UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________________

FORM 10-Q

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended: September 30, 2018

or

[  ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from ________________ to _____________

Commission File Number: 1-34242

DNB Financial Corporation

(Exact name of registrant as specified in its charter)

Pennsylvania23-2222567

Pennsylvania (State or other jurisdiction of incorporation or organization) 23-2222567 (I.R.S. Employer Identification No.)

4 Brandywine Avenue - Downingtown, PA 19335

(Address of principal executive offices and Zip Code)

(610) 269-1040

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes☐ No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock ($1.00 Par Value) (Class)   4,315,518(Shares Outstanding as of November5, 2018)

DNB FINANCIAL CORPORATION AND SUBSIDIARY

INDEX

	PART  I - FINANCIAL INFORMATION	PAGE NO.
ITEM 1.	FINANCIAL STATEMENTS (Unaudited):
	CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
	September 30, 2018 and December 31, 2017	3
	CONSOLIDATED STATEMENTS OF INCOME
	Three and NineMonths Ended September 30, 2018 and 2017	4
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
	Three and NineMonths Ended September 30, 2018 and 2017	5
	CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY	6
	Nine Months Ended September 30, 2018 and 2017
	CONSOLIDATED STATEMENTS OF CASH FLOWS
	Nine Months Ended September 30, 2018 and 2017	7
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	8
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	31
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	48
ITEM 4.	CONTROLS AND PROCEDURES	48
	PART II - OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	48
ITEM 1A.	RISK FACTORS	48
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	48
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	49
ITEM 4.	MINE SAFETY DISCLOSURES	49
ITEM 5.	OTHER INFORMATION	49
ITEM 6.	EXHIBITS	49
SIGNATURES		50
EXHIBIT INDEX		51

2

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

DNB Financial Corporation and Subsidiary

Consolidated Statements of Financial Condition (Unaudited)

	September 30,		December 31,
(Dollars in thousands, except share and per share data)	2018		2017
Assets
Cash and due from banks	$	10,702	$	10,917
Cash and cash equivalents		10,702		10,917
Available-for-sale investment securities at fair value (amortized cost of $102,345 and $113,555)		99,161		111,783
Held-to-maturity investment securities (fair value of $60,303 and $62,420)		62,069		62,390
Total investment securities		161,230		174,173
Loans held for sale		-		651
Loans		908,293		845,897
Allowance for credit losses		(6,559)		(5,843)
Net loans		901,734		840,054
Restricted stock		5,864		7,641
Office property and equipment, net		7,881		8,649
Accrued interest receivable		4,210		3,822
Other real estate owned & other repossessed property		5,077		5,012
Bank owned life insurance (BOLI)		9,472		9,314
Core deposit intangible		364		435
Goodwill		15,525		15,525
Net deferred taxes		3,084		2,980
Other assets		2,972		2,742
Total assets	$	1,128,115	$	1,081,915
Liabilities and Stockholders’ Equity
Liabilities
Non-interest-bearing deposits	$	168,311	$	176,815
Interest-bearing deposits:
NOW		213,707		199,310
Money market		227,797		221,726
Savings		78,996		81,050
Time		154,021		140,490
Brokered deposits		97,049		41,812
Total deposits		939,881		861,203
Federal Home Loan Bank of Pittsburgh (FHLBP) advances		36,952		79,013
Repurchase agreements		4,089		12,023
Junior subordinated debentures		9,279		9,279
Subordinated debt		9,750		9,750
Other borrowings		13,554		2,738
Total borrowings		73,624		112,803
Accrued interest payable		557		554
Other liabilities		5,994		5,413
Total liabilities		1,020,056		979,973
Stockholders’ Equity
Common stock, $1.00 par value;
20,000,000 shares authorized; 4,375,645 and 4,362,939issued, respectively; 4,311,860 and 4,286,117outstanding, respectively		4,393		4,379
Treasury stock, at cost; 63,785 and 76,822 shares, respectively		(1,196)		(1,429)
Surplus		69,316		69,110
Retained earnings		39,523		32,272
Accumulated other comprehensive loss		(3,977)		(2,390)
Total stockholders’ equity		108,059		101,942
Total liabilities and stockholders’ equity	$	1,128,115	$	1,081,915

See accompanying notes to unaudited consolidated financial statements.

3

DNB Financial Corporation and Subsidiary

Consolidated Statements of Income (Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands, except share and per share data)	2018		2017		2018		2017
Interest Income:
Interest and fees on loans	$	10,588	$	9,994	$	30,634	$	29,089
Interest and dividends on investment securities:
Taxable		754		721		2,409		2,175
Exempt from federal taxes		219		236		654		714
Interest on cash and cash equivalents		74		38		140		166
Total interest and dividend income		11,635		10,989		33,837		32,144
Interest Expense:
Interest on NOW, money market and savings		998		606		2,822		1,678
Interest on time deposits		579		307		1,237		921
Interest on brokered deposits		457		160		1,070		346
Interest on FHLB advances		199		185		739		522
Interest on repurchase agreements		2		8		14		21
Interest on junior subordinated debentures		122		99		340		286
Interest on subordinated debt		104		104		311		311
Interest on other borrowings		23		14		58		42
Total interest expense		2,484		1,483		6,591		4,127
Net interest income		9,151		9,506		27,246		28,017
Provision for credit losses		100		375		850		1,285
Net interest income after provision for credit losses		9,051		9,131		26,396		26,732
Non-interest Income:
Service charges		274		282		848		936
Wealth management		542		411		1,489		1,256
Mortgage banking		56		62		193		112
Increase in cash surrender value of BOLI		54		55		158		165
Gain on sale of investment securities, net		-		-		-		25
Gain on sale of loans		27		35		37		132
Gains from insurance proceeds		8		-		8		80
Other fees		410		426		1,243		1,293
Total non-interest income		1,371		1,271		3,976		3,999
Non-interest Expense:
Salaries and employee benefits		3,709		3,926		11,742		11,291
Furniture and equipment		564		525		1,603		1,526
Occupancy		656		631		1,987		2,006
Professional and consulting		484		485		1,311		1,334
Advertising and marketing		182		135		568		575
FDIC insurance		123		161		363		506
PA shares tax		242		219		727		677
Telecommunications		89		87		254		265
Loss on sale or write down of OREO, net		11		7		151		121
Due diligence and merger expense		-		-		-		77
Other expenses		713		814		2,337		2,441
Total non-interest expense		6,773		6,990		21,043		20,819
Income before income tax expense		3,649		3,412		9,329		9,912
Income tax expense		629		1,001		1,647		2,774
Net income	$	3,020	$	2,411	$	7,682	$	7,138
Earnings per common share:
Basic	$	0.70	$	0.57	$	1.79	$	1.68
Diluted	$	0.70	$	0.56	$	1.78	$	1.66
Cash dividends per common share	$	0.07	$	0.07	$	0.21	$	0.21
Weighted average common shares outstanding:
Basic	4,307,402		4,262,165		4,298,987		4,255,520
Diluted	4,317,553		4,296,371		4,313,638		4,287,745

See accompanying notes to unaudited consolidated financial statements.

4

DNB Financial Corporation and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands)	2018		2017		2018		2017
Net income	$	3,020	$	2,411	$	7,682	$	7,138
Other Comprehensive (Loss) Income:
Unrealized holding gains arising during the period
Before tax amount		(163)		165		(1,412)		401
Tax effect		34		(56)		296		(136)
		(129)		109		(1,116)		265
Accretion of discount on AFS to HTM reclassification
Before tax amount(1)		-		1		-		8
Tax effect(2)		-		-		-		(3)
		-		1		-		5
Less reclassification for gains on sales of AFS investment securities included in net income
Before tax amount(3)		-		-		-		(9)
Tax effect(2)		-		-		-		3
		-		-		-		(6)
Total other comprehensive (loss) income		(129)		110		(1,116)		264
Total comprehensive income	$	2,891	$	2,521	$	6,566	$	7,402
(1) Amounts are included in "Interest and dividends on investment securities" in the consolidated statements of income.
(2) Amounts are included in "Income tax expense" in the consolidated statements of income.
(3) Amounts are included in "Gains on sale of investment securities, net" in the consolidated statements of income.

See accompanying notes to unaudited consolidated financial statements.

5

DNB Financial Corporation and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

									Accumulated
									Other
	Common		Treasury				Retained		Comprehensive
(Dollars in thousands)	Stock		Stock		Surplus		Earnings		Loss		Total
Balance at January 1, 2018	$	4,379	$	(1,429)	$	69,110	$	32,272	$	(2,390)	$	101,942
Net income for nine months ended September 30, 2018		-		-		-		7,682		-		7,682
Other comprehensive loss		-		-		-		-		(1,116)		(1,116)
Restricted stock compensation expense (4,908 shares vested)		10		-		260		-		-		270
Exercise of stock options (7,798 shares)		8		-		(8)		-		-		-
Taxes on exercise of stock options		(4)		-		(262)		-		-		(266)
Cash dividends - common ($0.21 per share)		-		-		-		(902)		-		(902)
Sale of treasury shares to 401(k) (8,828 shares)		-		159		145		-		-		304
Sale of treasury shares to deferred comp. plan (4,209 shares)		-		74		71		-		-		145
Adoption impact - ASU 2018-02		-		-		-		471		(471)		-
Balance at September 30, 2018	$	4,393	$	(1,196)	$	69,316	$	39,523	$	(3,977)	$	108,059

									Accumulated
									Other
	Common		Treasury				Retained		Comprehensive
(Dollars in thousands)	Stock		Stock		Surplus		Earnings		Loss		Total
Balance at January 1, 2017	$	4,351	$	(1,730)	$	68,973	$	25,520	$	(2,274)	$	94,840
Net income for nine months ended September 30, 2017		-		-		-		7,138		-		7,138
Other comprehensive income		-		-		-		-		264		264
Restricted stock compensation expense		13		-		308		-		-		321
Exercise of stock options (9,264 shares)		9		-		(9)		-		-		-
Taxes on exercise of stock options		-		-		(189)		-		-		(189)
Cash dividends - common ($0.21 per share)		-		-		-		(895)		-		(895)
Sale of treasury shares to 401(k) (8,366 shares)		-		151		62		-		-		213
Sale of treasury shares to deferred comp. plan (4,313 shares)		-		77		115		-		-		192
Balance at September 30, 2017	$	4,373	$	(1,502)	$	69,260	$	31,763	$	(2,010)	$	101,884

See accompanying notes to unaudited consolidated financial statements.

6

DNB Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

	Nine Months Ended September 30,
(Dollars in thousands)	2018		2017
Cash Flows From Operating Activities:
Net income	$	7,682	$	7,138
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		1,144		1,253
Provision for credit losses		850		1,285
Stock based compensation		270		321
Net gain on sale of securities		-		(25)
Net loss on sale or write down of OREO and other repossessed property		151		121
Gain on insurance proceeds		(8)		(80)
Earnings from investment in BOLI		(158)		(165)
Deferred tax expense		193		260
Proceeds from sales of mortgage loans		11,088		3,698
Mortgage loans originated for sale		(10,244)		(3,936)
Gain on sale of mortgage loans		(193)		(112)
Proceeds from sales of loans		805		2,142
Loans originated for sale		(768)		(2,010)
Gain on sale of loans		(37)		(132)
Increase in accrued interest receivable		(388)		(224)
(Increase) decrease in other assets		(230)		101
Increase (decrease) in accrued interest payable		3		(73)
Increase in other liabilities		581		2,716
Net Cash Provided by Operating Activities		10,741		12,278
Cash Flows From Investing Activities:
Activity in available-for-sale securities:
Sales		-		3,030
Maturities, repayments and calls		10,976		19,318
Purchases		-		(15,093)
Activity in held-to-maturity securities:
Sales		-		737
Maturities, repayments and calls		413		641
Purchases		-		(1,407)
Net decrease (increase) in restricted stock		1,777		(990)
Net increase in loans		(62,848)		(6,074)
Death benefit proceeds		8		310
Purchases of property and equipment		(164)		(576)
Expenses capitalized in OREO		-		(15)
Proceeds from sale of OREO and other repossessed property		102		596
Net Cash (Used in) Provided by Investing Activities		(49,736)		477
Cash Flows From Financing Activities:
Net increase (decrease) in deposits		78,678		(13,859)
Repayment of FHLBP advances		(226,661)		(24,133)
Funding of FHLBP advances		184,600		19,848
Net (decrease) increase in repurchase agreements		(7,934)		3,494
Proceeds from (repayment of) other borrowings		10,816		(39)
Dividends paid		(902)		(895)
Payment of employee taxes on stock option exercise and share award vest		(266)		(189)
Tax benefit for restricted stock vesting		-		-
Sale of treasury stock		449		405
Net Cash Provided By (Used In) Financing Activities		38,780		(15,368)
Net Change in Cash and Cash Equivalents		(215)		(2,613)
Cash and Cash Equivalents at Beginning of Period		10,917		22,103
Cash and Cash Equivalents at End of Period	$	10,702	$	19,490
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest	$	6,588	$	4,200
Income taxes		975		2,536
Supplemental Disclosure of Non-cash Flow Information:
Net decrease in goodwill		-		65
Transfers from loans to real estate owned and other repossessed property		318		2,851

See accompanying notes to unaudited consolidated financial statements.

7

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of DNB Financial Corporation (referred to herein as the "Corporation" or "DNB") and its subsidiary, DNB First, National Association (the "Bank") have been prepared in accordance with the instructions for Form 10-Q and therefore do not include certain information or footnotes necessary for the presentation of financial condition, statement of operations and statement of cash flows required by generally accepted accounting principles. However, in the opinion of management, the consolidated financial statements reflect all adjustments (which consist of normal recurring adjustments) necessary for a fair presentation of the results for the unaudited periods. Prior amounts not affecting net income are reclassified when necessary to conform to current period classifications. The results of operations for the three and ninemonths ended September 30, 2018 are not necessarily indicative of the results which may be expected for the entire year.  The consolidated financial statements should be read in conjunction with the Annual Report and report on Form 10-K for the year ended December 31, 2017. 

Subsequent Events-- Management has evaluated events and transactions occurring subsequent to September 30, 2018 for items that should potentially be recognized or disclosed in these Consolidated Financial Statements. The evaluation was conducted through the date these financial statements were issued.

Recent Accounting Pronouncements-  

Accounting Developments Affecting DNB

In May 2014, the FASB issued ASU No. 2014-09, ‘‘Revenue from Contracts with Customers (Topic 606).’’ The updated standard is a new comprehensive revenue recognition model that requires revenue to be recognized in a manner that depicts the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 by one year. During 2016 and 2017, the FASB issued ASU Nos. 2016-10, 2016-12, 2016-20, and 2017-13 that provided additional guidance related to the identification of performance obligations within a contract, assessing collectability, contract costs, and other technical corrections and improvements.

DNB adopted the new standards discussed above effective January 1, 2018 using the modified retrospective approach. A significant majority of DNB’s revenues are explicitly excluded from the scope of the new guidance including interest, dividend income, BOLI, gain/loss on sale of loans and investments on the Consolidated Statements of Income. The adoption of ASU 2014-09 did not require a cumulative adjustment to the opening balance of retained earnings as of January 1, 2018 and is not expected to have a material impact on DNB’s Consolidated Statements of Financial Condition, Comprehensive Income, Stockholders’ Equity or Cash Flows for the year ended December 31, 2018. Non-interest income components in the scope of Topic 606 continue to be recognized when DNB’s performance obligations are complete or at the time of sale after a customer’s transaction posts in the account. Disclosures required for DNB’s revenue streams in the scope of ASU 2014-09 are included in Non-Interest Income in the following table.

8

Non-interest Income Non-interest income includes revenue from contracts with customers in the scope of ASU 2014-09 as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands)	2018		2017		2018		2017
Non-interest Income:
Service charges:
Non-sufficient funds charges	$	157	$	173	$	458	$	538
Business analysis charges		42		39		127		120
Cycle charges		24		23		69		69
Lockbox fees		2		2		54		57
Stop payment fees		5		4		12		14
Wire transfer fees		23		20		66		64
Other service charges		21		21		62		74
Total service charges		274		282		848		936
Wealth management:
DNB Investments & Insurance		185		115		423		361
DNB First Investment Management & Trust		357		296		1,066		895
Total wealth management		542		411		1,489		1,256
Other fee income:
Cardholder interchange fees		257		245		771		733
Safe deposit box		24		27		74		77
Check printing		14		15		49		54
Merchant card processing		44		48		134		145
ATM surcharges for non-DNB customers		19		22		56		62
Other fee income		13		28		40		85
Total other fee income		371		385		1,124		1,156
Total Revenue from contracts with customers		1,187		1,078		3,461		3,348
Total Revenue not within the scope of ASC 606		184		193		515		651
Total non-interest income	$	1,371	$	1,271	$	3,976	$	3,999

Service charges on deposit accounts are recorded monthly when DNB’s performance obligations are complete. Deposit balances are disclosed in the Consolidated Statement of Condition. For transaction-based service charges such as non-sufficient funds charges, wire transfer fees, stop payment fees, ATM fees, and other transaction-based fees, revenue is recognized at the time of sale after the transaction posts in the customer’s account.

Wealth management revenue includes non-deposit products and services offered under the names “DNB Investment & Insurance” and “DNB First Investment Management & Trust”.

Through a third-party marketing agreement with Cetera Investment Services, LLC (“Cetera”), DNB Investment & Insurance offers a complete line of investment and insurance products. DNB’s performance obligation as an agent is to arrange for the sale of products by Cetera. Monthly, DNB recognizes  commission fees in the amounts to which it is entitled in accordance with the terms of the marketing agreement for products sold. Shortly after a sale, the product provided remits the commission payment through Cetera to the Company, and the Company recognizes the revenue.

DNB First Investment Management & Trust offers a full line of investment and fiduciary services. DNB’s performance obligation is to manage investments, estates and trusts. Investment management and trust income is primarily comprised of fees earned from the management and administration of trusts, estates and investment agency portfolios. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized quarterly, based upon the quarter-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after quarter end through a direct charge to customers’ accounts. While managing estates and trusts, DNB contracts with a third-party tax preparation service. For tax preparation services, DNB’s obligation as an agent is to arrange for the performance of services by the third party. As tax services are rendered, DNB records revenue net of the cost of the services.

Cardholder interchange fees consist of revenue DNB is entitled per agreements with third party debit and credit card providers. DNB’s performance obligation as an agent is to arrange for cardholder services with its customers in accordance with fees and terms offered by the third-party service providers. Based on cardholder transactions reported by third party service providers, DNB recognizes fees for the amount it is contractually entitled.

DNB also contracts with third party providers for check printing, merchant card services, and ATM services. DNB’s performance obligation as an agent is to arrange for the services with its customers in accordance with fees and terms offered by the third-party service providers. Monthly, DNB recognizes fees for the amount it is contractually entitled.

9

DNB adopted ASU 2015-16, Business Combinations (Topic 805), in 2016: Simplifying the Accounting for Measurement Period Adjustments on a prospective basis. This amendment eliminates the requirement to account for adjustments to provisional amounts recognized in a business combination retrospectively. Instead, the acquirer will recognize the adjustments to provisional amounts during the period in which the adjustments are determined, including the effect on earnings of any amounts the acquirer would have recorded in previous periods if the accounting had been completed at the acquisition date. DNB evaluated the impact of this guidance and it does not have a material impact to the consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. In particular, the guidance revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The guidance also amends certain disclosure requirements associated with fair value of financial instruments. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. As of September 30, 2018, DNB did not hold any equity investments (excluding restricted investments in bank stocks).  DNB does not expect to make significant purchases of equity investments; therefore, the adoption of this ASU is not expected to be material to DNB's consolidated financial statements. Adoption of the standard on January 1, 2018 also resulted in the use of an exit price rather than an entrance price to determine the fair value of loans not measured at fair value on a non-recurring basis in the consolidated balance sheets.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. DNB has determined that upon the adoption of ASU 2016-02 we will be required to recognize a right-of-use asset and a corresponding liability based on the then present value of such obligation. DNB is preparing an inventory of its leases and evaluating the impact of this ASU on these leases. Upon adoption of the guidance, DNB expects to report increased assets and increased liabilities as a result of recognizing right-of-use assets and lease liabilities on its consolidated statement of condition. DNB is currently evaluating the extent of the impact that the adoption of this ASU will have on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, this ASU is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods therein. Accordingly, effective January of 2017, DNB adopted the pronouncement. During the three and ninemonth periods ended September 30, 2018, DNB had $51,000 and $93,000 of tax benefits for stock option exercises and restricted stock vesting, respectively. In accordance with ASU 2016-09, forfeitures are recognized as they occur instead of applying an estimated forfeiture rate to each grant. For purposes of the determination of stock-based compensation expense for the three and nine month periods ended September 30, 2018, we recognized actual forfeitures of 0and 4,345 shares of restricted stock awards that were granted to officers and other employees.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," (ASU 2016-13), which addresses concerns regarding the perceived delay in recognition of credit losses under the existing incurred loss model. The amendment introduces a new, single model for recognizing credit losses on all financial instruments presented on cost basis. Under the new model, entities must estimate current expected credit losses by considering all available relevant information, including historical and current information, as well as reasonable and supportable forecasts of future events. The update also requires additional qualitative and quantitative information to allow users to better understand the credit risk within the portfolio and the methodologies for determining allowance. ASU 2016-13 is effective for DNB on January 1, 2020 and must be applied using the modified retrospective approach with limited exceptions. Early adoption is permitted. Although early adoption is permitted for fiscal years beginning after December 15, 2018, DNB does not plan to early adopt. DNB has established a CECL Implementation Team to assess the impact of this ASU on its consolidated financial position, results of operations, and cash flows. DNB has been preserving certain historical loan information from its core processing system in anticipation of adopting the standard and will be evaluating control and process framework, data, model, and resource requirements and areas where modifications will be required. The team continues to assess the impact of the standard; however, DNB expects adopting this ASU will result in an increase in its allowance for credit losses. The amount of the increase in the allowance for credit losses upon adoption will be dependent upon the characteristics of the portfolio at the adoption date, as well as macroeconomic conditions and forecasts at that date. A cumulative effect adjustment will be made to retained earnings for the impact of the standard at the beginning of the period the standard is adopted.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). The amendments in this update provide guidance for eight specific cash flow classification issues for which current guidance is unclear or does not exist, thereby reducing diversity in practice. For public companies, the update is effective for annual periods beginning after December 15, 2017.

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Accordingly, effective January 1, 2018, DNB adopted the pronouncement and it did not have a material impact to DNB’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business. The new guidance narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities (collectively, the set) is not a business. To be considered a business, the set would need to include an input and a substantive process that together significantly contribute to the ability to create outputs, as defined by the ASU. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods, and should be applied prospectively. Early adoption is permitted. DNB will apply this guidance to applicable transactions after the adoption date.

In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, under the amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value with its carrying amount. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount when measuring the goodwill impairment loss, if applicable. The update also eliminated the requirements for zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments are effective for public business entities for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. DNB will not early adopt this ASU for its annual goodwill impairment test, and conducted a qualitative test (step zero) as of October 1, 2017 and determined that its Goodwill has not been impaired. The adoption of this ASU is not expected to have a material impact on DNB’s consolidated financial statements. 

In March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” Under the new guidance, employers will present the service cost component of the net periodic benefit cost in the same income statement line item (e.g., Salaries and Benefits) as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. Employers will present the other components separately (e.g., Other Noninterest Expense) from the line item that includes the service cost. ASU No. 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, however, DNB has decided not to early adopt. Employers will apply the guidance on the presentation of the components of net periodic benefit cost in the income statement retrospectively. ASU No. 2017-07 will not have a material impact on DNB Consolidated Financial Statements because the Pension plan has been frozen to new accruals since December 31, 2003, and thus, generated no service cost in any subsequent year.

In March of 2017, the FASB issued ASU No. 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”  (“ASU 2017-08”). This guidance shortens the amortization period for premiums on certain callable debt securities to the earliest call date (with an explicit, non-contingent call feature that is callable at a fixed price and on a preset dates), rather than contractual maturity date as currently required under GAAP. The ASU does not impact instruments without preset call dates such as mortgage-backed securities. For instruments with contingent call features, once the contingency is resolved and the security is callable at a fixed price and preset date, the security is within the scope of the ASU. ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and early adoption is permitted.Accordingly, effective January of 2017, DNB early adopted the pronouncement. The adoption of the ASU did not have a material impact to the consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718):  Scope of Modification Accounting; (“ASU 2017-09”).  ASU 2017-09 provides clarity by offering guidance on the scope of modification accounting for share-based payment awards and gives direction on which changes to the terms or conditions of these awards require an entity to apply modification accounting.  Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions.  The guidance is effective prospectively for all companies for annual periods beginning on or after December 15, 2017. Early adoption is permitted. DNB adopted the ASU on January 1, 2018 and the effects were immaterial.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income; (“ASU 2018-02”). This ASU allows a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for certain income tax effects stranded in AOCI as a result of the Tax Act. Consequently, the reclassification eliminates the stranded tax effects resulting from the Tax Act and is intended to improve the usefulness of information reported to financial statement users. However, because the ASU only relates to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires the effect of a change in tax laws or rates to be included in income from continuing operations is not affected. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. DNB adopted this ASU on January 1, 2018. The amount of this reclassification is $471,000.

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NOTE 2: INVESTMENT SECURITIES

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

	September 30, 2018
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
Held To Maturity
US Government agency obligations	$	8,682	$	34	$	-	$	8,716
Government Sponsored Entities (GSE) mortgage-backed securities		413		-		(4)		409
Corporate bonds		13,882		84		(95)		13,871
Collateralized mortgage obligations GSE		1,211		-		(55)		1,156
State and municipal taxable		362		-		(10)		352
State and municipal tax-exempt		37,519		2		(1,722)		35,799
Total	$	62,069	$	120	$	(1,886)	$	60,303
Available For Sale
US Government agency obligations	$	50,077	$	-	$	(622)	$	49,455
GSE mortgage-backed securities		28,762		-		(1,431)		27,331
Collateralized mortgage obligations GSE		10,610		-		(669)		9,941
Corporate bonds		10,913		-		(275)		10,638
State and municipal tax-exempt		1,983		-		(187)		1,796
Total	$	102,345	$	-	$	(3,184)	$	99,161