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: ~~June~~September 30, 2019

[ ] 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

Pennsylvania

(State or other jurisdiction of

incorporation or organization)

23-2222567

(I.R.S. Employer Identification No.)

4 Brandywine Avenue - Downingtown, PA 19335

(Address of principal executive offices and Zip Code)

(610) 269-1040

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock ($1.00 Par Value)	DNBF	The NASDAQ Stock Market LLC

Not Applicable

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

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


Yes ☒		No ☐

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


Yes ☒		No ☐

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


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

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

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


Yes ☐		No ☒

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

Common Stock ($1.00 Par Value) (Class) 4,~~334~~337,~~431~~803 (Shares Outstanding as of ~~August~~November 51, 2019)

DNB FINANCIAL CORPORATION AND SUBSIDIARY

INDEX

	PART I - FINANCIAL INFORMATION	PAGE NO.
ITEM 1.	FINANCIAL STATEMENTS (Unaudited):
	CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
	June 30, 2019 and December 31, 2018	3
	September 30, 2019 and December 31, 2018	3
	CONSOLIDATED STATEMENTS OF INCOME
	Three and Six Months Ended June 30, 2019 and 2018	4
	Three and Nine Months Ended September 30, 2019 and 2018	4
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
	Three and Six Months Ended June 30, 2019 and 2018	5
	Three and Nine Months Ended September 30, 2019 and 2018	5
	CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY	6
	Three and Six Months Ended June 30, 2019 and 2018
	Three and Nine Months Ended September 30, 2019 and 2018
	CONSOLIDATED STATEMENTS OF CASH FLOWS
	Six Months Ended June 30, 2019 and 2018	7
	Nine Months Ended September 30, 2019 and 2018	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	45
ITEM 4.	CONTROLS AND PROCEDURES	45
	PART II - OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	45
ITEM 1A.	RISK FACTORS	45
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	45
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	46
ITEM 4.	MINE SAFETY DISCLOSURES	46
ITEM 5.	OTHER INFORMATION	46
ITEM 6.	EXHIBITS	46
SIGNATURES		47
EXHIBIT INDEX		48

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

DNB Financial Corporation and Subsidiary

Consolidated Statements of Financial Condition (Unaudited)

	June 30,		December 31,
	September 30,		December 31,
(Dollars in thousands, except share and per share data)	2019		2018
Assets
Cash and due from banks	$	4619,~~398~~722	$	17,321
Cash and cash equivalents		4619,~~398~~722		17,321
Available-for-sale investment securities at fair value (amortized cost of $70,406 and $98,765)		69,931		96,643
Available-for-sale investment securities at fair value (amortized cost of $65,716 and $98,765)		65,454		96,643
Held-to-maturity investment securities (fair value of $60,322 and $61,135)		59,949		62,026
Held-to-maturity investment securities (fair value of $57,884 and $61,135)		57,491		62,026
Total investment securities		~~129~~122,~~880~~945		158,669
Loans held for sale		~~501~~259		419
Loans		~~930~~923,~~521~~949		934,971
Allowance for credit losses		(6,~~672~~853)		(6,675)
Net loans		~~923~~917,~~849~~096		928,296
Restricted stock		5,~~734~~760		5,616
Office property and equipment, net		7,~~230~~049		7,636
Operating lease right-of-use asset		3,~~792~~605		-
Accrued interest receivable		4,~~297~~122		4,207
Other real estate owned & other repossessed property		2,~~825~~848		5,051
Bank owned life insurance (BOLI)		9,~~635~~690		9,530
Core deposit intangible		~~302~~281		343
Goodwill		15,525		15,525
Net deferred taxes		2,~~416~~496		2,762
Other assets		2,~~025~~096		2,860
Total assets	$	1,~~154~~113,~~409~~494	$	1,158,235
Liabilities and Stockholders’ Equity
Liabilities
Non-interest-bearing deposits	$	~~178~~174,~~454~~341	$	164,746
Interest-bearing deposits:
NOW		~~214~~204,~~806~~646		236,071
Money market		~~236~~225,~~707~~549		235,023
Savings		7976,~~489~~903		77,979
Time		~~178~~187,~~530~~805		162,096
Brokered deposits		8762,~~877~~873		108,651
Total deposits		~~975~~932,~~863~~117		984,566
Federal Home Loan Bank of Pittsburgh (FHLBP) advances		31,~~203~~188		32,935
Junior subordinated debentures		9,279		9,279
Subordinated debt		9,750		9,750
Other borrowings		~~272~~254		3,305
Total borrowings		50,~~504~~471		55,269
Accrued interest payable		~~641~~545		646
Other liabilities		5,~~071~~259		5,908
Operating lease liability		43,~~174~~989		-
Total liabilities		1992,~~036,253~~381		1,046,389
Stockholders’ Equity
Common stock, $1.00 par value;
20,000,000 shares authorized; 4,381,872 and 4,381,872 issued, respectively; 4,331,121 and 4,321,745 outstanding, respectively		4,382		4,391
20,000,000 shares authorized; 4,382,223 and 4,381,872 issued, respectively; 4,334,782 and 4,321,745 outstanding, respectively		4,382		4,391
Treasury stock, at cost; 50,751 and 60,127 shares, respectively		(961)		(1,130)
Treasury stock, at cost; 47,441 and 60,127 shares, respectively		(903)		(1,130)
Surplus		69,~~613~~778		69,333
Retained earnings		4649,~~791~~357		42,223
Accumulated other comprehensive loss		(1,~~669~~501)		(2,971)
Total stockholders’ equity		~~118~~121,~~156~~113		111,846
Total liabilities and stockholders’ equity	$	1,~~154~~113,~~409~~494	$	1,158,235

See accompanying notes to unaudited consolidated financial statements.

DNB Financial Corporation and Subsidiary

Consolidated Statements of Income (Unaudited)

	Three Months Ended				~~Six~~Nine Months Ended
	June 30,				June 30,
	September 30,				September 30,
(Dollars in thousands, except share and per share data)	2019		2018		2019		2018
Interest Income:
Interest and fees on loans	$	11,~~358~~137	$	10,~~164~~588	$	2233,~~648~~785	$	2030,~~046~~634
Interest and dividends on investment securities:
Taxable		~~812~~630		~~862~~754		12,~~623~~253		12,~~655~~409
Exempt from federal taxes		~~211~~207		~~218~~219		~~427~~634		~~435~~654
Interest on cash and cash equivalents		~~138~~271		4574		~~181~~452		66140
Total interest and dividend income		12,~~519~~245		11,~~289~~635		2437,~~879~~124		2233,~~202~~837
Interest Expense:
Interest on NOW, money market and savings		1,~~109~~161		~~994~~998		23,~~160~~321		12,~~824~~822
Interest on time deposits		~~916~~1,014		~~333~~579		12,~~744~~758		~~658~~1,237
Interest on brokered deposits		~~592~~494		~~414~~457		1,~~203~~697		~~613~~1,070
Interest on FHLB advances		~~145~~138		~~239~~199		~~370~~508		~~540~~739
Interest on repurchase agreements		-		62		-		1214
Interest on junior subordinated debentures		~~129~~122		~~113~~122		~~256~~378		~~218~~340
Interest on subordinated debt		~~103~~104		~~103~~104		~~207~~311		~~207~~311
Interest on other borrowings		109		1923		2635		3558
Total interest expense		3,~~004~~042		2,~~221~~484		59,~~966~~008		46,~~107~~591
Net interest income		9,~~515~~203		9,~~068~~151		1828,~~913~~116		1827,~~095~~246
Provision for credit losses		~~100~~325		~~375~~100		~~300~~625		~~750~~850
Net interest income after provision for credit losses		98,~~415~~878		89,~~693~~051		1827,~~613~~491		1726,~~345~~396
Non-interest Income:
Service charges		~~246~~251		~~261~~274		~~537~~788		~~574~~848
Wealth management		~~529~~514		~~512~~542		~~974~~1,488		~~947~~1,489
Mortgage banking		7270		7656		~~146~~216		~~137~~193
Increase in cash surrender value of BOLI		5355		5254		~~105~~160		~~104~~158
Gain on sale of investment securities, net		1121		-		4125		-
Gain on sale of loans		-		1027		-		1037
Other fees		443		421		852		833
Gains from insurance proceeds		-		8		-		8
Total non-interest income		1,344		1,332		2,618		2,605
Other fees		472		410		1,324		1,243
Total non-interest income		1,483		1,371		4,101		3,976
Non-interest Expense:
Salaries and employee benefits		3,~~785~~602		43,~~261~~709		711,~~638~~240		811,~~033~~742
Furniture and equipment		~~663~~548		~~550~~564		1,~~204~~752		1,~~039~~603
Occupancy		~~627~~653		~~634~~656		12,~~352~~005		1,~~331~~987
Professional and consulting		~~440~~411		~~424~~484		1,~~017~~428		~~827~~1,311
Advertising and marketing		~~225~~97		~~204~~182		~~420~~517		~~386~~568
FDIC insurance		95(7)		~~122~~123		~~209~~202		~~240~~363
PA shares tax		~~260~~259		~~243~~242		~~520~~779		~~485~~727
Telecommunications		9089		8489		~~178~~267		~~165~~254
Loss on sale or write down of OREO, net		3715		~~140~~11		~~150~~165		~~140~~151
Transaction costs		~~519~~362		-		~~519~~881		-
Other expenses		~~771~~707		~~878~~713		12,~~583~~290		12,~~624~~337
Total non-interest expense		76,~~512~~736		76,~~540~~773		1421,~~790~~526		1421,~~270~~043
Income before income tax expense		3,~~247~~625		23,~~485~~649		610,~~441~~066		59,~~680~~329
Income tax expense		~~660~~755		~~436~~629		12,~~267~~022		1,~~018~~647
Net income	$	2,~~587~~870	$	23,~~049~~020	$	58,~~174~~044	$	47,~~662~~682
Earnings per common share:
Basic	$	0.6066	$	0.4870	$	1.2086	$	1.0979
Diluted	$	0.6066	$	0.4770	$	1.1986	$	1.0878
Cash dividends per common share	$	0.07	$	0.07	$	0.1421	$	0.1421
Weighted average common shares outstanding:
Basic	4,~~331~~334,~~121~~649		4,~~298~~307,~~409~~402		4,~~329~~331,~~226~~026		4,~~294~~298,~~758~~987
Diluted	4,~~336~~341,~~254~~010		4,~~314~~317,~~418~~553		4,~~333~~335,~~181~~792		4,~~311~~313,~~696~~638

See accompanying notes to unaudited consolidated financial statements.

DNB Financial Corporation and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)

	Three Months Ended				~~Six~~Nine Months Ended
	June 30,				June 30,
	September 30,				September 30,
(Dollars in thousands)	2019		2018		2019		2018
Net income	$	2,~~587~~870	$	23,~~049~~020	$	58,~~174~~044	$	47,~~662~~682
Other Comprehensive Income (Loss):
Unrealized holding gains (losses) arising during the period
Before tax amount		~~838~~269		(~~235~~163)		1,~~647~~916		(1,~~249~~412)
Tax effect		(~~176~~58)		4934		(~~344~~402)		~~262~~296
		211		(129)		1,514		(1,116)
Less reclassification for gains on sales of AFS investment securities included in net income
Before tax amount(1)		(156)		-		(157)		-
Tax effect(2)		-13		-		-13		-
		(1)		-		(1)		-
		(43)		-		(44)		-
Other comprehensive income - securities		661		(186)		1,302		(987)
Total other comprehensive income (loss)		168		(129)		1,470		(1,116)
Total other comprehensive income (loss)		661		(186)		1,302		(987)
Total comprehensive income	$	3,038	$	2,891	$	9,514	$	6,566
Total comprehensive income	$	3,248	$	1,863	$	6,476	$	3,675
(1) Amounts are included in "Gains on sale of investment securities, net" in the consolidated statements of income.
(2) Amounts are included in "Income tax expense" in the consolidated statements of income.

See accompanying notes to unaudited consolidated financial statements.

DNB Financial Corporation and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

									Accumulated
									Other
	Common		Treasury				Retained		Comprehensive
(Dollars in thousands)	Stock		Stock		Surplus		Earnings		Loss		Total
Balance at April 1, 2019	$	4,382	$	(1,027)	$	69,454	$	44,507	$	(2,330)	$	114,986
Balance at July 1, 2019	$	4,382	$	(961)	$	69,613	$	46,791	$	(1,669)	$	118,156
Net income for three months ended June 30, 2019		-		-		-		2,587		-		2,587
Net income for three months ended September 30, 2019		-		-		-		2,870		-		2,870
Other comprehensive income		-		-		-		-		~~661~~168		~~661~~168
Restricted stock compensation expense (no shares vested)		-		-		82		-		-		82
Restricted stock compensation expense (351 shares vested)		-		-		82		-		-		82
Cash dividends - common ($0.07 per share)		-		-		-		(303)		-		(303)
Taxes on exercise of stock options		-		-		(8)		-		-		(8)
Non-cash funding of 401(k) (2,335 shares)		-		42		48		-		-		90
Cash dividends - common ($0.07 per share)		-		-		-		(304)		-		(304)
Non-cash funding of deferred comp. plan (1,371 shares)		-		24		29		-		-		53
Non-cash funding of 401(k) (2,202 shares)		-		39		60		-		-		99
Balance at June 30, 2019	$	4,382	$	(961)	$	69,613	$	46,791	$	(1,669)	$	118,156
Non-cash funding of deferred comp. plan (1,108 shares)		-		19		31		-		-		50
Balance at September 30, 2019	$	4,382	$	(903)	$	69,778	$	49,357	$	(1,501)	$	121,113
									Accumulated
									Other
	Common		Treasury				Retained		Comprehensive
(Dollars in thousands)	Stock		Stock		Surplus		Earnings		Loss		Total
Balance at January 1, 2019	$	4,391	$	(1,130)	$	69,333	$	42,223	$	(2,971)	$	111,846
Net income for six months ended June 30, 2019		-		-		-		5,174		-		5,174
Net income for nine months ended September 30, 2019		-		-		-		8,044		-		8,044
Other comprehensive income		-		-		-		-		1,~~302~~470		1,~~302~~470
Restricted stock compensation expense (no shares vested)		(9)		-		152		-		-		143
Restricted stock compensation expense (351 shares vested)		(9)		-		234		-		-		225
Cash dividends - common ($0.14 per share)		-		-		-		(606)		-		(606)
Taxes on exercise of stock options		-		-		(8)		-		-		(8)
Non-cash funding of 401(k) (6,266 shares)		-		114		83		-		-		197
Cash dividends - common ($0.21 per share)		-		-		-		(910)		-		(910)
Non-cash funding of deferred comp. plan (3,110 shares)		-		55		45		-		-		100
Non-cash funding of 401(k) (8,468 shares)		-		153		143		-		-		296
Balance at June 30, 2019	$	4,382	$	(961)	$	69,613	$	46,791	$	(1,669)	$	118,156
Non-cash funding of deferred comp. plan (4,218 shares)		-		74		76		-		-		150
Balance at September 30, 2019	$	4,382	$	(903)	$	69,778	$	49,357	$	(1,501)	$	121,113

									Accumulated
									Other
	Common		Treasury				Retained		Comprehensive
(Dollars in thousands)	Stock		Stock		Surplus		Earnings		Loss		Total
Balance at April 1, 2018	$	4,383	$	(1,345)	$	69,238	$	35,056	$	(3,662)	$	103,670
Balance at July 1, 2018	$	4,385	$	(1,276)	$	69,268	$	36,804	$	(3,848)	$	105,333
Net income for three months ended June 30, 2018		-		-		-		2,049		-		2,049
Net income for three months ended September 30, 2018		-		-		-		3,020		-		3,020
Other comprehensive loss		-		-		-		-		(~~186~~129)		(~~186~~129)
Restricted stock compensation expense (4,012 shares vested)		4		-		104		-		-		108
Restricted stock compensation expense (no shares vested)		2		-		64		-		-		66
Exercise of stock options (1,372 shares)		1		-		(1)		-		-		-
Exercise of stock options (5,460 shares)		6		-		(6)		-		-		-
Shares withheld for employee taxes on stock option exercise and share award vest		~~(3)~~-		-		(~~140~~86)		-		-		(~~143~~86)
Cash dividends - common ($0.07 per share)		-		-		-		(301)		-		(301)
Non-cash funding of 401(k) (2,428 shares)		-		44		42		-		-		86
Non-cash funding of 401(k) (3,170 shares)		-		57		53		-		-		110
Non-cash funding of deferred comp. plan (1,397 shares)		-		25		25		-		-		50
Non-cash funding of deferred comp. plan (1,332 shares)		-		23		23		-		-		46
Balance at June 30, 2018	$	4,385	$	(1,276)	$	69,268	$	36,804	$	(3,848)	$	105,333
Balance at September 30, 2018	$	4,393	$	(1,196)	$	69,316	$	39,523	$	(3,977)	$	108,059
									Accumulated
									Other
	Common		Treasury				Retained		Comprehensive
(Dollars in thousands)	Stock		Stock		Surplus		Earnings		Loss		Total
Balance at January 1, 2018	$	4,379	$	(1,429)	$	69,110	$	32,272	$	(2,390)	$	101,942
Net income for six months ended June 30, 2018		-		-		-		4,662		-		4,662
Net income for nine months ended September 30, 2018		-		-		-		7,682		-		7,682
Other comprehensive loss		-		-		-		-		(~~987~~1,116)		(~~987~~1,116)
Restricted stock compensation expense (4,908 shares vested)		810		-		~~196~~260		-		-		~~204~~270
Exercise of stock options (2,338 shares)		2		-		(2)		-		-		-
Exercise of stock options (7,798 shares)		8		-		(8)		-		-		-
Shares withheld for employee taxes on stock option exercise and share award vest		(4)		-		(~~176~~262)		-		-		(~~180~~266)
Cash dividends - common ($0.14 per share)		-		-		-		(601)		-		(601)
Cash dividends - common ($0.21 per share)		-		-		-		(902)		-		(902)
Non-cash funding of 401(k) (5,658 shares)		-		102		92		-		-		194
Non-cash funding of 401(k) (8,828 shares)		-		159		145		-		-		304
Non-cash funding of deferred comp. plan (2,877 shares)		-		51		48		-		-		99
Non-cash funding of deferred comp. plan (4,209 shares)		-		74		71		-		-		145
Adoption impact - ASU 2018-02		-		-		-		471		(471)		-
Balance at June 30, 2018	$	4,385	$	(1,276)	$	69,268	$	36,804	$	(3,848)	$	105,333
Balance at September 30, 2018	$	4,393	$	(1,196)	$	69,316	$	39,523	$	(3,977)	$	108,059

See accompanying notes to unaudited consolidated financial statements.

DNB Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended June 30,
	Nine Months Ended September 30,
(Dollars in thousands)	2019		2018
Cash Flows From Operating Activities:
Net income	$	58,~~174~~044	$	47,~~662~~682
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		~~694~~1,015		~~761~~1,144
Provision for credit losses		~~300~~625		~~750~~850
Stock based compensation		~~143~~225		~~204~~270
Non-cash funding of retirement plans		~~297~~446		~~293~~449
Net gain on sale of securities		(4125)		-
Net loss on sale or write down of OREO and other repossessed property		~~150~~165		~~140~~151
Earnings from investment in BOLI		(105)		(104)
Gain on insurance proceeds		-		(8)
Deferred tax expense		-		167
Earnings from investment in BOLI		(160)		(158)
Proceeds from sales of mortgage loans		8,113		8,620
Deferred tax (benefit) expense		(125)		193
Mortgage loans originated for sale		(8,049)		(8,108)
Proceeds from sales of mortgage loans		11,828		11,088
Gain on sale of mortgage loans		(146)		(137)
Mortgage loans originated for sale		(11,452)		(10,244)
Proceeds from sales of loans		-		188
Gain on sale of mortgage loans		(216)		(193)
Loans originated for sale		-		(178)
Proceeds from sales of loans		-		805
Gain on sale of loans		-		(10)
Loans originated for sale		-		(768)
Gain on sale of loans		-		(37)
Write off of property and equipment		3		-
Increase in accrued interest receivable		(90)		(89)
Decrease (increase) in accrued interest receivable		85		(388)
Decrease in other assets		1,215		97
Decrease (increase) in other assets		1,144		(230)
(Decrease) increase in accrued interest payable		(5101)		73
(Decrease) increase in other liabilities		(~~837~~649)		~~241~~581
Amortization of operating lease right-of-use asset		~~372~~558		-
Accretion of operating lease liability		(~~369~~554)		-
Net Cash Provided by Operating Activities		610,~~856~~756		711,~~504~~190
Cash Flows From Investing Activities:
Activity in available-for-sale securities:
Sales		1316,~~905~~715		-
Maturities, repayments and calls		4547,~~875~~754		610,~~953~~976
Purchases		(31,546)		-
Activity in held-to-maturity securities:
Maturities, repayments and calls		24,~~148~~707		~~304~~413
Net (increase) decrease in restricted stock		(~~118~~144)		~~691~~1,777
Net decrease (increase) in loans		39,~~559~~923		(4062,~~102~~848)
Purchases of property and equipment		(192)		(122)
Death benefit proceeds		-		8
Purchases of property and equipment		(289)		(164)
Purchase of third party ownership in OREO		(165)		-
Proceeds from sale of OREO and other repossessed property		2,~~829~~855		33102
Net Cash Provided By (Used In) Investing Activities		3649,~~295~~810		(3249,~~243~~736)
Cash Flows From Financing Activities:
Net (decrease) increase in deposits		(852,~~703~~449)		7278,~~912~~678
Repayment of FHLBP advances		(66,~~732~~747)		(~~200~~226,~~641~~661)
Funding of FHLBP advances		65,000		184,600
Net decrease in repurchase agreements		-		(67,~~414~~934)
Decrease in other borrowings		(3,033)		(2,402)
(Decrease) increase in other borrowings		(3,051)		10,816
Dividends paid		(~~606~~910)		(~~601~~902)
Payment of employee taxes on stock option exercise and share award vest		-(8)		(~~180~~266)
Net Cash (Used in) Provided by Financing Activities		(1458,~~074~~165)		4738,~~274~~331
Net Change in Cash and Cash Equivalents		292,~~077~~401		~~22,535~~(215)
Cash and Cash Equivalents at Beginning of Period		17,321		10,917
Cash and Cash Equivalents at End of Period	$	4619,~~398~~722	$	3310,~~452~~702
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest	$	59,~~971~~109	$	46,~~100~~588
Income taxes		~~719~~1,301		~~600~~975
Supplemental Disclosure of Non-cash Flow Information:
Transfers from loans to real estate owned and other repossessed property		~~588~~652		~~274~~318

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 ~~six~~nine months ended ~~June~~September 30, 2019 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, 2018.

Subsequent Events-- Management has evaluated events and transactions occurring subsequent to ~~June~~September 30, 2019 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.

Merger Agreement. On June 5, 2019, S&T Bancorp, Inc. (“S&T”) and DNB entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which DNB will merge with and into S&T (the “Merger”), with S&T continuing as the surviving entity in the Merger, subject to the terms and conditions set forth therein. Immediately following the Merger, DNB’s wholly owned bank subsidiary, DNB First, National Association, will merge with and into S&T’s wholly owned bank subsidiary, S&T Bank (the “Bank Merger”), with S&T Bank continuing as the surviving entity in the Bank Merger. The Merger Agreement was unanimously approved by the Board of Directors of each of S&T and DNB.

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), DNB shareholders will have the right to receive 1.22 shares of common stock, par value $2.50 per share, of S&T for each share of common stock, par value $1.00 per share, of DNB.

The merger is subject to customary closing conditions enumerated in the merger agreement, including receipt of regulatory approvals and the approval of DNB’s shareholders. It is anticipated that the transaction will close during the fourth quarter of 2019.

Recent Accounting Pronouncements-

Accounting Developments Affecting DNB

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

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

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

	Three Months Ended				~~Six~~Nine Months Ended
	June 30,				June 30,
	September 30,				September 30,
(Dollars in thousands)	2019		2018		2019		2018
Non-interest Income:
Service charges:
Non-sufficient funds charges	$	~~122~~132	$	~~142~~157	$	~~255~~387	$	~~301~~458
Business analysis charges		4645		4442		92137		85127
Cycle charges		2124		2224		4165		4569
Lockbox fees		102		82		5759		5254
Stop payment fees		5		35		914		712
Wire transfer fees		22		2223		4466		4366
Other service charges		2021		2021		3960		4162
Total service charges		~~246~~251		~~261~~274		~~537~~788		~~574~~848
Wealth management:
DNB Investments & Insurance		~~126~~109		~~150~~185		~~202~~311		~~238~~423
DNB First Investment Management & Trust		~~403~~405		~~362~~357		~~772~~1,177		~~709~~1,066
Total wealth management		~~529~~514		~~512~~542		~~974~~1,488		~~947~~1,489
Other fee income:
Cardholder interchange fees		~~286~~282		~~269~~257		~~539~~821		~~514~~771
Safe deposit box		2423		2624		4770		5074
Check printing		1315		1214		3752		3549
Merchant card processing		4541		4244		87128		90134
ATM surcharges for non-DNB customers		1716		2019		3248		3756
Other fee income		1211		13		2637		2740
Total other fee income		~~397~~388		~~382~~371		~~768~~1,156		~~753~~1,124
Total Revenue from contracts with customers		1,~~172~~153		1,~~155~~187		23,~~279~~432		23,~~274~~461
Total Revenue not within the scope of ASC 606		~~172~~330		~~177~~184		~~339~~669		~~331~~515
Total non-interest income	$	1,~~344~~483	$	1,~~332~~371	$	24,~~618~~101	$	23,~~605~~976

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

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

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

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

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

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

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

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. In particular, the guidance revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The guidance also amends certain disclosure requirements associated with fair value of financial instruments. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. As of ~~June~~September 30, 2019, DNB did not hold any equity investments (excluding restricted investments in bank stocks). DNB does not expect to make significant purchases of equity investments; therefore, the adoption of this ASU is not expected to be material to DNB's consolidated financial statements. Adoption of the standard on January 1, 2018 also resulted in the use of an exit price rather than an entrance price to determine the fair value of loans not measured at fair value on a non-recurring basis in the consolidated balance sheets.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. DNB has determined that upon the adoption of ASU 2016-02 is required to recognize a right-of-use asset and a corresponding liability based on the then present value of such obligation. The adoption of ASU 2016-02 resulted in the recognition of operating lease liabilities of $4.4 million and right-of-use asset of $4.0 million. The adoption of the new standard did not have a material impact on its Consolidated Statements of Income. Update 2018-11 - Leases (topic 842): Targeted Improvements provided an additional/optional transition method to adopt the new leases standard. Prior to this ASU issuance, a modified retrospective transition approach was required. The adoption of this ASU does not materially impact our Consolidated Statement of Financial Condition and Consolidated Statements of Changes in Stockholders’ Equity. Update 2018-20 - Leases (topic 842): Narrow-Scope Improvements for Lessors was released to better clarify the treatment of sales taxes and other similar taxes related to Lessor and Lessees costs and payments. The amendments in this update permit lessors, as an accounting policy election, to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Instead, those lessors will account for those costs as if they are lessee costs. Also, certain lessor costs require lessors to exclude from variable payments, and therefore revenue, lessor costs paid by lessees directly to third parties. DNB’s lessor income is immaterial; as such, this ASU does not materially impact our Consolidated Statement of Financial Condition or Consolidated Statements of Comprehensive Income. DNB adopted the use-of-hindsight practical expedient.

DNB recognized rent expense associated with our leases as follows:

	Three Months Ended				~~Six~~Nine Months Ended
	June 30,				June 30,
	September 30,				September 30,
(Dollars in thousands)	2019		2018		2019		2018
Operating lease cost:
Fixed rent expense	$	251	$	284	$	~~503~~754	$	~~569~~852
Net lease cost	$	251	$	284	$	~~503~~754	$	~~569~~852
Lease costs
Amortization of lease liability	$	~~186~~185	$	-	$	~~372~~557	$	-
Interest expense		6566		-		~~131~~197		-
Net lease cost	$	251	$	-	$	~~503~~754	$	-

DNB had the following cash and non-cash activities associated with our leases:

	Three Months Ended				~~Six~~Nine Months Ended
	June 30,				June 30,
	September 30,				September 30,
(Dollars in thousands)	2019		2018		2019		2018
Cash paid for the amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	250	$	242	$	~~500~~750	$	~~484~~726
Non-cash investing and financing activities:
Additions to ROU assets obtained from:
New operating lease liabilities	$	43,~~174~~989	$	-	$	43,~~174~~989	$	-

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

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). The amendments in this update provide guidance for eight specific cash flow classification issues for which current guidance is unclear or does not exist, thereby reducing diversity in practice. For public companies, the update is effective for annual periods beginning after December 15, 2017. Accordingly, effective January 1, 2018, DNB adopted the pronouncement and it did not have a material impact to DNB’s consolidated financial statements.

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

In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, under the amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value with its carrying amount. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount when measuring the goodwill impairment loss, if applicable. The update also eliminated the requirements for zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments are effective for public business entities for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. DNB will not early adopt this ASU for its annual goodwill impairment test, and conducted a qualitative test (step zero) as of October 1, 2018 and determined that its Goodwill has not been impaired. The adoption of this ASU is not expected to have a material impact on DNB’s consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” Under the new guidance, employers will present the service cost component of the net periodic benefit cost in the same income statement line item (e.g., Salaries and Benefits) as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. Employers

will present the other components separately (e.g., Other Noninterest Expense) from the line item that includes the service cost. ASU No. 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, however, DNB has decided not to early adopt. Employers will apply the guidance on the presentation of the components of net periodic benefit cost in the income statement retrospectively. ASU No. 2017-07 will not have a material impact on DNB Consolidated Financial Statements because the Pension plan has been frozen to new accruals since December 31, 2003, and thus, generated no service cost in any subsequent year.

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

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

NOTE 2: INVESTMENT SECURITIES

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

	June 30, 2019
	September 30, 2019
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
Held To Maturity
US Government agency obligations	$	8,~~886~~955	$	3315	$	-	$	8,~~919~~970
Government Sponsored Entities (GSE) mortgage-backed securities		~~341~~314		7		-		~~348~~321
Corporate bonds		1312,~~728~~190		~~245~~207		-		1312,~~973~~397
Collateralized mortgage obligations GSE		~~1,044~~979		25		(41)		~~1,042~~983
State and municipal taxable		362		5		-		367
State and municipal tax-exempt		3534,~~588~~691		~~117~~157		(322)		3534,~~673~~846
Total	$	5957,~~949~~491	$	~~409~~396	$	(363)	$	6057,~~322~~884
Available For Sale
US Government agency obligations	$	24,~~189~~192	$	158	$	(248)	$	24,~~180~~192
GSE mortgage-backed securities		2624,~~256~~813		2332		(~~306~~187)		2524,~~973~~658
Collateralized mortgage obligations GSE		98,~~464~~981		822		(~~177~~144)		98,~~295~~859
Corporate bonds		86,~~796~~029		1314		(73)		86,~~802~~040
State and municipal tax-exempt		1,701		-5		(201)		1,~~681~~705
Total	$	7065,~~406~~716	$	5981	$	(~~534~~343)	$	6965,~~931~~454



	December 31, 2018
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
Held To Maturity
US Government agency obligations	$	8,749	$	41	$	-	$	8,790
Government Sponsored Entities (GSE) mortgage-backed securities		389		-		-		389
Corporate bonds		13,851		124		(47)		13,928
Collateralized mortgage obligations GSE		1,159		-		(27)		1,132
State and municipal taxable		362		-		(3)		359
State and municipal tax-exempt		37,516		19		(998)		36,537
Total	$	62,026	$	184	$	(1,075)	$	61,135

Available For Sale
US Government agency obligations	$	48,082	$	-	$	(359)	$	47,723
GSE mortgage-backed securities		27,563		-		(1,005)		26,558
Collateralized mortgage obligations GSE		10,249		-		(441)		9,808
Corporate bonds		10,890		-		(186)		10,704
State and municipal tax-exempt		1,981		-		(131)		1,850
Total	$	98,765	$	-	$	(2,122)	$	96,643

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 ~~June~~September 30, 2019 and December 31, 2018.

	June 30, 2019
	September 30, 2019
					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	$	~~171~~164	$	(41)	$	-	$	-	$	~~171~~164	$	(41)
State and municipal tax-exempt		~~5,537~~603		(322)		-		-		~~5,537~~603		(322)
Total	$	~~5,708~~767	$	(363)	$	-	$	-	$	~~5,708~~767	$	(363)
Available For Sale
US Government agency obligations	$	134,~~965~~993	$	(248)	$	-	$	-	$	134,~~965~~993	$	(248)
GSE mortgage-backed securities		2220,~~599~~444		(~~306~~187)		-2,244		-(11)		2218,~~599~~200		(~~306~~176)
Collateralized mortgage obligations GSE		67,~~980~~040		(~~177~~144)		-409		-(7)		6,~~980~~631		(~~177~~137)
Corporate bonds		51,~~028~~001		(73)		-		-		51,~~028~~001		(73)
State and municipal tax-exempt		~~1,681~~783		(201)		-783		-(1)		~~1,681~~-		~~(20)~~-
Total	$	5034,~~253~~261	$	(~~534~~343)	$	-3,436	$	-(19)	$	5030,~~253~~825	$	(~~534~~324)


	December 31, 2018
					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	$	4,157	$	(47)	$	1,887	$	(15)	$	2,270	$	(32)
Collateralized mortgage obligations GSE		1,132		(27)		-		-		1,132		(27)
State and municipal taxable		359		(3)		-		-		359		(3)
State and municipal tax-exempt		26,466		(998)		2,045		(31)		24,421		(967)
Total	$	32,114	$	(1,075)	$	3,932	$	(46)	$	28,182	$	(1,029)
Available For Sale
US Government agency obligations	$	37,723	$	(359)	$	-	$	-	$	37,723	$	(359)
GSE mortgage-backed securities		26,558		(1,005)		-		-		26,558		(1,005)
Collateralized mortgage obligations GSE		9,808		(441)		-		-		9,808		(441)
Corporate bonds		10,704		(186)		2,035		(7)		8,669		(179)
State and municipal tax-exempt		1,850		(131)		-		-		1,850		(131)
Total	$	86,643	$	(2,122)	$	2,035	$	(7)	$	84,608	$	(2,115)

As of ~~June~~September 30, 2019, there were ~~fourteen~~fifteen collateralized mortgage obligations GSE, ~~eighteen~~seventeen GSE mortgage-backed securities, ~~three~~two U.S. agency obligations, ~~nine~~two tax-exempt municipalities, and ~~three~~one corporate ~~bonds~~bond 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 their 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 ~~June~~September 30, 2019 represents an other-than-temporary impairment (OTTI). DNB reviews its investment portfolio on a quarterly basis, reviewing 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 ~~June~~September 30, 2019, the following securities were reviewed:

Collateralized mortgage obligations GSE There are ~~fourteen~~fifteen impaired securities classified as collateralized mortgage obligations GSE, ~~all~~fourteen of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is 64.3443% of its carrying value. All of these securities were issued and insured by FNMA, FHLMC or GNMA. DNB receives monthly principal and interest payments on all of these securities on a timely basis and none of these agencies have 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 ~~June~~September 30, 2019 levels. Management concluded that these securities were not other-than-temporarily impaired at ~~June~~September 30, 2019.

GSE mortgage-backed securities There are ~~eighteen~~seventeen impaired securities classified as GSE mortgage-backed securities, ~~all~~fourteen of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is 1.8644% of its carrying value. These securities were issued and insured by FNMA, FHLMC or GNMA. DNB receives monthly principal and interest payments on these securities on a timely basis and none of these have 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 ~~June~~September 30, 2019 levels. Management concluded that these securities were not other-than-temporarily impaired at ~~June~~September 30, 2019.

US Government agency obligations There are two impaired securities classified as agencies, both of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is 0.22% of its carrying value. All of these securities were issued and insured by FHLB, FNMA or FHLMC. DNB has received timely interest payments on all of these securities and none

~~US Government agency obligations There are three impaired securities classified as agencies, all~~ of ~~which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is 0.41% of its carrying value. All of~~ these ~~securities were issued and insured by FHLB, FNMA or FHLMC. DNB has received timely interest payments on all of these securities and none of these~~ agencies have 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 ~~June~~September 30, 2019.

State and municipal tax-exempt There are two ~~nine~~ impaired securities in this category, ~~which~~one ~~are comprised~~ of ~~intermediate to long-term municipal bonds, all of~~ which ~~have~~has been impaired for more than 12 months. The largest unrealized loss of a security in this group is 20.1028% of its carrying value. ~~All~~Both ofsecurities are ~~the~~uninsured ~~issues~~school ~~carry~~districts, ~~an “AA”~~but orone ~~better~~has ~~underlying~~a ~~credit~~state ~~rating~~school ~~and/or~~district ~~have~~credit ~~strong~~enhancement ~~underlying~~program. ~~fundamentals;~~One ~~included~~carries ~~but~~an ~~not~~“Aa3” ~~limited~~underlying tocredit ~~annual financial reports~~rating, ~~geographic location, population,~~ and ~~debt ratios. In certain cases, options for calls reduce~~ the ~~effective~~other ~~duration~~carries ~~and~~an in“AA” ~~turn,~~underlying ~~future~~credit ~~market value fluctuations~~rating. Both ~~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 nine municipal securities, four are school districts that have state school district credit enhancement programs and one of those has additional insurance. The remaining five are one uninsured school district, one insured township, and three uninsured townships, all of which have strong underlying ratings. Management concluded that these securities were not other-than-temporarily impaired at ~~June~~September 30, 2019.

Corporate bonds There ~~are three~~ is one impaired ~~bonds classified as~~ corporate ~~bonds~~bond, ~~all of~~ which ~~have~~has been impaired for more than 12 months. The ~~largest~~ unrealized loss of athis security ~~in this group~~ is 0.4633% of its carrying value. The ~~bonds~~bond is ~~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~~The ofissue ~~the issues carry a~~ carries an "~~BBB+~~A-" ~~or better~~ underlying credit support and ~~were~~was evaluated on the basis on ~~their~~its 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~~security ~~approach~~approaches its ~~their~~ maturity ~~dates~~date or if interest rates decline from ~~June~~September 30, 2019 levels. Management concluded that ~~these~~this ~~securities~~security was ~~were~~ not other-than-temporarily impaired at ~~June~~September 30, 2019.

The amortized cost and fair value of investment securities as of ~~June~~September 30, 2019, by final contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid without penalties.

Held to Maturity

Available for Sale

(Dollars in thousands)

Amortized Cost

Fair Value

Amortized Cost

Fair Value

Due in one year or less

11,~~735~~804

11,~~770~~821

1415,~~989~~996

1415,~~968~~990

Due after one year through five years

1413,~~149~~171

1413,~~245~~210

1815,~~448~~546

1815,~~455~~559

Due after five years through ten years

2729,~~454~~198

2729,~~697~~487

1412,~~329~~527

1412,~~214~~470

Due after ten years

63,~~611~~318

63,~~610~~366

2221,~~640~~647

2221,~~294~~435

Total investment securities

5957,~~949~~491

6057,~~322~~884

7065,~~406~~716

6965,~~931~~454

The HTM securities called during the ~~six~~nine months ended ~~June~~September 30, 2019 resulted in a gain on call of $368,000. Gains and losses resulting from investment sales, redemptions or calls were as follows:

	Three Months Ended				~~Six~~Nine Months Ended
	June 30,				June 30,
	September 30,				September 30,
(Dollars in thousands)	2019		2018		2019		2018
Gross realized gains-AFS	$	1056	$	-	$	1066	$	-
Gross realized gains-HTM		-65		-		368		-
Gross realized losses-AFS		~~(9)~~-		-		(9)		-
Net realized gain	$	1121	$	-	$	4125	$	-

At ~~June~~September 30, 2019 and December 31, 2018, investment securities with a carrying value of approximately $6968.70 million and $95.8 million, respectively, were pledged to secure public funds and for other purposes as required by law.

NOTE 3: LOANS

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

(Dollars in thousands)	~~June~~September 30, 2019		December 31, 2018
Residential mortgage	$	9893,~~802~~586	$	99,932
Commercial mortgage		~~521~~527,~~060~~680		535,735
Commercial:
Commercial term		~~179~~174,~~294~~445		166,335
Commercial construction		7775,~~060~~573		76,302
Consumer:
Home equity		4948,~~492~~094		51,536
Other		4,~~813~~571		5,131
Total loans	$	~~930~~923,~~521~~949	$	934,971
Less allowance for credit losses		(6,~~672~~853)		(6,675)
Net loans	$	~~923~~917,~~849~~096	$	928,296

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

					Three Months Ended June 30, 2019						Six Months Ended June 30, 2019
					Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
(Dollars in thousands)	~~June~~September 30, 2019		December 31, 2018		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	$	~~779~~1,337	$	905	$	1113	$	-	$	1113	$	2336	$	-	$	2336
Commercial mortgage		~~563~~698		1,307		116		-		116		2743		-		2743
Commercial:
Commercial term		23,~~026~~203		2,300		2256		-		2256		65121		-		65121
Commercial construction		21,~~274~~558		476		1327		-		1327		1340		-		1340
Consumer:
Home equity		143		391		~~(1)~~2		-		~~(1)~~2		68		-		68
Other		~~138~~133		167		3		-		3		69		-		69
Total non-accrual loans	$	57,~~923~~072	$	5,546	$	49117	$	-	$	49117	$	~~140~~257	$	-	$	~~140~~257
Loans 90 days past due and accruing		~~205~~-		233		3-		3-		-		3-		3-		-
Total non-performing loans	$	67,~~128~~072	$	5,779	$	52117	$	3-	$	49117	$	~~143~~257	$	3-	$	~~140~~257

			Three Months Ended June 30, 2018						Six Months Ended June 30, 2018
			Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
(Dollars in thousands)	~~June~~September 30, 2018		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	$	1,~~344~~005	$	189	$	-	$	189	$	4352	$	-	$	4352
Commercial mortgage		1,~~593~~561		2830		-		2830		5888		-		5888
Commercial:
Commercial term		2,~~583~~624		4650		-		4650		90140		-		90140
Commercial construction		~~488~~479		9		-		9		2029		-		2029
Consumer:
Home equity		~~498~~631		39		-		39		817		-		817
Other		~~215~~171		3		-		3		1114		-		1114
Total non-accrual loans	$	6,~~721~~471	$	~~107~~110	$	-	$	~~107~~110	$	~~230~~340	$	-	$	~~230~~340
Loans 90 days past due and accruing		23-		1-		1-		-		1-		1-		-
Total non-performing loans	$	6,~~744~~471	$	~~108~~110	$	1-	$	~~107~~110	$	~~231~~340	$	1-	$	~~230~~340

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 ~~June~~September 30, 2019 and December 31, 2018.

Age Analysis of Past Due Loans Receivable

June 30, 2019

September 30, 2019

Loans

30-59

60-89

Receivable

Days

Greater

Total

> 90

Past

than

Total

Loans

Days and

(Dollars in thousands)

Due

90 Days

Past Due

Current

Receivable

Accruing

Residential mortgage

~~972~~1,146

~~378~~494

~~610~~1,031

12,~~960~~671

9690,~~842~~915

9893,~~802~~586

~~142~~-

Commercial mortgage (less acquired with credit deterioration)

47540

-112

~~625~~698

~~672~~1,350

~~519~~525,~~867~~809

~~520~~527,~~539~~159

63-

Acquired commercial mortgage with credit deterioration

521

Commercial:

Commercial term

~~920~~-

-113

~~296~~1,517

1,~~216~~630

~~178~~172,~~078~~815

~~179~~174,~~294~~445

Commercial construction

-96

-1,462

-1,558

7774,~~060~~015

7775,~~060~~573

Consumer:

Home equity

~~168~~30

~~120~~-

143

~~431~~173

4947,~~061~~921

4948,~~492~~094

Other

8519

8886

~~175~~106

4,~~638~~465

4,~~813~~571

Total

21,~~192~~735

~~500~~816

14,~~762~~937

47,~~454~~488

~~926~~916,~~067~~461

~~930~~923,~~521~~949

~~205~~-



	December 31, 2018
													Loans
	30-59		60-89										Receivable
	Days		Days		Greater						Total		> 90
	Past		Past		than		Total				Loans		Days and
(Dollars in thousands)	Due		Due		90 Days		Past Due		Current		Receivable		Accruing
Residential mortgage	$	666	$	1,742	$	845	$	3,253	$	96,679	$	99,932	$	130
Commercial mortgage (less acquired with credit deterioration)		-		-		840		840		534,739		535,579		103
Acquired commercial mortgage with credit deterioration		-		-		-		-		156		156		-
Commercial:
Commercial term		20		37		957		1,014		165,321		166,335		-
Commercial construction		-		-		-		-		76,302		76,302		-
Consumer:
Home equity		398		144		247		789		50,747		51,536		-
Other		26		-		108		134		4,997		5,131		-
Total	$	1,110	$	1,923	$	2,997	$	6,030	$	928,941	$	934,971	$	233

DNB had $~~353~~343,000 of residential mortgage loans in the process of foreclosure and $97140,000 in residential real estate in other real estate owned as of ~~June~~September 30, 2019. DNB had no residential mortgage loans in the process of foreclosure and $97,000 of residential real estate in other real estate owned as of December 31, 2018.

The following tables summarize information in regards to impaired loans by loan portfolio class as of ~~June~~September 30, 2019 and December 31, 2018, and for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

Impaired Loans

		June 30, 2019						December 31, 2018
		September 30, 2019						December 31, 2018
	Recorded		Unpaid		Related		Recorded		Unpaid		Related
	Investment		Principal		Allowance		Investment		Principal		Allowance
(Dollars in thousands)			Balance						Balance
With no related allowance recorded:
Residential mortgage	$	2,~~759~~781	$	3,~~110~~147	$	-	$	1,462	$	1,804	$	-
Commercial mortgage		1,~~513~~643		1,~~766~~896		-		1,532		1,780		-
Acquired commercial mortgage with credit deterioration		521		535		-		514		527
Commercial:
Commercial term		1,~~309~~573		12,~~841~~140		-		1,343		1,845		-
Commercial construction		21,~~274~~558		21,~~321~~563		-		476		514		-
Consumer:
Home equity		~~279~~277		~~284~~282		-		531		535		-
Other		~~168~~129		~~242~~198		-		156		205		-
Total	$	8,~~823~~482	$	109,~~099~~761	$	-	$	6,014	$	7,210	$	-
With allowance recorded:
Residential mortgage		-		-		-		73		73		1
Commercial mortgage		-		-		-		737		802		78
Commercial:
Commercial term		~~717~~1,630		~~744~~1,664		~~161~~302		957		1,015		203
Consumer:
Other		-34		-41		-5		41		42		3
Total	$	~~717~~1,664	$	~~744~~1,705	$	~~161~~307	$	1,808	$	1,932	$	285
Total:
Residential mortgage		2,~~759~~781		3,~~110~~147		-		1,535		1,877		1
Commercial mortgage		1,~~513~~643		1,~~766~~896		-		2,269		2,582		78
Acquired commercial mortgage with credit deterioration		521		535		-		514		527		-
Commercial:
Commercial term		23,~~026~~203		23,~~585~~804		~~161~~302		2,300		2,860		203
Commercial construction		21,~~274~~558		21,~~321~~563		-		476		514		-
Consumer:
Home equity		~~279~~277		~~284~~282		-		531		535		-
Other		~~168~~163		~~242~~239		-5		197		247		3
Total	$	910,~~540~~146	$	1011,~~843~~466	$	~~161~~307	$	7,822	$	9,142	$	285

	Three Months Ended		Three Months Ended		~~Six~~Nine Months Ended		~~Six~~Nine Months Ended
	June 30, 2019		June 30, 2018		June 30, 2019		June 30, 2018
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
	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	$ 2,770	$ 1613	$ 21,~~109~~748	$ 56	$ 2,~~358~~464	$ 1831	$ 21,~~042~~925	$ 612
Commercial mortgage	1,~~845~~578	12	2,~~597~~446	1213	1,~~986~~900	2436	2,~~668~~602	2437
Acquired commercial mortgage with credit deterioration	521	9	~~654~~521	89	519	1827	~~748~~691	1524
Commercial:
Commercial term	1,~~318~~441	-	21,~~024~~662	-	1,~~326~~388	-	1,~~931~~790	-
Commercial construction	1,~~137~~916	-	~~493~~484	-	~~758~~958	-	~~500~~495	-
Consumer:
Home equity	~~404~~278	32	~~624~~706	21	~~447~~404	46	~~620~~658	45
Other	~~172~~148	-1	~~207~~182	-1	~~180~~167	12	~~177~~173	-1
Total	$ 8,~~167~~652	$ 4037	$ 87,~~708~~749	$ 2730	$ 7,~~574~~800	$ 65102	$ 8,~~686~~334	$ 4979
With allowance recorded:
Residential mortgage	-	-	3774	-1	-	-	2537	-1
Acquired residential mortgage with credit deterioration	-	-	-	-	-	-	2	-
Commercial mortgage	-	-	81100	-	-	-	6076	-
Commercial:
Commercial term	~~717~~1,174	-	~~774~~941	-	~~797~~1,005	-	~~628~~786	-
Consumer:
Other	-17	-	7142	-	-9	-	9078	-
Total	$ ~~717~~1,191	$ -	$ ~~963~~1,157	$ -1	$ ~~797~~1,014	$ -	$ ~~805~~979	$ -1
Total:
Residential mortgage	2,770	1613	21,~~146~~822	57	2,~~358~~464	1831	21,~~067~~962	613
Acquired residential mortgage with credit deterioration	-	-	-	-	-	-	2	-
Commercial mortgage	1,~~845~~578	12	2,~~678~~546	1213	1,~~986~~900	2436	2,~~728~~678	2437
Acquired commercial mortgage with credit deterioration	521	9	~~654~~521	89	519	1827	~~748~~691	1524
Commercial:
Commercial term	2,~~035~~615	-	2,~~798~~603	-	2,~~123~~393	-	2,~~559~~576	-
Commercial construction	1,~~137~~916	-	~~493~~484	-	~~758~~958	-	~~500~~495	-
Consumer:
Home equity	~~404~~278	32	~~624~~706	21	~~447~~404	46	~~620~~658	45
Other	~~172~~165	-1	~~278~~224	-1	~~180~~176	12	~~267~~251	-1
Total	$ 89,~~884~~843	$ 4037	$ 98,~~671~~906	$ 2731	$ 8,~~371~~814	$ 65102	$ 9,~~491~~313	$ 4980

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 ~~June~~September 30, 2019 and December 31, 2018.

Credit Quality Indicators

June 30, 2019

September 30, 2019

Special

(Dollars in thousands)

Pass

Mention

Substandard

Doubtful

Total

Residential mortgage

9690,~~078~~263

~~142~~185

23,~~582~~138

9893,~~802~~586

Commercial mortgage

~~504~~509,~~508~~820

133,~~387~~576

314,~~165~~284

~~521~~527,~~060~~680

Commercial:

Commercial term

~~174~~168,~~507~~720

~~695~~768

4,~~092~~957

~~179~~174,~~294~~445

Commercial construction

7372,~~325~~703

~~935~~1,312

21,~~800~~558

7775,~~060~~573

Consumer:

Home equity

4947,~~198~~829

~~151~~122

143

4948,~~492~~094

Other

4,~~674~~438

~~139~~133

4,~~813~~571

Total

~~902~~893,~~290~~773

155,~~310~~963

1224,~~921~~213

~~930~~923,~~521~~949



	December 31, 2018
			Special
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Residential mortgage	$	97,577	$	-	$	2,355	$	-	$	99,932
Commercial mortgage		528,692		2,367		4,676		-		535,735
Commercial:
Commercial term		161,051		1,178		4,106		-		166,335
Commercial construction		72,077		3,603		622		-		76,302
Consumer:
Home equity		50,988		143		405		-		51,536
Other		4,924		-		207		-		5,131
Total	$	915,309	$	7,291	$	12,371	$	-	$	934,971

Troubled Debt Restructurings Loans whose terms are modified are classified as troubled debt restructurings (“TDR”) if DNB grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. During the ~~six~~ nine month period ended ~~June~~September 30, 2019, DNB classified two residential mortgage loans totaling $1.5 million and four commercial term loans totaling $421,000 as TDR. One residential mortgage loan’s rate was changed but the term was not extended, and the other residential mortgage loan and the four commercial term loans had their terms extended. During the ~~six~~nine month period ended ~~June~~September 30, 2018, DNB classified one residential mortgage loan totaling $73,000 as TDR. The loan’s rate was changed but the term was not extended. Loans classified as troubled debt restructurings are designated as impaired. The recorded investments in troubled debt restructured loans at ~~June~~September 30, 2019 and December 31, 2018 are as follows:

	June 30, 2019
	September 30, 2019
	Pre-Modification		Post-Modification
(Dollars in thousands)	Outstanding Recorded Investment		Outstanding Recorded Investment		Recorded Investment
Residential mortgage	$	2,155	$	2,308	$	2,~~110~~091
Commercial mortgage		992		992		~~950~~945
Commercial term		421		421		~~421~~414
Consumer:
Home equity		148		148		~~136~~134
Other		40		42		3029
Total	$	3,756	$	3,911	$	3,~~647~~613
	December 31, 2018
	Pre-Modification		Post-Modification
(Dollars in thousands)	Outstanding Recorded Investment		Outstanding Recorded Investment		Recorded Investment
Residential mortgage	$	676	$	805	$	630
Commercial mortgage		992		992		962
Consumer:
Home equity		148		148		140
Other		40		42		30
Total	$	1,856	$	1,987	$	1,762

At September 30, 2019, DNB had fifteen TDRs with recorded investment totaling $3,613,000, eight of which are accruing loans in compliance with the terms of the modifications and seven of which are non-accrual loans. As a result of collateral evaluations, specific reserves and charge-offs have been taken where appropriate. DNB recognized partial charge-offs totaling $151,000 on two

At June 30, 2019, DNB had fifteen TDRs with recorded investment totaling $3,647,000, ten of which are accruing loans in compliance with the terms of the modifications and five of which are non-accrual loans. As a result of collateral evaluations, specific reserves and charge-offs have been taken where appropriate. DNB recognized partial charge-offs totaling $151,000 on two residential loans prior to their restructuring and $2,000 on one consumer installment loan after its restructuring. As of ~~June~~September 30, 2019, there were no defaulted TDRs as all TDRs were current with respect to their associated forbearance agreements. There were notwo ~~defaults~~residential onmortgages classified as TDRs that were moved to non-accrual due to payments being more than 90 days past due during the ~~six~~nine months ended ~~June~~September 30, 2019.

At December 31, 2018, DNB had nine TDRs with recorded investment totaling $1,762,000, all of which were accruing loans in compliance with the terms of the modifications. As a result of collateral evaluations, specific reserves and charge-offs have been taken where appropriate. As of December 31, 2018, DNB recognized partial charge-offs totaling $151,000 on two residential loans prior to their restructuring and $2,000 on one consumer installment loan after its restructuring. As of December 31, 2018, there were no defaulted TDRs as all TDRs were current with respect to their associated forbearance agreements. There were no defaults on TDRs within twelve months of restructure during 2018. DNB classified one residential mortgage loan totaling $73,000 as TDR during the year ended December 31, 2018.

The following tables set forth the composition of DNB’s allowance for credit losses as of ~~June~~September 30, 2019 and December 31, 2018, the activity for the three and ~~six~~ nine months ended ~~June~~September 30, 2019 and 2018 and as of and for the year ended December 31, 2018.

Allowance for Credit Losses and Recorded Investment in Loans Receivables

	Residential		Commercial		Commercial		Commercial		Consumer		Consumer
(Dollars in thousands)	Mortgage		Mortgage		Term		Construction		Home Equity		Other		Unallocated		Total
Allowance for credit losses:
Beginning balance - April 1, 2019	$	156	$	3,493	$	1,189	$	1,080	$	183	$	43	$	575	$	6,719
Beginning balance - July 1, 2019	$	133	$	3,579	$	1,144	$	1,032	$	209	$	39	$	536	$	6,672
Charge-offs		-(125)		~~(23)~~-		(2224)		-		~~(128)~~-		-(3)		-		(~~173~~152)
Recoveries		-		71		197		-		-		-		-		268
Provisions		~~(23)~~115		~~102~~95		~~(42)~~119		(4838)		~~154~~(3)		~~(4)~~10		~~(39)~~27		~~100~~325
Ending balance - June 30, 2019	$	133	$	3,579	$	1,144	$	1,032	$	209	$	39	$	536	$	6,672
Ending balance - September 30, 2019	$	123	$	3,675	$	1,246	$	994	$	206	$	46	$	563	$	6,853

	Residential		Commercial		Commercial		Commercial		Consumer		Consumer
(Dollars in thousands)	Mortgage		Mortgage		Term		Construction		Home Equity		Other		Unallocated		Total
Allowance for credit losses:
Beginning balance - January 1, 2019	$	161	$	3,647	$	1,062	$	1,032	$	190	$	46	$	537	$	6,675
Charge-offs		-(125)		(105)		(91115)		-		(128)		(1720)		-		(~~341~~493)
Recoveries		4		78		2734		-		-		-		-		3846
Provisions		~~(32)~~83		30125		~~146~~265		-(38)		~~147~~144		1020		~~(1)~~26		~~300~~625
Ending balance - June 30, 2019	$	133	$	3,579	$	1,144	$	1,032	$	209	$	39	$	536	$	6,672
Ending balance - September 30, 2019	$	123	$	3,675	$	1,246	$	994	$	206	$	46	$	563	$	6,853
Ending balance: individually evaluated for impairment	$	-	$	-	$	~~161~~302	$	-	$	-	$	-5	$	-	$	~~161~~307
Ending balance: collectively evaluated for impairment	$	~~133~~123	$	3,~~579~~675	$	~~983~~944	$	~~1,032~~994	$	~~209~~206	$	3941	$	~~536~~563	$	6,~~511~~546
Loans receivables:
Ending balance	$	9893,~~802~~586	$	~~521~~527,~~060~~680	$	~~179~~174,~~294~~445	$	7775,~~060~~573	$	4948,~~492~~094	$	4,~~813~~571			$	~~930~~923,~~521~~949
Ending balance: individually evaluated for impairment	$	2,~~759~~781	$	1,~~513~~643	$	23,~~026~~203	$	21,~~274~~558	$	~~279~~277	$	~~168~~163			$	9,~~019~~625
Ending balance: acquired with credit deterioration	$	-	$	521	$	-	$	-	$	-	$	-			$	521
Ending balance: collectively evaluated for impairment	$	9690,~~043~~805	$	~~519~~525,~~026~~516	$	~~177~~171,~~268~~242	$	74,~~786~~015	$	4947,~~213~~817	$	4,~~645~~408			$	~~920~~913,~~981~~803
Reserve for unfunded loan commitments included in other liabilities	$	-	$	24	$	~~189~~178	$	~~209~~197	$	2019	$	-			$	~~420~~398

	Residential		Commercial		Commercial		Commercial		Consumer		Consumer
(Dollars in thousands)	Mortgage		Mortgage		Term		Construction		Home Equity		Other		Unallocated		Total
Allowance for credit losses:
Beginning balance - April 1, 2018	$	226	$	2,987	$	904	$	1,219	$	176	$	55	$	578	$	6,145
Beginning balance - July 1, 2018	$	207	$	3,076	$	889	$	1,355	$	196	$	49	$	416	$	6,188
Charge-offs		~~(103)~~-		~~(171)~~-		(4715)		-		-		(3723)		-		(~~358~~38)
Recoveries		25308		-		-		-		-		1		-		26309
Provisions		59(352)		~~260~~213		32113		~~136~~(287)		20-		3021		~~(162)~~392		~~375~~100
Ending balance - June 30, 2018	$	207	$	3,076	$	889	$	1,355	$	196	$	49	$	416	$	6,188
Ending balance - September 30, 2018	$	163	$	3,289	$	987	$	1,068	$	196	$	48	$	808	$	6,559

	Residential		Commercial		Commercial		Commercial		Consumer		Consumer
(Dollars in thousands)	Mortgage		Mortgage		Term		Construction		Home Equity		Other		Unallocated		Total
Allowance for credit losses:
Beginning balance - January 1, 2018	$	221	$	2,856	$	845	$	1,128	$	183	$	63	$	547	$	5,843
Charge-offs		(137)		(184)		(6479)		-		-		(4972)		-		(~~434~~472)
Recoveries		26334		-		2		-		-		12		-		29338
Provisions		97(255)		~~404~~617		~~106~~219		~~227~~(60)		13		3455		~~(131)~~261		~~750~~850
Ending balance - June 30, 2018	$	207	$	3,076	$	889	$	1,355	$	196	$	49	$	416	$	6,188
Ending balance - September 30, 2018	$	163	$	3,289	$	987	$	1,068	$	196	$	48	$	808	$	6,559
Reserve for unfunded loan commitments included in other liabilities	$	-	$	3	$	~~183~~176	$	~~201~~186	$	21	$	-			$	~~408~~386



	Residential		Commercial		Commercial		Commercial		Consumer		Consumer
(Dollars in thousands)	Mortgage		Mortgage		Term		Construction		Home Equity		Other		Unallocated		Total
Allowance for credit losses:
Ending balance - December 31, 2018	$	161	$	3,647	$	1,062	$	1,032	$	190	$	46	$	537	$	6,675
Ending balance: individually evaluated for impairment	$	1	$	78	$	203	$	-	$	-	$	3	$	-	$	285
Ending balance: collectively evaluated for impairment	$	160	$	3,569	$	859	$	1,032	$	190	$	43	$	537	$	6,390
Loans receivables:
Ending balance	$	99,932	$	535,735	$	166,335	$	76,302	$	51,536	$	5,131			$	934,971
Ending balance: individually evaluated for impairment	$	1,535	$	2,269	$	2,300	$	476	$	531	$	197			$	7,308
Ending balance: acquired with credit deterioration	$	-	$	514	$	-	$	-	$	-	$	-			$	514
Ending balance: collectively evaluated for impairment	$	98,397	$	532,952	$	164,035	$	75,826	$	51,005	$	4,934			$	927,149
Reserve for unfunded loan commitments included in other liabilities	$	-	$	4	$	167	$	206	$	21	$	-			$	398

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, and no anti-dilutive stock awards outstanding at ~~June~~September 30, 2019 and ~~June~~September 30, 2018. The following table sets forth the computation of basic and diluted earnings per share:

Three Months Ended

~~Six~~Nine Months Ended

June 30, 2019

September 30, 2019

(In thousands, except per-share data)

Income

Amount

Income

Amount

Basic EPS

Income available to common stockholders

2,~~587~~870

4,~~331~~335

0.6066

58,~~174~~044

4,~~329~~331

1.2086

Effect of potential dilutive common stock equivalents – stock options and restricted shares

~~(0.01)~~-

Diluted EPS

Income available to common stockholders after assumed conversions

2,~~587~~870

4,~~336~~341

0.6066

58,~~174~~044

4,~~333~~336

1.1986

Three Months Ended

~~Six~~Nine Months Ended

June 30, 2018

September 30, 2018

(In thousands, except per-share data)

Income

Amount

Income

Amount

Basic EPS

Income available to common stockholders

23,~~049~~020

4,~~298~~307

0.4870

47,~~662~~682

4,~~295~~299

1.0979

Effect of potential dilutive common stock equivalents – stock options and restricted shares

1611

~~(0.01)~~-

1715

(0.01)

Diluted EPS

Income available to common stockholders after assumed conversions

23,~~049~~020

4,~~314~~318

0.4770

47,~~662~~682

4,~~312~~314

1.0878

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
June 30, 2019
September 30, 2019
Net unrealized loss on AFS securities	$	(~~475~~262)	$	~~100~~55	$	(~~375~~207)
Unrealized actuarial losses-pension		(1,637)		343		(1,294)
	$	(21,~~112~~899)	$	~~443~~398	$	(1,~~669~~501)
December 31, 2018
Net unrealized loss on AFS securities	$	(2,122)	$	445	$	(1,677)
Unrealized actuarial losses-pension		(1,637)		343		(1,294)
	$	(3,759)	$	788	$	(2,971)

NOTE 7: SUBORDINATED DEBENTURES AND NOTES

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.

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 ~~June~~September 30, 2019. All options are immediately exercisable. During the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, DNB had no expenses related to the plan. Under the Stock Option Plan, no shares were exercised during the ~~six~~nine months ended ~~June~~September 30, 2019. Under the Stock Option Plan, 516,~~300~~450 shares were exercised during the ~~six~~nine months ended ~~June~~September 30, 2018. The shares awarded from the non-qualified cashless exercises resulted in an increase in shares outstanding of 27,~~338~~798 shares. There was a cash equivalent of 28,~~962~~652 shares used to pay all applicable taxes on the transactions. DNB had no stock option activity during the ~~six~~nine months ended ~~June~~September 30, 2019 and had no stock options outstanding at ~~June~~September 30, 2019 or December 31, 2018. Stock option activity is indicated below.

	Number		Weighted Average
	Outstanding		Exercise Price
Outstanding January 1, 2018		16,450	$	10.31
Issued		-		-
Exercised		516,~~300~~450		10.31
Forfeited		-		-
Expired		-		-
Outstanding June 30, 2018		11,150	$	10.31
Outstanding September 30, 2018		-	$	-

Other Stock-Based Compensation

DNB maintains an Incentive Equity and Deferred Compensation Plan (the "Plan"). The Plan provides that up to 493,101 (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 ~~six~~nine month periods ended ~~June~~September 30, 2019, $82,000 and $~~143~~225,000 was amortized to expense. For the three and ~~six~~nine month periods ended ~~June~~September 30, 2018, $~~108~~66,000 and $~~204~~270,000 was amortized to expense.

As of ~~June~~September 30, 2019, there was approximately $~~568~~486,000 in additional compensation that will be recognized over the weighted average life of 1.6037 years. At ~~June~~September 30, 2019, 482,501 shares were reserved for future grants under the Plan.

There were 8,500 restricted shares that vested during the ~~six~~nine months ended ~~June~~September 30, 2018. The shares awarded from the cashless exercises resulted in an increase in shares outstanding of 4,908 shares. There was a cash equivalent of 3,492 shares used to pay all applicable taxes on the transactions. There were no540 ~~such~~restricted ~~transactions~~shares that vested during the ~~six~~nine months ended ~~June~~September 30, 2019. The shares awarded from the cashless exercises resulted in an increase in shares outstanding of 351 shares. There was a cash equivalent of 189 shares used to pay all applicable taxes on the transactions. Stock grant activity is indicated below:

		Weighted Average
	Shares	Stock Price
Non-vested stock awards—January 1, 2019	18,590	$	30.90
Granted	10,600		39.36
Forfeited	-		-
Vested	-540		-26.00
Non-vested stock awards—June 30, 2019	29,190	$	33.98
Non-vested stock awards—September 30, 2019	28,650	$	34.13

		Weighted Average
	Shares	Stock Price
Non-vested stock awards—January 1, 2018	31,130	$	26.53
Granted	10,750		33.98
Forfeited	4,345		28.92
Vested	8,500		26.69
Non-vested stock awards—June 30, 2018	29,035	$	28.88
Non-vested stock awards—September 30, 2018	29,035	$	28.88

NOTE 9: INCOME TAXES

As of ~~June~~September 30, 2019, DNB had no material unrecognized tax benefits or accrued interest and penalties. It is DNB’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 2016 through 2018 were open for examination as of ~~June~~September 30, 2019.

NOTE 10: FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. 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. When recorded at fair value, these assets are included as Level 3 fair values.

The following tables present assets measured at fair value on a recurring basis as of ~~June~~September 30, 2019 and December 31, 2018:

		June 30, 2019
		September 30, 2019
(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	$	-	$	24,~~180~~192	$	-	$	24,~~180~~192
GSE mortgage-backed securities		-		2524,~~973~~658		-		2524,~~973~~658
Collateralized mortgage obligations GSE		-		98,~~295~~859		-		98,~~295~~859
Corporate bonds		-		86,~~802~~040		-		86,~~802~~040
State and municipal tax-exempt		-		1,~~681~~705		-		1,~~681~~705
Total	$	-	$	6965,~~931~~454	$	-	$	6965,~~931~~454
Assets Measured at Fair Value on a Nonrecurring Basis
Impaired loans	$	-	$	-	$	~~691~~1,455	$	~~691~~1,455
OREO and other repossessed property		-		-		1,~~430~~685		1,~~430~~685
Total	$	-	$	-	$	23,~~121~~140	$	23,~~121~~140



		December 31, 2018

(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	$	-	$	47,723	$	-	$	47,723
GSE mortgage-backed securities		-		26,558		-		26,558
Collateralized mortgage obligations GSE		-		9,808		-		9,808
Corporate bonds		-		10,704		-		10,704
State and municipal tax-exempt		-		1,850		-		1,850
Total	$	-	$	96,643	$	-	$	96,643


Assets Measured at Fair Value on a Nonrecurring Basis
Impaired loans	$	-	$	-	$	1,523	$	1,523
OREO and other repossessed property		-		-		1,247		1,247
Total	$	-	$	-	$	2,770	$	2,770

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:

June 30, 2019
September 30, 2019
Quantitative Information about Level 3 Fair Value Measurement
		Fair Value	Valuation		Range
(Dollars in thousands)		Estimate	Techniques	Unobservable Input	(Weighted Average)
Impaired loans - Commercial term	$	~~556~~1,328	Appraisal of collateral (1)	Disposal costs (2)	0%	to	-8%	(-42%)
Impaired loans - Consumer other		~~135~~127	Appraisal of collateral (1)	Disposal costs (2)	-7%	to	-8%	(-8%)
Impaired loan total	$	~~691~~1,455
Other real estate owned	$	1,~~430~~685		Disposal costs (2)	-8%	to	-8%	(-8%)

(1)

(2)



December 31, 2018
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	$	72	Appraisal of collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)
Impaired loans - Commercial mortgage		659	Appraisal of collateral (1)	Disposal costs (2)	-14%	to	-14%	(-14%)
Impaired loans - Commercial term		754	Appraisal of collateral (1)	Disposal costs (2)	0%	to	-16%	(-11%)
Impaired loans - Consumer other		38	Appraisal of collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)
Impaired loan total	$	1,523
Other real estate owned	$	1,247		Disposal costs (2)	-8%	to	-8%	(-8%)

⁽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 $910.51 million at ~~June~~September 30, 2019. Of this, $~~717,000~~1.7 million had specific valuation allowances of $~~161~~307,000, leaving a fair value of $~~556,000~~1.4 million as of ~~June~~September 30, 2019. In addition, DNB had $~~152~~111,000 in impaired loans that were partially charged down by $1714,000, leaving $~~135~~97,000 at fair value as of ~~June~~September 30, 2019. The total fair value of impaired loans at ~~June~~September 30, 2019 was $~~691,000~~1.5 million.

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

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 $2.8 million of such assets at ~~June~~September 30, 2019, $2.7 million of which was OREO and $106,000 was in other repossessed property. DNB had $5.1 million of such assets at December 31, 2018, which consisted of $4.9 million in OREO and $142,000 in other repossessed property. DNB wrote down the carrying values of certain assets totaling $1.59 million by $~~105~~176,000 to $1.47 million during the ~~six~~nine month period ended ~~June~~September 30, 2019. DNB wrote down the carrying values of certain assets totaling $1.6 million by $355,000 to $1.2 million during the year ended December 31, 2018.

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 ~~six~~nine months ended ~~June~~September 30, 2019.

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 statement of financial condition. The carrying amounts and fair values of financial instruments at ~~June~~September 30, 2019 and December 31, 2018 are as follows:

		June 30, 2019
		September 30, 2019
		Carrying		Fair
(Dollars in thousands)		Amount		Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	4619,~~398~~722	$	4619,~~398~~722	$	4619,~~398~~722	$	-	$	-
AFS investment securities		6965,~~931~~454		6965,~~931~~454		-		6965,~~931~~454		-
HTM investment securities		5957,~~949~~491		6057,~~322~~884		-		5855,~~322~~884		2,000
Restricted stock		5,~~734~~760		5,~~734~~760		-		5,~~734~~760		-
Loans held-for-sale		~~501~~259		~~515~~264		-		-		~~515~~264
Loans, net of allowance, including impaired		~~923~~917,~~849~~096		~~921~~913,~~497~~587		-		-		~~921~~913,~~497~~587
Accrued interest receivable		4,~~297~~122		4,~~297~~122		-		4,~~297~~122		-
Financial liabilities
Deposits:
Non-interest-bearing		~~178~~174,~~454~~341		~~178~~174,~~454~~341		-		~~178~~174,~~454~~341		-
NOW, Money market, and Savings		~~531~~507,~~002~~098		~~531~~507,~~002~~098		-		~~531~~507,~~002~~098		-
Time		~~178~~187,~~530~~805		~~178~~188,~~808~~368		-		~~178~~188,~~808~~368		-
Brokered		8762,~~877~~873		8762,~~369~~639		-		8762,~~369~~639		-
FHLBP advances		31,~~203~~188		31,~~112~~186		-		31,~~112~~186		-
Junior subordinated debentures and other borrowings		9,279		9,~~990~~717		-		9,~~990~~717		-
Subordinated debt		9,750		9,~~271~~208		-		9,~~271~~208		-
Accrued interest payable		~~641~~545		~~641~~545		-		~~641~~545		-
Off-balance sheet instruments		-		-		-		-		-


		December 31, 2018

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

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.

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

FORWARD-LOOKING STATEMENTS

DNB Financial Corporation (the “Registrant”, “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 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 the implementation of Basel III, which may be changed unilaterally and retroactively by legislative or regulatory actions; the ability to complete the previously announced business combination with S&T; the ability to achieve the expected benefits of the merger with S&T in the time frames expected or at all, or may be more costly to achieve; that prior to completion of the merger transaction or thereafter, the parties’ respective businesses may not perform as expected due to transaction-related uncertainties or other factors; the parties’ ability to implement successful integration strategies; the ability to obtain the required regulatory approvals, shareholder approvals, or other closing conditions in a timely manner, or at all; reputational risks and the reaction of the parties’ customers to the merger transaction; diversion of management time to merger-related issues; 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 Financial Corporation, a Pennsylvania business corporation, is a bank holding company registered with and supervised by the Board of Governors of the Federal Reserve System (Federal Reserve Board). The Registrant was incorporated on October 28, 1982 and commenced operations on July 1, 1983 upon consummation of the acquisition of all of the outstanding stock of Downingtown National Bank, now known as DNB First, National Association (the “Bank”). Since commencing operations, DNB’s business has consisted primarily of managing and supervising the Bank, and its principal source of income has been derived from the Bank.

The Bank was organized in 1860. The Bank is a national banking association that is a member of the Federal Reserve System, the deposits of which are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is a full service commercial bank providing a wide range of services to individuals and small to medium sized businesses in the southeastern Pennsylvania market area, including accepting time, demand, and savings deposits and making secured and unsecured commercial, real estate and consumer loans. In addition, the Bank has fourteen (14) full service branches and a full-service wealth management group known as “DNB First Wealth Management.” The Bank’s financial subsidiary, DNB Financial Services, Inc., (also known as “DNB Investments & Insurance”) is a Pennsylvania licensed insurance agency, which, through a third party marketing agreement with Cetera Investment Services, LLC, sells a broad variety of insurance and investment products. The Bank’s other subsidiaries are Downco, Inc. and DN Acquisition

Company, Inc. which were incorporated in December 1995 and December 2008, respectively, for the purpose of acquiring and holding Other Real Estate Owned acquired through foreclosure or deed in-lieu-of foreclosure, as well as Bank-occupied real estate.

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, annuities, 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. To that end, DNB continues to make appropriate investments in all areas of our business, including people, technology, facilities and marketing.

~~The~~All ~~merger~~required isregulatory ~~subject~~approvals tohave ~~customary~~been ~~closing~~received ~~conditions~~and ~~enumerated~~DNB inshareholders ~~the~~have ~~merger~~approved ~~agreement, including receipt of regulatory approvals and~~ the ~~approval~~merger ~~of DNB’s shareholders~~agreement. It is anticipated that the transaction will close during the fourth quarter of 2019.

MATERIAL CHALLENGES, RISKS AND OPPORTUNITIES

The following is a summary of material challenges, risks and opportunities DNB has faced during the ~~six~~nine month period ended ~~June~~September 30, 2019:

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 quarterly 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. Simulation model results continue to show moderate liability sensitivity to rising rates in 100, 200, 300 and 400 basis point shock scenarios over a 12 month period. Rate changes ramped in over 24 months also show moderate liability sensitivity.

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 (including brokered deposits), principal and interest payments on loans, proceeds from loan sales, sales and maturities of mortgage-backed and investment securities, and FHLBP advances. 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 liquidity (Federal funds sold, investments and interest‑bearing cash balances, 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 experiencing credit quality deterioration. DNB’s loan review procedures provide objective 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. As the U.S. economy moves through a period of recession, it is possible that delinquencies and non-performing assets may rise as the value of homes decline and DNB’s borrowers experience financial difficulty due to corporate downsizing, reduced sales and income levels, or other negative events which will impact their ability to meet their contractual loan payments. To minimize the impact on DNB’s earnings and maintain sound credit quality, management continues to aggressively monitor credit and credit relationships that may be impacted by such adverse factors.

Competition. In addition to the challenges related to the interest rate environment, community banks in Chester, Philadelphia 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 has negatively affected DNB’s net interest margin. To compensate for the increased competition, DNB, along with other area community banks, has aggressively sought and marketed customers who have been disenfranchised by these mergers.

To attract these customers, DNB offers deposit products and services, such as Choice Checking relationship products, and Online Banking with bill payment, external transfer and account aggregation functionality. DNB also offers a complete package of cash management services including automated clearing house services, remote deposit, payroll services, merchant services, and account payment solutions. Our broad range of Business Checking products provides solutions to meet the needs of a variety of businesses and non-profit organizations.

FDIC Insurance and Assessments. The Bank’s deposits are insured to applicable limits by the FDIC. Under 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 FDIC may take action to increase insurance premiums if the deposit insurance fund is not funded to its regulatory mandated Designated Reserve Ratio (DRR). Currently, the FDIC is required to achieve a DRR of 1.35% by September 30, 2020, and has established a target DRR of 2.0%. Under the Dodd-Frank Act, the FDIC assesses premiums from each institution based on its average consolidated total assets minus its average tangible equity, while utilizing a scorecard method to determine each institution’s risk to the deposit insurance fund. The Dodd-Frank Act also requires the FDIC, in setting assessments, to offset the effect of increasing its reserve for the deposit insurance fund on institutions with consolidated total assets of less than $10 billion. To achieve the mandated DRR consistent with these provisions of the Dodd-Frank Act, the FDIC implemented a rule in 2016 imposing a surcharge of 4.5 basis points on all insured depository institutions with consolidated total assets of $10 billion or more in addition to their regular assessments. Under the rule, the surcharge would cease once a DRR of 1.35% had been achieved or on December 31, 2018, whichever came first. On September 30, 2018, the DRR reached 1.36%, and the surcharge was eliminated.

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, respectively. 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.

Material Trends and Uncertainties.

DNB reported net income of $2.69 million, or $0.6066 per diluted share, for the quarter ending ~~June~~September 30, 2019, compared with $23.0 million, or $0.4770 per diluted share, for the same quarter, last year. For the ~~six~~nine months ended ~~June~~September 30, 2019, net income was $58.20 million, or $1.1986 per diluted share, compared with $47.7 million, or $1.0878 per diluted share, for the same period, last year. Results for the three and ~~six~~nine months ending ~~June~~September 30, 2019, included $~~519~~362,000 and $881,000, of transaction expenses, for the ~~recently~~same ~~announced~~respective periods, for the merger with S&T.

There are many aspects of the economy and the Federal Reserve’s monetary policy that influence DNB’s ability to grow revenues and net income. InAs ~~general~~expected, the ~~U.S.~~Federal ~~economy~~Open isMarket ~~growing~~Committee at(FOMC) areduced ~~moderate~~the ~~pace.~~fed ~~The~~funds ~~Federal~~range ~~Open~~by ~~Market~~another ~~Committee~~25 ~~(FOMC)~~basis ~~decided~~points atto ~~their~~1.75%–2.00% ~~June~~at ~~19,~~its September 2019 meeting, tomaking ~~maintain~~this the ~~current~~second ~~target~~cut ~~range~~since ~~for~~ the ~~federal~~Federal ~~funds~~Reserve ~~rate~~stopped athiking 2interest rates last December.~~25%-2.50%.~~ The ~~FOMC~~committee ~~removed~~once ~~the~~again ~~word~~cited “~~patient”~~implications ~~from~~of ~~its~~global ~~statement~~developments” and ~~noted~~“muted ~~that~~inflation ~~“uncertainties~~pressures” ~~have~~as ~~increased in~~ the ~~economic outlook~~causes. The ~~Federal~~Fed’s ~~Reserve~~Summary of Economic Projections (~~Fed~~SEP) ~~will~~indicate ~~continue~~a ~~reducing~~continued ~~its~~positive ~~balance~~outlook ~~sheet~~for ~~through~~the ~~redemptions~~U.S. ofeconomy ~~Treasury~~and ~~securities~~they ofcontinue ~~$15~~to ~~billion~~acknowledge ~~per~~that ~~month—while~~the ~~continuing~~U.S. toeconomy ~~redeem~~itself ~~mortgage-backed~~is ~~security~~still ~~purchases~~doing byjust upfine toand ~~$20~~that ~~billion~~they ~~per~~continue ~~month.~~to ~~The~~see ~~committee~~sustained ~~intends~~expansion. toMore ~~conclude~~specifically, ~~its~~the ~~balance~~FOMC’s ~~sheet~~statement ~~runoff~~points atto the ~~end~~continued strength of ~~September~~the ~~2019.~~labor ~~Labor~~ market, ~~activity~~moderate ~~remains~~growth ~~strong,~~in ~~and~~ economic activity, issolid ~~rising~~job ~~at a moderate rate. Job~~ gains ~~have been solid~~, ~~while~~a ~~the~~low unemployment rate ~~has~~and ~~remained~~strong ~~low. Indicators suggest that growth of~~ household spending ~~has~~growth. ~~picked~~The uponly ~~from~~downside ~~earlier~~seems ~~this~~to ~~year,~~be ~~while~~weakened business fixed investment ~~remains soft. Both overall inflation—~~and ~~core inflation~~exports, ~~excluding~~both ~~food~~of ~~and~~which ~~energy—have~~can ~~declined.~~be ~~Currently,~~explained ~~both~~by ~~are below~~ the ~~Fed’s~~ongoing ~~long-term~~trade ~~target of 2%~~conflict. ~~Looking~~The ~~forward,~~SEP ~~the~~indicates that committee ~~expects~~members ~~inflation~~now topredict ~~run~~an ~~near~~infinitesimal ~~its~~increase 2%in ~~target~~both ~~over~~ the ~~medium~~real ~~term.~~GDP ~~Current~~and ~~global~~the ~~economic~~unemployment ~~and~~rate ~~financial~~for ~~uncertainties,~~2019. ~~along~~The ~~with~~personal ~~muted~~consumption ~~inflation~~expenditure ~~pressures,~~(PCE) ~~imply~~and ~~that~~Core ~~incoming~~PCE ~~economic~~inflation ~~data~~projections ~~will~~remain ~~impact~~unchanged from the ~~outlook~~June ~~for~~SEP, ~~any~~so ~~future~~inflation ~~adjustments~~continues to ~~the~~be ~~target~~a ~~range~~non-event. ~~for~~Their ~~the~~future ~~federal~~predictions ~~funds~~for ~~rate.~~2020 ~~Timing~~to of2022 ~~future~~and ~~federal~~the ~~funds~~longer ~~rate~~run ~~changes~~also ~~will~~remain ~~reflect~~relatively ~~labor~~unchanged. ~~market~~Still, ~~conditions;~~the ~~indicators~~“most oflikely ~~inflation~~case ~~pressures~~is ~~and~~continued ~~expectations;~~moderate ~~and~~growth,” ~~financial~~a ~~and~~widely ~~international~~shared ~~developments.~~projection ~~The~~among ~~Fed~~forecasters, ~~will~~according ~~act appropriately~~ to ~~sustain~~Chairman ~~the expansion~~Powell.

Although the national and international economies influence DNB’s results, economic conditions in southeastern Pennsylvania are more germane, as the majority of DNB’s loan and deposits relationships are with businesses and individuals within the Third Federal Reserve District. The Federal Reserve’s ~~June~~September 54, 2019 Beige Book summarizes the economic climate which impacts DNB’s operating environment.

The ~~June~~September 54, 2019 Beige Book indicated that, on balance, aggregate business activity in the Third District ~~strengthened~~continued ~~further~~at to a modest pace of growth. ~~Growth~~during ~~was characterized as slight in~~ the ~~April~~September 174, 2019 Beige Book ~~Period~~period. ~~Growth~~Manufacturing accelerated to a moderate pace of ~~manufacturing~~growth, and nonmanufacturing, non-auto retail sales, and tourism ~~picked~~continued upat to a modest pace, ~~while~~of ~~homebuilding~~growth. ~~held~~Sales ~~steady~~for ~~and~~new ~~auto~~autos ~~sales~~as ~~appeared~~well toas ~~have~~commercial ~~fallen~~real ~~slightly.~~estate ~~The~~construction ~~Federal~~and ~~Reserve~~leasing ~~Bank’s contacts noted that tariffs~~ continued to ~~prompt~~decline ~~concerns,~~slightly. ~~induce~~Homebuilding ~~uncertainty~~softened somewhat, and ~~delay~~existing ~~business~~home ~~investment.~~sales ~~The~~declined ~~labor market tightened~~ further. ~~and~~Wage ~~continued~~increases toremained ~~constrain~~moderate, ~~employment~~as ~~growth~~the ~~and~~labor ~~spur~~market ~~moderate~~remained ~~wage increases~~tight. Overall, price pressures remained modest. The ~~firms'~~Federal Reserve Bank’s contacts outlook for growth over the next six months remained positive ~~and edged higher overall~~, with ~~more~~about ~~than~~ half of all firms anticipating increases in general activity and less than one-fifth expecting decreases. However, contacts noted a ~~third~~slightly ~~expecting~~more nocautious ~~change~~outlook given trade and market uncertainty.

Overall, Third District homebuilders reported noa ~~change~~modest decrease in contract signings ~~for~~in ~~early~~the ~~spring~~September on4, a2019 ~~year-over-year~~Beige ~~basis~~Book ~~after~~period, ~~growing~~down ~~slightly~~from ~~last~~the July 17, 2019 Beige Book period. ~~However,~~The ~~better~~Federal ~~weather~~Reserve’s ~~this~~contacts ~~spring~~noted ~~has~~some ~~been~~strength ~~good~~in ~~for~~southern ~~construction~~New ~~activity~~Jersey housing markets across most price ranges but a slowing in traffic and sales at all price points in central Pennsylvania. Existing home sales ~~continued~~declined tomoderately on a year-over-year basis – a larger decline ~~moderately~~than in the July 17, 2019 Beige Book period, across most local markets. ~~The~~Low ~~spring~~inventories ~~sales~~continued ~~season brought no relief~~ to ~~the~~limit ~~falling~~sales ~~inventory~~in ofall ~~new listings~~markets.

The Federal Reserve’s non-residential real estate contacts reported that, on balance, commercial real estate construction and leasing activity continued to ~~edge~~pull back from relatively high levels,. ~~but~~The ~~the~~ Federal Reserve Bank’s contacts’ ~~describe~~noted ~~markets~~that asfundamentals ~~healthy~~in ~~with~~larger ~~room~~markets toseemed ~~grow for the remainder of 2019~~sound. Office and industrial markets were characterized ~~with~~by relatively even to positive net absorption, stable vacancy rates, ~~rent growth,~~ and incremental ~~new~~rent ~~construction~~growth.

Third District financial firms reported a continuation of moderate growth in both overall loan volumes (excluding credit cards) and credit card lending on a year-over-year basis ~~and a continuation of modest growth in credit card lending~~. During the ~~June~~September 54, 2019 Beige Book period (reported without seasonal adjustments), volumes appeared to grow robustly in home mortgages and auto lending. ~~Loans~~Commercial ~~grew slightly for commercial~~ and industrial ~~lending. Commercial real estate~~ loans, ~~home~~grew ~~equity lines~~moderately, ~~and~~as did other consumer loans (not elsewhere classified). ~~were~~Home ~~flat~~equity tolines ~~down~~declined ~~slightly~~modestly. The Federal Reserve ~~Bank~~’s banking contacts continued to note ~~looser~~increased ~~lending~~uncertainty, ~~standards and aggressive pricing~~ but ~~few~~while ~~problems~~some ~~with~~contacts ~~credit~~reported ~~quality.~~that ~~The~~businesses ~~Federal~~were ~~Reserve~~hanging ~~Bank’s~~on ~~contacts~~the insidelines ~~and~~or ~~out~~hitting ofpause, ~~the~~other ~~banking~~contacts ~~sector~~ have ~~noted~~not ~~that~~seen ~~firms~~customers ~~are~~holding ~~now~~off ~~taking~~on ~~longer~~making toinvestments. ~~pay~~The ~~(but~~Federal ~~without~~Reserve’s ~~becoming~~contacts ~~delinquent);~~generally ~~some~~remained ~~suggest~~optimistic ~~this~~for ~~may represent~~ the ~~relative~~remainder ~~value~~ of ~~money~~2019, ~~now~~although ~~that~~somewhat ~~deposit~~less ~~interest~~so ~~rates~~than ~~are~~in ~~higher.~~the ~~Bankers~~July ~~and~~17, ~~their~~2019 ~~customers~~Beige ~~continued~~Book ~~to be bullish for the remainder of 2019~~period.

During the ~~June~~September 54, 2019 Beige Book Period, Third District manufacturing firms reported a modest growth in activity, ~~after~~a ~~noting~~pickup afrom the slight ~~increase~~pace inof growth during the ~~April~~July 17, 2019 Beige Book ~~Period~~period. ~~Shipments~~Indexes for shipments and unfilled orders ~~are~~remained ~~running a bit~~ above long-term non-recession averages~~; however~~, and the new orders ~~are~~index atimproved ~~typical~~to ~~levels~~an above-average level as well. The makers of lumber products, chemicals, and fabricated metal products, ~~and~~noted ~~industrial machinery tended to note~~ gains in new orders and shipments, ~~while~~since ~~primary~~the ~~metal~~July ~~producers~~17, ~~reported~~2019 ~~little~~Beige ~~change.~~Book ~~Tariffs remained a key concern for many manufacturers~~period. The ~~Federal~~primary ~~Reserve~~metal ~~Bank’s~~and ~~contacts~~industrial ~~noted~~machinery ~~that~~producers ~~much~~reported oflittle ~~the~~change, ~~impact~~and ~~from~~ the ~~initial~~makers ~~10 percent tariffs was absorbed along the supply chain before reaching the consumer. However, they expect much more~~ of ~~the~~electronic ~~impact~~products ~~from~~noted ~~the 25 percent tariffs to be passed through to the consumer~~declines. ~~Manufacturers' expectations of activity and of new orders over the next~~

~~six~~These ~~months~~trends ~~have~~were ~~changed~~somewhat ~~little~~weaker ~~since~~this year compared with the ~~April~~same ~~17,~~period ~~2019~~one ~~Beige~~year ~~Book~~ago ~~Period~~ for most of the sectors. Manufacturers' expectations of activity over the next six months improved somewhat. Expectations of shipments and ~~have~~of ~~generally~~new ~~remained~~orders ~~below~~were above long-term non-recession averages., ~~Expectations~~with ~~for~~the ~~future~~latter ~~shipments~~rising ~~did~~above ~~rise~~average ~~somewhat,~~over asthe ~~did~~period. ~~expectations~~Expectations of future employment and planned capital spending. ~~The~~also ~~latter~~remained ~~two~~above ~~indicators~~average but were ~~above~~little ~~their~~changed. ~~historical~~Some ~~non-recession~~firms ~~averages~~reported that uncertainty continued to hamper their investment decisions.

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, compared to other areas of the country. DNB’s franchise spans Chester, Philadelphia and Delaware counties in southeastern Pennsylvania and the majority of loans and deposits relationships are with businesses and individuals within the Third Federal Reserve District.

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 Reform and Legislation. From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of DNB in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. DNB cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on its financial condition or results of operations. A change in statutes, regulations or regulatory policies applicable to DNB or our subsidiaries could have a material effect on our business, financial condition and results of operations.

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 was 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 implemented 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 no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the final rules provided that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Corporation) were 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 contained 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 be utilized 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~~

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 principles. 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 preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Consolidated Statements of Financial Condition, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Amounts subject to significant estimates are items such as the allowance for credit losses and lending related commitments, the fair value of repossessed assets, pension and post-retirement obligations, the fair value of financial instruments, other-than-temporary impairments of investment securities, the valuation of assets acquired and liabilities assumed in business combinations, and the valuations of goodwill for impairment. Among other effects, such changes could result in future impairments of investment securities, and establishment of allowances for credit losses and lending related commitments as well as increased benefit plans’ expenses.

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 $1.1511 billion at ~~June~~September 30, 2019, compared to $1.16 billion at December 31, 2018. The $344.87 million decrease in total assets was primarily attributable to a $2835.87 million decrease in investment securities and a an $411.42 million decrease in net loans, offset by a $292.14 million increase in cash and cash equivalents.

Investment Securities. Investment securities at ~~June~~September 30, 2019 were $~~129~~122.9 million, compared to $158.7 million at December 31, 2018. The $2835.87 million decrease in investment securities was primarily due to $6169.92 million in sales, principal pay-downs, calls and maturities, offset by $31.5 million in purchases of investment securities, and a $1.69 million decrease in unrealized loss of the AFS portfolio.

Gross Loans. DNB’s loans held for investment decreased $411.50 million to $~~930~~923.59 million at ~~June~~September 30, 2019, compared to $935.0 million at December 31, 2018. Total commercial loans decreased $~~958~~674,000, residential loans decreased $16.13 million, and consumer loans decreased $2.4.0 million.

Deposits. Deposits were $~~975~~932.91 million at ~~June~~September 30, 2019, compared to $984.6 million at December 31, 2018. Deposits decreased $852.74 million or 05.8833% during the ~~six~~nine month period ended ~~June~~September 30, 2019. Core deposits, which are comprised of demand, NOW, money markets and savings accounts, decreased by $432.4 million, time deposits increased by $1625.47 and brokered deposits decreased by $2045.8 million.

Borrowings. Borrowings were $50.5 million at ~~June~~September 30, 2019, compared to $55.3 million at December 31, 2018. The decrease of $4.8 million or 8.6268% was primarily due to a $1.7 million decrease in FHLBP advances and a $3.01 million decrease in other borrowings.

Stockholders’ Equity. Stockholders' equity was $~~118~~121.21 million at ~~June~~September 30, 2019, compared to $111.8 million at December 31, 2018. The increase in stockholders’ equity was primarily a result of year-to-date earnings of $58.20 million, other comprehensive income of $1.3 million, non-cash funding of treasury shares totaling $297,000, and restricted stock compensation expense of $143,000. These additions to stockholders’ equity were partially offset by $606,000 of dividends paid on DNB’s common stock.

income of $1.5 million, non-cash funding of treasury shares totaling $446,000, and restricted stock compensation expense of $225,000. These additions to stockholders’ equity were partially offset by $910,000 of dividends paid on DNB’s common stock.

RESULTS OF OPERATIONS

SUMMARY

Net income for the three and ~~six~~nine month periods ended ~~June~~September 30, 2019 was $2.69 million and $58.20 million, or $0.6066 and $1.2086 per diluted share, respectively, compared to $23.0 million and $47.7 million, or $0.4770 and $1.0878 per diluted share, for the same period in 2018. The $~~538~~150,000 ~~increase~~decrease in net income in the ~~second~~third quarter of 2019 compared to the ~~second~~third quarter of 2018 was primarily attributable to a $~~447~~225,000 increase in ~~net~~provision ~~interest~~for ~~income~~credit ~~before~~losses ~~provision~~and ~~(primarily~~a ~~due~~$126,000 toincrease ~~increased~~in ~~interest~~ income ontax ~~loans)~~expense, offset by a $~~275~~112,000 ~~decrease~~increase in ~~provision~~non-interest ~~for credit losses~~income, a $2852,000 ~~decrease~~increase in ~~non-~~net interest ~~expense~~income before provision (primarily due to ~~decreased~~increased ~~salaries~~interest ~~and~~income ~~employee~~on ~~benefits expenses~~loans), and a $1237,000 ~~increase~~decrease in non-interest ~~income,~~expense ~~offset~~(primarily bydue ato ~~$224,000~~decreased ~~increase~~FDIC ininsurance ~~income~~expense ~~tax~~and ~~expense~~decreased salaries and employee benefits). The $~~512~~362,000 increase in net income during the ~~six~~nine month period ended ~~June~~September 30, 2019 compared to the ~~six~~nine month period ended ~~June~~September 30, 2018 was primarily attributable to ana $~~818~~870,000 increase in net interest income before provision (primarily due to increased interest income on loans), a $~~450~~225,000 decrease in provision for credit loss, and a $13125,000 increase in non-interest income, offset by a $~~520~~483,000 increase in non-interest expense (primarily due to $~~519~~881,000 of transaction costs related to the pending merger with S&T) and a $~~249~~375,000 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, Federal funds purchased, subordinated debentures and notes, and other borrowings.

Net interest income for the three and ~~six~~ nine month periods ended ~~June~~September 30, 2019 was $9.52 million and $1828.91 million, respectively, compared to $9.12 million and $1827.12 million for the same periods in 2018. Interest income for the three and ~~six~~ nine month periods ended ~~June~~September 30, 2019 was $12.52 million and $2437.91 million, respectively, compared to $11.36 million and $2233.28 million for the same periods in 2018. The $~~1.2 million~~ 610,000 increase in interest income in the ~~second~~third quarter of 2019, compared to the ~~second~~third quarter of 2018, was primarily due to increases of $~~1.2 million~~549,000 in interest and fees on loans and $93197,000 in interest on cash and cash equivalents, offset by a decrease of $57136,000 in interest and dividends on investment securities. The $23.73 million increase in interest income during the ~~six~~nine months ended ~~June~~September 30, 2019 compared to the ~~six~~nine month period ended ~~June~~September 30, 2018 was primarily due to increases of $23.62 million in interest and fees on loans and $~~115~~312,000 in interest on cash and cash equivalents, offset by a decrease of $40176,000 in interest and dividends on investment securities. The weighted average yield on total interest-earning assets was 4.5341% and 4.5249% for the three and ~~six~~ nine month periods ended ~~June~~September 30, 2019, respectively, compared to 4.2830% and 4.2620% for the same periods in 2018. Interest expense for the three and ~~six~~ nine month periods ended ~~June~~September 30, 2019 was $3.0 million and $69.0 million, respectively, compared to $2.25 million and $46.16 million for the same periods in 2018. The $~~783~~558,000 increase in interest expense in the ~~second~~third quarter of 2019, compared to the ~~second~~third quarter of 2018, was primarily due to an increase of $~~876~~635,000 in interest on deposits offset by a decrease of $9377,000 in interest on borrowings. The $12.94 million increase in interest expense during the ~~six~~nine month period ended ~~June~~September 30, 2019, compared to the ~~six~~nine month period ended ~~June~~September 30, 2018, was primarily due to an increase of $2.06 million in interest on deposits offset by a decrease of $~~153~~230,000 in interest on borrowings. The composite cost of funds for the three and ~~six~~ nine month periods ended ~~June~~September 30, 2019 was 1.1718% and 1.1617%, respectively, compared to 0.9098% and 0.8488% for the same periods in 2018.

Interest on loans was $11.41 million and $2233.6 8 million for the three and ~~six~~ nine month periods ended ~~June~~September 30, 2019, respectively, compared to $10.26 million and $2030.06 million for the same periods in 2018. The average balance of loans was $~~934~~921.2 million, with a tax equivalent average yield of 4.8981% (a non-GAAP measure) for the ~~second~~third quarter of 2019, compared to $~~869~~889.21 million, with a tax equivalent average yield of 4.7074% (a non-GAAP measure) for the same period in 2018. The average balance of loans was $~~934~~930.71 million, with a tax equivalent average yield of 4.8987% (a non-GAAP measure) for the ~~six~~nine month period ended ~~June~~September 30, 2019, compared to $~~860~~870.41 million, with a tax equivalent average yield of 4.7172% (a non-GAAP measure) for the same period in 2018. See the following table for a reconciliation of the non-GAAP measure “tax equivalent average yield on loans.”

Tax equivalent average yield on loans (Non-GAAP)
	Three Months Ended						~~Six~~Nine Months Ended
	June 30,						June 30,
	September 30,						September 30,
(Dollars in thousands)	2019			2018			2019			2018
Interest and fees on loans (GAAP)	$	11,~~358~~137		$	10,~~164~~588		$	2233,~~648~~785		$	2030,~~046~~634
Tax adjustment		2421			2726			5174			5785
Tax equivalent interest and fees on loans (Non-GAAP)	$	11,~~382~~158		$	10,~~191~~614		$	2233,~~699~~859		$	2030,~~103~~719
Average balance of loans	$	~~934~~921,~~156~~180		$	~~869~~889,~~166~~113		$	~~934~~930,~~660~~117		$	~~860~~870,~~443~~105
Tax equivalent average yield on loans (Non-GAAP)		4.8981	%		4.7074	%		4.8987	%		4.7172	%

Interest and dividends on investment securities was $1.0 million and $2.1 million for the three and six month periods ended June 30, 2019, respectively, compared to $1.1 million and $2.1 million for the same periods in 2018. The average balance of investment

Interest and dividends on investment securities was $~~149~~837,000 and $2.9 million for the three and nine month periods ended September 30, 2019, respectively, compared to $973,000 and $3.1 million for the same periods in 2018. The average balance of investment securities was $132.7 million with a tax equivalent average yield of 2.8767% (a non-GAAP measure) for the ~~second~~third quarter of 2019, compared to $~~178~~173.61 million with a tax equivalent average yield of 2.5337% (a non-GAAP measure) for the same period in 2018. The average balance of securities was $~~157~~149.41 million with a tax equivalent average yield of 2.7574% (a non-GAAP measure) for the ~~six~~nine month period ended ~~June~~September 30, 2019, compared to $~~180~~178.61 million with a tax equivalent average yield of 2.4443% (a non-GAAP measure) for the same period in 2018. See the following table for a reconciliation of the non-GAAP measure “tax equivalent average yield on investment securities.”

Tax equivalent average yield on investment securities (Non-GAAP)
	Three Months Ended						~~Six~~Nine Months Ended
	June 30,						June 30,
	September 30,						September 30,
(Dollars in thousands)	2019			2018			2019			2018
Interest on tax exempt investment securities (GAAP)	$	~~1,023~~837		$	~~1,080~~973		$	2,~~050~~887		$	23,~~090~~063
Tax adjustment		48			52			~~106~~161			~~110~~168
Tax equivalent interest on tax-exempt investment securities (Non-GAAP)	$	~~1,071~~885		$	1,~~132~~025		$	23,~~156~~048		$	23,~~200~~231
Average balance of investment securities	$	~~149~~132,~~315~~722		$	~~178~~173,~~644~~080		$	~~157~~149,~~371~~065		$	~~180~~178,~~638~~091
Tax equivalent average yield on investment securities (Non-GAAP)		2.8767	%		2.5337	%		2.7574	%		2.4443	%

Interest on deposits was $2.67 million and $57.18 million for the three and ~~six~~ nine month periods ended ~~June~~September 30, 2019, respectively, compared to $12.70 million and $35.1 million for the same periods in 2018. The average balance of deposits was $~~978~~970.68 million, with an average rate of 1.0709% for the ~~second~~third quarter of 2019, compared to $~~907~~935.87 million, with an average rate of 0.7786% for the same period in 2018. The average balance of deposits was $~~975~~973.38 million, with an average rate of 1.0607% for the ~~six~~nine month period ended ~~June~~September 30, 2019, compared to $~~890~~905.47 million, with an average rate of 0.7075% for the same period in 2018.

Interest on borrowings was $~~387~~373,000 and $~~859,000~~1.2 million for the three and ~~six~~ nine month periods ended ~~June~~September 30, 2019, respectively, compared to $~~480~~450,000 and $1.05 million for the same periods in 2018. The average balance of borrowings was $5251.34 million, with an average rate of 2.9788% for the ~~second~~third quarter of 2019, compared to $8773.70 million, with an average rate of 2.2045% for the same period in 2018. The average balance of borrowings was $5956.36 million, with an average rate of 2.9190% for the ~~six~~nine month period ended ~~June~~September 30, 2019, compared to $9789.84 million, with an average rate of 2.0818% for the same period in 2018.

PROVISION FOR CREDIT LOSSES

To provide for known and inherent losses in the loan portfolios, DNB maintains an allowance for credit losses. Provisions for credit losses are charged against income to increase the allowance when necessary. Loan losses are charged directly against the allowance and recoveries on previously charged-off loans 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 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”). Based on reviews and analyses by regulators, additional allowances may be required in the future.

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 loan review methodology and degree of oversight by DNB’s Board of Directors;

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. New appraisal values we have obtained for existing loans have generally been consistent with trends indicated by Case-Schiller and other indices.

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~~325,000 and $~~300~~625,000 provision made during the three and ~~six~~ nine month periods ended ~~June~~September 30, 2019, respectively, compared to $~~375~~100,000 and $~~750~~850,000 for the same periods in 2018. DNB’s percentage of allowance for credit losses to total loans was 0.7274% at ~~June~~September 30, 2019 compared to 0.71% and 0.7072% at December 31, 2018 and ~~June~~September 30, 2018, respectively. Net charge-offs were $~~303~~447,000, $368,000, and $~~405~~135,000 during the ~~six~~nine months ended ~~June~~September 30, 2019, year ended December 31, 2018, and ~~six~~nine months ended ~~June~~September 30, 2018, respectively. The percentage of net charge-offs to total average loans were 0.0305%, 0.04%, and 0.0502% 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. Management is not aware of any potential problem loans, which were accruing and current at ~~June~~September 30, 2019, 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 increased $~~349,000~~1.3 million during the ~~six~~nine month period ended ~~June~~September 30, 2019. The ratio of the allowance for credit losses as a percentage of loans reflects management’s estimate of the level of inherent losses in the portfolio.

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 June 30, 2019, DNB had $9.0 million of non-performing assets, which included $6.1 million of non-performing loans and $2.8 million of OREO and other repossessed assets. This compares to $10.8 million of non-performing assets at December 31, 2018

As of September 30, 2019, DNB had $9.9 million of non-performing assets, which included $7.1 million of non-performing loans and $2.8 million of OREO and other repossessed assets. This compares to $10.8 million of non-performing assets at December 31, 2018 which included $5.8 million of non-performing loans and $5.1 million 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. 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 cashflow shortfalls, including estimated costs to sell in comparison to the carrying value of the loan. Of the $910.51 million of impaired loans ($57.91 million of non-performing loans, $32.16 million of performing TDRs, and a $521,000 performing ASC 310-30 loan) at ~~June~~ September 30, 2019, $~~717,000~~1.7 million had valuation allowances of $~~161~~307,000 and $8.85 million had no specific allowance. Of the $7.8 million of impaired loans ($5.5 million of non-performing loans, $1.8 million of performing TDRs, and a $514,000 performing ASC 310-30 loan) at December 31, 2018, $1.8 million had valuation allowances of $285,000 and $6.0 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 no valuation was necessary. During the quarter ended ~~June~~September 30, 2019, DNB recognized $~~174~~152,000 in total charge-offs, $~~151~~128,000 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 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 $250,000 or higher, every twelve to twenty-four months, dependent upon management’s assessment of trends in relevant markets and property types. 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 our expected costs to sell the asset.

Analysis of Allowance for Credit Losses

(Dollars in thousands)

	Six Months Ended		Year Ended		Six Months Ended
	Nine Months Ended		Year Ended		Nine Months Ended
	June 30, 2019		December 31, 2018		June 30, 2018
	September 30, 2019		December 31, 2018		September 30, 2018
Beginning balance	$	6,675	$	5,843	$	5,843
Provisions		~~300~~625		1,200		~~750~~850
Charge-offs:
Residential mortgage		-(125)		(178)		(137)
Commercial mortgage		(105)		(249)		(184)
Commercial:
Commercial term		(91115)		(243)		(6479)
Commercial construction		-		-		-
Consumer:
Home equity		(128)		-		-
Other		(1720)		(72)		(4972)
Total charged off		(~~341~~493)		(742)		(~~434~~472)
Recoveries:
Residential mortgage		4		341		26334
Commercial mortgage		78		22		-
Commercial:
Commercial term		2734		4		2
Commercial construction		-		5		-
Consumer:
Home Equity		-		-		-
Other		-		2		12
Total recoveries		3846		374		29338
Ending balance	$	6,~~672~~853	$	6,675	$	6,~~188~~559

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)

		June 30, 2019				December 31, 2018				June 30, 2018
		September 30, 2019				December 31, 2018				September 30, 2018
			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	$	~~133~~123	1110	%	$	161	11	%	$	~~207~~163	11	%
Commercial mortgage		3,~~579~~675	5657			3,647	57			3,~~076~~289	58
Commercial:
Commercial term		1,~~144~~246	19			1,062	18			~~889~~987	15
Commercial construction		~~1,032~~994	8			1,032	8			1,~~355~~068	9
Consumer:
Home equity		~~209~~206	5			190	5			196	6
Other		3946	1			46	1			4948	1
Unallocated		~~536~~563	-			537	-			~~416~~808	-
Total	$	6,~~672~~853	100	%	$	6,675	100	%	$	6,~~188~~559	100	%
Reserve for unfunded loan commitments	$	~~420~~398			$	398			$	~~408~~386

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, mortgage loans, SBA loans and OREO properties. In addition, DNB receives fees for cash management, mortgage banking, remote capture, merchant services, debit cards, safe deposit box rentals and similar activities.

Non-interest income for the three and ~~six~~nine month periods ended ~~June~~September 30, 2019 was $1.35 million and $24.61 million, respectively, compared to $1.34 million and $24.60 million for the same periods in 2018. The $12112,000 increase during the three month period ended ~~June~~September 30, 2019 was primarily due to increases of $121,000 in gain on sale of investment securities, $62,000 in other

~~30, 2019 was primarily due to increases of $22,000 in other~~ fees (mostly Visa interchange fees) and $1714,000 in ~~wealth~~mortgage ~~management~~banking, offset by decreases of $1528,000 in ~~service~~wealth ~~charges (mostly NSF fees)~~management, $1027,000 in gain on ~~sales~~sale of loans, $23,000 in service charges (mostly NSF fees), and $48,000 in ~~mortgage~~gains ~~banking~~from insurance proceeds. The $13125,000 increase during the ~~six~~nine months ended ~~June~~September 30, 2019 was primarily attributable to increases of $27125,000 in ~~wealth~~gain ~~management~~on sale of investment securities, $1981,000 in other fees (mostly Visa interchange fees), and $923,000 in mortgage banking, ~~and $4,000 in gain on sale of investment securities,~~ offset by decreases of $3760,000 in service charges (mostly NSF fees), ~~and~~ $1037,000 in gain on ~~sales~~sale of loans, and $8,000 in gains from insurance proceeds.

NON-INTEREST EXPENSE

Non-interest expense for the three and ~~six~~ nine month periods ended ~~June~~September 30, 2019 was $76.57 million and $1421.85 million, respectively, compared to $76.58 million and $1421.30 million for the same periods in 2018. During the three month period ended ~~June~~September 30, 2019, total non-interest expense decreased by $2837,000 compared to the same period in 2018. The $2837,000 decrease was mainly attributable to decreases of $~~476~~130,000 in ~~salaries~~FDIC ~~and~~insurance ~~employee~~(due ~~expenses~~to ~~(compensation~~a ~~expense~~small ~~for~~bank ~~the~~assessment ~~second~~credit ~~quarter~~applied ofto ~~2018~~offset ~~included~~the Deposit aInsurance ~~one-time~~Fund ~~severance~~(DIF) ~~payment~~Reserve ofratio exceeding 1.38%), $~~434~~107,000 ~~and~~in ~~other~~salaries ~~related~~and ~~costs~~employee ofexpenses ~~$79,000~~(due ~~associated~~to ~~with~~increased anopen ~~internal restructuring~~positions), $~~107~~85,000 in ~~other~~advertising ~~expenses~~and ~~(mostly decreased charge-off expense)~~marketing, $~~103~~73,000 in ~~loss~~professional onand ~~sale~~consulting or(mostly ~~write~~3rd ~~down~~party ofservices ~~OREO~~and legal expenses), $2716,000 in ~~FDIC~~furniture ~~insurance~~and equipment (mostly decreased depreciation expense), and $76,000 in ~~occupancy~~other expenses. These decreases were partially offset by increases of $~~519~~362,000 in transaction costs related to the pending merger with S&T, ~~$113,000 in furniture~~ and ~~equipment (mostly maintenance agreements),~~ $~~21,000 in advertising and marketing, $~~17,000 in PA shares tax~~, $16,000 in professional and consulting (mostly legal expenses), and $6,000 in telecommunications~~. During the ~~six~~nine month period ended ~~June~~September 30, 2019, total non-interest expense increased $~~520~~483,000 compared to the same period in 2018. The increase was primarily due to increases of $~~519~~881,000 in transaction costs relating to the pending merger with S&T, $~~190~~149,000 in ~~professional~~furniture and ~~consulting~~equipment (mostly ~~legal~~maintenance ~~expenses~~agreements), $~~165~~117,000 in ~~furniture~~professional and ~~equipment~~consulting (mostly ~~maintenance~~legal ~~agreements~~expenses), $3552,000 in PA shares tax, $3418,000 in ~~advertising~~occupancy ~~and~~(mostly ~~marketing,~~repairs ~~$21,000~~& inmaintenance ~~occupancy~~and ~~(mostly~~ operating lease expense), $1314,000 in ~~telecommunications, and $10,000 in~~ loss on sale or write down of OREO, and $13,000 in telecommunications. These increases were partially offset by decreases of $~~395~~502,000 in salaries and employee benefits (compensation expense for the second quarter of 2018 included a one-time severance payment of $434,000 and other related costs of $79,000 associated with an internal restructuring), $161,000 ~~costs~~in ~~for~~FDIC ~~2018~~insurance ~~noted~~(due to a credit described above), $4151,000 in ~~other~~advertising ~~expenses~~and marketing, and $3147,000 in ~~FDIC~~other ~~insurance~~expenses.

INCOME TAXES

Income tax expense for the three and ~~six~~ nine month periods ended ~~June~~September 30, 2019 was $~~660~~755,000 and $12.30 million, respectively, compared to $~~436~~629,000 and $1.06 million for the same periods in 2018. The effective tax rate for the three and ~~six~~ nine month periods ended ~~June~~September 30, 2019 was 20.38% and 1920.71%, respectively, compared to 17.52% and 17.97% for the same periods in 2018. The effective tax rate increased during 2019 due to certain transaction costs, which are non-deductible for federal tax purposes. Income tax expense for each period differs from the amount determined at the statutory rate, due to tax-exempt income on loans and investment securities and DNB's ownership of BOLI policies.

ASSET QUALITY

DNB works diligently to improve asset quality by adhering to strict underwriting standards and improving lending policies and procedures. Non-performing assets totaled $9.09 million at ~~June~~September 30, 2019 compared to $10.8 million at December 31, 2018 and $11.95 million at ~~June~~September 30, 2018. Loans acquired in connection with the purchase of ERB have been recorded at fair value, in accordance with GAAP, and are based on an initial estimate of the expected cash flows, including a reduction for estimated credit losses, and without carryover of the respective portfolio’s historical allowance for credit losses. DNB will continually evaluate the loans acquired from ERB for additional impairment as part of our normal allowance review process. 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, loans delinquent over ninety days and still accruing, as well as OREO and other repossessed assets. Non-accrual loans are loans 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 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 consumer purchased chattel 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 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 ~~June~~September 30, 2019, DNB had $1224.92 million of substandard loans. Of the $1224.92 million, $717.01 million are performing and are believed to require supervision and review greater than loans rated pass or special mention; 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, 2018 was $6.3 million. DNB had $15.3 million of special mention loans at June 30, 2019 compared to $7.3 million at December 31, 2018. The increase in special mention loans during the six months ended June 30, 2019 was primarily due to rating

~~downgrades~~loans at December 31, 2018 was $6.3 million. DNB had $6.0 million of special mention loans at September 30, 2019 compared to $7.3 million at December 31, 2018. The decrease in special mention loans during the nine months ended September 30, 2019 was primarily due to rating changes in the portfolio, specifically a decrease in special mention rated loans of $112.03 million ofin commercial ~~mortgage~~construction loans, $~~142~~410,000 ofin ~~residential~~commercial ~~mortgages~~term loans, and $821,000 in home equity loans, offset by ~~upgrades/downgrades~~ increases in special mention rated loans of $~~483,000~~1.2 million in commercial ~~term~~mortgage loans and $~~2.7~~185,000 ~~million~~ in ~~commercial~~residential ~~construction~~mortgage loans. 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)

	June 30, 2019			December 31, 2018			June 30, 2018
	September 30, 2019			December 31, 2018			September 30, 2018
Non-accrual loans:
Residential mortgage	$	~~779~~1,337		$	905		$	1,~~344~~005
Commercial mortgage		~~563~~698			1,307			1,~~593~~561
Commercial:
Commercial term		23,~~026~~203			2,300			2,~~583~~624
Commercial construction		21,~~274~~558			476			~~488~~479
Consumer:
Home equity		143			391			~~498~~631
Other		~~138~~133			167			~~215~~171
Total non-accrual loans		57,~~923~~072			5,546			6,~~721~~471
Loans 90 days past due and still accruing		~~205~~-			233			23-
Total non-performing loans		67,~~128~~072			5,779			6,~~744~~471
Other real estate owned & other repossessed property		2,~~825~~848			5,051			5,~~113~~077
Total non-performing assets	$	89,~~953~~920		$	10,830		$	11,~~857~~548
Asset quality ratios:
Non-performing loans to total loans		0.6677	%		0.62	%		0.7671	%
Non-performing assets to total assets		0.7889			0.94			1.0502
Allowance for credit losses to:
Total loans		0.7274			0.71			0.7072
Non-performing loans		~~108~~96.9			115.5			91101.84

	June 30, 2019
	September 30, 2019
	Pre-Modification		Post-Modification
(Dollars in thousands)	Outstanding Recorded Investment		Outstanding Recorded Investment		Recorded Investment
Residential mortgage	$	2,155	$	2,308	$	2,~~110~~091
Commercial mortgage		992		992		~~950~~945
Commercial term		421		421		~~421~~414
Consumer:
Home equity		148		148		~~136~~134
Other		40		42		3029
Total	$	3,756	$	3,911	$	3,~~647~~613
	December 31, 2018
	Pre-Modification		Post-Modification
(Dollars in thousands)	Outstanding Recorded Investment		Outstanding Recorded Investment		Recorded Investment
Residential mortgage	$	676	$	805	$	630
Commercial mortgage		992		992		962
Consumer:
Home equity		148		148		140
Other		40		42		30
Total	$	1,856	$	1,987	$	1,762

At ~~June~~September 30, 2019, DNB had fifteen TDRs with recorded investment totaling $3,~~647~~613,000, ~~ten~~eight of which are accruing loans in compliance with the terms of the modifications and ~~five~~ seven of which are non-accrual loans. As a result of collateral evaluations, specific reserves and charge-offs have been taken where appropriate. DNB recognized partial charge-offs totaling $151,000 on two residential loans prior to their restructuring and $2,000 on one consumer installment loan after its restructuring. As of ~~June~~September 30, 2019, there were no defaulted TDRs as all TDRs were current with respect to their associated forbearance agreements. There were notwo residential ~~defaults~~mortgages onclassified as TDRs that were moved to non-accrual due to payments being more than 90 days past due during the ~~six~~nine months ended ~~June~~September 30, 2019.

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
	Six Months Ended		Year Ended		Six Months Ended
	Nine Months Ended		Year Ended		Nine Months Ended
(Dollars in thousands)	~~June~~September 30, 2019		December 31, 2018		~~June~~September 30, 2018
Total recorded investment	$	910,~~540~~146	$	7,822	$	98,~~041~~772
Impaired loans with a specific allowance		~~717~~1,664		1,808		~~821~~1,495
Impaired loans without a specific allowance		8,~~823~~482		6,014		87,~~220~~277
Average recorded investment		8,~~371~~814		9,312		9,~~491~~313
Specific allowance allocation		~~161~~307		285		~~194~~341
Total principal and interest collected		~~250~~1,042		204		~~318~~526
Interest income recorded		65102		80		4980

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 liquidity, which totaled $~~121~~87.70 million at ~~June~~September 30, 2019 compared to $97.4 million at December 31, 2018. Liquidity includes investments and restricted stock, Federal funds sold and cash and due from banks, less the amount of securities required to be pledged for certain liabilities. 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 $~~557~~522.43 million at ~~June~~September 30, 2019. 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 ~~June~~September 30, 2019, DNB’s Maximum Borrowing Capacity with the FHLBP was $~~462~~458.35 million. At ~~June~~September 30, 2019, DNB had borrowed $31.2 million and the FHLB had issued letters of credit on DNB's behalf, totaling $50.0 million against its available credit lines. At ~~June~~September 30, 2019, DNB also had available $60.0 million of unsecured federal funds lines of credit with other financial institutions as well as $~~508~~498.49 million of available short or long term funding through several agreements and programs with brokers. Management believes that DNB has adequate resources to meet its short-term and long-term funding requirements.

At ~~June~~September 30, 2019, DNB had $~~198~~189.09 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 $250,000 scheduled to mature in one year or less from ~~June~~September 30, 2019 totaled $5147.35 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 Bank has met the definition of “well capitalized” for regulatory purposes on ~~June~~September 30, 2019. 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 Federal Reserve Bank’s (“FRB”) minimum leverage ratio ~~requirements for bank holding companies and meets other requirements to be considered “well capitalized” (see additional discussion included in Note 17 of DNB’s December 31, 2018 Form 10-K).~~

requirements for bank holding companies and meets other requirements to be considered “well capitalized” (see additional discussion included in Note 17 of DNB’s December 31, 2018 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. Under the final capital rules that became effective on January 1, 2015, there was a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement is being phased in over three years beginning in 2016. DNB must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% to 2.50% by 2019. The capital conservation buffer is 2.50% and 1.875% for 2019 and 2018, respectively.

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
June 30, 2019
September 30, 2019
Total risk-based capital	$	~~129~~132,~~840~~807	14.1576	%	$	7371,~~427~~967	8.00	%		N/A	N/A
Common Equity Tier 1 capital		~~103~~106,~~998~~806	11.3387			4140,~~303~~481	4.50			N/A	N/A
Tier 1 risk-based capital		~~112~~115,~~998~~806	12.3187			5553,~~070~~975	6.00			N/A	N/A
Tier 1 (leverage) capital		~~112~~115,~~998~~806	910.8919			45,~~700~~449	4.00			N/A	N/A
December 31, 2018
Total risk-based capital	$	124,769	13.61	%	$	73,538	8.00	%		N/A	N/A
Common equity tier 1 capital		98,949	10.79			41,365	4.50			N/A	N/A
Tier 1 risk-based capital		107,949	11.77			55,153	6.00			N/A	N/A
Tier 1 (leverage) capital		107,949	9.48			45,557	4.00			N/A	N/A
DNB First, N.A.
June 30, 2019
September 30, 2019
Total risk-based capital	$	~~128~~131,~~208~~200	1314.9961	%	$	7371,~~288~~829	8.00	%	$	9189,~~610~~786	10.00	%
Common Equity Tier 1 capital		~~121~~123,~~116~~949	13.2280			4140,~~224~~404	4.50			5958,~~546~~361	6.50
Tier 1 risk-based capital		~~121~~123,~~116~~949	13.2280			5453,~~966~~872	6.00			7371,~~288~~829	8.00
Tier 1 (leverage) capital		~~121~~123,~~116~~949	10.6192			45,~~646~~396	4.00			5756,~~058~~745	5.00
December 31, 2018
Total risk-based capital	$	123,239	13.46	%	$	73,399	8.00	%	$	91,748	10.00	%
Common equity tier 1 capital		116,169	12.69			41,287	4.50			59,636	6.50
Tier 1 risk-based capital		116,169	12.69			55,049	6.00			73,399	8.00
Tier 1 (leverage) capital		116,169	10.21			45,503	4.00			56,879	5.00
*Does not include capital conservation buffer of 2.5% and 1.875% for June 30, 2019 and December 31, 2018, respectively.

In addition, 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 ~~June~~September 30, 2019 and December 31, 2018, 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 ~~June~~September 30, 2019 and December 31, 2018.

(Dollars in thousands)		~~June~~September 30, 2019						December 31, 2018
Change in rates		Flat		-200bp		+200bp		Flat		-200bp		+200bp
EVE	$	~~148~~138,~~474~~738	$	~~138~~137,~~915~~653	$	~~147~~138,~~575~~746	$	153,190	$	148,270	$	145,420
Change				(91,~~559~~085)		~~(899)~~8				(4,920)		(7,770)
Change as % of assets				(0.81%)		(0.10%)				(0.4%)		(0.7%)
Change as % of PV equity				(60.48%)		(0.60%)				(3.2%)		(5.1%)

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 ~~June~~September 30, 2019, 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 ~~June~~September 30, 2019, 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

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in “Risk Factors” included within the 2018 Form 10-K. The risks described therein are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

There were no unregistered sales of equity securities during the quarter ended ~~June~~September 30, 2019. The following table provides information on repurchases by DNB of its common stock in each month of the quarter ended ~~June~~September 30, 2019:

				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)
April 1, 2019 – April 30, 2019	-	$	-	-	$	63,016
July 1, 2019 – July 31, 2019	-	$	-	-	$	63,016
May 1, 2019 – May 31, 2019	-		-	-	$	63,016
August 1, 2019 – August 31, 2019	-		-	-	$	63,016
June 1, 2019 – June 30, 2019	-		-	-	$	63,016
September 1, 2019 – September 30, 2019	-		-	-	$	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
2.1	Agreement and Plan of Merger by and between DNB Financial Corporation and S&T Bancorp, Inc., dated as of June 5, 2019, filed as Exhibit 2.1 to Form 8-K on June 5, 2019 and incorporated herein by reference.
2.2	Agreement and Plan of Merger by and between DNB Financial Corporation and East River Bank, dated as of April 4, 2016, filed as Exhibit 2.1 to Form 8-K on April 5, 2016 and incorporated herein by reference.
3.1	Amended and Restated Articles of Incorporation, as amended effective June 30, 2017, filed as Exhibit 3.1 to Form 8-K on July 3, 2017 and incorporated herein by reference.
3.2	Bylaws of the Registrant as amended January 27, 2016, filed ~~herewith~~as Exhibit 3.2 to Form 10-Q on August 8, 2019 and incorporated herein by reference.
3.3	Amendment to Bylaws of DNB Financial Corporation, dated June 5, 2019, filed ~~herewith~~as Exhibit 3.3 to Form 10-Q on August 8, 2019 and incorporated herein by reference.
31.1	Rule 13a-14(a)/15d-14 (a) Certification of Chief Executive Officer, filed herewith.
31.2	Rule 13a-14(a)/15d-14 (a) Certification of Chief Financial Officer, filed herewith.
32.1	Section 1350 Certification of Chief Executive Officer, filed herewith.
32.2	Section 1350 Certification of Chief Financial Officer, filed herewith.
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.

		DNB FINANCIAL CORPORATION
August 5, 2019	BY:	/s/ William J. Hieb
November 1, 2019	BY:	/s/ William J. Hieb
		William J. Hieb, Chief Executive Officer, President and Director
August 5, 2019	BY:	/s/ Gerald F. Sopp
November 1, 2019	BY:	/s/ Gerald F. Sopp
		Gerald F. Sopp, Chief Financial Officer and Executive Vice President

Exhibit Index

Exhibit Number	Description
2.1	Agreement and Plan of Merger by and between DNB Financial Corporation and S&T Bancorp, Inc., dated as of June 5, 2019, filed as Exhibit 2.1 to Form 8-K on June 5, 2019 and incorporated herein by reference.
2.2	Agreement and Plan of Merger by and between DNB Financial Corporation and East River Bank, dated as of April 4, 2016, filed as Exhibit 2.1 to Form 8-K on April 5, 2016 and incorporated herein by reference.
3.1	Amended and Restated Articles of Incorporation, as amended effective June 30, 2017, filed as Exhibit 3.1 to Form 8-K on July 3, 2017 and incorporated herein by reference.
3.2	Bylaws of the Registrant as amended January 27, 2016, filed ~~herewith~~as Exhibit 3.2 to Form 10-Q on August 8, 2019 and incorporated herein by reference.
3.3	Amendment to Bylaws of DNB Financial Corporation, dated June 5, 2019, filed ~~herewith~~as Exhibit 3.3 to Form 10-Q on August 8, 2019 and incorporated herein by reference.
31.1	Rule 13a-14(a)/15d-14 (a) Certification of Chief Executive Officer, filed herewith.
31.2	Rule 13a-14(a)/15d-14 (a) Certification of Chief Financial Officer, filed herewith.
32.1	Section 1350 Certification of Chief Executive Officer, filed herewith.
32.2	Section 1350 Certification of Chief Financial Officer, filed herewith.
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

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