment (OTTI). The OTTI analysis focuses on duration and amount by which a security is below book. As of June 30, 2013, the following securities were reviewed:

Tax-exempt municipal securities There are 42 impaired securities classified as Municipal. Two have been impaired for more than twelve months, but do not have a loss greater than 10% of the book value, and 14 have a loss greater than 10% of the book value, but have been impaired for less than 12 months. All of the issuers that are listed have never deferred or defaulted on interest payments, so credit risk is acceptable. Twelve of the impaired municipals are school districts that have state qualified school aid, eight of which have additional private insurance. The remaining are three townships and one insured county, all of which have strong underlying ratings.

Corporate Securities The unrealized loss on three investments in the corporate bond portfolio was caused by a number of factors. Some of the bonds have had downgrades since they were purchased. Some of the corporates have been affected by the market's perception of the impact of sovereign debit holdings and spreads on the financial sector have widened since they were purchased. The book value of the three securities is $4.5 million and the unrealized loss is $100,000 or 2.2%. All of the bonds have been impaired for more than twelve months and have a loss less than 10% of the book value. The contractual terms of those investments do not permit the issuer to settle these securities at a price less than the par value of the investments. Based on this analysis and an evaluation of DNB’s ability and intent to hold these securities for a reasonable period of time sufficient for each security to increase to DNB’s cost, DNB does not intend to sell these securities and it is not more likely than not that DNB will be required to sell the securities before recovery of their cost, DNB does not consider these securities to be other-than-temporarily impaired at June 30, 2013.

Equity securities. DNB’s investment in five marketable equity securities consists primarily of securities in common stock of community banks in Pennsylvania. The unrealized losses on the five securities in the equity securities portfolio were all impaired for more than twelve months. The severity and duration of the impairment are driven by higher collateral losses, wider credit spreads, and changes in interest rates within the financial services sector. DNB evaluated the prospects of all issuers in relation to the severity and duration of the impairment. These securities have been adversely impacted by the effects of the current economic environment on the financial services industry. We evaluated each of the underlying banks for credit impairment based on its financial condition and performance. As of June 30, 2013, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis. Based on our evaluation and expectation that these investments will recover within a reasonable period of time, we do not consider these investments to be other-than-temporarily impaired at June 30, 2013.

The amortized cost and fair value of investment securities as of June 30, 2013, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid without penalties.



		Held to Maturity				Available for Sale
		Amortized				Amortized
(Dollars in thousands)		Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	-	$	-	$	8,450	$	8,468
Due after one year through five years		-		-		37,794		37,935
Due after five years through ten years		24,564		24,829		34,237		33,788
Due after ten years		42,710		41,318		52,257		51,436
No stated maturity		-		-		27		16
Total investment securities	$	67,274	$	66,147	$	132,765	$	131,643

DNB sold $22.5 million and $9.8 million from the Available For Sale portfolio during the six month periods ending June 30, 2013 and 2012, respectively. Gains and losses resulting from investment sales, redemptions or calls were as follows:



		Three Months Ended				Six Months Ended
		June 30,				June 30,
(Dollars in thousands)		2013		2012		2013		2012
Gross realized gains-AFS	$	155	$	85	$	471	$	85
Gross realized losses-AFS		-		(6)		(257)		(6)
Net realized gain	$	155	$	79	$	214	$	79

At June 30, 2013 and December 31, 2012, investment securities with a carrying value of approximately $129.1 million and $90.0 million, respectively, were pledged to secure public funds, repurchase agreements and for other purposes as required by law.