NOTE 2: INVESTMENT SECURITIES

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



		September 30, 2014
		Amortized		Unrealized		Unrealized
(Dollars in thousands)		Cost		Gains		Losses		Fair Value
Held To Maturity
US Government agency obligations	$	7,670	$	202	$	-	$	7,872
Government Sponsored Entities (GSE) mortgage-backed securities		3,775		118		-		3,893
Corporate bonds		6,261		497		-		6,758
Collateralized mortgage obligations GSE		3,860		-		(60)		3,800
State and municipal tax-exempt		40,594		455		(611)		40,438
Total	$	62,160	$	1,272	$	(671)	$	62,761

Available For Sale
US Government agency obligations	$	27,443	$	-	$	(191)	$	27,252
GSE mortgage-backed securities		70,016		50		(466)		69,600
Collateralized mortgage obligations GSE		21,496		12		(787)		20,721
Corporate bonds		17,840		19		(130)		17,729
State and municipal tax-exempt		609		-		(1)		608
Equity securities		27		2		(13)		16
Total	$	137,431	$	83	$	(1,588)	$	135,926



		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 following table details the aggregate unrealized losses and aggregate fair value of the underlying securities whose fair values are below their amortized cost at September 30, 2014 and December 31, 2013.



		September 30, 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	$	3,800	$	(60)	$	3,800	$	(60)	$	-	$	-
State and Municipal tax-exempt		22,002		(611)		5,148		(6)		16,854		(605)
Total	$	25,802	$	(671)	$	8,948	$	(66)	$	16,854	$	(605)
Available For Sale
US Government agency obligations	$	17,052	$	(191)	$	2,505	$	(5)	$	14,547	$	(186)
GSE mortgage-backed securities		62,496		(466)		55,282		(249)		7,214		(217)
Collateralized mortgage obligations GSE		16,308		(787)		2,363		(64)		13,945		(723)
Corporate bonds		12,685		(130)		8,748		(43)		3,937		(87)
State and Municipal tax-exempt		608		(1)		-		-		608		(1)
Equity securities		11		(13)		-		-		11		(13)
Total	$	109,160	$	(1,588)	$	68,898	$	(361)	$	40,262	$	(1,227)



		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 September 30, 2014, there were twenty-eight mortgage-backed securities, seven corporate bonds, ten U.S. agency obligations, seventeen collateralized mortgage obligations, thirty 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 September 30, 2014 represents an other-than-temporary impairment (OTTI). DNB reviews its investment portfolio on a quarterly basis judging each investment for OTTI. The OTTI analysis focuses on condition of the issuers as well as duration and severity of impairment in determining OTTI. As of September 30, 2014, the following securities were reviewed:

Collateralized mortgage obligations GSE There are seventeen impaired securities classified as collateralized mortgage obligations, eleven of which were impaired for more than 12 months. 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 September 30, 2014 levels. Management concluded that these securities were not other-than-temporarily impaired at September 30, 2014.

State and municipal tax-exempt There are thirty impaired securities in this category, which are comprised of intermediate to long-term municipal bonds, twenty-six of which were impaired for more than 12 months. All of the issues carry an “A” or better underlying credit rating and/or have strong 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, 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. Of the thirty municipal securities, there are eighteen insured school districts, nine uninsured school districts, and three uninsured townships, all of which have strong underlying ratings. Management concluded that these securities were not other-than-temporarily impaired at September 30, 2014.

US Government agency obligations There are ten impaired securities classified as agencies, eight of which were impaired for more than 12 months. 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 were not other-than-temporarily impaired at September 30, 2014.

GSE mortgage-backed securities There are twenty-eight impaired bonds classified as GSE mortgage-backed securities, four of which were impaired for more than 12 months. 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 principal or interest. DNB anticipates a recovery in the market value as the securities approach their maturity dates or if interest rates decline from September 30, 2014 levels. Management concluded that these securities were not other-than-temporarily impaired at September 30, 2014.

Corporate Securities There were seven impaired bonds classified as corporate bonds, two of which were impaired for more than 12 months. 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 September 30, 2014 levels. Management concluded that these securities were not other-than-temporarily impaired at September 30, 2014.

Equity securities. DNB’s investment in five marketable equity securities consists primarily of securities in common stock of community banks in Pennsylvania, all of which were impaired for more than 12 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. Based on our evaluation and expectation that these investments will recover within a reasonable period of time, management does not consider these investments to be other-than-temporarily impaired at September 30, 2014.

The amortized cost and fair value of investment securities as of September 30, 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	$	-	$	-	$	3,531	$	3,526
Due after one year through five years		1,003		991		32,077		31,837
Due after five years through ten years		32,433		33,102		65,822		65,587
Due after ten years		28,724		28,668		35,974		34,960
No stated maturity		-		-		27		16
Total investment securities	$	62,160	$	62,761	$	137,431	$	135,926

The principal value of investments securites sold as of the dates indicated are shown below. The HTM securities that were sold during the nine months ended September 30, 2014 were permissible because DNB collected greater than 85% of the original recorded investment on the HTM securities prior to the sale.



		Three Months Ended				Nine Months Ended
		September 30,				September 30,
(Dollars in thousands)		2014		2013		2014		2013
Available for sale securities sold	$	6,635	$	8,412	$	34,970	$	30,960
Held to maturity securities sold		385		-		1,613		-
Total sold securities	$	7,020	$	8,412	$	36,583	$	30,960

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)		2014		2013		2014		2013
Gross realized gains-AFS	$	81	$	281	$	375	$	752
Gross realized gains-HTM		5		-		73		-
Gross realized losses-AFS		-		-		(25)		(257)
Net realized gain	$	86	$	281	$	423	$	495

At September 30, 2014 and December 31, 2013, investment securities with a carrying value of approximately $143.9 million and $116.2 million, respectively, were pledged to secure public funds, repurchase agreements and for other purposes as required by law.