NOTE 2: INVESTMENT SECURITIES

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



		March 31, 2014
		Amortized		Unrealized		Unrealized
(Dollars in thousands)		Cost		Gains		Losses		Fair Value
Held To Maturity
US Government agency obligations	$	7,553	$	154	$	-	$	7,707
Government Sponsored Entities (GSE) mortgage-backed securities		4,411		131		-		4,542
Corporate bonds		6,291		384		-		6,675
Collateralized mortgage obligations GSE		4,620		9		(53)		4,576
State and municipal tax-exempt		40,606		201		(1,488)		39,319
Total	$	63,481	$	879	$	(1,541)	$	62,819

Available For Sale
US Government agency obligations	$	23,482	$	17	$	(385)	$	23,114
GSE mortgage-backed securities		61,841		33		(501)		61,373
Collateralized mortgage obligations GSE		21,642		29		(598)		21,073
Corporate bonds		21,045		16		(159)		20,902
State and municipal tax-exempt		613		-		(7)		606
Certificates of deposit		1,250		13		-		1,263
Equity securities		27		2		(12)		17
Total	$	129,900	$	110	$	(1,662)	$	128,348



		December 31, 2013
		Amortized		Unrealized		Unrealized
(Dollars in thousands)		Cost		Gains		Losses		Fair Value
Held To Maturity
US Government agency obligations	$	7,494	$	75	$	-	$	7,569
Government Sponsored Entities (GSE) mortgage-backed securities		5,934		200		-		6,134
Corporate bonds		6,357		249		-		6,606
Collateralized mortgage obligations GSE		4,903		10		(89)		4,824
State and municipal tax-exempt		40,611		83		(2,425)		38,269
Total	$	65,299	$	617	$	(2,514)	$	63,402

Available For Sale
US Government agency obligations	$	30,522	$	4	$	(583)	$	29,943
GSE mortgage-backed securities		49,448		180		(698)		48,930
Collateralized mortgage obligations GSE		23,836		18		(968)		22,886
Corporate bonds		16,944		-		(394)		16,550
State and municipal tax-exempt		2,091		-		(19)		2,072
Certificates of deposit		1,250		10		-		1,260
Equity securities		27		2		(11)		18
Total	$	124,118	$	214	$	(2,673)	$	121,659

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 March 31, 2014 and December 31, 2013.



		March 31, 2014
						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
Collateralized mortgage obligations GSE	$	4,290	$	(53)	$	4,290	$	(53)	$	-	$	-
State and Municipal tax-exempt		23,933		(1,488)		11,637		(380)		12,296		(1,108)
Total	$	28,223	$	(1,541)	$	15,927	$	(433)	$	12,296	$	(1,108)
Available For Sale
US Government agency obligations	$	16,896	$	(385)	$	16,896	$	(385)	$	-	$	-
GSE mortgage-backed securities		52,864		(501)		52,864		(501)		-		-
Collateralized mortgage obligations GSE		17,977		(598)		15,697		(493)		2,280		(105)
Corporate bonds		13,321		(159)		9,671		(63)		3,650		(96)
State and Municipal tax-exempt		606		(7)		302		(3)		304		(4)
Equity securities		11		(12)		-		-		11		(12)
Total	$	101,675	$	(1,662)	$	95,430	$	(1,445)	$	6,245	$	(217)



		December 31, 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
Collateralized mortgage obligations GSE	$	2,530	$	(89)	$	2,530	$	(89)	$	-	$	-
State and municipal tax-exempt		29,142		(2,425)		17,434		(727)		11,708		(1,698)
Total	$	31,672	$	(2,514)	$	19,964	$	(816)	$	11,708	$	(1,698)
Available For Sale
US Government agency obligations	$	24,931	$	(583)	$	24,931	$	(583)	$	-	$	-
GSE mortgage-backed securities		38,255		(698)		38,255		(698)		-		-
Collateralized mortgage obligations GSE		21,416		(968)		20,336		(959)		1,080		(9)
Corporate bonds		16,549		(394)		10,968		(223)		5,581		(171)
State and municipal tax-exempt		1,072		(19)		300		(6)		772		(13)
Equity securities		12		(11)		-		-		12		(11)
Total	$	102,235	$	(2,673)	$	94,790	$	(2,469)	$	7,445	$	(204)

As of March 31, 2014, there were twenty-two mortgage-backed securities, seven corporate bonds, ten U.S. agency obligations, seventeen collateralized mortgage obligations, thirty-six tax-exempt municipalities, 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 March 31, 2014 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 March 31, 2014, the following securities were reviewed:

Collateralized mortgage obligations GSE There are seventeen impaired securities classified as collateralized mortgage obligations. All of these securities were issued and insured by FNMA, FHLMC or GNMA. DNB receives monthly principal and interest payments on all of these securities on a timely basis and none of these agencies has ever defaulted on mortgage-backed principal or interest. DNB anticipates a recovery in the market value as the securities approach their maturity dates or if interest rates decline from March 31, 2014 levels. Management concluded that these securities were not other-than-temporarily impaired at March 31, 2014.

State and municipal tax-exempt There are thirty-six impaired securities in this category, which are comprised of intermediate to long-term municipal bonds. All of the issues carry an A or better underlying credit support and were evaluated on the basis on their underlying fundamentals; included but not limited to annual financial reports, geographic location, population and debt ratios. In certain cases, options for calls reduce the effective duration and in turn the future market value fluctuations. All issues are performing and are expected to continue to perform in accordance with their respective contractual terms and conditions. There have not been disruptions of any payments, associated with any of these municipal securities. These bonds are investment grade and the value decline is related to the changes in interest rates. Twenty-seven of the impaired municipals are school districts that have PA school district credit enhancement programs and nineteen of those also have additional insurance. The remaining nine are two insured school districts, two uninsured school districts, and five townships, all of which have strong underlying ratings. Management concluded that these securities were not other-than-temporarily impaired at March 31, 2014.

US Government agency obligations There are ten impaired securities classified as agencies. All of these securities were issued and insured by FHLB, FNMA, or FHLMC. DNB has received timely interest payments on all of these securities and none of these agencies has ever defaulted on their bonds. DNB anticipates a recovery in the market value as the securities approach their maturity dates. Management concluded that these securities not other-than-temporarily impaired at March 31, 2014.

GSE mortgage-backed securities There are twenty-two impaired bonds classified as GSE mortgage-backed securities. All of these securities were issued and insured by FNMA, FHLMC, or GNMA. DNB receives monthly principal and interest payments on all of these securities on a timely basis an none of these agencies has ever defaulted on mortgage-backed principal or interest. DNB anticipates a recovery in the market value as the securities approach their maturity dates or if interest rates decline from March 31, 2014 levels. Management concluded that these securities were not other-than-temporarily impaired at March 31, 2014.

Corporate Securities There were seven impaired bonds classified as corporate bonds. The bonds are investment grade and the value decline is related to the changes in interest rates that occurred since the time of purchase and subsequent changes in spreads affecting the market prices. All of the issues carry an A or better underlying credit support and were evaluated on the basis on their underlying fundamentals; included but not limited to annual financial reports, rating agency reports, capital strength and debt ratios. DNB anticipates a recovery in the market value as the securities approach their maturity dates or if interest rates decline from March 31, 2014 levels. Management concluded that these securities were not other-than-temporarily impaired at March 31, 2014.

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 March 31, 2014.

The amortized cost and fair value of investment securities as of March 31, 2014, 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	$	-	$	-	$	2,071	$	2,071
Due after one year through five years		-		-		21,763		21,514
Due after five years through ten years		31,010		31,124		63,042		62,666
Due after ten years		32,471		31,695		42,997		42,080
No stated maturity		-		-		27		17
Total investment securities	$	63,481	$	62,819	$	129,900	$	128,348

DNB sold $15.2 million and $16.3 million from the Available for Sale portfolio during the three months ended March 31, 2014 and 2013, respectively. DNB sold $1.2 million and no securities from the Held to Maturity portfolio during the three month period ending March 31, 2014 and 2013, respectively. The sales of HTM securities were permissible because DNB collected greater than 85% of the principal outstanding on the HTM securities that were sold during the three months ended March 31, 2014. Gains and losses resulting from investment sales, redemptions or calls were as follows:



		Three Months Ended
		March 31,
(Dollars in thousands)		2014		2013
Gross realized gains-AFS	$	192	$	316
Gross realized gains-HTM		68		-
Gross realized losses-AFS		(25)		(257)
Net realized gain	$	235	$	59

At March 31, 2014 and December 31, 2013, investment securities with a carrying value of approximately $114.0 million and $116.2 million, respectively, were pledged to secure public funds, repurchase agreements and for other purposes as required by law.