(10) FAIR VALUES

FASB ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy based on the nature of data inputs for fair value determinations, under which DNB is required to value each asset within its scope using assumptions that market participations would utilize to value that asset. When DNB uses its own assumptions, it is required to disclose additional information about the assumptions used and the effect of the measurement on earnings or the net change in assets for the period.

The three levels of the fair value hierarchy under FASB ASC Topic 820 are as follows:

Level 1—Quoted prices in active markets for identical securities.

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active and model derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3—Instruments whose significant value drivers are unobservable.

A description of the valuation methodologies used for assets measured at fair value is set forth below:

DNB’s available-for-sale investment securities, which generally include U.S. government agencies and mortgage backed securities, collateralized mortgage obligations, corporate bonds, asset-backed securities, and state and municipal tax-exempt securities are reported at fair value. These securities are valued by an independent third party (“preparer”). The preparer’s evaluations are based on market data. They utilize evaluated pricing models that vary by asset and incorporate available trade, bid and other market information. For securities that do not trade on a daily basis, their evaluated pricing applications apply available information such as benchmarking and matrix pricing. The market inputs normally sought in the evaluation of securities include benchmark yields, reported trades, broker/dealer quotes (only obtained from market makers or broker/dealers recognized as market participants), issuer spreads, two-sided markets, benchmark securities, bid, offers and reference data. For certain securities additional inputs may be used or some market inputs may not be applicable. Inputs are prioritized differently on any given day based on market conditions.

U.S. Government agencies are evaluated and priced using multi‑dimensional relational models and option adjusted spreads. State and municipal securities are evaluated on a series of matrices including reported trades and material event notices. Mortgage backed securities are evaluated using matrix correlation to treasury or floating index benchmarks, prepayment speeds, monthly payment information and other benchmarks. Other investments are evaluated using a broker‑quote based application, including quotes from issuers.

Impaired loans are those loans that the Bank has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third‑party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

OREO assets are adjusted to fair value less estimated selling costs upon transfer of the loans to OREO. Subsequently, OREO assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. There assets are included as level 3 fair values.

The following table summarizes the assets at December 31, 2018 and December 31, 2017 that are recognized on DNB’s balance sheet using fair value measurement determined based on the differing levels of input.



	December 31, 2018
							Assets at
(Dollars in thousands)	Level 1		Level 2		Level 3		Fair Value
Assets Measured at Fair Value on a Recurring Basis
US Government agency obligations	$	-	$	47,723	$	-	$	47,723
GSE mortgage-backed securities		-		26,558		-		26,558
Collateralized mortgage obligations GSE		-		9,808		-		9,808
Corporate bonds		-		10,704		-		10,704
State and municipal tax-exempt		-		1,850		-		1,850
Total assets measured at fair value on a recurring basis	$	-	$	96,643	$	-	$	96,643
Assets Measured at Fair Value on a Nonrecurring Basis
Impaired loans	$	-	$	-	$	1,523	$	1,523
OREO & other repossessed property		-		-		1,247		1,247
Total assets measured at fair value on a nonrecurring basis	$	-	$	-	$	2,770	$	2,770



	December 31, 2017
							Assets at
(Dollars in thousands)	Level 1		Level 2		Level 3		Fair Value
Assets Measured at Fair Value on a Recurring Basis
US Government agency obligations	$	-	$	52,893	$	-	$	52,893
GSE mortgage-backed securities		-		32,488		-		32,488
Collateralized mortgage obligations GSE		-		11,654		-		11,654
Corporate bonds		-		12,820		-		12,820
State and municipal tax-exempt		-		1,928		-		1,928
Total assets measured at fair value on a recurring basis	$	-	$	111,783	$	-	$	111,783
Assets Measured at Fair Value on a Nonrecurring Basis
Impaired loans	$	-	$	-	$	1,814	$	1,814
OREO & other repossessed property		-		-		817		817
Total assets measured at fair value on a nonrecurring basis	$	-	$	-	$	2,631	$	2,631

The following table presents additional information about assets measured at fair value on a nonrecurring basis and for which DNB has utilized Level 3 inputs to determine fair value:



Quantitative Information about Level 3 Fair Value Measurement
December 31, 2018

	Fair Value		Valuation		Range (Weighted
(Dollars in thousands)	Estimate		Techniques	Unobservable Input	Average)
Impaired loans - Residential mortgage	$	72	Appraisal of collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)
Impaired loans - Commercial mortgage		659	Appraisal of collateral (1)	Disposal costs (2)	-14%	to	-14%	(-14%)
Impaired loans - Commercial term		754	Appraisal of collateral (1)	Disposal costs (2)	0%	to	-16%	(-11%)
Impaired loans - Consumer other		38	Appraisal of collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)
Impaired loan total	$	1,523
Other real estate owned	$	1,247		Disposal costs (2)	-8%	to	-8%	(-8%)

Quantitative Information about Level 3 Fair Value Measurement
December 31, 2017

	Fair Value		Valuation		Range (Weighted
(Dollars in thousands)	Estimate		Techniques	Unobservable Input	Average)
Impaired loans - Residential mortgage	$	4	Appraisal of collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)
Impaired loans - Commercial mortgage		46	Appraisal of collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)
Impaired loans - Commercial term		1,648	Appraisal of collateral (1)	Disposal costs (2)	0%	to	-9%	(-8%)
Impaired loans - Consumer other		116	Appraisal of collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)
Impaired loan total	$	1,814
Other real estate owned	$	817		Disposal costs (2)	-8%	to	-8%	(-8%)

⁽¹⁾

Fair value is generally determined through independent appraisals or sales contracts of the underlying collateral, which generally include various level 3 inputs which are not identifiable.

⁽²⁾

Appraisals are adjusted by management for qualitative factors, such as economic conditions and estimated disposal costs.

Impaired loans. Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $7.8 million at December 31, 2018. Of this, $1.8 million had specific valuation allowances of $285,000, leaving a fair value of $1.5 million as of December 31, 2018. DNB did not have any impaired loans that were partially charged down that didn’t already have a specific reserve during the year ended December 31, 2018. The total fair value of impaired loans at December 31, 2018 was $1.5 million.

Impaired loans had a carrying amount of $9.1 million at December 31, 2017. Of this, $491,000 had specific valuation allowances of $157,000, leaving a fair value of $334,000 at December 31, 2017. In addition, DNB had $1.9 million in impaired loans that were partially charged down by $442,000, leaving $1.5 million at fair value as of December 31, 2017. The total fair value of impaired loans at December 31, 2017 was $1.8 million.

Other Real Estate Owned & other repossessed property Other real estate owned (“OREO”) consists of properties acquired as a result of, or in-lieu-of, foreclosure. Properties or other assets are classified as OREO and other repossessed property are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying value or fair value, less estimated costs to sell. Costs relating to the development or improvement of the assets are capitalized and costs relating to holding the assets are charged to expense. DNB had $5.1 million of such assets at December 31, 2018, which consisted of $4.9 million in OREO and $142,000 in other repossessed property. DNB had $5.0 million of such assets at December 31, 2017, which consisted of $4.8 million in OREO and $177,000 in other repossessed property. Subsequent to the repossession of these assets, DNB wrote down the carrying values of certain assets totaling $1.6 million by $355,000 to $1.2 million in OREO during the year ended December 31, 2018. DNB wrote down the carrying values of certain assets totaling $956,000 by $139,000 to $817,000 in OREO during the year ended December 31, 2017.

Below is management’s estimate of the fair value of all financial instruments, whether carried at cost or fair value on DNB’s consolidated balance sheet. The carrying amounts and estimated fair values of financial instruments at December 31, 2018 and December 31, 2017 are as follows:


	December 31, 2018
			Estimated
	Carrying		Fair
(Dollars in thousands)	Amount		Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	17,321	$	17,321	$	17,321	$	-	$	-
AFS investment securities		96,643		96,643		-		96,643		-
HTM investment securities		62,026		61,135		-		59,135		2,000
Restricted stock		5,616		5,616		-		5,616		-
Loans held for sale		419		429		-		-		429
Loans, net of allowance, including impaired		928,296		914,822		-		-		914,822
Accrued interest receivable		4,207		4,207		-		4,207		-
Financial liabilities
Deposits:
Non-interest-bearing		164,746		164,746		-		164,746		-
NOW, Money market, and Savings		549,073		549,073		-		549,073		-
Time		162,096		160,944		-		160,944		-
Brokered		108,651		97,250		-		97,250		-
Repurchase agreements		-		-		-		-		-
FHLBP advances		32,935		32,347		-		32,347		-
Junior subordinated debentures and other borrowings		9,279		10,285		-		10,285		-
Subordinated debt		9,750		9,505		-		9,505		-
Accrued interest payable		646		646		-		646		-
Off-balance sheet instruments		-		-		-		-		-

	December 31, 2017
			Estimated
	Carrying		Fair
(Dollars in thousands)	Amount		Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	10,917	$	10,917	$	10,917	$	-	$	-
AFS investment securities		111,783		111,783		-		111,783		-
HTM investment securities		62,390		62,420		-		60,420		2,000
Restricted stock		7,641		7,641		-		7,641		-
Loans held for sale		651		657		-		-		657
Loans, net of allowance, including impaired		840,054		821,672		-		-		821,672
Accrued interest receivable		3,822		3,822		-		3,822		-
Financial liabilities
Deposits:
Non-interest-bearing		176,815		176,815		-		176,815		-
NOW, Money market, and Savings		502,086		502,086		-		502,086		-
Time		140,490		139,406		-		139,406		-
Brokered		41,812		42,304		-		42,304		-
Repurchase agreements		12,023		12,023		-		12,023		-
FHLBP advances		79,013		78,531		-		78,531		-
Junior subordinated debentures and other borrowings		9,279		9,373		-		9,373		-
Subordinated debt		9,750		9,577		-		9,577		-
Accrued interest payable		554		554		-		554		-
Off-balance sheet instruments		-		-		-		-		-

The specific estimation methods and assumptions used can have a substantial impact on the resulting fair values of financial instruments. Following is a brief summary of the significant assumptions, methods, and estimates used in estimating fair value.

Limitations Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time DNB’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of DNB’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.