DNB FINANCIAL CORP /PA/ - FORM 10-Q

Attached files

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EX-31.1 - EX-31.1 - DNB FINANCIAL CORP /PA/	c671-20150930xex311.htm
EX-31.2 - EX-31.2 - DNB FINANCIAL CORP /PA/	c671-20150930xex312.htm
EX-32.1 - EX-32.1 - DNB FINANCIAL CORP /PA/	c671-20150930xex321.htm
EX-32.2 - EX-32.2 - DNB FINANCIAL CORP /PA/	c671-20150930xex322.htm

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, 2015

[ ] 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)

Pennsylvania 23-2222567

(State or other jurisdiction of (I.R.S. Employer Identification No.)

incorporation or organization)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).


Yes ☒		No ☐

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

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☒

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)

2,809,917 (Shares Outstanding as of November 9, 2015)

DNB FINANCIAL CORPORATION AND SUBSIDIARY

INDEX


	PART I - FINANCIAL INFORMATION	PAGE NO

ITEM 1.	FINANCIAL STATEMENTS (Unaudited):

	CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
	September 30, 2015 and December 31, 2014	3

	CONSOLIDATED STATEMENTS OF INCOME
	Three and Nine-Months Ended September 30, 2015 and 2014	4

	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
	Three and Nine-Months Ended September 30, 2015 and 2014	5

	CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY	6
	Nine Months Ended September 30, 2015 and 2014

	CONSOLIDATED STATEMENTS OF CASH FLOWS
	Nine Months Ended September 30, 2015 and 2014	7

	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	8

ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	30


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	47

ITEM 4.	CONTROLS AND PROCEDURES	47

	PART II - OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	47

ITEM 1A.	RISK FACTORS	47

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	47

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	48

ITEM 4.	MINE SAFETY DISCLOSURES	48

ITEM 5.	OTHER INFORMATION	48

ITEM 6.	EXHIBITS	48

SIGNATURES		49

EXHIBIT INDEX

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)		2015		2014
Assets
Cash and due from banks	$	18,959	$	12,504
Federal Funds Sold		-		-
Cash and cash equivalents		18,959		12,504
Available-for-sale investment securities at fair value (amortized cost of $162,088 and $172,867)		162,063		172,202
Held-to-maturity investment securities (fair value of $66,007 and $60,099)		65,300		59,454
Total investment securities		227,363		231,656
Loans held for sale		-		617
Loans and leases		470,396		455,603
Allowance for credit losses		(4,729)		(4,906)
Net loans and leases		465,667		450,697
Restricted stock		2,964		2,587
Office property and equipment, net		6,630		7,668
Accrued interest receivable		2,542		2,253
Other real estate owned & other repossessed property		2,235		901
Bank owned life insurance (BOLI)		9,267		9,098
Core deposit intangible		70		82
Net deferred taxes		3,512		3,446
Other assets		2,682		1,821
Total assets	$	741,891	$	723,330
Liabilities and Stockholders’ Equity
Liabilities
Non-interest-bearing deposits	$	120,018	$	102,107
Interest-bearing deposits:
NOW		189,502		205,816
Money market		139,213		143,483
Savings		71,316		66,634
Time		69,744		76,805
Brokered deposits		18,665		10,238
Total deposits		608,458		605,083
Federal Home Loan Bank of Pittsburgh (FHLBP) advances		20,000		20,000
Repurchase agreements		30,501		19,221
Junior subordinated debentures		9,279		9,279
Subordinated debt		9,750		-
Other borrowings		475		505
Total borrowings		70,005		49,005
Accrued interest payable		322		351
Other liabilities		4,738		4,983
Total liabilities		683,523		659,422
Stockholders’ Equity
Preferred stock, $10.00 par value;
1,000,000 shares authorized; $1,000 liquidation preference per share; 3,250 and 13,000 issued, respectively		3,250		13,000
Common stock, $1.00 par value;
10,000,000 shares authorized; 2,919,126 and 2,903,610 issued, respectively; 2,806,549 and 2,778,724 outstanding, respectively		2,961		2,931
Treasury stock, at cost; 112,577 and 124,886 shares, respectively		(2,076)		(2,301)
Surplus		35,147		34,745
Retained earnings		20,259		17,132
Accumulated other comprehensive loss		(1,173)		(1,599)
Total stockholders’ equity		58,368		63,908
Total liabilities and stockholders’ equity	$	741,891	$	723,330

See accompanying notes to unaudited consolidated financial statements.

DNB Financial Corporation and Subsidiary

Consolidated Statements of Income (Unaudited)



		Three Months Ended				Nine Months Ended
		September 30,				September 30,
(Dollars in thousands, except per share data)		2015		2014		2015		2014
Interest Income:
Interest and fees on loans and leases	$	5,083	$	4,948	$	15,006	$	14,610
Interest and dividends on investment securities:
Taxable		714		671		2,208		2,120
Exempt from federal taxes		354		275		1,042		826
Interest on cash and cash equivalents		10		11		32		28
Total interest and dividend income		6,161		5,905		18,288		17,584
Interest Expense:
Interest on NOW, money market and savings		148		121		450		408
Interest on time deposits		84		149		291		566
Interest in brokered deposits		68		23		118		28
Interest on FHLB advances		198		148		589		443
Interest on repurchase agreements		16		10		35		29
Interest on junior subordinated debentures		77		75		224		221
Interest on subordinated debt		103		-		237		-
Interest on other borrowings		17		18		51		55
Total interest expense		711		544		1,995		1,750
Net interest income		5,450		5,361		16,293		15,834
Provision for credit losses		100		300		815		930
Net interest income after provision for credit losses		5,350		5,061		15,478		14,904
Non-interest Income:
Service charges		292		303		860		935
Wealth management		317		343		1,091		979
Mortgage banking		38		30		127		30
Increase in cash surrender value of BOLI		57		58		169		174
Gain on sale of investment securities, net		10		86		74		423
Gain on sale of loans		-		-		416		-
Other fees		323		307		973		919
Total non-interest income		1,037		1,127		3,710		3,460
Non-interest Expense:
Salaries and employee benefits		2,615		2,431		7,897		7,406
Furniture and equipment		303		311		908		974
Occupancy		431		497		1,500		1,637
Professional and consulting		317		296		906		920
Advertising and marketing		141		149		480		500
Printing and supplies		35		42		122		129
FDIC insurance		129		123		376		355
PA shares tax		151		151		452		451
Telecommunications		63		68		184		188
Postage		20		17		65		59
Loss on sale or write down of OREO, net		154		-		154		7
Other expenses		400		447		1,263		1,274
Total non-interest expense		4,759		4,532		14,307		13,900
Income before income tax expense		1,628		1,656		4,881		4,464
Income tax expense		359		427		1,125		1,111
Net income	$	1,269	$	1,229	$	3,756	$	3,353
Preferred stock dividends and accretion of discount		8		33		42		103
Net income available to Common Shareholders	$	1,261	$	1,196	$	3,714	$	3,250
Earnings per common share:
Basic	$	0.45	$	0.43	$	1.33	$	1.18
Diluted	$	0.44	$	0.43	$	1.31	$	1.16
Cash dividends per common share	$	0.07	$	0.07	$	0.21	$	0.21
Weighted average common shares outstanding:
Basic		2,806,549		2,769,451		2,798,360		2,763,597
Diluted		2,852,237		2,816,703		2,844,319		2,809,691

See accompanying notes to unaudited consolidated financial statements

DNB Financial Corporation and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)



		Three Months Ended				Nine Months Ended
		September 30,				September 30,
(Dollars in thousands)		2015		2014		2015		2014
Net income	$	1,269	$	1,229	$	3,756	$	3,353
Other Comprehensive Income (Loss):
Unrealized holding gains (losses) arising during the period
Before tax amount		767		(647)		714		1,377
Tax effect		(261)		220		(243)		(468)
Net of tax		506		(427)		471		909
Accretion of discount on AFS to HTM reclassification(1)
Before tax amount		2		2		6		6
Tax effect(2)		(1)		-		(2)		(2)
Net of tax		1		2		4		4
Less reclassification for gains included in net income
Before tax amount		(10)		(86)		(74)		(423)
Tax effect(2)		4		29		25		144
Net of tax		(6)		(57)		(49)		(279)
Total other comprehensive income (loss)		501		(482)		426		634
Total comprehensive income	$	1,770	$	747	$	4,182	$	3,987
(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 (benefit) in the consolidated statements of income.

See accompanying notes to unaudited consolidated financial statements.

DNB Financial Corportation and Subsidiary

Consolidated Statements of Stockholders’ Equity (Unaudited)



											Accumulated
											Other
	Preferred		Common		Treasury				Retained		Comprehensive
(Dollars in thousands)	Stock		Stock		Stock		Surplus		Earnings		Loss		Total
Balance at January 1, 2015	$	13,000	$	2,931	$	(2,301)	$	34,745	$	17,132	$	(1,599)	$	63,908
Net income for nine months ended September 30, 2015		-		-		-		-		3,756		-		3,756
Other comprehensive income		-		-		-		-		-		426		426
Redemption of preferred stock (9,750 shares)		(9,750)		-		-		-		-		-		(9,750)
Restricted stock compensation expense		-		14		-		236		-		-		250
Exercise of stock options (95,834 shares)		-		16		-		247		-		-		263
Taxes on exercise of stock options		-		-		-		(153)		-		-		(153)
Cash dividends - common ($0.21 per share)		-		-		-		-		(587)		-		(587)
Cash dividends SBLF preferred		-		-		-		-		(42)		-		(42)
Sale of treasury shares to 401(k) (8,280 shares)		-		-		151		49		-		-		200
Sale of treasury shares to deferred comp. plan (4,029 shares)		-		-		74		23		-		-		97
Balance at September 30, 2015	$	3,250	$	2,961	$	(2,076)	$	35,147	$	20,259	$	(1,173)	$	58,368



											Accumulated
											Other
	Preferred		Common		Treasury				Retained		Comprehensive
(Dollars in thousands)	Stock		Stock		Stock		Surplus		Earnings		Loss		Total
Balance at January 1, 2014	$	12,995	$	2,910	$	(2,629)	$	34,441	$	13,239	$	(2,373)	$	58,583
Net income for nine months ended September 30, 2014		-		-		-		-		3,353		-		3,353
Other comprehensive income		-		-		-		-		-		634		634
SBLF issuance costs accretion		5		-		-		-		(5)		-		-
Restricted stock compensation expense		-		10		-		148		-		-		158
Exercise of stock options (22,806 shares)		-		5		-		12		-		-		17
Taxes on exercise of stock options		-		-		-		(24)		-		-		(24)
Stock option compensation expense		-		-		-		42		-		-		42
Cash dividends - common ($0.21 per share)		-		-		-		-		(581)		-		(581)
Cash dividends SBLF preferred		-		-		-		-		(98)		-		(98)
Sale of treasury shares to 401(k) (9,071 shares)		-		-		166		19		-		-		185
Sale of treasury shares to deferred comp. plan (4,565 shares)		-		-		84		10		-		-		94
Balance at September 30, 2014	$	13,000	$	2,925	$	(2,379)	$	34,648	$	15,908	$	(1,739)	$	62,363

See accompanying notes to unaudited consolidated financial statements.

DNB Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)



	Nine Months Ended
	September 30,
(Dollars in thousands)		2015		2014
Cash Flows From Operating Activities:
Net income	$	3,756	$	3,353
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		1,385		1,370
Provision for credit losses		815		930
Stock based compensation		250		200
Net gain on sale of investments		(74)		(423)
Net loss on sale and write down of OREO and other repossessed property		154		7
Earnings from investment in BOLI		(169)		(174)
Deferred tax benefit		(285)		(234)
Proceeds from sales of loans originated for sale		14,332		1,183
Loans originated for sale		(13,172)		(1,153)
Gain on sale of loans		(543)		(30)
Write off of property and equipment		690		-
Taxes on exercise of stock options		(153)		(24)
(Increase) decrease in accrued interest receivable		(289)		20
(Increase) decrease in other assets		(859)		216
Decrease in accrued interest payable		(29)		(75)
(Decrease) increase in other liabilities		(245)		174
Net Cash Provided By Operating Activities		5,564		5,340
Cash Flows From Investing Activities:
Activity in available-for-sale securities:
Sales		17,969		34,970
Maturities, repayments and calls		39,982		20,317
Purchases		(47,929)		(68,991)
Activity in held-to-maturity securities:
Sales		-		1,613
Maturities, repayments and calls		1,452		1,675
Purchases		(7,209)		-
Net (increase) decrease in restricted stock		(377)		36
Net increase in loans and leases		(17,273)		(34,830)
Net purchases of property and equipment, less proceeds from disposals		(280)		(283)
Proceeds from sale of OREO and other repossessed property		-		299
Net Cash Used in Investing Activities		(13,665)		(45,194)
Cash Flows From Financing Activities:
Net increase in deposits		3,375		30,619
Net increase (decrease) in repurchase agreements		11,280		(524)
Proceeds from issuance of subordinated debt		9,750		-
Repayment of other borrowings		(30)		(27)
Dividends paid		(629)		(679)
Proceeds from the exercise of stock options		263		17
Redemption of preferred stock		(9,750)		-
Sale of treasury stock		297		279
Net Cash Provided by Financing Activities		14,556		29,685
Net Change in Cash and Cash Equivalents		6,455		(10,169)
Cash and Cash Equivalents at Beginning of Period		12,504		34,060
Cash and Cash Equivalents at End of Period	$	18,959	$	23,891
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest	$	2,024	$	1,825
Income taxes		1,702		722
Supplemental Disclosure of Non-cash Flow Information:
Transfers from loans and leases to real estate owned and other repossessed property		1,488		111

See accompanying notes to unaudited consolidated financial statements.

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 nine months ended September 30, 2015 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, 2014.

Subsequent Events-- Management has evaluated events and transactions occurring subsequent to September 30, 2015 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-

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contract with Customers (Topic 606). The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following five steps: 1) identify the contracts(s) with the customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations in the contract; and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also specifies the accounting for some costs to obtain or fulfill a contract with a customer. For a public entity, the amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. DNB is still evaluating the effect of this amendment on DNB's consolidated financial statements.

In June 2014, ASU No. 2014-11 amended ASC Topic 860, “Transfers and Servicing” to address concerns that current accounting guidance distinguishes between repurchase agreements that settle at the same time as the maturity of the transferred financial asset and those that settle any time before maturity. The update changed the accounting for repurchase-to-maturity transactions to secured borrowing accounting and, for repurchase financing arrangements, separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which resulted in secured borrowing accounting for the repurchase agreement. The adoption of this ASU did not have a material effect on DNB’s operating results or financial condition.

In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The update simplifies the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2015, and is to be applied retrospectively. Early adoption is permitted. DNB is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on the DNB's consolidated financial statements.

NOTE 2: INVESTMENT SECURITIES

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



		September 30, 2015
		Amortized		Unrealized		Unrealized
(Dollars in thousands)		Cost		Gains		Losses		Fair Value
Held To Maturity
US Government agency obligations	$	7,912	$	426	$	-	$	8,338
Government Sponsored Entities (GSE) mortgage-backed securities		2,937		115		-		3,052
Corporate bonds		11,052		319		(4)		11,367
Collateralized mortgage obligations GSE		2,821		23		(9)		2,835
State and municipal tax-exempt		40,578		316		(479)		40,415
Total	$	65,300	$	1,199	$	(492)	$	66,007

Available For Sale
US Government agency obligations	$	60,849	$	127	$	(8)	$	60,968
GSE mortgage-backed securities		43,098		233		(40)		43,291
Collateralized mortgage obligations GSE		17,110		37		(254)		16,893
Corporate bonds		23,409		20		(233)		23,196
State and municipal tax-exempt		17,595		107		(5)		17,697
Equity securities		27		2		(11)		18
Total	$	162,088	$	526	$	(551)	$	162,063



		December 31, 2014
		Amortized		Unrealized		Unrealized
(Dollars in thousands)		Cost		Gains		Losses		Fair Value
Held To Maturity
US Government agency obligations	$	7,730	$	343	$	-	$	8,073
Government Sponsored Entities (GSE) mortgage-backed securities		3,579		133		-		3,712
Corporate bonds		3,951		324		-		4,275
Collateralized mortgage obligations GSE		3,605		3		(29)		3,579
State and municipal tax-exempt		40,589		418		(547)		40,460
Total	$	59,454	$	1,221	$	(576)	$	60,099

Available For Sale
US Government agency obligations	$	61,547	$	4	$	(197)	$	61,354
GSE mortgage-backed securities		66,669		189		(135)		66,723
Collateralized mortgage obligations GSE		20,499		8		(496)		20,011
Corporate bonds		13,208		-		(106)		13,102
State and municipal tax-exempt		10,917		87		(10)		10,994
Equity securities		27		2		(11)		18
Total	$	172,867	$	290	$	(955)	$	172,202

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, 2015 and December 31, 2014.

		September 30, 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	$	2,674	$	(4)	$	2,674	$	(4)	$	-	$	-
Collateralized mortgage obligations GSE		1,611		(9)		420		(6)		1,191		(3)
State and municipal tax-exempt		16,867		(479)		6,681		(76)		10,186		(403)
Total	$	21,152	$	(492)	$	9,775	$	(86)	$	11,377	$	(406)
Available For Sale
US Government agency obligations	$	13,231	$	(8)	$	13,231	$	(8)	$	-	$	-
GSE mortgage-backed securities		6,516		(40)		1,990		(4)		4,526		(36)
Collateralized mortgage obligations GSE		12,557		(254)		829		(6)		11,728		(248)
Corporate bonds		18,526		(233)		14,099		(161)		4,427		(72)
State and municipal tax-exempt		7,286		(5)		7,286		(5)		-		-
Equity securities		12		(11)		-		-		12		(11)
Total	$	58,128	$	(551)	$	37,435	$	(184)	$	20,693	$	(367)



		December 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	$	3,043	$	(29)	$	3,043	$	(29)	$	-	$	-
State and municipal tax-exempt		19,054		(547)		2,138		(7)		16,916		(540)
Total	$	22,097	$	(576)	$	5,181	$	(36)	$	16,916	$	(540)
Available For Sale
US Government agency obligations	$	56,342	$	(197)	$	49,222	$	(97)	$	7,120	$	(100)
GSE mortgage-backed securities		22,157		(135)		14,996		(38)		7,161		(97)
Collateralized mortgage obligations GSE		18,133		(496)		3,669		(5)		14,464		(491)
Corporate bonds		13,102		(106)		9,531		(31)		3,571		(75)
State and municipal tax-exempt		2,967		(10)		2,360		(9)		607		(1)
Equity securities		12		(11)		-		-		12		(11)
Total	$	112,713	$	(955)	$	79,778	$	(180)	$	32,935	$	(775)

As of September 30, 2015, there were four GSE mortgage-backed securities, eleven corporate bonds, two U.S. agency obligations, fourteen 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, 2015 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, 2015, the following securities were reviewed:

Collateralized mortgage obligations GSE There are fourteen impaired securities classified as collateralized mortgage obligations, twelve of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is 3.48% of its book 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 September 30, 2015 levels. Management concluded that these securities were not other-than-temporarily impaired at September 30, 2015.

State and municipal tax-exempt There are thirty impaired securities in this category, which are comprised of intermediate to long-term municipal bonds, fourteen of which have been impaired for more than 12 months. The largest unrealized loss of a security

in this group is 6.51% of its book value. 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, seven uninsured school districts, and five uninsured townships, all of which have strong underlying ratings. Management concluded that these securities were not other-than-temporarily impaired at September 30, 2015.

US Government agency obligations There are two impaired securities classified as agencies, none of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is 0.07% of its book 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 September 30, 2015.

GSE mortgage-backed securities There are four impaired bonds classified as GSE mortgage-backed securities, three of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is 0.94% of its book 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 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, 2015 levels. Management concluded that these securities were not other-than-temporarily impaired at September 30, 2015.

Corporate securities There are eleven impaired bonds classified as corporate bonds, two of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is 2.88% of its book 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 September 30, 2105 levels. Management concluded that these securities were not other-than-temporarily impaired at September 30, 2015.

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 have been impaired for more than 12 months. The unrealized loss of this portfolio is $11,000. The largest unrealized loss of a security in this group is 78.33%. 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, 2015.

The amortized cost and fair value of investment securities as of September 30, 2015, 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	$	-	$	-	$	6,689	$	6,684
Due after one year through five years		15,069		15,755		80,666		80,594
Due after five years through ten years		30,304		30,403		43,967		44,197
Due after ten years		19,927		19,849		30,739		30,570
No stated maturity		-		-		27		18
Total investment securities	$	65,300	$	66,007	$	162,088	$	162,063

The gross 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)		2015		2014		2015		2014
Available for sale securities sold	$	8,238	$	6,635	$	17,969	$	34,970
Held to maturity securities sold		-		385		-		1,613
Total sold securities	$	8,238	$	7,020	$	17,969	$	36,583

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)		2015		2014		2015		2014
Gross realized gains-AFS	$	13	$	81	$	77	$	375
Gross realized gains-HTM		-		5		-		73
Gross realized losses-AFS		(3)		-		(3)		(25)
Net realized gain	$	10	$	86	$	74	$	423

At September 30, 2015 and December 31, 2014, investment securities with a carrying value of approximately $167.8 million and $174.9 million, respectively, were pledged to secure public funds, repurchase agreements and for other purposes as required by law.

NOTE 3: LOANS

The following table sets forth information concerning the composition of total loans and leases outstanding, as of the dates indicated.



(Dollars in thousands)	September 30, 2015		December 31, 2014
Residential mortgage	$	27,591	$	25,993
Commercial mortgage		287,161		257,310
Commercial:
Commercial term		77,020		80,819
Commercial construction		20,679		35,534
Consumer:
Home equity		52,540		50,192
Other		5,405		5,755
Total loans and leases	$	470,396	$	455,603
Less allowance for credit losses		(4,729)		(4,906)
Net loans and leases	$	465,667	$	450,697

Information concerning non-accrual loans are shown in the following tables:



					Three Months Ended September 30, 2015						Nine Months Ended September 30, 2015
(Dollars in thousands)	December 31, 2014		September 30, 2015		Interest income that would have been recorded under original terms		Interest income recorded during the period		Net impact on interest income		Interest income that would have been recorded under original terms		Interest income recorded during the period		Net impact on interest income
Non-accrual loans:
Residential mortgage	$	2,458	$	1,600	$	10	$	-	$	10	$	50	$	-	$	50
Commercial mortgage		1,294		1,075		21		-		21		64		-		64
Commercial:
Commercial term		198		191		2		-		2		7		-		7
Commercial construction		2,043		451		56		-		56		226		-		226
Consumer:
Home equity		432		313		7		-		7		19		-		19
Other		94		120		6		-		6		14		-		14
Total non-accrual loans	$	6,519	$	3,750	$	102	$	-	$	102	$	380	$	-	$	380
Loans 90 days past due and accruing		334		498		-		-		-		5		5		-
Total non-performing loans	$	6,853	$	4,248	$	102	$	-	$	102	$	385	$	5	$	380



			Three Months Ended September 30, 2014						Nine Months Ended September 30, 2014
(Dollars in thousands)	September 30, 2014		Interest income that would have been recorded under original terms		Interest income recorded during the period		Net impact on interest income		Interest income that would have been recorded under original terms		Interest income recorded during the period		Net impact on interest income
Non-accrual loans:
Residential mortgage	$	2,117	$	21	$	-	$	21	$	45	$	-	$	45
Commercial mortgage		1,131		9		-		9		18		-		18
Commercial:
Commercial term		200		1		-		1		1		-		1
Commercial construction		2,043		87		-		87		267		-		267
Consumer:
Home equity		342		5		-		5		19		3		16
Other		95		5		-		5		10		-		10
Total non-accrual loans	$	5,928	$	128	$	-	$	128	$	360	$	3	$	357
Loans 90 days past due and accruing		105		3		3		-		10		10		-
Total non-performing loans	$	6,033	$	131	$	3	$	128	$	370	$	13	$	357

NOTE 4: ALLOWANCE FOR CREDIT LOSSES

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a scheduled payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of September 30, 2015 and December 31, 2014.

Age Analysis of Past Due Loans Receivable



September 30, 2015
														Loans
														Receivable
		30-59		60-89		Greater						Total		> 90
		Days Past		Days Past		than		Total				Loans		Days and
(Dollars in thousands)		Due		Due		90 Days		Past Due		Current		Receivable		Accruing
Residential mortgage	$	54	$	1,440	$	2,021	$	3,515	$	24,076	$	27,591	$	498
Commercial mortgage		259		-		96		355		286,806		287,161		-
Commercial:
Commercial term		-		-		-		-		77,020		77,020		-
Commercial construction		-		-		451		451		20,228		20,679		-
Consumer:
Home equity		-		-		246		246		52,294		52,540		-
Other		-		84		120		204		5,201		5,405		-
Total	$	313	$	1,524	$	2,934	$	4,771	$	465,625	$	470,396	$	498



December 31, 2014
														Loans
														Receivable
		30-59		60-89		Greater						Total		> 90
		Days Past		Days Past		than		Total				Loans		Days and
(Dollars in thousands)		Due		Due		90 Days		Past Due		Current		Receivable		Accruing
Residential mortgage	$	1,005	$	302	$	2,648	$	3,955	$	22,038	$	25,993	$	191
Commercial mortgage		48		187		236		471		256,839		257,310		-
Commercial:
Commercial term		-		-		-		-		80,819		80,819		-
Commercial construction		-		-		2,043		2,043		33,491		35,534		-
Consumer:
Home equity		58		214		386		658		49,534		50,192		119
Other		71		70		119		260		5,495		5,755		24
Total	$	1,182	$	773	$	5,432	$	7,387	$	448,216	$	455,603	$	334

The following tables summarize information in regards to impaired loans by loan portfolio class as of and for the three and nine months ended September 30, 2015 and 2014 and as of December 31, 2014.

Impaired Loans





		September 30, 2015						December 31, 2014
		Recorded		Unpaid		Related		Recorded		Unpaid		Related
		Investment		Principal		Allowance		Investment		Principal		Allowance
(Dollars in thousands)				Balance						Balance
With no related allowance recorded:
Residential mortgage	$	1,483	$	2,083	$	-	$	2,457	$	3,270	$	-
Commercial mortgage		1,191		1,454		-		3,400		3,501		-
Commercial construction		-		-		-		1,706		4,822		-
Consumer:
Home equity		431		446		-		549		564		-
Other		80		88		-		94		102		-
Total	$	3,185	$	4,071	$	-	$	8,206	$	12,259	$	-
With allowance recorded:
Residential mortgage		117		117		2		-		-		-
Commercial mortgage		-		-		-		200		200		104
Commercial:
Commercial term		200		209		112		200		202		119
Commercial construction		563		2,945		4		450		2,031		50
Consumer:
Other		40		40		2		-		-		-
Total	$	920	$	3,311	$	120	$	850	$	2,433	$	273
Total:
Residential mortgage		1,600		2,200		2		2,457		3,270		-
Commercial mortgage		1,191		1,454		-		3,600		3,701		104
Commercial:
Commercial term		200		209		112		200		202		119
Commercial construction		563		2,945		4		2,156		6,853		50
Consumer:
Home equity		431		446		-		549		564		-
Other		120		128		2		94		102		-
Total	$	4,105	$	7,382	$	120	$	9,056	$	14,692	$	273




		Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
		September 30, 2015				September 30, 2014				September 30, 2015				September 30, 2014
		Average		Interest		Average		Interest		Average		Interest		Average		Interest
		Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
(Dollars in thousands)		Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Residential mortgage	$	1,577	$	-	$	1,926	$	-	$	1,948	$	-	$	1,899	$	-
Commercial mortgage		2,277		28		2,964		29		2,831		85		2,736		76
Commercial construction		125		-		1,625		-		763		-		1,211		-
Consumer:
Home equity		489		1		459		1		497		3		437		7
Other		125		-		61		-		134		-		54		-
Total	$	4,593	$	29	$	7,035	$	30	$	6,173	$	88	$	6,337	$	83
With allowance recorded:
Residential mortgage		59		-		-		-		131		-		188		-
Commercial mortgage		101		-		-		-		151		-		18		-
Commercial:
Commercial term		200		-		100		-		200		-		50		-
Commercial construction		588		-		656		-		672		-		1,170		-
Consumer:
Home equity		-		-		-		-		22		-		-		-
Other		20		-		36		-		10		-		53		-
Total	$	968	$	-	$	792	$	-	$	1,186	$	-	$	1,479	$	-
Total:
Residential mortgage		1,636		-		1,926		-		2,079		-		2,087		-
Commercial mortgage		2,378		28		2,964		29		2,982		85		2,754		76
Commercial:
Commercial term		200		-		100		-		200		-		50		-
Commercial construction		713		-		2,281		-		1,435		-		2,381		-
Consumer:
Home equity		489		1		459		1		519		3		437		7
Other		145		-		97		-		144		-		107		-
Total	$	5,561	$	29	$	7,827	$	30	$	7,359	$	88	$	7,816	$	83

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within DNB’s internal risk rating system as of September 30, 2015 and December 31, 2014.

Credit Quality Indicators



		September 30, 2015
				Special
(Dollars in thousands)		Pass		Mention		Substandard		Doubtful		Total
Residential mortgage	$	25,720	$	-	$	1,871	$	-	$	27,591
Commercial mortgage		276,237		4,029		6,895		-		287,161
Commercial:
Commercial term		68,469		2,578		5,973		-		77,020
Commercial construction		16,662		-		4,017		-		20,679
Consumer:
Home equity		52,080		-		460		-		52,540
Other		5,285		-		120		-		5,405
Total	$	444,453	$	6,607	$	19,336	$	-	$	470,396



		December 31, 2014
				Special
(Dollars in thousands)		Pass		Mention		Substandard		Doubtful		Total
Residential mortgage	$	23,259	$	-	$	2,734	$	-	$	25,993
Commercial mortgage		245,307		2,610		9,393		-		257,310
Commercial:
Commercial term		75,303		72		5,444		-		80,819
Commercial construction		31,057		-		4,477		-		35,534
Consumer:
Home equity		49,611		-		581		-		50,192
Other		5,661		-		94		-		5,755
Total	$	430,198	$	2,682	$	22,723	$	-	$	455,603

Loans classified as troubled debt restructurings (“TDR”) are considered impaired. As of September 30, 2015, DNB had no commercial mortgages classified as a TDR, compared to one commercial mortgage classified as a TDR totaling $2,246,000 at December 31, 2014, and one commercial mortgage classified as a TDR totaling $2,269,000 (the same loan) at September 30, 2014. This loan paid off during the third quarter of 2015. The rate on this loan was modified and the terms of the loans were changed to interest only while the project was being built out. The loan commenced normal principal and interest payments in June 2014. The loan was extended and there was no reduction of principal. The balance of the loan prior to modification was $2,272,000 and the balance after the modification was $2,272,000. During the three and nine months ended September 30, 2015 and 2014, there were no defaults on any terms of this loan.

As of September 30, 2015, DNB had one consumer home equity loan classified as a TDR totaling $102,000, compared to one consumer home equity loan classified as a TDR totaling $102,000 (the same loan) at December 31, 2014, and one consumer home equity loan classified as a TDR totaling $102,000 (the same loan) at September 30, 2014. The monthly payment on this loan was reduced for 36 months and the borrower will resume making contractual payments at the end of this period. The loan was extended and there was no reduction of principal. This loan was classified a TDR in June of 2014. The balance of the loan prior to modification was $102,000 and the balance after the modification was $102,000. During the three and nine months ended September 30, 2015 and 2014, there were no defaults on any terms of this loan.

The following tables set forth the composition of DNB’s allowance for credit losses as of September 30, 2015 and December 31, 2014, the activity for the three and nine months ended September 30, 2015 and 2014 and as of and for the year ended December 31, 2014.

Allowance for Credit Losses and Recorded Investment in Loans Receivables



	Residential		Commercial		Commercial		Commercial		Lease		Consumer		Consumer
(Dollars in thousands)	Mortgage		Mortgage		Term		Construction		Financing		Home Equity		Other		Unallocated		Total
Allowance for credit losses:
Beginning balance - July 1, 2015	$	265	$	2,562	$	721	$	774	$	-	$	190	$	65	$	531	$	5,108
Charge-offs		(34)		(105)		(16)		(299)		-		(10)		(30)		-		(494)
Recoveries		2		-		8		5		-		-		-		-		15
Provisions		(39)		34		6		198		-		20		31		(150)		100
Ending balance - September 30, 2015	$	194	$	2,491	$	719	$	678	$	-	$	200	$	66	$	381	$	4,729



	Residential		Commercial		Commercial		Commercial		Lease		Consumer		Consumer
(Dollars in thousands)	Mortgage		Mortgage		Term		Construction		Financing		Home Equity		Other		Unallocated		Total
Allowance for credit losses:
Beginning balance - January 1, 2015	$	269	$	2,300	$	709	$	881	$	-	$	189	$	70	$	488	$	4,906
Charge-offs		(69)		(105)		(190)		(577)		-		(11)		(60)		-		(1,012)
Recoveries		2		-		10		5		2		-		1		-		20
Provisions		(8)		296		190		369		(2)		22		55		(107)		815
Ending balance - September 30, 2015	$	194	$	2,491	$	719	$	678	$	-	$	200	$	66	$	381	$	4,729

Ending balance: individually evaluated for impairment	$	2	$	-	$	112	$	4	$	-	$	-	$	2	$	-	$	120

Ending balance: collectively evaluated for impairment	$	192	$	2,491	$	607	$	674	$	-	$	200	$	64	$	381	$	4,609
Loans receivables:
Ending balance	$	27,591	$	287,161	$	77,020	$	20,679	$	-	$	52,540	$	5,405			$	470,396

Ending balance: individually evaluated for impairment	$	1,600	$	1,191	$	200	$	563	$	-	$	431	$	120			$	4,105

Ending balance: collectively evaluated for impairment	$	25,991	$	285,970	$	76,820	$	20,116	$	-	$	52,109	$	5,285			$	466,291

Reserve for unfunded loan commitments included in other liabilities	$	-	$	4	$	105	$	57	$	-	$	12	$	-			$	178



	Residential		Commercial		Commercial		Commercial		Lease		Consumer		Consumer
(Dollars in thousands)	Mortgage		Mortgage		Term		Construction		Financing		Home Equity		Other		Unallocated		Total
Allowance for credit losses:
Beginning balance - July 1, 2014	$	315	$	2,131	$	641	$	1,019	$	-	$	176	$	98	$	507	$	4,887
Charge-offs		(59)		-		(13)		(250)		(1)		-		(71)		-		(394)
Recoveries		-		-		-		93		1		-		-		-		94
Provisions		63		53		121		(86)		-		-		44		105		300
Ending balance - September 30, 2014	$	319	$	2,184	$	749	$	776	$	-	$	176	$	71	$	612	$	4,887



	Residential		Commercial		Commercial		Commercial		Lease		Consumer		Consumer
(Dollars in thousands)	Mortgage		Mortgage		Term		Construction		Financing		Home Equity		Other		Unallocated		Total
Allowance for credit losses:
Beginning balance - January 1, 2014	$	285	$	2,010	$	621	$	1,033	$	-	$	156	$	78	$	440	$	4,623
Charge-offs		(159)		(8)		(31)		(511)		(1)		-		(82)		-		(792)
Recoveries		5		-		2		103		7		-		9		-		126
Provisions		188		182		157		151		(6)		20		66		172		930
Ending balance - September 30, 2014	$	319	$	2,184	$	749	$	776	$	-	$	176	$	71	$	612	$	4,887
Reserve for unfunded loan commitments included in other liabilities	$	-	$	9	$	85	$	40	$	-	$	11	$	-			$	145



	Residential		Commercial		Commercial		Commercial		Lease		Consumer		Consumer
(Dollars in thousands)	Mortgage		Mortgage		Term		Construction		Financing		Home Equity		Other		Unallocated		Total
Allowance for credit losses:
Ending balance - December 31, 2014	$	269	$	2,300	$	709	$	881	$	-	$	189	$	70	$	488	$	4,906
Ending balance: individually evaluated for impairment	$	-	$	104	$	119	$	50	$	-	$	-	$	-	$	-	$	273
Ending balance: collectively evaluated for impairment	$	269	$	2,196	$	590	$	831	$	-	$	189	$	70	$	488	$	4,633
Loans receivables:
Ending balance	$	25,993	$	257,310	$	80,819	$	35,534	$	-	$	50,192	$	5,755			$	455,603
Ending balance: individually evaluated for impairment	$	2,457	$	3,600	$	200	$	2,156	$	-	$	549	$	94			$	9,056
Ending balance: collectively evaluated for impairment	$	23,536	$	253,710	$	80,619	$	33,378	$	-	$	49,643	$	5,661			$	446,547
Reserve for unfunded loan commitments included in other liabilities	$	-	$	10	$	89	$	55	$	-	$	12	$	-			$	166

NOTE 5: EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed based on the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the treasury stock method and reflects the potential dilution that could occur from the exercise of stock options, and warrants and the amortized portion of unvested stock awards. Stock options and unvested stock awards for which the exercise or the grant price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation. Treasury shares are not deemed outstanding for calculations. There were no outstanding stock warrants, no anti-dilutive stock options outstanding, and no anti-dilutive stock awards outstanding at September 30, 2015. There were no anti-dilutive stock warrants outstanding, 66,852 anti-dilutive stock options outstanding, and no anti-dilutive stock awards outstanding at September 30, 2014. The following table sets forth the computation of basic and diluted earnings per share:



		Three Months Ended					Nine Months Ended
		September 30, 2015					September 30, 2015
(In thousands, except per-share data)		Income	Shares		Amount		Income	Shares		Amount
Basic EPS
Income available to common stockholders	$	1,261	2,807	$	0.45	$	3,714	2,798	$	1.33
Effect of potential dilutive common stock equivalents – stock options and restricted shares		-	45		(0.01)		-	46		(0.02)
Diluted EPS
Income available to common stockholders after assumed conversions	$	1,261	2,852	$	0.44	$	3,714	2,844	$	1.31



		Three Months Ended					Nine Months Ended
		September 30, 2014					September 30, 2014
(In thousands, except per-share data)		Income	Shares		Amount		Income	Shares		Amount
Basic EPS
Income available to common stockholders	$	1,196	2,769	$	0.43	$	3,250	2,764	$	1.18
Effect of potential dilutive common stock equivalents – stock options and restricted shares		-	48		-		-	46		(0.02)
Diluted EPS
Income available to common stockholders after assumed conversions	$	1,196	2,817	$	0.43	$	3,250	2,810	$	1.16

NOTE 6: ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss included in stockholders' equity are as follows:



Accumulated Other Comprehensive Loss		Before-Tax		Tax		Net-of-Tax
(Dollars in thousands)		Amount		Effect		Amount
September 30, 2015
Net unrealized loss on AFS securities	$	(25)	$	9	$	(16)
Discount on AFS to HTM reclassification		(18)		6		(12)
Unrealized actuarial losses-pension		(1,734)		589		(1,145)
	$	(1,777)	$	604	$	(1,173)
December 31, 2014
Net unrealized loss on AFS securities	$	(665)	$	227	$	(438)
Discount on AFS to HTM reclassification		(24)		8		(16)
Unrealized actuarial losses-pension		(1,734)		589		(1,145)
	$	(2,423)	$	824	$	(1,599)

NOTE 7: SUBORDINATED DEBENTURES, NOTES, AND OTHER BORROWINGS

DNB has two issuances of junior subordinated debentures (the “debentures”) as follows. The majority of the proceeds of each issuance were invested in DNB’s subsidiary, DNB First, National Association, to increase the Bank’s capital levels. The junior subordinated debentures issued in each case qualify as a component of capital for regulatory purposes. DNB Capital Trust I and II are special purpose Delaware business trusts, which are not consolidated.

DNB Capital Trust I

DNB’s first issuance of junior subordinated debentures was on July 20, 2001. These debentures are floating rate and were issued to DNB Capital Trust I, a Delaware business trust in which DNB owns all of the common equity. DNB Capital Trust I issued $5.0 million of floating rate (6 month Libor plus 3.75%, with a cap of 12%) capital preferred securities to a qualified institutional buyer. The proceeds of these securities were used by the Trust, along with DNB’s capital contribution, to purchase $5.2 million principal amount of DNB’s floating rate junior subordinated debentures. The preferred securities have been redeemable since July 25, 2006 and must be redeemed upon maturity of the debentures on July 25, 2031.

DNB Capital Trust II

DNB’s second issuance of junior subordinated debentures was on March 30, 2005. These are floating rate and were issued to DNB Capital Trust II, a Delaware business trust in which DNB owns all of the common equity. DNB Capital Trust II issued $4.0 million of floating rate (the rate was fixed at 6.56% for the first 5 years and is now adjusting at a rate of 3-month LIBOR plus 1.77%) capital preferred securities. The proceeds of these securities were used by the Trust, along with DNB’s capital contribution, to purchase $4.1 million principal amount of DNB’s floating rate junior subordinated debentures. The preferred securities have been redeemable since May 23, 2010. The preferred securities must be redeemed upon maturity of the debentures on May 23, 2035.

Subordinated Note

On March 5, 2015, DNB Financial Corporation entered into a Subordinated Note Purchase Agreement (the “Agreement”) with an accredited investor under which DNB issued a $9.75 million subordinated note (the “Note”) to the investor. The Note has a maturity date of March 6, 2025, and bears interest at a fixed rate of 4.25% per annum for the first 5 years and then will float at the Wall Street Journal Prime rate plus 1.00%, provided that the interest rate applicable to the outstanding principal balance will at no time be less than 3.0% and more than 5.75% per annum.

DNB may, at its option, beginning with the first interest payment date after March 6, 2019, and on any interest payment date thereafter, redeem the Note, in whole or in part, at par plus accrued and unpaid interest to the date of redemption. The Note is not subject to repayment at the option of the noteholder.

The Note is unsecured and ranks junior in right of payment to DNB’s senior indebtedness and to DNB’s obligations to its general creditors and qualifies as Tier 2 capital for regulatory purposes.

Repurchase Agreements Accounted for as Secured Borrowings

Repurchase agreements accounted for as secured borrowings are shown in the following table.


(Dollars in thousands)	Overnight and Continuous		Up to 30 days		30 - 90 days		Greater than 90 days		Total
September 30, 2015
Repurchase agreements and repurchase-to-maturity transactions	$	30,501	$	-	$	-	$	-	$	30,501
Gross amount of recognized liabilities for repurchase agreements
in Statement of Condition									$	30,501
December 31, 2014
Repurchase agreements and repurchase-to-maturity transactions	$	19,221	$	-	$	-	$	-	$	19,221
Gross amount of recognized liabilities for repurchase agreements
in Statement of Condition									$	19,221

As of September 30, 2015 and December 31, 2014, DNB had $30.5 million and $19.2 million of repurchase agreements, respectively. In conjunction with these repurchase agreements, $31.1 million and $19.6 million of state and municipal securities were sold on an overnight basis as of September 30, 2015 and December 31, 2014, respectively, which represents 102% of the repurchase agreement amount.

NOTE 8: STOCK-BASED COMPENSATION

Stock Option Plan

DNB has a Stock Option Plan for employees and directors. Under the plan, options (both qualified and non-qualified) to purchase a maximum of 793,368 (as adjusted for subsequent stock dividends) shares of DNB’s common stock could be issued to employees and directors. Under the plan, option exercise prices must equal the fair market value of the shares on the date of option grant and the option exercise period may not exceed ten years. Vesting of options under the plan is determined by the Plan Committee. There were 354,090 shares available for grant at September 30, 2015. All options are immediately exercisable. DNB had no expenses related to the plan during the three and nine months ended September 30, 2015 compared to $12,000 and $42,000 during the three and nine months ended September 30, 2014. DNB has no anticipated additional expense related to the plan. Stock option activity is indicated below.



	Number	Weighted Average
	Outstanding	Exercise Price
Outstanding January 1, 2015	163,586	$	15.13
Issued	-		-
Exercised	95,834		19.40
Forfeited	-		-
Expired	-		-
Outstanding September 30, 2015	67,752	$	9.09



	Number	Weighted Average
	Outstanding	Exercise Price
Outstanding January 1, 2014	207,303	$	15.92
Issued	-		-
Exercised	22,806		16.44
Forfeited	-		-
Expired	-		-
Outstanding September 30, 2014	184,497	$	15.86

The weighted-average price and weighted average remaining contractual life for the outstanding options are listed in the following table for the dates indicated.



September 30, 2015
	Range of				Weighted Average
	Exercise	Number	Number		Exercise	Remaining		Intrinsic
	Prices	Outstanding	Exercisable		Price	Contractual Life		Value
$	6.93-10.99	64,500	64,500	$	8.67	2.41 years	$	1,139,000
	14.00-19.99	3,252	3,252		17.51	0.22 years		29,000
	Total	67,752	67,752	$	9.09	2.30 years	$	1,168,000



December 31, 2014
	Range of				Weighted Average
	Exercise	Number	Number		Exercise	Remaining		Intrinsic
	Prices	Outstanding	Exercisable		Price	Contractual Life		Value
$	6.93-10.99	80,650	80,650	$	8.66	3.15 years	$	1,044,000
	14.00-19.99	34,895	34,895		17.51	0.97 years		143,000
	23.00-24.27	48,041	48,041		24.27	0.29 years		-
	Total	163,586	163,586	$	15.13	1.85 years	$	1,187,000

Other Stock-Based Compensation

DNB maintains an Incentive Equity and Deferred Compensation Plan (the "Plan"). The Plan provides that up to 243,101 (as adjusted for subsequent stock dividends) shares of common stock may be granted, at the discretion of the Board, to individuals of the Corporation. Shares already granted are issuable on the earlier of three or four years (cliff vesting period) after the date of the grant or a change in control of DNB if the recipients are then employed by DNB (“Vest Date”). Upon issuance of the shares, resale of the shares is restricted for an additional one year, during which the shares may not be sold, pledged or otherwise disposed of. Prior to the Vest Date and in the event the recipient terminates association with DNB for reasons other than death, disability or change in control, the recipient forfeits all rights to the shares that would otherwise be issued under the grant.

Share awards granted by the Plan were recorded at the date of award based on the market value of shares. Awards are being amortized to expense over a three or four year cliff-vesting period. DNB records compensation expense equal to the value of the shares being amortized. For the three and nine month periods ended September 30, 2015, $85,000 and $250,000 was amortized to expense, respectively. For the three and nine month periods ended September 30, 2014, $53,000 and $158,000 was amortized to expense, respectively. As of September 30, 2015, there was approximately $680,000 in additional compensation that will be recognized over the remaining service period of approximately 1.78 years. At September 30, 2015, 117,764 shares were reserved for future grants under the Plan.

Stock grant activity is indicated below:



		Weighted Average
	Shares	Stock Price
Non-vested stock awards—January 1, 2015	75,930	$	17.66
Granted	-		-
Forfeited	1,270		19.21
Vested	-		-
Non-vested stock awards—September 30, 2015	74,660	$	17.63



		Weighted Average
	Shares	Stock Price
Non-vested stock awards—January 1, 2014	50,795	$	15.65
Granted	-		-
Forfeited	-		-
Vested	-		-
Non-vested stock awards—September 30, 2014	50,795	$	15.65

NOTE 9: INCOME TAXES

As of September 30, 2015, the Corporation had no material unrecognized tax benefits or accrued interest and penalties. It is the Corporation’s policy to account for interest and penalties accrued relative to unrecognized tax benefits as a component of income tax expense. Federal and state tax years 2011 through 2014 were open for examination as of September 30, 2015.

NOTE 10: FAIR VALUE OF FINANCIAL INSTRUMENTS

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 and equity 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 securities 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 establishing a new cost basis. 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 September 30, 2015 and December 31, 2014 that are recognized on DNB’s statement of financial condition using fair value measurement determined based on the differing levels of input:



		September 30, 2015

(Dollars in thousands)		Level 1		Level 2		Level 3		Fair Value
Assets Measured at Fair Value on a Recurring Basis
AFS Investment Securities:
US Government agency obligations	$	-	$	60,968	$	-	$	60,968
GSE mortgage-backed securities		-		43,291		-		43,291
Collateralized mortgage obligations GSE		-		16,893		-		16,893
Corporate bonds		-		23,196		-		23,196
State and municipal tax-exempt		-		17,697		-		17,697
Equity securities		18		-		-		18
Total	$	18	$	162,045	$	-	$	162,063


Assets Measured at Fair Value on a Nonrecurring Basis
Impaired loans	$	-	$	-	$	896	$	896
OREO and other repossessed property		-		-		453		453
Total	$	-	$	-	$	1,349	$	1,349



		December 31, 2014

(Dollars in thousands)		Level 1		Level 2		Level 3		Fair Value
Assets Measured at Fair Value on a Recurring Basis
AFS Investment Securities:
US Government agency obligations	$	-	$	61,354	$	-	$	61,354
GSE mortgage-backed securities		-		66,723		-		66,723
Collateralized mortgage obligations GSE		-		20,011		-		20,011
Corporate bonds		-		13,102		-		13,102
State and municipal tax-exempt		-		10,994		-		10,994
Equity securities		18		-		-		18
Total	$	18	$	172,184	$	-	$	172,202


Assets Measured at Fair Value on a Nonrecurring Basis
Impaired loans	$	-	$	-	$	2,916	$	2,916
OREO and other repossessed property		-		-		100		100
Total	$	-	$	-	$	3,016	$	3,016

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:



September 30, 2015
Quantitative Information about Level 3 Fair Value Measurement

		Fair Value	Valuation		Range
(Dollars in thousands)		Estimate	Techniques	Unobservable Input	(Weighted Average)
Impaired loans - Residential mortgage	$	115	Appraisal of	Appraisal adj. (2)	0%	to	0%	(0%)
			collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)
Impaired loans - Commercial mortgage		96	Appraisal of	Appraisal adj. (2)	0%	to	0%	(0%)
			collateral (1)	Disposal costs (2)	-13%	to	-13%	(-13%)
Impaired loans - Commercial term		88	Appraisal of	Appraisal adj. (2)	-72%	to	-72%	(-72%)
			collateral (1)	Disposal costs (2)	-11%	to	-11%	(-11%)
Impaired loans - Commercial construction		559	Appraisal of	Appraisal adj. (2)	0%	to	0%	(0%)
			collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)
Impaired loans - Consumer other		38	Appraisal of	Appraisal adj. (2)	0%	to	0%	(0%)
			collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)
Impaired loan total	$	896
Other real estate owned	$	453		Disposal costs (2)	8%	to	8%	(-8%)

(1)

(2)



December 31, 2014
Quantitative Information about Level 3 Fair Value Measurement

		Fair Value	Valuation		Range
(Dollars in thousands)		Estimate	Techniques	Unobservable Input	(Weighted Average)
Impaired loans - Residential mortgage	$	1,244	Appraisal of	Appraisal adj. (2)	0%	to	0%	(0%)
			collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)
Impaired loans - Commercial mortgage		97	Appraisal of	Appraisal adj. (2)	0%	to	0%	(0%)
			collateral (1)	Disposal costs (2)	-13%	to	-13%	(-13%)
Impaired loans - Commercial term		81	Appraisal of	Appraisal adj. (2)	0%	to	0%	(0%)
			collateral (1)	Disposal costs (2)	-11%	to	-11%	(-11%)
Impaired loans - Commercial construction		1,494	Appraisal of	Appraisal adj. (2)	0%	to	-47%	(-19%)
			collateral (1)	Disposal costs (2)	-11%	to	-11%	(-11%)
Impaired loan total	$	2,916
Other real estate owned	$	100		Disposal costs (2)	-8%	to	-16%	(-12%)

⁽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 and 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 $4.1 million at September 30, 2015. Of this, $920,000 had a specific valuation allowance of $120,000, leaving a fair value of $800,000 as of September 30, 2015. DNB had $202,000 in impaired loans that were partially charged down by $106,000, leaving $96,000 at fair value as of September 30, 2015. The total fair value of impaired loans at September 30, 2015 was $896,000.

Impaired loans had a carrying amount of $9.1 million at December 31, 2014. Of this, $850,000 had a specific valuation allowance of $273,000, leaving a fair value of $577,000 at December 31, 2014. In addition, DNB had $2.9 million in impaired loans that were partially charged down by $526,000, leaving $2.3 million at fair value as of December 31, 2014. The total fair value of impaired loans at December 31, 2014 was $2.9 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 $2.2 million of such assets at September 30, 2015, $2.1 million of which was OREO and $165,000 was in other repossessed property. DNB had $901,000 of such assets at December 31, 2014, which consisted of $837,000 in OREO and $64,000 in other repossessed property. Subsequent to the repossession of these assets, DNB wrote down the carrying value of one OREO property by $154,000 to $453,000 during the nine month period ending September 30, 2015. DNB did not write down the carrying values of OREO in the nine month period ending September 30, 2014.

DNB's policy is to recognize transfer between levels as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers between Level 1 and 2 for the three and nine months ended September 30, 2015.

Below is management’s estimate of the fair value of all financial instruments, whether carried at cost or fair value on the Company’s consolidated balance sheet. The carrying amounts and fair values of financial instruments at September 30, 2015 and December 31, 2014 are as follows:



		September 30, 2015

		Carrying		Fair
(Dollars in thousands)		Amount		Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	18,959	$	18,959	$	18,959	$	-	$	-
AFS investment securities		162,063		162,063		18		162,045		-
HTM investment securities		65,300		66,007		-		66,007		-
Restricted stock		2,964		2,964		-		2,964		-
Loans and leases, net of allowance, including impaired		465,667		453,356		-		-		453,356
Accrued interest receivable		2,542		2,542		-		2,542		-
Financial liabilities
Deposits:
Non-interest-bearing deposits		120,018		120,018		-		120,018		-
Interest-bearing deposits:		400,031		400,031		-		400,031		-
Time		69,744		69,408		-		69,408		-
Brokered deposits		18,665		18,558		-		18,558		-
Repurchase agreements		30,501		30,501		-		30,501		-
FHLBP advances		20,000		20,413		-		20,413		-
Junior subordinated debentures and other borrowings		9,279		8,067		-		8,067		-
Subordinated debt		9,750		10,131		-		10,131		-
Accrued interest payable		322		322		-		322		-
Off-balance sheet instruments		-		-		-		-		-



		December 31, 2014

		Carrying		Fair
(Dollars in thousands)		Amount		Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	12,504	$	12,504	$	12,504	$	-	$	-
AFS investment securities		172,202		172,202		18		172,184		-
HTM investment securities		59,454		60,099		-		60,099		-
Restricted stock		2,587		2,587		-		2,587		-
Loans held-for-sale		617		640		-		-		-
Loans and leases, net of allowance, including impaired		450,697		436,499		-		-		436,499
Accrued interest receivable		2,253		2,253		-		2,253		-
Financial liabilities
Deposits:
Non-interest-bearing deposits		102,107		102,107		-		102,107		-
Interest-bearing deposits:		415,933		415,933		-		415,933		-
Time		76,805		76,519		-		76,519		-
Brokered deposits		10,238		10,204		-		10,204		-
Repurchase agreements		19,221		19,221		-		19,221		-
FHLBP advances		20,000		20,616		-		20,616		-
Junior subordinated debentures and other borrowings		9,279		7,546		-		7,546		-
Accrued interest payable		351		351		-		351		-
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.

Cash and Cash Equivalents, Accrued Interest Receivable and Accrued Interest Payable The carrying amounts for short-term investments (cash and cash equivalents) and accrued interest receivable and payable approximate fair value.

Loans Held-for-Sale The fair value of loans held-for-sale is determined, when possible, using quoted secondary-market prices. If no such quotes prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan.

Investment Securities The fair value of investment securities are determined 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. The carrying amount of non-readily marketable equity securities approximates liquidation value.

Restricted Stock The carrying amount of restricted investment in Federal Home Loan Bank stock, Federal Reserve stock and ACBB stock approximates fair value, and considers the limited marketability of such securities.

Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial mortgages, residential mortgages, consumer and non-accrual loans. The fair value of performing loans is calculated by discounting expected cash flows using an estimated market discount rate. Expected cash flows include both contractual cash flows and prepayments of loan balances. Prepayments on consumer loans were determined using the median of estimates of securities dealers for mortgage-backed investment pools.

The estimated discount rate considers credit and interest rate risk inherent in the loan portfolios and other factors such as liquidity premiums and incremental servicing costs to an investor. Management has made estimates of fair value discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, management has no basis to determine whether the fair value presented would be indicative of the value negotiated in an actual sale.

The fair value for non-accrual loans not based on fair value of collateral is derived through a discounted cash flow analysis, which includes the opportunity costs of carrying a non-performing asset. An estimated discount rate was used for these non-accrual loans, based on the probability of loss and the expected time to recovery.

Deposits The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate money market accounts, savings accounts, and interest checking accounts approximate their fair values at the reporting date. Fair values for fixed-rate CDs and brokered deposits (all of which are CDs) are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Of the $18.7 million in brokered deposits, $4.0 million matures in 2016, $6.2 million matures in 2017, $3.2 million matures in 2018, and $5.3 million matures in 2019.

Federal Home Loan Bank of Pittsburgh advances The fair value of the FHLBP advances is obtained from the FHLB and is calculated by discounting contractual cash flows using an estimated interest rate based on the current rates available for debt of similar remaining maturities and collateral terms.

Repurchase agreements Fair value approximates the carrying value of such liabilities due to their short-term nature.

Junior subordinated debentures The fair value for subordinated debentures is calculated using discounted cash flows based upon current market spreads to LIBOR for debt of similar remaining maturities and collateral terms.

Subordinated debt The fair value of the subordinated debt was estimated using either a discounted cash flow analysis based on current market interest rates for debt with similar maturities and credit quality or estimated using market quotes.

Off-balance-sheet Instruments (Disclosed at Cost) Off-balance-sheet instruments are primarily comprised of loan commitments, which are generally priced at market at the time of funding. Fees on commitments to extend credit and stand-by letters of credit are deemed to be immaterial and these instruments are expected to be settled at face value or expire unused. It is impractical to assign any fair value to these instruments. At September 30, 2015, un-funded loan commitments totaled $111.7 million and stand-by letters of credit totaled $3.5 million. At December 31, 2014, un-funded loan commitments totaled $101.7 million and stand-by letters of credit totaled $2.2 million.

NOTE 11: STOCKHOLDERS’ EQUITY

In July 2013, the Board of Governors of the Federal Reserve approved the Basel III interim final rule (Basel III), which is intended to strengthen the quality and increase the required level of regulatory capital for a more stable and resilient banking system. The changes include (1) a new regulatory capital measure, Common Equity Tier 1 (CET1), which is limited to capital elements of the highest quality, (2) a new definition and increase of tier 1 capital which is now comprised of CET1 and Additional Tier 1, (3) changes in calculation of some risk-weighted assets and off-balance sheet exposure, and (4) a capital conservation buffer that will limit capital distributions, stock redemptions, and certain discretionary bonus payments if the institution does not maintain capital in excess of the minimum capital requirements. These new capital rules took effect for our Bank on January 1, 2015 and reporting began with the March 31, 2015 call report.

On August 4, 2011, DNB entered into a Securities Purchase Agreement with the Secretary of the Treasury, pursuant to which the Corporation issued and sold to the Treasury 13,000 shares of its Non-Cumulative Perpetual Preferred Stock, Series 2011A (“Series 2011A Preferred Stock”), having a liquidation preference of $1,000 per share for aggregate proceeds of $13,000,000. The Securities Purchase Agreement was entered into, and the Series 2011A Preferred Stock was issued, pursuant to the Treasury’s Small Business Lending Fund program (“SBLF”), a $30 billion fund established under the Small Business Jobs Act of 2010, that encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion. Of the $13.0 million in aggregate proceeds, $11,879,000 was used to repurchase the outstanding cumulative perpetual preferred stock. The securities sold in

this transaction were exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a transaction by DNB not involving a public offering.

The Series 2011A Preferred Stock is entitled to receive non-cumulative dividends payable quarterly, on each January 1, April 1, July 1 and October 1, beginning October 1, 2011. The dividend rate, which is calculated on the aggregate Liquidation Amount, was initially set at 3.874% per annum, and was based upon the level of “Qualified Small Business Lending”, or “QSBL” (as defined in the Securities Purchase Agreement) originated by the Corporation’s wholly subsidiary DNB First, the Bank. The dividend rate for dividends beyond the initial period are based upon the “Percentage Change in Qualified Lending” (as defined in the Securities Purchase Agreement) between each dividend period and the “Baseline” QSBL level. Such dividend rate may vary from 1% per annum to 5% per annum for the second through tenth dividend periods depending on the volume of Qualified Small Business Lending the Bank will originate in future periods, and will be fixed at a rate between 1% per annum to 7% per annum and remain unchanged up to four and one-half years following the funding date (the eleventh through the first half of the nineteenth dividend periods). Because it is not feasible to predict the volume of Qualified Small Business Lending in future periods, it is not feasible to estimate specific future dividend rates under this formula. If the Series 2011A Preferred Stock remains outstanding for more than four-and-one-half years, the dividend rate will be fixed at 9%. Prior to that time, in general, the dividend rate decreases as the level of the Bank’s Qualified Small Business Lending increases. Such dividends are not cumulative, but the Corporation may only declare and pay dividends on its common stock (or any other equity securities junior to the Series 2011A Preferred Stock) if it has declared and paid dividends for the current dividend period on the Series 2011A Preferred Stock, and will be subject to other restrictions on its ability to repurchase or redeem common stock and other securities. In addition, if (i) the Corporation has not timely declared and paid dividends on the Series 2011A Preferred Stock for six dividend periods or more, whether or not consecutive, and (ii) shares of Series 2011A Preferred Stock with an aggregate liquidation preference of at least $13,000,000 are still outstanding, the Treasury (or any successor holder of Series 2011A Preferred Stock) may designate two additional directors to be elected to the Corporation’s Board of Directors. DNB paid an annual rate on the $13.0 million of Series 2011A Preferred Stock of 1.00% for the year ended December 31, 2014 and the annual rate remained at 1.00% as of September 30, 2015.

As more completely described in the Certificate of Designation, holders of the Series 2011A Preferred Stock have the right to vote as a separate class on certain matters relating to the rights of holders of Series 2011A Preferred Stock and on certain corporate transactions. Except with respect to such matters and, if applicable, the election of the additional directors described above, the Series 2011A Preferred Stock does not have voting rights.

The Corporation may redeem the shares of Series 2011A Preferred Stock, in whole or in part, at any time at a redemption price equal to the sum of the Liquidation Amount per share and the per-share amount of any unpaid dividends for the then-current period, subject to any required prior approval by the Corporation’s primary federal banking regulator.

On March 6, 2015, DNB redeemed 9,750 of the 13,000 shares of the Corporation’s Series 2011A Preferred Stock that had been issued to the United States Department of the Treasury in connection with the Corporation’s participation in the SBLF program. The shares were redeemed at their liquidation value of $1,000 per share plus accrued dividends for a total redemption price of $9,767,604. Following the consummation of this partial redemption, the Corporation continues to have outstanding 3,250 shares of its Series 2011A Preferred Stock.

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

DNB Financial Corporation (the “Corporation” or "DNB"), may from time to time make written or oral “forward-looking statements,” including statements contained in the Corporation’s filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q and the exhibits hereto and thereto), in its reports to stockholders and in other communications by the Corporation, which are made in good faith by the Corporation pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended.

These forward-looking statements include statements with respect to the Corporation’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Corporation’s control). The words “may,” “could,” “should,” “would,”"will," “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause the Corporation’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Corporation conducts operations; the effects of, and

changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; the recent downgrade, and any future downgrades, in the credit rating of the U.S. Government and federal agencies; inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Corporation and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services; the willingness of users to substitute competitors’ products and services for the Corporation’s products and services; the success of the Corporation in gaining regulatory approval of its products and services, when required; the impact of changes in laws and regulations applicable to financial institutions (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and saving habits; the nature, extent, and timing of governmental actions and reforms, including the rules of participation for the Small Business Lending Fund, the implementation of Basel III, which may be changed unilaterally and retroactively by legislative or regulatory actions; and the success of the Corporation at managing the risks involved in the foregoing.

The Corporation cautions that the foregoing list of important factors is not exclusive. Readers are also cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this report, even if subsequently made available by the Corporation on its website or otherwise. The Corporation does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Corporation to reflect events or circumstances occurring after the date of this report.

For a complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review our filings with the Securities and Exchange Commission, including this Form 10-Q, as well as any changes in risk factors or other risks that we may identify in our quarterly or other reports subsequently filed with the SEC.

DESCRIPTION OF DNB'S BUSINESS AND BUSINESS STRATEGY

DNB is a bank holding company whose bank subsidiary, DNB First, National Association (the “Bank”) is a nationally chartered commercial bank with trust powers, and a member of the FDIC. DNB provides a broad range of banking services to individual and corporate customers through its twelve community offices located throughout Chester and Delaware Counties, Pennsylvania. DNB is a community banking organization that focuses its lending and other services on businesses and consumers in the local market area. DNB funds all these activities with retail and business deposits and borrowings. Through its DNB First Investment Management & Trust division, the Bank provides investment management and trust administration services to individuals and non-profit organizations. The Bank and its subsidiary, DNB Investments & Insurance, provide brokerage, retirement and insurance services.

DNB earns revenues and generates cash flows by lending funds to commercial and consumer customers in its marketplace. DNB generates its largest source of interest income through its lending function. A secondary source of interest income is DNB’s investment portfolio, which provides liquidity and cash flows for future lending needs.

In addition to interest earned on loans and investments, DNB earns revenues from fees it charges customers for non-lending services. These products and services include trust administration, estate settlement, investment management, annuity, insurance and brokerage; cash management services; banking and ATM services; as well as safekeeping and other depository services.

To ensure we remain well positioned to meet the growing needs of our customers and communities and to meet the challenges of the 21st century, we’ve worked to build awareness of our full-service capabilities and ability to meet the needs of a wide range of customers. This served to not only retain our existing, customer base, but to position ourselves as an attractive financial institution on which younger individuals and families can build their dreams. To that end, DNB continues to make appropriate investments in all areas of our business, including people, technology, facilities and marketing.

Comprehensive 5-Year Plan. During the third quarter of 2015, management updated the 5-year strategic plan that was designed to reposition its balance sheet and improve core earnings. Through the plan, management will endeavor to expand its loan portfolio through new originations, increased loan participations, as well as strategic loan and lease receivable purchases. Management also plans to reduce the absolute level of borrowings with cash flows from existing loans and investments as well as from new deposit growth. A discussion on DNB’s Key Strategies follows below:

•Focus on penetrating existing markets to maximize profitability;

•Grow loans and diversify the mix;

•Improve asset quality;

•Focus on profitable customer segments;

•Grow and diversify non-interest income, primarily wealth management and mortgage banking;

•Continue to grow core deposits to maintain low funding costs;

•Focus on cost containment and improving operational efficiencies; and

•Continue to engage employees to help them become more effective and successful.

Strategic Plan Update. DNB reported net income available to common stockholders of $1.3 million, or $0.44 per diluted share, for the quarter ending September 30, 2015, compared with $1.2 million, or $0.43 per diluted share, for the same quarter, 2014. Net income available for common shareholders for the first nine months of 2015 was $3.7 million, or $1.31 per diluted share, compared with $3.3 million or $1.16 per diluted share, in the prior year period. Quarterly earnings increased as a result of higher levels of earning assets and constant vigilance of expense management. Non-interest expense was $4.8 million for the third quarter of 2015, which represented an increase of only 1.6% from that of the corresponding quarter last year.

The net interest margin for the third quarter of 2015 was 3.13%, compared with 3.33% for the third quarter of 2014 and 3.11% for the second quarter of 2015. On a consecutive quarter basis, DNB’'s net interest margin was relatively stable in 2015, despite continuing pressure due to the low-interest rate environment and intense pricing competition for quality lending business.

Quality loan growth was achieved over the past year and we remain committed to maintaining our prudent pricing and credit discipline. Total loans grew $21.0 million or 4.7% to $470.4 million as of September 30, 2015, from $449.4 million as of September 30, 2014. On a sequential quarter basis, total loans decreased slightly (less than 1%) from $472.3 million as of June 30, 2015. As of September 30, 2015, total loans were 63.4% of total assets compared with 64.6% as of September 30, 2014. Loan growth has been moderate; and DNB remains challenged to grow commercial loans in a competitive market, while maintaining its conservative underwriting standards. DNB’s loans and leases increased $14.8 million to $470.4 million at September 30, 2015, compared to $455.6 million at December 31, 2014. Total commercial loans, residential loans, and consumer loans increased $11.2 million, $1.6 million, and $2.0 million, respectively.

Asset quality remained strong. Net charge-offs decreased slightly to 0.41% of total average loans for the quarter ending September 30, 2015, compared with 0.43% for the quarter ending June 30, 2015. The net charge-offs for the three months ended September 30, 2015, were primarily due to four credits, two of which were previously reserved, for which new market and financial information became available during the quarter. Total non-performing assets, including loans and other real estate property, were $6.5 million as of September 30, 2015, compared with $6.6 million as of June 30, 2015, and $6.9 million as of September 30, 2014. The ratio of non-performing assets to total assets was 0.87% and non-performing loans were 0.90% of total loans as of September 30, 2015. As of the same date, the allowance for loan losses to total loans ratio was 1.01%.

On a sequential quarter basis, total core deposits declined $30.9 million, or 5.6% (not annualized), but represented 85.5% of total deposits as of September 30, 2015. The decrease in core deposits was primarily due to a $20.1 million decrease in NOW accounts. The decline is mainly attributed to the delay in approving the Commonwealth of Pennsylvania's annual budget, which includes distributions to many of DNB's municipal clients, who have temporarily drawn down their accounts to fund normal operating costs. Time deposits, however, increased $13.0 million. Total deposits were $608.5 million as of September 30, 2015, compared with $626.4 million as of June 30, 2015 and $589.4 million at September 30, 2014.

Total non-interest income for the third quarter of 2015 was $1.0 million, which was essentially unchanged from the same quarter in 2014. On a sequential quarter basis, total non-interest income declined $301,000, or 22.5% (not annualized). The primary reason for the decrease was a $185,000 gain on Small Business Administration (SBA) loan sales, which occurred in the previous quarter and a $105,000 decrease in income from DNB’s wealth management business. Wealth management fees were $317,000 for the quarter ending September 30, 2015, which represented nearly one-third of total fee income. Assets under administration were $184.5 million as of September 30, 2015, but were negatively impacted by declines in asset values due to market conditions.

Management has made a concerted effort to improve the measurement and tracking of business lines and overall corporate performance levels. Improved information systems have increased DNB's ability to track key indicators and enhance corporate performance levels. Better measurement against goals and objectives and increased accountability will be integral in attaining desired loan, deposit and fee income production.

MATERIAL CHALLENGES, RISKS AND OPPORTUNITIES

The following is a summary of material challenges, risks and opportunities DNB has faced during the nine month period ended September 30, 2015:

Interest Rate Risk Management. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. DNB considers interest rate risk the predominant risk in terms of its potential impact on earnings. Interest rate risk can occur for any one or more of the following reasons: (a) assets and liabilities may mature or re-price at different times; (b) short-term or long-term market rates may change by different amounts; or (c) the remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change.

The principal objective of the Bank’s interest rate risk management is to evaluate the interest rate risk included in certain on and off-balance sheet accounts, determine the level of risk appropriate given the Bank’s business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with management’s approved guidelines. Through such management, DNB seeks to reduce the vulnerability of its operations to changes in interest rates. The Bank’s Asset Liability Committee (the “ALCO”) is responsible for reviewing the Bank’s asset/liability policies and interest rate risk position and making decisions involving asset liability considerations. The ALCO meets on a monthly basis and reports trends and the Bank’s interest rate risk position to the Board of Directors. The extent of the movement of interest rates is an uncertainty that could have a negative impact on the earnings of the Bank.

The largest component of DNB’s total income is net interest income, and the majority of DNB’s financial instruments are comprised of interest rate-sensitive assets and liabilities with various terms and maturities. The primary objective of management is to maximize net interest income while minimizing interest rate risk. Interest rate risk is derived from timing differences in the re-pricing of assets and liabilities, loan prepayments, deposit withdrawals, and differences in lending and funding rates. The ALCO actively seeks to monitor and control the mix of interest rate-sensitive assets and interest rate-sensitive liabilities. One measure of interest rate risk is net interest income simulation analysis. The ALCO utilizes simulation analysis, whereby the model estimates the variance in net interest income with a change in interest rates of plus or minus 200 and 300 basis points in addition to four yield curve twists over a twelve-month period.

Liquidity and Market Risk Management Liquidity is the ability to meet current and future financial obligations. The Bank further defines liquidity as the ability to respond to deposit outflows as well as maintain flexibility to take advantage of lending and investment opportunities. The Bank’s primary sources of funds are operating earnings, deposits, repurchase agreements, principal and interest payments on loans, proceeds from loan sales, principal and interest payments on mortgage backed securities, sales of investment securities, and advances from the FHLB. The Bank uses the funds generated to support its lending and investment activities as well as any other demands for liquidity such as deposit outflows. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, mortgage prepayments, loan and security sales and the exercise of call features are greatly influenced by general interest rates, economic conditions and competition.

The objective of DNB’s asset/liability management function is to maintain consistent growth in net interest income within DNB’s policy limits. This objective is accomplished through the management of liquidity and interest rate risk, as well as customer offerings of various loan and deposit products. DNB maintains adequate liquidity to meet daily funding requirements, anticipated deposit withdrawals, or asset opportunities in a timely manner. Liquidity is also necessary to meet obligations during unusual, extraordinary or adverse operating circumstances, while avoiding a significant loss or cost. DNB’s foundation for liquidity is a stable deposit base as well as a marketable investment portfolio that provides cash flow through regular maturities or that can be used for collateral to secure funding in an emergency. As part of its liquidity management, DNB maintains assets, which comprise its primary liquidity (Federal funds sold, investments and cash and due from banks, less pledged securities).

Credit Risk Management. DNB defines credit risk as the risk of default by a customer or counter-party. The objective of DNB’s credit risk management strategy is to quantify and manage credit risk on an aggregate portfolio basis as well as to limit the risk of loss resulting from an individual customer default. Credit risk is managed through a combination of underwriting, documentation and collection standards. DNB’s credit risk management strategy calls for regular credit examinations and quarterly management reviews of large credit exposures and credits that are experiencing credit quality deterioration. DNB’s loan review procedures provide assessments of the quality of underwriting, documentation, risk grading and charge-off procedures, as well as an assessment of the allowance for credit loss reserve analysis process.

Competition. In addition to the challenges related to the interest rate environment, community banks in Chester and Delaware Counties have been experiencing increased competition from large regional and international banks entering DNB’s marketplace through mergers and acquisitions. Competition for loans and deposits may negatively affect DNB’s net interest margin. To compensate for the increased competition, DNB has targeted customers who have been disenfranchised by these mergers. To attract these customers, DNB has introduced new products and services, such as Mobile Money and Mobile Deposit, Popmoney and instant issue debit cards.

FDIC Insurance and Assessments. The Bank’s deposits are insured to applicable limits by the FDIC. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the maximum deposit insurance amount was permanently increased from $100,000 to $250,000.

The FDIC has adopted a risk-based premium system that provides for quarterly assessments based on an insured institution’s ranking in one of four risk categories based on their examination ratings and capital ratios. Within its risk category, an institution is assigned an initial base assessment which is then adjusted to determine its final assessment rate based on its level of brokered deposits, secured liabilities and unsecured debt.

The Dodd-Frank Act required the FDIC to take such steps as necessary to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020. In setting the assessments, the FDIC is required to offset the effect of the higher reserve ratio against insured depository institutions with total consolidated assets of less than $10 billion. The Dodd-Frank Act also broadened the base for FDIC insurance assessments so that assessments will be based on the average consolidated total assets less average tangible equity capital of a financial institution rather than on its insured deposits. The FDIC has adopted a restoration plan to increase the reserve ratio to 1.15% by September 30, 2020 with additional rulemaking scheduled regarding the method to be used to achieve a 1.35% reserve ratio by that date and offset the effect on institutions with less than $10 billion in assets.

Pursuant to these requirements, the FDIC adopted new assessment regulations effective April 1, 2011 that redefined the assessment base as average consolidated assets less average tangible equity. Insured banks with more than $1.0 billion in assets must calculate quarterly average assets based on daily balances while smaller banks and newly chartered banks may use weekly averages. Average assets would be reduced by goodwill and other intangibles. Average tangible equity equals Tier 1 capital. For institutions with more than $1.0 billion in assets, average tangible equity is calculated on a weekly basis while smaller institutions may use the quarter-end balance. The base assessment rate for insured institutions in Risk Category I will range between 5 to 9 basis points and for institutions in Risk Categories II, III, and IV will be 14, 23 and 35 basis points. An institution’s assessment rate will be reduced based on the amount of its outstanding unsecured long-term debt and for institutions in Risk Categories II, III and IV may be increased based on their brokered deposits.

In addition to deposit insurance assessments, banks are subject to assessments to pay the interest on Financing Corporation bonds. The Financing Corporation was created by Congress to issue bonds to finance the resolution of failed thrift institutions. The FDIC sets the Financing Corporation assessment rate every quarter. The current annual Financing Corporation assessment rate is 60 basis points on the deposit insurance assessment base, as defined above, which we anticipate will result in an aggregate estimated FICO assessment payment by the Bank of $39,000 in 2015.

Material Trends and Uncertainties.

For the quarter ended September 30, 2015, DNB reported net income of $1.3 million versus $1.2 million for the same period in 2014. Per share earnings on a fully diluted basis were $0.44, up from $0.43 the prior year. Even though DNB’s quarterly earnings have increased, there are many aspects of the economy and the Federal Reserve’s monetary policy that hinder DNB’s ability to grow revenues and net income. One of the most significant factors is that the global and U.S. economies have experienced reduced business activity as a result of disruptions in the financial system during the past seven years. The United States, Europe, China and many other countries across the globe are struggling with too much debt and weaker streams of revenues as a result of recessionary pressures and high unemployment. Overall economic growth continues to be slow at a time when national and regional unemployment rates have improved, however participation rates remain at historically low levels. The risks associated with our business remain acute in periods of slow wage and economic growth. Moreover, financial institutions continue to be affected by a sluggish real estate market. While we are continuing to take steps to decrease and limit our exposure to problem loans, we nonetheless retain direct exposure to the residential and commercial real estate markets, and we are affected by these events.

The October 14, 2015 Beige Book indicated that aggregate business activity in the Third District continued to grow at a modest pace. In addition, most contacts continued to report modest growth in hiring, although staffing firms reported stronger results. On balance, only slight increases were reported in wages and prices, including home prices. Moderate growth of economic activity is anticipated over the next six months.

Overall, Third District homebuilders reported a slight improvement since the September 2, 2015 Beige Book. Builders in New Jersey and Pennsylvania noted ongoing softness. Builders did not cite any recent cost increases for materials; however, most continue to struggle with labor costs and securing timely delivery of subcontract work. Brokers in the major Third District housing markets continued to report modest growth of existing home sales. The relative lack of new home construction continues to buoy existing home sales. Year-over-year comparisons have begun to diminish, as 2014's sales began to strengthen near year-end. Inventory levels remain relatively unchanged at sufficiently high levels such that price increases are constrained and limited to select local markets.

The Federal Reserve’s nonresidential real estate contacts reported little change to the modest pace of growth in construction and leasing activity seen earlier. Activity remains focused on urban, upscale mixed-use developments and on industrial warehouse space. The Federal Reserve’s contacts remained optimistic for ongoing growth of both new construction and leasing activity throughout the District into 2016.

Third District financial firms reported moderate overall increases in total loan volumes since the September 2, 2015 Beige Book. Commercial real estate activity, commercial and industrial lending, auto loans, and other consumer lending (excluding credit cards) were the segments with the strongest growth in volumes. Residential real estate lending volumes remained essentially flat for mortgages and refinancing loans. The Federal Reserve’s banking contacts in most parts of the District described a steadily growing economy with little sign of inflation. The Federal Reserve’s contacts remained optimistic for continued growth over the next six months.

Third District manufacturers reported that general activity had declined; however, contacts reported little change in the slight growth of new orders and in shipments. Moreover, employment picked up a bit among manufacturers. Gains in activity appeared to be stronger among the makers of lumber and wood products, paper products, fabricated metal products, and instruments; activity appeared weaker among the makers of chemicals, primary metals, and electronics. Firms continued to cite concerns about the strong dollar. Despite the weakness in general activity suggested by the Federal Reserve’s contacts, their expectations of growth during the next six months have remained the same since the September 2, 2015 Beige Book report, if not slightly better. Firms also indicated higher expectations for future capital expenditures; however, plans for future hiring sagged a bit. Still, nearly three times more firms anticipate hiring workers than firms that expect to decrease employment.

Although DNB’s earnings have been impacted by the general economic conditions, the impact has not been as severe as it has been in many parts of the nation, largely due to a relatively healthier economic climate in the Third Federal Reserve District and specifically Chester County. DNB’s franchise spans both Chester and Delaware counties in southeastern Pennsylvania. The majority of loans have been made to businesses and individuals in Chester County and the majority of deposits are from businesses and individuals within the County. According to census data, Chester County’s population has grown at approximately 15%, compared to 13% for the nation and 3% for the Commonwealth of Pennsylvania. The median household income in Chester County is $86,184 and the County ranks 14th nationally in disposable income. The unemployment rate for Chester County stood at 4.1% as of June 2015, compared to a Pennsylvania unemployment rate of 5.4% and a national unemployment rate of 5.5%. Traditionally, the unemployment rate has been the lowest in the surrounding five-county area and it ranks among the lowest unemployment rates in the Commonwealth. Chester County has a civilian labor force of 266,900, with manufacturing jobs representing 23.1% of the workforce and retail shopping comprising 13.8% of the total employment. During the last few years, the County has been able to keep most of its major employers; however some of them have downsized in order to remain competitive. Chester County is home to several Fortune 500 companies. Thirteen Chester County employers have 1,000 employees or more. Of these 13 companies, two companies have more than 5,000 employees.

These and other factors have impacted our operations. We continue to focus on the consistency and stability of core earnings and balance sheet strength which are critical success factors in today’s challenging economic environment.

Regulatory Initiatives Related to Our Industry. The federal government continues to consider a variety of reforms related to banking and the financial industry including, without limitation, the Dodd-Frank Act. The Dodd-Frank Act is intended to promote financial stability in the U.S., reduce the risk of bailouts and protect against abusive financial services practices by improving accountability and transparency in the financial system and ending “too big to fail” institutions. It is the broadest overhaul of the U.S. financial system since the Great Depression, and although enacted more than five years ago, much of its impact will be determined by the scope and substance of many regulations that still need to be adopted by various regulatory agencies to implement its provisions. For these reasons, the overall impact on DNB and its subsidiaries remains unknown at this time.

The Dodd-Frank Act delegates to various federal agencies, including the Consumer Financial Protection Bureau, the task of implementing its many provisions through regulation. While some regulations have been adopted, hundreds of new federal regulations, studies and reports addressing all of the major areas of the new law, including the regulation of banks and their holding companies, will be required, ensuring that federal rules and policies in this area will be further developing for months and years to come. Based on the provisions of the Dodd-Frank Act and adopted and anticipated implementing regulations, it is highly likely that banks and thrifts as well as their holding companies will be subject to significantly increased regulation and compliance obligations.

The Dodd-Frank Act could require us to make material expenditures, in particular personnel training costs and additional compliance expenses, or otherwise adversely affect our business or financial results. It could also require us to change certain of our business practices, adversely affect our ability to pursue business opportunities we might otherwise consider engaging in, cause business disruptions and/or have other impacts that are as-of-yet unknown to DNB and the Bank. Failure to comply with these laws or regulations, even if inadvertent, could result in negative publicity, fines or additional licensing expenses, any of which could have an adverse effect on our cash flow and results of operations. For example, a provision of the Dodd-Frank Act precludes bank holding companies from treating future trust preferred securities issuances as Tier 1 capital for regulatory capital adequacy purposes. This

provision may narrow the number of possible capital raising opportunities DNB and other bank holding companies might have in the future. Further, the new rules issued by the Consumer Financial Protection Bureau may materially affect the methods and costs of compliance by the Bank in connection with future consumer-related transactions.

Capital Rules. On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Corporation and the Bank. The FDIC and the OCC have subsequently approved these rules. The final rules were adopted following the issuance of proposed rules by the Federal Reserve in June 2012, and implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.

The rules include new risk-based capital and leverage ratios, which will be phased in from 2015 to 2019, and refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Corporation and the Bank under the final rules effective as of January 1, 2015: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. This will result in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

The final rules implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the final rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Corporation) will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.

The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions took effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions are required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).

The final rules set forth certain changes for the calculation of risk-weighted assets, which have been required to utilize since January 1, 2015. The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets. Based on our current capital composition and levels, we believe that we are in compliance with the requirements as set forth in the final rules presently in effect.

Other Material Challenges, Risks and Opportunities. As a financial institution, DNB's earnings are significantly affected by general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the United States economy and local economies in which we operate. As mentioned above in Material Trends and Uncertainties, the economic downturn, increased unemployment, and other events negatively impact household and/or corporate incomes and could decrease the demand for DNB's loan and non-loan products and services and increase the number of customers who fail to pay interest or principal on their loans. Geopolitical conditions can also affect DNB's earnings. Acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and our military conflicts, could impact business conditions in the United States.

CRITICAL ACCOUNTING POLICIES

The following discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principals. Generally

accepted accounting principles are complex and require management to apply significant judgment to various accounting, reporting and disclosure matters. Management must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. Actual results may differ from these estimates under different assumptions or conditions.

In management's opinion, the most critical accounting policies and estimates impacting DNB's consolidated financial statements are listed below. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. For a complete discussion of DNB's significant accounting policies, see the notes to the Consolidated Financial Statements included in DNB's 10-K for the year ended December 31, 2014.

Determination of the allowance for credit losses. Credit loss allowance policies involve significant judgments, estimates and assumptions by management which may have a material impact on the carrying value of net loans and leases and, potentially, on the net income recognized by DNB from period to period. The allowance for credit losses is based on management’s ongoing evaluation of the loan and lease portfolio and reflects an amount considered by management to be its best estimate of the amount necessary to absorb known and inherent losses in the portfolio. Management considers a variety of factors when establishing the allowance, such as the impact of current economic conditions, diversification of the portfolios, delinquency statistics, results of loan review and related classifications, and historic loss rates. In addition, certain individual loans which management has identified as problematic are specifically provided for, based upon an evaluation of the borrower’s perceived ability to pay, the estimated adequacy of the underlying collateral and other relevant factors. In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for credit losses. They may require additions to the allowance based upon their judgments about information available to them at the time of examination. Although provisions have been established and segmented by type of loan, based upon management’s assessment of their differing inherent loss characteristics, the entire allowance for credit losses is available to absorb further losses in any category.

Management uses significant estimates to determine the allowance for credit losses. Because the allowance for credit losses is dependent, to a great extent, on conditions that may be beyond DNB’s control, management’s estimate of the amount necessary to absorb credit losses and actual credit losses could differ. DNB’s current judgment is that the allowance for credit losses remains appropriate at September 30, 2015. For a description of DNB’s accounting policies in connection with its allowance for credit losses, see, “Allowance for Credit Losses”, in Management’s Discussion and Analysis.

Realization of deferred income tax items. Estimates of deferred tax assets and deferred tax liabilities make up the asset category titled “net deferred taxes”. These estimates involve significant judgments and assumptions by management, which may have a material impact on the carrying value of the net deferred tax assets for financial reporting purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance would be established against deferred tax assets when in the judgment of management, it is more likely than not that such deferred tax assets will not become available. For a more detailed description of these items, refer to Note 11 (Federal Income Taxes) to DNB’s consolidated financial statements for the year ended December 31, 2014.

The notes to DNB's most recent Consolidated Financial Statements as set forth in DNB's Annual Report 10-K identify other significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of DNB and its results of operations.

FINANCIAL CONDITION

DNB's total assets were $741.9 million at September 30, 2015, compared to $723.3 million at December 31, 2014. The $18.6 million increase in total assets was primarily attributable to a $14.8 million increase in loans and leases before allowance for credit losses, a $6.5 million increase in cash and cash equivalents, a $2.0 million increase in all other assets, and a $177,000 decrease in the allowance for credit losses, offset by a $4.5 million decrease in investment securities, and a $617,000 decrease in loans held for sale.

Investment Securities. Investment securities, including restricted stock, at September 30, 2015 were $230.3 million, compared to $234.2 million at December 31, 2014. The $3.9 million decrease in investment securities and restricted stock was primarily due to $59.4 million in sales, principal pay-downs, calls and maturities, offset by $55.5 million in purchases of investment securities and restricted stock.

Gross Loans and Leases. DNB’s loans and leases increased $14.8 million to $470.4 million at September 30, 2015, compared to $455.6 million at December 31, 2014. Total commercial loans, residential loans, and consumer loans increased $11.2 million, $1.6

million, and $2.0 million, respectively.

Deposits. Deposits were $608.5 million at September 30, 2015, compared to $605.1 million at December 31, 2014. Deposits increased $3.4 million or 0.56% during the nine-month period ended September 30, 2015. Core deposits, which are comprised of demand, NOW, money markets and savings accounts, increased by $2.0 million and brokered deposits increased by $8.4 million, while time deposits decreased by $7.1 million.

Borrowings. Borrowings were $70.0 million at September 30, 2015, compared to $49.0 million at December 31, 2014. The increase of $21.0 million or 42.9% was primarily due to an $11.3 million increase in repurchase agreements and a $9.8 million increase in subordinated debt. (See Note 7 regarding issuance of $9.8 million subordinated debt.)

Stockholders’ Equity. Stockholders' equity was $58.4 million at September 30, 2015, compared to $63.9 million at December 31, 2014. The decrease in stockholders’ equity was primarily a result of the partial redemption of the SBLF Series 2011A Preferred Stock by $9.8 million, $587,000 of dividends paid on DNB’s common stock and $42,000 of dividends paid on SBLF Series 2011A Preferred Stock. These subtractions to stockholders equity were partially offset by year-to-date earnings of $3.8 million and $426,000 of other comprehensive income (see Note 11 in this Form 10-Q regarding DNB's participation in the Treasury’s SBLF, a $30 billion fund established under the Small Business Jobs Act of 2010.)

RESULTS OF OPERATIONS

SUMMARY

Net income for the three and nine-month periods ended September 30, 2015 was $1.3 million and $3.8 million compared to $1.2 million and $3.4 million for the same periods in 2014. Diluted earnings per share for the three and nine-month periods ended September 30, 2015 were $0.44 and $1.31 compared to $0.43 and $1.16 for the same periods in 2014. The $40,000 increase in net income during the most recent three-month period was primarily attributable to a $200,000 decrease in the provision for credit losses, an $89,000 increase in net interest income, and a $68,000 decrease in income tax expense, offset by a $90,000 decrease in non-interest income and a $227,000 increase in non-interest expense. The $403,000 increase in net income during the nine-month period was primarily attributable to a $459,000 increase in net interest income, a $250,000 increase in non-interest income, and a $115,000 decrease in the provision for credit losses, offset by a $407,000 increase in non-interest expense, and a $14,000 increase in income tax expense.

NET INTEREST INCOME

DNB's earnings performance is primarily dependent upon its level of net interest income, which is the excess of interest income over interest expense. Interest income includes interest earned on loans, investments and federal funds sold and interest-earning cash, as well as loan fees and dividend income earned on investment securities. Interest expense includes interest on deposits, Federal Home Loan Bank of Pittsburgh ("FHLBP") advances, repurchase agreements, Federal funds purchased, subordinated notes, and other borrowings.

Net interest income for the three and nine-month periods ended September 30, 2015 was $5.5 million and $16.3 million, compared to $5.4 million and $15.8 million for the same periods in 2014. Interest income for the three and nine-month periods ended September 30, 2015 was $6.2 million and $18.3 million, compared to $5.9 million and $17.6 million for the same periods in 2014. Interest expense for the three and nine-month periods ended September 30, 2015 was $711,000 and $2.0 million, compared to $544,000 and $1.8 million for the same periods in 2014. The composite cost of funds for the three and nine-month periods ended September 30, 2015 was 0.42% and 0.39%, compared to 0.34% and 0.38% for the same periods in 2014. The net interest margin for the three and nine-month periods ended September 30, 2015 was 3.13% and 3.13%, compared to 3.33% and 3.35% for the same periods in 2014.

Interest on loans and leases was $5.1 million and $15.0 million for the three and nine-month periods ended September 30, 2015, compared to $4.9 million and $14.6 million for the same periods in 2014. The average balance of loans and leases was $469.9 million with an average yield of 4.32% for the third quarter of 2015, compared to $439.6 million with an average yield of 4.45% for the same period in 2014. The average balance of loans and leases was $463.3 million with an average yield of 4.33% for the nine months ended September 30, 2015, compared to $431.0 million with an average yield of 4.51% for the same period in 2014.

Interest and dividends on investment securities was $1.1 million and $3.3 million for the three and nine-month periods ended September 30, 2015, compared to $946,000 and $2.9 million for the same periods in 2014. The average balance of investment securities was $225.8 million with a tax equivalent average yield of 2.17% for the third quarter of 2015, compared to $194.2 million with a tax equivalent average yield of 2.28% for the same period in 2014. The average balance of investment securities was $230.9 million with a tax equivalent average yield of 2.11% for the nine months ended September 30, 2015, compared to $192.2 million with a tax equivalent average yield of 2.28% for the same period in 2014.

Interest on deposits was $300,000 and $859,000 for the three and nine-month periods ended September 30, 2015, compared to $293,000 and $1.0 million for the same periods in 2014. The average balance of deposits was $607.3 million with an average rate of 0.20% for the third quarter of 2015, compared to $570.7 million with an average rate of 0.19% for the same period in 2014. The average balance of deposits was $616.0 million with an average rate of 0.19% for the nine months ended September 30, 2015, compared to $562.6 million with an average rate of 0.23% for the same period in 2014.

Interest on borrowings was $411,000 and $1.1 million for the three and nine-month period ended September 30, 2015, compared to $251,000 and $748,000 for the same periods in 2014. The average balance of borrowings was $71.5 million with an average rate of 2.29% for the third quarter of 2015, compared to $40.3 million with an average rate of 2.47% for the same period in 2014. The average balance of borrowings was $60.9 million with an average rate of 2.49% for the nine months ended September 30, 2015, compared to $39.7 million with an average rate of 2.52% for the same period in 2014. The increase in borrowings in both current periods is primarily due to issuance of $9.75 million in subordinated debt and higher levels of outstanding repurchase agreements.

PROVISION FOR CREDIT LOSSES

To provide for known and inherent losses in the loan and lease portfolios, DNB maintains an allowance for credit losses. Provisions for credit losses are charged against income to increase the allowance when necessary. Loan and lease losses are charged directly against the allowance and recoveries on previously charged-off loans and leases are added to the allowance. In establishing its allowance for credit losses, management considers the size and risk exposure of each segment of the loan and lease portfolio, past loss experience, present indicators of risk such as delinquency rates, levels of non-accruals, the potential for losses in future periods, and other relevant factors. Management’s evaluation of criticized and classified loans generally includes reviews of borrowers of $100,000 or greater. Consideration is also given to examinations performed by regulatory agencies, primarily the Office of the Comptroller of the Currency (“OCC”).

Management reviews and establishes the adequacy of the allowance for credit losses in accordance with U.S. generally accepted accounting principles, guidance provided by the Securities and Exchange Commission and as prescribed in OCC Bulletin 2006-47. Its methodology for assessing the appropriateness of the allowance consists of several key elements which include: specific allowances for identified impaired loans; and allowances by loan type for pooled homogenous loans. In considering national and local economic trends, we review a variety of information including Federal Reserve publications, general economic statistics, foreclosure rates and housing statistics published by third parties. We believe this improves the measure of inherent loss over a complete economic cycle and reduces the impact for qualitative adjustments. The unallocated portion of the allowance is intended to provide for probable losses not otherwise accounted for in management’s other elements of its overall estimate. An unallocated component is maintained to cover uncertainties such as changes in the national and local economy, concentrations of credit, expansion into new markets and other factors that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

In addition, DNB reviews historical loss experience for the residential mortgage, commercial mortgage, commercial term, commercial construction, home equity and consumer installment loan pools to determine a historical loss factor. The historical loss factors are then applied to the current portfolio balances to determine the required reserve percentage for each loan pool. A historical loss ratio is determined for each group over a five year period. The five year average loss ratio by type is then used to calculate the estimated loss based on the current balance of each group. This five year time period is appropriate given DNB’s historical level of losses and, more importantly, represents the current economic environment.

This analysis is intended to assess the potential for loss within the loan portfolio and to substantiate the adequacy of the allowance. Should the analysis indicate that the allowance is not adequate, management will recommend a provision expense be made in an amount equal to the shortfall derived. In establishing and reviewing the allowance for adequacy, emphasis has been placed on utilizing the methodology prescribed in OCC Bulletin 2006-47. Management believes that the following factors create a comprehensive system of controls in which management can monitor the quality of the loan portfolio. Consideration has been given to the following factors and variables which may influence the risk of loss within the loan portfolio:

•Changes in the nature and volume of the portfolio and in the terms of loans;

•Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans;

•The existence and effect of any concentrations of credit, and changes in the level of such concentrations;

•Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;

•Changes in the experience, ability, and depth of lending management and other relevant staff;

•Changes in the quality of the institution’s loan review system;

•Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;

•The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio; and

•Changes in the value of underlying collateral for collateral‑dependent loans.

Portfolio risk includes the levels and trends in delinquencies, impaired loans, changes in the loan rating matrix and trends in volume and terms of loans. Management is satisfied with the stability of the past due and non-performing loans and believes there has been no further decline in the quality of the loan portfolio due to any trend in delinquent or adversely classified loans. In addition to ordering new appraisals and creating specific reserves on impaired loans, the allowance allocation rates were increased, reflective of delinquency trends which have been caused by continued weakness in the housing markets, falling home equity values, and rising unemployment. New appraisal values we have obtained for existing loans have generally been consistent with trends indicated by Case-Schiller and other indices.

Given the contraction in real estate values, DNB closely monitors the loan to value ratios of all classified assets and requires periodic current appraisals to monitor underlying collateral values. Management also reviews borrower, sponsorship and guarantor’s financial strength along with their ability and willingness to provide financial support of their obligations on an immediate and continuing basis.

There was a $100,000 and a $815,000 provision made during the three and nine months ended September 30, 2015, compared to $300,000 and $930,000 for the same periods in 2014. DNB’s percentage of allowance for credit losses to total loans and leases was 1.01% at Septmeber 30, 2015 compared to 1.08% and 1.09% at December 31, 2014 and September 30, 2014, respectively. Net charge-offs were $992,000, $847,000, and $666,000 during the nine months ended September 30, 2015, year ended December 31, 2014, and nine months ended September 30, 2014, respectively. The percentage of net charge-offs to total average loans and leases were 0.21%, 0.19%, and 0.15% for those same respective periods. Management believes that the allowance for credit losses is adequate, but continues to monitor it along with other performance metrics including those ratios related to non-performing loans and leases. Management is not aware of any potential problem loans, which were accruing and current at September 30, 2015, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms and that would result in a significant loss to DNB. Non-performing loans decreased $2.6 million during the nine month period ended September 30, 2015. The ratio of the allowance for credit losses as a percentage of loans and leases was 1.01% at September 30, 2015 and 1.08% at December 31, 2014 and reflects management’s estimate of the level of inherent losses in the portfolio, which has been impacted by a recessionary economy, continued high unemployment, a weakened housing market and deterioration in income-producing properties.

We typically establish a general valuation allowance on classified loans which are not individually impaired. In establishing the general valuation allowance, we segregate these loans by category. The categories used by DNB include “doubtful,” “substandard,” “special mention,” “watch list” and “pass.” For commercial mortgage, commercial and construction loans, the determination of the category for each loan is based on periodic reviews of each loan by our lending and credit officers as well as an independent, third-party consultant. The reviews include a consideration of such factors as recent payment history, current financial data, cash flow, financial projections, collateral evaluations, guarantor or sponsorship financial strength and current economic and business conditions. Categories for residential mortgage and consumer loans are determined through a similar review. Classification of a loan within a category is based on identified weaknesses that increase the credit risk of loss on the loan. Each category carries a loss factor for the allowance percentage to be assigned to the loans within that category. The allowance percentage, is determined based on inherent losses associated with each type of lending as determined through consideration of our loss history with each type of loan, trends in credit quality and collateral values, and an evaluation of current economic and business conditions.

We establish a general allowance on non-classified loans to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem loans. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages to each category. An evaluation of each category is made to determine the need to further segregate the loans within each category by type. For our residential mortgage and consumer loan portfolios, we identify similar characteristics throughout the portfolio including credit scores, loan-to-value ratios and collateral. For our commercial mortgage and construction loan portfolios, a further analysis is made in which we segregated the loans

by type based on the purpose of the loan and the collateral properties securing the loan. Various risk factors for each type of loan are considered, including the impact of general economic and business conditions, collateral value trends, credit quality trends and historical loss experience.

As of September 30, 2015, DNB had $6.5 million of non-performing assets, which included $4.2 million of non-performing loans and $2.2 million of OREO and other repossessed assets. This compares to $7.8 million of non-performing assets at December 31, 2014 which included $6.9 million of non-performing or impaired loans and $901,000 of OREO and other repossessed assets. Loans are reviewed for impairment in accordance with FASB ASC 310-10-35. Impaired loans can either be secured or unsecured, not including large groups of smaller balance loans that are collectively evaluated. Impairment is measured by the difference between the loan amount and the present value of the future cash flow discounted at the loan’s effective interest rate. Management measures loans for impairment by using the fair value of collateral for collateral dependent loans. In general, management reduces the amount of the appraisal by the estimated cost of acquisition and disposition of the underlying collateral and compares that adjusted value with DNB’s carrying value. DNB establishes a specific valuation allowance on impaired loans that have a collateral shortfall and/or statement cashflow shortfalls, including estimated costs to sell in comparison to the carrying value of the loan. Of the $4.1 million of impaired loans at September 30, 2015, $920,000 had valuation allowances of $120,000 and $3.2 million had no specific allowance. Of the $9.1 million of impaired loans at December 31, 2014, $850,000 had valuation allowances of $273,000 and $8.2 million had no specific allowance. For those impaired loans that management determined that no specific valuation allowance was necessary, management has reviewed the present value of the future cash flows or the appraisal for each loan and determined that there is no shortfall in the collateral. During the quarter ended Septmber 30, 2015, DNB recognized $494,000 in total charge-offs, $479,000 of which related to impaired loans. An impaired loan may not represent an expected loss.

We typically order new third-party appraisals or collateral valuations when a loan becomes impaired or is transferred to Other Real Estate Owned ("OREO"). This is done within two weeks of a loan becoming impaired or a loan moving to OREO. It generally takes two to eight weeks to receive the appraisals, depending on the type of property being appraised. We recognize any provision or related charge-off within two weeks of receiving the appraisal after the appraisal has been reviewed by DNB. We generally order a new appraisal for all impaired real estate loans having a balance of $100,000 or higher, every twelve months, unless management determines more frequent appraisals are necessary. We use updated valuations when time constraints do not permit a full appraisal process, to reflect rapidly changing market conditions. Because appraisals and updated valuations utilize historical data in reaching valuation conclusions, the appraised or updated value may or may not reflect the actual sales price that we will receive at the time of sale. Management uses the qualitative factor “Changes in the value of underlying collateral for collateral-dependent loans” to calculate any required reserve to mitigate this risk.

Real estate appraisals typically include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property) and the cost approach. Not all appraisals utilize all three approaches to value. Depending on the nature of the collateral and market conditions, the appraiser may emphasize one approach over another in determining the fair value of collateral.

Appraisals may also contain different estimates of value based on the level of occupancy or future improvements. “As-is” valuations represent an estimate of value based on current market conditions with no changes to the collateral’s use or condition. “As-stabilized” or “as-completed” valuations assume that the collateral is improved to a stated standard or achieves its highest and best use in terms of occupancy. “As-stabilized” valuations may be subject to a present value adjustment for market conditions or the schedule for improvements.

In connection with the valuation process, we will typically develop an exit strategy for the collateral by assessing overall market conditions, the current condition and use of the asset and its highest and best use. For most income-producing real estate, investors value most highly a stable income stream from the asset; consequently, we conduct a comparative evaluation to determine whether conducting a sale on an “as-is” basis or on an “as-stabilized” basis is most likely to produce the highest net realizable value and compare these values with the costs incurred and the holding period necessary to achieve the “as stabilized” value.

Our estimates of the net realizable value of collateral include a deduction for the expected costs to sell the collateral or such other deductions as deemed appropriate. For most real estate collateral, we apply a seven to ten percent deduction to the value of real estate collateral to determine its expected costs to sell the asset.

Analysis of Allowance for Credit Losses

(Dollars in thousands)



		Nine Months Ended September 30, 2015		Year Ended December 31, 2014		Nine Months Ended September 30, 2014
Beginning balance	$	4,906	$	4,623	$	4,623
Provisions		815		1,130		930
Loans charged off:
Residential mortgage		(69)		(326)		(159)
Commercial mortgage		(105)		(8)		(8)
Commercial:
Commercial term		(190)		(47)		(31)
Commercial construction		(577)		(511)		(511)
Lease financing		-		(1)		(1)
Consumer:
Home equity		(11)		-		-
Other		(60)		(82)		(82)
Total charged off		(1,012)		(975)		(792)
Recoveries:
Residential mortgage		2		5		5
Commercial mortgage		-		-		-
Commercial:
Commercial term		10		3		2
Commercial construction		5		103		103
Lease financing		2		8		7
Consumer:
Home Equity		-		-		-
Other		1		9		9
Total recoveries		20		128		126
Ending balance	$	4,729	$	4,906	$	4,887
Reserve for unfunded loan commitments	$	178	$	166	$	145

The following table sets forth the composition of DNB’s allowance for credit losses for the dates indicated.

Composition of Allowance for Credit Losses

(Dollars in thousands)



		September 30, 2015				December 31, 2014				September 30, 2014
			Percent of				Percent of				Percent of
			Loan Type				Loan Type				Loan Type
			to Total				to Total				to Total
		Amount	Loans			Amount	Loans			Amount	Loans
Residential mortgage	$	194	6	%	$	269	6	%	$	319	6	%
Commercial mortgage		2,491	61			2,300	56			2,184	57
Commercial:
Commercial term		719	16			709	18			749	20
Commercial construction		678	5			881	8			776	6
Consumer:
Home equity		200	11			189	11			176	10
Other		66	1			70	1			71	1
Unallocated		381	-			488	-			612	-
Total	$	4,729	100	%	$	4,906	100	%	$	4,887	100	%
Reserve for unfunded loan commitments	$	178			$	166			$	145

NON-INTEREST INCOME

Non-interest income includes service charges on deposit products; fees received in connection with the sale of non-depository products and services, including fiduciary and investment advisory services offered through DNB First Investment Management and Trust; securities brokerage products and services and insurance products and services offered through DNB Investments & Insurance; and other sources of income such as increases in the cash surrender value of Bank Owned Life Insurance (“BOLI”), net gains on sales of investment securities, SBA loans and OREO properties. In addition, DNB receives fees for cash management, remote capture, merchant services, debit cards, safe deposit box rentals and similar activities.

Non-interest income for the three and nine-month period ended September 30, 2015 was $1.0 million and $3.7 million, compared to $1.1 million and $3.5 million for the same periods in 2014. The $90,000 decrease during the three months ended September 30, 2015 was mainly attributable to decreases of $76,000 in gains of sales of investments, $26,000 in wealth management, and $11,000 in service charges on deposits (primarily NSF fees). These decreases were offset by increases of $16,000 in other fees (mostly check printing fees and merchant card processing) and $8,000 in mortgage banking. The $250,000 increase during the nine months ended September 30, 2015 was mainly attributable to increases of $416,000 in gains on sales of loans, $112,000 in wealth management, $97,000 in mortgage banking, and $54,000 in other fees (mostly check printing fees and merchant card processing). These increases were offset by decreases of $349,000 in gains on sale of investments and $75,000 in service charges on deposits (primarily NSF fees).

NON-INTEREST EXPENSE

Non-interest expense for the three and nine-month periods ended September 30, 2015 was $4.8 million and $14.3 million, compared to $4.5 million and $13.9 million for the same periods in 2014. During the three months ended September 30, 2015, total non-interest expense increased by $227,000. The increase was primarily due to increases of $184,000 in salary and employee benefits (normal merit increases, higher incentives paid to revenue generators, and increased restricted stock expense), $154,000 in loss on sale or write down on OREO, and $21,000 in professional and consulting. The increases were partially offset by decreases of $66,000 in occupancy, $47,000 in other expenses (mostly contributions, OREO expenses and Visa debit card charge-off expenses), $8,000 in furniture and equipment, $8,000 in advertising and marketing, and $7,000 in printing and supplies. During the nine months ended September 30, 2015, total non-interest expense increased by $407,000. The increase was primarily due to increases of $491,000 in salary and employee benefits (normal merit increases, higher incentives paid to revenue generators, and increased restricted stock expense), $147,000 in loss on sale or write down of OREO, and $21,000 in FDIC insurance. These increases were partially offset by decreases of $137,000 in occupancy, $66,000 in furniture and equipment, $20,000 in advertising and marketing, $14,000 in professional and consulting, and $11,000 in other expenses (mostly contributions).

INCOME TAXES

Income tax expense for the three and nine-month periods ended September 30, 2015 was $359,000 and $1.1 million, compared to $427,000 and $1.1 million for the same periods in 2014. The effective tax rate for the three and nine-month periods ended September 30, 2015 was 22.1% and 23.0% compared to 25.8% and 24.9% for the same periods in 2014. The primary reason for the lower effective tax rate was an increase in tax exempt loans to local municipalities and tax exempt municipal investment securities. Income tax expense for each period differs from the amount determined at the statutory rate of 34.0% due to tax-exempt income on loans and investment securities, DNB's ownership of BOLI policies, and tax credits recognized on a low-income housing limited partnership.

ASSET QUALITY

DNB continues to work diligently to improve asset quality by adhering to strict underwriting standards and improving lending policies and procedures. Non-performing assets totaled $6.5 million at September 30, 2015 compared to $7.8 million at December 31, 2014 and $6.9 million at September 30, 2014. The non-performing loans to total loans ratio was 0.90% at September 30, 2015, 1.50% at December 31, 2014 and 1.34% at September 30, 2014. The non-performing assets to total assets ratio was 0.87% at September 30, 2015, 1.07% at December 31, 2014, and 1.00% at September 30, 2014. The allowance to non-performing loans and leases ratio was 111.3% at September 30, 2015, 71.6% at December 31, 2014 and 81.0% at September 30, 2014. Non-performing assets have, and will continue to have, an impact on earnings; therefore management intends to continue working aggressively to reduce the level of such assets.

Non-performing assets are comprised of non-accrual loans and leases, loans and leases delinquent over ninety days and still accruing, as well as OREO and other repossessed assets. Non-accrual loans and leases are loans and leases for which the accrual of interest ceases when the collection of principal or interest payments is determined to be doubtful by management. It is the policy of DNB to discontinue the accrual of interest when principal or interest payments are delinquent 90 days or more (unless the loan principal and interest are determined by management to be fully secured and in the process of collection), or earlier if considered

prudent. Interest received on such loans is applied to the principal balance, or may, in some instances, be recognized as income on a cash basis. A non-accrual loan or lease may be restored to accrual status when management expects to collect all contractual principal and interest due and the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms. OREO consists of real estate acquired by foreclosure or deed-in-lieu of foreclosure. Other repossessed assets are primarily assets from DNB’s commercial lease portfolio that were repossessed. OREO and other repossessed assets are carried at the lower of carrying value or estimated fair value, less estimated disposition costs. Any significant change in the level of non-performing assets is dependent, to a large extent, on the economic climate within DNB’s market area.

DNB’s Credit Policy Committee monitors the performance of the loan and lease portfolio to identify potential problem assets on a timely basis. Committee members meet to design, implement and review asset recovery strategies, which serve to maximize the recovery of each troubled asset. As of September 30, 2015, DNB had $19.3 million of substandard loans. Of the $19.3 million, $15.3 million are performing and are believed to require increased supervision and review; and may, depending on the economic environment and other factors, become non-performing assets in future periods. The amount of performing substandard loans at December 31, 2014 was $16.0 million. The majority of the loans are secured by commercial real estate, with lesser amounts being secured by residential real estate, inventory and receivables.

The following table sets forth those assets that are: (i) placed on non-accrual status, (ii) contractually delinquent by 90 days or more and still accruing, and (iii) OREO as a result of foreclosure or voluntary transfer to DNB as well as other repossessed assets. In addition, the table sets forth DNB's asset quality and allowance coverage ratios at the dates indicated:

Non-Performing Assets

(Dollars in thousands)



		September 30, 2015		December 31, 2014		September 30, 2014
Non-accrual loans:
Residential mortgage	$	1,600	$	2,458	$	2,117
Commercial mortgage		1,075		1,294		1,131
Commercial:
Commercial term		191		198		200
Commercial construction		451		2,043		2,043
Consumer:
Home equity		313		432		342
Other		120		94		95
Total non-accrual loans		3,750		6,519		5,928
Loans 90 days past due and still accruing		498		334		105
Total non-performing loans		4,248		6,853		6,033
Other real estate owned & other repossessed property		2,235		901		901
Total non-performing assets	$	6,483	$	7,754	$	6,934
Asset quality ratios:
Non-performing loans to total loans		0.90	%	1.50	%	1.34	%
Non-performing assets to total assets		0.87		1.07		1.00
Allowance for credit losses to:
Total loans and leases		1.01		1.08		1.09
Non-performing loans and leases		111.3		71.6		81.0

Included in the loan and lease portfolio are loans for which DNB has ceased the accrual of interest. If contractual interest income had been recorded on non-accrual loans, interest would have been increased as shown in the following table:



		Nine Months Ended		Year Ended		Nine Months Ended
		September 30,		December 31,		September 30,
(Dollars in thousands)		2015		2014		2014
Interest income which would have been
recorded under original terms	$	380	$	499	$	360
Interest income recorded during the period		-		97		3
Net impact on interest income	$	380	$	402	$	357

As of September 30, 2015, DNB had no commercial mortgages classified as a TDR, compared to one commercial mortgage classified as a TDR totaling $2,246,000 at December 31, 2014, and one commercial mortgage classified as a TDR totaling $2,269,000 (the same loan) at September 30, 2014. This loan paid off during the third quarter of 2015. The rate on this loan was modified and the terms of the loans were changed to interest only while the project was being built out. The loan commenced normal principal and interest payments in June 2014. The loan was extended and there was no reduction of principal. The balance of the loan prior to modification was $2,272,000 and the balance after the modification was $2,272,000. During the three and nine months ended September 30, 2015 and 2014, there were no defaults on any terms of this loan.

Impaired loans are measured for impairment using the fair value of the collateral for collateral dependent loans. Information regarding impaired loans is presented as follows:



		At and For the		At and For the		At and For the
		Nine Months Ended		Year Ended		Nine Months Ended
		September 30,		December 31,		September 30,
(Dollars in thousands)		2015		2014		2014
Total recorded investment	$	4,105	$	9,056	$	8,453
Impaired loans with a specific allowance		920		850		200
Impaired loans without a specific allowance		3,185		8,206		8,253
Average recorded investment		7,359		8,064		7,816
Specific allowance allocation		120		273		121
Total principal and interest collected		2,830		478		290
Interest income recorded		-		97		3

LIQUIDITY AND CAPITAL RESOURCES

Management maintains liquidity to meet depositors’ needs for funds, to satisfy or fund loan commitments, and for other operating purposes. DNB’s foundation for liquidity is a stable and loyal customer deposit base, cash and cash equivalents, and a marketable investment portfolio that provides periodic cash flow through regular maturities and amortization, or that can be used as collateral to secure funding. As part of its liquidity management, DNB maintains assets that comprise its primary liquidity, which totaled $81.5 million at September 30, 2015 compared to $71.9 million at December 31, 2014. Primary liquidity includes investments and restricted stock, Federal funds sold and cash and due from banks, less pledged securities of $167.8 million. DNB also anticipates scheduled payments and prepayments on its loan and mortgage-backed securities portfolios.

In addition, DNB maintains borrowing arrangements with various correspondent banks, the Federal Home Loan Bank of Pittsburgh and the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs. Through these relationships, DNB had available credit of approximately $302.9 million at September 30, 2015. As a member of the FHLB, we are eligible to borrow up to a specific credit limit which is determined by the amount of our residential mortgages, commercial mortgages and other loans that have been pledged as collateral. As of September 30, 2015, our Maximum Borrowing Capacity with the FHLB was $256.9 million. At September 30, 2015, DNB had borrowed $20.0 million and the FHLB had issued letters of credit, on DNB's behalf, totaling $30.0 million against its available credit lines. At September 30, 2015, we also had available $46.0 million of unsecured federal funds lines of credit with other financial institutions as well as $19.7 million of available short or long term funding through the Certificate of Deposit Account Registry Service (CDARS) program and $109.6 million of available short or long term funding through Raymond James’ brokered CDs agreement. Management believes that DNB has adequate resources to meet its short-term and long-term funding requirements.

On August 5, 2011, Standard & Poor's downgraded the credit rating of the U.S. Government and federal agencies, including the FHLB, from AAA to AA+, with a negative outlook. Any future downgrades in the credit ratings of the U.S. Government and the FHLB could likely increase the borrowing costs of the FHLB and possibly have a negative impact on its operations and long-term performance. It is possible this could have an adverse effect on the value of the Corporation's investment in FHLB stock.

At September 30, 2015, DNB had $111.7 million in un-funded loan commitments. Management anticipates these commitments will be funded by means of normal cash flows. Certificates of deposit greater than or equal to $100,000 scheduled to mature in one year or less from September 30, 2015 totaled $37.2 million. Management believes that the majority of such deposits will be reinvested with DNB and that certificates that are not renewed will be funded by a reduction in cash and cash equivalents or by pay-downs and maturities of loans and investments.

The Corporation and the Bank have each met the definition of “well capitalized” for regulatory purposes on September 30, 2015. The Bank’s capital category is determined for the purposes of applying the bank regulators’ “prompt corrective action” regulations and for determining levels of deposit insurance assessments and may not constitute an accurate representation of the Corporation’s or the Bank’s overall financial condition or prospects. The Corporation’s capital exceeds the FRB’s minimum leverage ratio requirements for bank holding companies (see additional discussion included in Note 16 of DNB’s December 31, 2014 Form 10-K).

Under federal banking laws and regulations, DNB and the Bank are required to maintain minimum capital as determined by certain regulatory ratios. Capital adequacy for regulatory purposes, and the capital category assigned to an institution by its regulators, may be determinative of an institution’s overall financial condition.

The following table summarizes data and ratios pertaining to the Corporation and the Bank's capital structure.



										To Be Well
						For Capital				Capitalized Under
						Adequacy				Prompt Corrective
		Actual				Purposes				Action Provisions
(Dollars in thousands)		Amount	Ratio			Amount	Ratio			Amount	Ratio
DNB Financial Corporation
September 30, 2015
Total risk-based capital	$	83,163	15.5	%	$	56,481	10.5	%		N/A	N/A
Common Equity Tier 1 capital		56,256	10.5			37,654	7.0			N/A	N/A
Tier 1 risk-based capital		68,506	12.7			45,723	8.5			N/A	N/A
Tier 1 (leverage) capital		68,506	9.2			29,692	4.0			N/A	N/A
December 31, 2014
Total risk-based capital	$	79,491	15.9	%	$	39,951	8.0	%		N/A	N/A
Tier 1 risk-based capital		74,419	14.9			19,975	4.0			N/A	N/A
Tier 1 (leverage) capital		74,419	10.6			28,215	4.0			N/A	N/A
DNB First, N.A.
September 30, 2015
Total risk-based capital	$	82,234	15.3	%	$	56,358	10.5	%	$	67,093	12.5	%
Common Equity Tier 1 capital		77,327	14.4			37,572	7.0			48,307	9.0
Tier 1 risk-based capital		77,327	14.4			45,623	8.5			56,358	10.5
Tier 1 (leverage) capital		77,327	10.4			29,645	4.0			37,056	5.0
December 31, 2014
Total risk-based capital	$	79,510	15.9	%	$	39,919	8.0	%	$	49,898	10.0	%
Tier 1 risk-based capital		74,438	14.9			19,959	4.0			29,939	6.0
Tier 1 (leverage) capital		74,438	10.6			28,198	4.0			35,247	5.0

In addition, the Federal Reserve Bank (the "FRB") leverage ratio rules require bank holding companies to maintain a minimum level of "primary capital" to total assets of 5.5% and a minimum level of "total capital" to total assets of 6%. For this purpose, (i) "primary capital" includes, among other items, common stock, certain perpetual debt instruments such as eligible Trust preferred securities, contingency and other capital reserves, and the allowance for loan losses, (ii) "total capital" includes, among other things, certain subordinated debt, and "total assets" is increased by the allowance for loan losses. DNB's primary capital ratio and its total capital ratio are both well in excess of FRB requirements.

REGULATORY MATTERS

Dividends payable to the Corporation by the Bank are subject to certain regulatory limitations. Under normal circumstances, the payment of dividends in any year without regulatory permission is limited to the net profits (as defined for regulatory purposes) for that year, plus the retained net profits for the preceding two calendar years.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

To measure the impacts of longer-term asset and liability mismatches beyond two years, DNB utilizes an Economic Value of Equity ("EVE") model. The EVE model measures the potential price risk of equity to changes in interest rates and factors in the optionality included on the balance sheet. EVE analysis is used to dynamically model the present value of asset and liability cash flows, with rates ranging up or down 200 basis points. The EVE is likely to be different if rates change. Results falling outside prescribed ranges may require action by management. At September 30, 2015 and December 31, 2014, DNB's variance in the EVE as a percentage of assets with an instantaneous and sustained parallel shift of 200 basis points was within its negative 3% guideline, as shown in the following table. The change as a percentage of the present value of equity with a 200 basis point increase was within DNB's negative 25% guideline at September 30, 2015 and December 31, 2014.



(Dollars in thousands)		September 30, 2015						December 31, 2014
Change in rates		Flat		-200bp		+200bp		Flat		-200bp		+200bp
EVE	$	73,809	$	65,478	$	63,308	$	72,548	$	68,218	$	58,656
Change				(8,331)		(10,501)				(4,330)		(13,892)
Change as % of assets				(1.1%)		(1.4%)				(0.6%)		(1.9%)
Change as % of PV equity				(11.3%)		(14.2%)				(6.0%)		(19.1%)

ITEM 4- CONTROLS AND PROCEDURES

DNB’s Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of September 30, 2015, the end of the period covered by this report, in accordance with the requirements of Exchange Act Rule 240.13a-15(b). Based on that evaluation, Management has concluded that DNB’s current disclosure controls and procedures are effective.

Management of DNB is responsible for establishing and maintaining adequate internal control over financial reporting for DNB, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. There was no change in DNB’s “internal control over financial reporting” (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2015, that has materially affected, or is reasonably likely to materially affect, DNB’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Neither DNB nor any of its subsidiaries is a party to, nor is any of their property the subject of, any material legal proceedings other than ordinary routine litigation incident to their businesses.

ITEM 1A. RISK FACTORS

Not applicable

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no unregistered sales of equity securities during the quarter ended September 30, 2015. The following table provides information on repurchases by DNB of its common stock in each month of the quarter ended September 30, 2015:



				Total Number of		Maximum Number
				Shares Purchased		of Shares that May
	Total Number		Average	as Part of Publicly		Yet Be Purchased
	Of Shares		Price Paid	Announced Plans		Under the Plans or
Period	Purchased		Per Share	or Programs		Programs (a)

July 1, 2015 – July 31, 2015	-	$	-	-	$	63,016

August 1, 2015 – August 31, 2015	-		-	-	$	63,016

September 1, 2015 – September 30, 2015	-		-	-	$	63,016

Total	-	$	-	-	$	63,016

On July 25, 2001, DNB authorized the buyback of up to 175,000 shares of its common stock over an indefinite period. On August 27, 2004, DNB increased the buyback from 175,000 to 325,000 shares of its common stock over an indefinite period.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

a) The following exhibits are filed or furnished herewith:


Exhibit Number		Description

3.1		Amended and Restated Articles of Incorporation, as amended effective December 8, 2008, filed March 31, 2009 as item 3(i) to Form 10-K for the fiscal year-ended December 31, 2008 (No. 1-34242) and incorporated herein by reference.
3.2		Bylaws of the Registrant as amended December 8, 2008, filed March 31, 2009 as item 3(ii) to Form 10-K for the fiscal year-ended December 31, 2008 (No. 1-34242) and incorporated herein by reference.
3.3		Certificate of Designations of Fixed Rate Cumulative Preferred Stock, Series 2008A of DNB Financial Corporation, filed as Exhibit 4.3 to Form 8-K (No. 1-34242) on January 26, 2009 and incorporated herein by reference.
31.1		Rule 13a-14(a)/15d-14 (a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a)/15d-14 (a) Certification of Chief Financial Officer
32.1		Section 1350 Certification of Chief Executive Officer
32.2		Section 1350 Certification of Chief Financial Officer
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


overmber
		DNB FINANCIAL CORPORATION

November 9, 2015	BY:	/s/ William S. Latoff
		William S. Latoff, Chairman of the Board and Chief Executive Officer



November 9, 2015	BY:	/s/ Gerald F. Sopp
		Gerald F. Sopp, Chief Financial Officer and Executive Vice President


Exhibit Number			Exhibit Index Description
3.1			Amended and Restated Articles of Incorporation, as amended effective December 8, 2008, filed March 31, 2009 as item 3(i) to Form 10-K for the fiscal year-ended December 31, 2008 (No. 1-34242) and incorporated herein by reference.
3.2			Bylaws of the Registrant as amended December 8, 2008, filed March 31, 2009 as item 3(ii) to Form 10-K for the fiscal year-ended December 31, 2008 (No. 1-34242) and incorporated herein by reference.
3.3			Certificate of Designations of Fixed Rate Cumulative Preferred Stock, Series 2008A of DNB Financial Corporation, filed as Exhibit 4.3 to Form 8-K (No. 1-34242) on January 26, 2009 and incorporated herein by reference.
31.1			Rule 13a-14(a)/15d-14 (a) Certification of Chief Executive Officer
31.2			Rule 13a-14(a)/15d-14 (a) Certification of Chief Financial Officer
32.1			Section 1350 Certification of Chief Executive Officer
32.2			Section 1350 Certification of Chief Financial Officer
101.INS			XBRL Instance Document
101.SCH			XBRL Taxonomy Extension Schema Document
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB			XBRL Taxonomy Extension Label Linkbase Document
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document

DNB FINANCIAL CORP /PA/ - FORM 10-Q - November 9, 2015

Attached files

DNB FINANCIAL CORP /PA/ Reports