NOTE 3: INVESTMENT SECURITIES

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



		September 30, 2013
		Amortized		Unrealized		Unrealized
(Dollars in thousands)		Cost		Gains		Losses		Fair Value
Held To Maturity
US Government agency obligations	$	7,437	$	177	$	-	$	7,614
Government Sponsored Entities (GSE) mortgage-backed securities		6,360		258		(6)		6,612
Corporate bonds		6,372		272		-		6,644
Collateralized mortgage obligations GSE		5,245		41		-		5,286
State and municipal tax-exempt		40,617		144		(2,081)		38,680
Total	$	66,031	$	892	$	(2,087)	$	64,836

Available For Sale
US Government agency obligations	$	38,604	$	16	$	(427)	$	38,193
GSE mortgage-backed securities		42,164		419		(309)		42,274
Collateralized mortgage obligations GSE		25,157		86		(499)		24,744
Corporate bonds		25,931		108		(343)		25,696
State and municipal tax-exempt		4,177		1		(20)		4,158
Certificates of deposit		1,250		7		-		1,257
Equity securities		27		1		(12)		16
Total	$	137,310	$	638	$	(1,610)	$	136,338



		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 September 30, 2013 and December 31, 2012.



		September 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	$	268	$	(6)	$	268	$	(6)	$	-	$	-
State and Municipal tax-exempt		25,875		(2,081)		25,875		(2,081)		-		-
Total	$	26,143	$	(2,087)	$	26,143	$	(2,087)	$	-	$	-
Available For Sale
US Government agency obligations	$	26,640	$	(427)	$	26,640	$	(427)	$	-	$	-
GSE mortgage-backed securities		13,383		(309)		13,383		(309)		-		-
Collateralized mortgage obligations GSE		16,362		(499)		16,362		(499)		-		-
Corporate bonds		15,796		(343)		11,381		(258)		4,415		(85)
State and Municipal tax-exempt		1,075		(20)		302		(5)		773		(15)
Equity securities		11		(12)		-		-		11		(12)
Total	$	73,267	$	(1,610)	$	68,068	$	(1,498)	$	5,199	$	(112)



		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 September 30, 2013, there were eight mortgage-backed securities, ten corporate bonds, seventeen U.S. agency obligations, eleven collateralized mortgage obligations, forty-one tax-exempt municipalities, one certificate 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 has reviewed all of these securities and believes that DNB will collect all principal and interest that is due on debt securities on a timely basis. Management does not believe any individual unrealized loss as of September 30, 2013 represents an other-than-temporary impairment. 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 severity of impairment in determining of OTTI. As of September 30, 2013, the following securities were reviewed:

Tax-exempt municipal securities There are forty-one impaired securities classified as Municipal. All of the issuers that are listed have never deferred or defaulted on interest payments. Market values have declined during the most recent quarter due to rising interest rates and the negative impact on the entire sector caused by the Detroit, Michigan bond default. Eight of the impaired municipals are school districts that have state qualified school aid, six of which have additional private insurance. The remaining nine are four insured school districts, one uninsured school district, 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 but all remain investment grade. 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 default rating on bonds with similar agency ratings is negligible. 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 September 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. Over the past five quarters, the unrealized loss on these equity securities has slowly decreased. 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 September 30, 2013.

The amortized cost and fair value of investment securities as of September 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	$	-	$	-	$	7,369	$	7,372
Due after one year through five years		-		-		29,508		29,432
Due after five years through ten years		24,880		25,057		44,813		44,465
Due after ten years		41,151		39,779		55,593		55,053
No stated maturity		-		-		27		16
Total investment securities	$	66,031	$	64,836	$	137,310	$	136,338

DNB sold $8.4 million and $31.0 million from the Available for Sale portfolio during the three and nine months ended September 30, 2013. DNB sold $4.6 million and $14.4 million from the Available For Sale portfolio during the three and nine month periods ending September 30, 2012. Gains and losses resulting from investment sales, redemptions or calls were as follows:



		Three Months Ended				Nine Months Ended
		September 30,				September 30,
(Dollars in thousands)		2013		2012		2013		2012
Gross realized gains-AFS	$	281	$	161	$	752	$	246
Gross realized losses-AFS		-		-		(257)		(6)
Net realized gain	$	281	$	161	$	495	$	240

At September 30, 2013 and December 31, 2012, investment securities with a carrying value of approximately $128.9 million and $90.0 million, respectively, were pledged to secure public funds, repurchase agreements and for other purposes as required by law.