(3) INVESTMENT SECURITIES

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



			December 31, 2016
	Amortized			Unrealized		Unrealized		Estimated
(Dollars in thousands)	Cost			Gains		Losses		Fair Value
Held To Maturity
US Government agency obligations	$	8,224		$	309	$	-	$	8,533
Government Sponsored Entities (GSE) mortgage-backed securities		1,440			38		-		1,478
Corporate bonds		12,825			230		(63)		12,992
Collateralized mortgage obligations GSE		1,966			2		(22)		1,946
State and municipal taxable		1,008			6		-		1,014
State and municipal tax-exempt		41,559			8		(1,406)		40,161
Total	$	67,022		$	593	$	(1,491)	$	66,124

Available For Sale
US Government agency obligations	$	52,428		$	31	$	(150)	$	52,309
GSE mortgage-backed securities		30,861			2		(723)		30,140
Collateralized mortgage obligations GSE		12,957			3		(387)		12,573
Corporate bonds		15,474			5		(299)		15,180
State and municipal tax-exempt		5,084			-		(128)		4,956
Asset-backed security		26			-		-		26
Total	$	116,830		$	41	$	(1,687)	$	115,184


			December 31, 2015
	Amortized			Unrealized		Unrealized		Estimated
(Dollars in thousands)	Cost			Gains		Losses		Fair Value
Held To Maturity
US Government agency obligations	$	7,973		$	320	$	-	$	8,293
Government Sponsored Entities (GSE) mortgage-backed securities		2,759			83		-		2,842
Corporate bonds		11,518			234		(42)		11,710
Collateralized mortgage obligations GSE		2,623			9		(26)		2,606
State and municipal tax-exempt		42,956			300		(276)		42,980
Total	$	67,829		$	946	$	(344)	$	68,431

Available For Sale
US Government agency obligations	$	58,460		$	-	$	(252)	$	58,208
GSE mortgage-backed securities		40,663			13		(325)		40,351
Collateralized mortgage obligations GSE		16,241			3		(438)		15,806
Corporate bonds		20,921			-		(350)		20,571
State and municipal tax-exempt		17,274			180		(11)		17,443
Total	$	153,559		$	196	$	(1,376)	$	152,379

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 December 31, 2016 and 2015.



	December 31, 2016
					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	$	5,962	$	(63)	$	3,992	$	(39)	$	1,970	$	(24)
Collateralized mortgage obligations GSE		1,104		(22)		1,104		(22)		-		-
State and municipal tax-exempt		32,690		(1,406)		32,690		(1,406)		-		-
Total	$	39,756	$	(1,491)	$	37,786	$	(1,467)	$	1,970	$	(24)
Available For Sale
US Government agency obligations	$	27,270	$	(150)	$	27,270	$	(150)	$	-	$	-
GSE mortgage-backed securities		29,145		(723)		29,145		(723)		-		-
Collateralized mortgage obligations GSE		12,116		(387)		4,868		(94)		7,248		(293)
Corporate bonds		13,031		(299)		7,593		(218)		5,438		(81)
State and municipal tax-exempt		4,956		(128)		4,956		(128)		-		-
Asset-backed security		26		-		26		-		-		-
Total	$	86,544	$	(1,687)	$	73,858	$	(1,313)	$	12,686	$	(374)



	December 31, 2015
					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	$	7,597	$	(42)	$	7,597	$	(42)	$	-	$	-
Collateralized mortgage obligations GSE		1,482		(26)		388		(10)		1,094		(16)
State and municipal tax-exempt		13,161		(276)		4,380		(34)		8,781		(242)
Total	$	22,240	$	(344)	$	12,365	$	(86)	$	9,875	$	(258)
Available For Sale
US Government agency obligations	$	58,208	$	(252)	$	58,208	$	(252)	$	-	$	-
GSE mortgage-backed securities		38,307		(325)		33,984		(238)		4,323		(87)
Collateralized mortgage obligations GSE		15,231		(438)		4,187		(41)		11,044		(397)
Corporate bonds		20,571		(350)		16,157		(264)		4,414		(86)
State and municipal tax-exempt		6,660		(11)		6,660		(11)		-		-
Total	$	138,977	$	(1,376)	$	119,196	$	(806)	$	19,781	$	(570)

As of December 31, 2016, there were fifteen GSE mortgage-backed securities, fifty-three municipalities, twelve corporate bonds, six agency notes, one asset-backed security, and seventeen collateralized mortgage obligations 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 December 31, 2016 represents an other-than-temporary impairment. DNB reviews its investment portfolio on a quarterly basis judging each investment for OTTI. The OTTI analysis focuses on the duration and the amount a particular security is below book.

Factors affecting the market price include credit risk, market risk, interest rates, economic cycles, and liquidity risk. The magnitude of any unrealized loss may be affected by the relative concentration of the Corporation’s investment in any one issuer or industry. DNB has established policies to reduce exposure through diversification of concentration of the investment portfolio including limits on concentrations to any one issuer and as such, management believes the investment portfolio is prudently diversified.

The declines in value are related to a change in interest rates and/or subsequent change in credit spreads required for these issues affecting market price. All issues are performing and are expected to continue to perform in accordance with their respective contractual terms and conditions. Short to intermediate average durations and in certain cases monthly principal payments should reduce further market value exposure to increases in rates.

Collateralized mortgage obligations GSE There are seventeen impaired securities classified as collateralized mortgage obligations, nine of which were impaired for more than 12 months. The largest unrealized loss of a security in this group is 4.47% of its carrying value. 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 December 31, 2016 levels. Management concluded that these securities were not other-than-temporarily impaired at December 31, 2016.

State and municipal tax-exempt There are fifty-three impaired securities in this category, which are comprised of intermediate to long-term municipal bonds, none of which were impaired for more than 12 months. The largest unrealized loss of a security in this group is 8.60% of its carrying value. All of the issues carry a “BBB” 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 conservative in nature 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. Thirty-four of the impaired municipals are school districts that have PA school district credit enhancement programs and twenty of those also have additional insurance. The remaining nineteen are two insured school districts, two uninsured school districts, six insured townships and nine uninsured townships, all of which have strong underlying ratings. Management concluded that these securities were not other-than-temporarily impaired at December 31, 2016.

US Government agency obligations There are six impaired securities classified as agencies, none of which were impaired for more than 12 months. The largest unrealized loss of a security in this group is 0.74% of its carrying value. 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 December 31, 2016.

Asset-backed securities There is one impaired security classified as asset-backed, which was not impaired for more than 12 months. The unrealized loss of this security is 0.02% of its carrying value. DNB has received timely interest payments on this security and it has never defaulted. DNB anticipates a recovery in the market value as the security approaches its maturity date. Management concluded that this security was not other-than-temporarily impaired at December 31, 2016.

GSE mortgage-backed securities There are fifteen impaired bonds classified as GSE mortgage-backed securities, none of which were impaired for more than 12 months. The largest unrealized loss of a security in this group is 3.29% of its carrying value. 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 December 31, 2016 levels. Management concluded that these securities were not other-than-temporarily impaired at December 31, 2016.

Corporate bonds There were twelve impaired bonds classified as corporate bonds, two of which were impaired for more than 12 months. The largest unrealized loss of a security in this group is 5.15% of its carrying value. 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 a “BBB+” 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 December 31, 2016 levels. Management concluded that these securities were not other-than-temporarily impaired at December 31, 2016.

In determining that the securities giving rise to the previously mentioned unrealized losses were not other than temporary, the Corporation evaluated the factors cited above, which the Corporation considers when assessing whether a security is other-than-temporarily impaired. In making these evaluations the Corporation must exercise considerable judgment. Accordingly, there can be no assurance that the actual results will not differ from the Corporation’s judgments and that such differences may not require the future recognition of other-than-temporary impairment charges that could have a material affect on the Corporation’s financial position and results of operations. In addition, the value of, and the realization of any loss on, an investment security is subject to numerous risks as cited above.

The amortized cost and estimated fair value of investment securities as of December 31, 2016, by final 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		Estimated		Amortized		Estimated
(Dollars in thousands)	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	-	$	-	$	19,731	$	19,720
Due after one year through five years		23,862		24,327		49,398		49,088
Due after five years through ten years		27,896		27,366		8,752		8,608
Due after ten years		15,264		14,431		38,949		37,768
Total investment securities	$	67,022	$	66,124	$	116,830	$	115,184

The principal values of investment securities sold as of the dates indicated are shown below. The HTM securities sold during 2016 were sold in accordance with GAAP, as DNB collected greater than 85% of the original recorded investment on the HTM securities prior to the sale. As a result, it is appropriate to continue to carry the remaining HTM portfolio as currently classified.



	Year Ended
	December 31
(Dollars in thousands)	2016		2015
Available for sale securities sold	$	43,913	$	17,988
Held to maturity securities sold		761		-
Total sold securities	$	44,674	$	17,988

Gains and losses resulting from investment sales, redemptions or calls were as follows:



	Year Ended
	December 31
(Dollars in thousands)	2016		2015
Gross realized gains-AFS	$	440	$	90
Gross realized gains-HTM		21		-
Gross realized losses-AFS		(30)		(12)
Gross realized losses-HTM		-		-
Net realized gain	$	431	$	78

At December 31, 2016 and 2015, investment securities with a carrying value of approximately $116.7 million and $147.9 million, respectively, were pledged to secure public funds, repurchase agreements, FHLBP advances and for other purposes as required by law. See Note 8 regarding the use of certain securities as collateral.