UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________________

FORM 10-Q

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

For the quarterly period ended: ~~September 30, 2016~~March 31, 2017

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

For the transition period from ________________ to _____________

Commission File Number: 1-34242

DNB Financial Corporation

(Exact name of registrant as specified in its charter)

Pennsylvania 23-2222567

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

incorporation or organization)

4 Brandywine Avenue - Downingtown, PA 19335

(Address of principal executive offices and Zip Code)

(610) 269-1040

(Registrant's telephone number, including area code)

Not Applicable

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

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


Yes ☒		No ☐

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


Yes ☒		No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, ~~or a~~ smaller reporting company, or an emerging growth company. See ~~definition~~the definitions of ~~“accelerated filer”,~~ “large accelerated filer”, ~~and~~“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 (Do not check if a smaller reporting company)	☐	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)

~~4,229,331~~4,257,942 (Shares Outstanding as of ~~November 4, 2016)~~May 12, 2017)

DNB FINANCIAL CORPORATION AND SUBSIDIARY

INDEX


	PART I - FINANCIAL INFORMATION	PAGE NO.

ITEM 1.	FINANCIAL STATEMENTS (Unaudited):

	CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
	~~September 30, 2016~~March 31, 2017 and December 31, ~~2015~~2016	3

	CONSOLIDATED STATEMENTS OF INCOME
	Three Months Ended March 31, 2017 and ~~Nine-Months Ended September 30,~~ 2016 ~~and 2015~~	4

	CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~(LOSS)~~ INCOME
	Three Months Ended March 31, 2017 and ~~Nine-Months Ended September 30,~~ 2016 ~~and 2015~~	5

	CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY	6
	~~Nine~~Three Months Ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~

	CONSOLIDATED STATEMENTS OF CASH FLOWS
	~~Nine~~Three Months Ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~	7

	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	8

ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2930


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	46

ITEM 4.	CONTROLS AND PROCEDURES	46

	PART II - OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	46

ITEM 1A.	RISK FACTORS	46

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	46

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	47

ITEM 4.	MINE SAFETY DISCLOSURES	47

ITEM 5.	OTHER INFORMATION	47

ITEM 6.	EXHIBITS	47

SIGNATURES		48

EXHIBIT INDEX

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

DNB Financial Corporation and Subsidiary

Consolidated Statements of Financial Condition (Unaudited)



	September 30,		December 31,		March 31,		December 31,
(Dollars in thousands, except share and per share data)	2016		2015		2017		2016
Assets
Cash and due from banks	$	30,442	$	21,119	$	44,068	$	22,103
Cash and cash equivalents		30,442		21,119		44,068		22,103
Available-for-sale investment securities at fair value (amortized cost of $121,492 and $153,559)		121,688		152,379
Held-to-maturity investment securities (fair value of $75,111 and $68,431)		73,789		67,829
Available-for-sale investment securities at fair value (amortized cost of $111,779 and $116,830)						110,284		115,184
Held-to-maturity investment securities (fair value of $67,637 and $66,124)						68,138		67,022
Total investment securities		195,477		220,208		178,422		182,206
Loans held for sale						200		-
Loans		509,475		481,758		816,363		817,529
Allowance for credit losses		(5,303)		(4,935)		(5,418)		(5,373)
Net loans		504,172		476,823		810,945		812,156
Restricted stock		3,623		3,447		5,400		5,381
Office property and equipment, net		9,033		6,806		9,203		9,243
Accrued interest receivable		2,639		2,410		3,590		3,567
Other real estate owned & other repossessed property		2,939		2,581		5,000		2,767
Bank owned life insurance (BOLI)		9,492		9,326		9,379		9,552
Core deposit intangible		56		66		511		537
Goodwill						15,525		15,590
Net deferred taxes		3,592		3,733		4,898		5,250
Other assets		8,807		2,299		2,798		2,333
Total assets	$	770,272	$	748,818	$	1,089,939	$	1,070,685
Liabilities and Stockholders’ Equity
Liabilities
Non-interest-bearing deposits	$	146,731	$	125,581	$	176,199	$	173,467
Interest-bearing deposits:
NOW		169,400		185,973		218,133		224,219
Money market		160,312		137,555		221,356		184,783
Savings		73,867		72,660		84,700		86,176
Time		71,920		66,018		177,335		187,256
Brokered deposits		23,313		18,488		28,045		29,286
Total deposits		645,543		606,275		905,768		885,187
Federal Home Loan Bank of Pittsburgh (FHLBP) advances		20,000		30,000		50,972		55,332
Repurchase agreements		19,483		32,416		11,474		11,889
Junior subordinated debentures		9,279		9,279		9,279		9,279
Subordinated debt		9,750		9,750		9,750		9,750
Other borrowings		431		464		406		418
Total borrowings		58,943		81,909		81,881		86,668
Accrued interest payable		329		345		491		534
Other liabilities		6,240		4,801		4,511		3,456
Total liabilities		711,055		693,330		992,651		975,845
Stockholders’ Equity
Preferred stock, $10.00 par value;
1,000,000 shares authorized; $1,000 liquidation preference per share; 0 and 0 issued, respectively		-		-
Common stock, $1.00 par value;
10,000,000 shares authorized; 2,951,128 and 2,933,049 issued, respectively; 2,853,434 and 2,823,840 outstanding, respectively		2,975		2,955
Treasury stock, at cost; 97,694 and 109,209 shares, respectively		(1,805)		(2,015)
10,000,000 shares authorized; 4,340,975 and 4,334,352 issued, respectively; 4,251,664 and 4,240,778 outstanding, respectively						4,362		4,351
Treasury stock, at cost; 89,311 and 93,574 shares, respectively						(1,653)		(1,730)
Surplus		35,614		35,097		69,089		68,973
Retained earnings		23,504		21,436		27,664		25,520
Accumulated other comprehensive loss		(1,071)		(1,985)		(2,174)		(2,274)
Total stockholders’ equity		59,217		55,488		97,288		94,840
Total liabilities and stockholders’ equity	$	770,272	$	748,818	$	1,089,939	$	1,070,685



	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(Dollars in thousands, except per share data)	2016		2015		2016		2015		2017		2016
Interest Income:
Interest and fees on loans	$	5,218	$	5,083	$	15,377	$	15,006	$	9,521	$	5,068
Interest and dividends on investment securities:
Taxable		716		714		2,150		2,208		697		682
Exempt from federal taxes		316		354		944		1,042		242		334
Interest on cash and cash equivalents		27		10		91		32		34		21
Total interest and dividend income		6,277		6,161		18,562		18,288		10,494		6,105
Interest Expense:
Interest on NOW, money market and savings		230		148		588		450		484		164
Interest on time deposits		139		84		396		291		301		117
Interest on brokered deposits		81		68		214		118		92		62
Interest on FHLB advances		92		198		276		589		169		94
Interest on repurchase agreements		9		16		30		35		6		11
Interest on junior subordinated debentures		89		77		254		224		92		81
Interest on subordinated debt		104		103		311		237		104		104
Interest on other borrowings		16		17		49		51		14		17
Total interest expense		760		711		2,118		1,995		1,262		650
Net interest income		5,517		5,450		16,444		16,293		9,232		5,455
Provision for credit losses		100		100		630		815		325		330
Net interest income after provision for credit losses		5,417		5,350		15,814		15,478		8,907		5,125
Non-interest Income:
Service charges		280		292		827		860		363		307
Wealth management		393		317		1,231		1,091		374		397
Mortgage banking		76		38		189		127		36		32
Increase in cash surrender value of BOLI		56		57		166		169		55		55
Gain on sale of investment securities, net		197		10		431		74		-		31
Gain on sale of loans		-		-		39		416		-		39
Gains from insurance proceeds		30		-		1,180		-		80		1,150
Other fees		337		323		1,022		973		398		318
Total non-interest income		1,369		1,037		5,085		3,710		1,306		2,329
Non-interest Expense:
Salaries and employee benefits		2,817		2,615		8,636		7,897		3,641		3,126
Furniture and equipment		422		303		1,093		908		496		329
Occupancy		524		431		1,459		1,500		719		468
Professional and consulting		306		317		948		906		393		497
Advertising and marketing		111		141		460		480		166		183
Printing and supplies		36		35		129		122		50		33
FDIC insurance		73		129		323		376		195		129
PA shares tax		157		151		476		452		225		162
Telecommunications		63		63		185		184		90		61
Postage		28		20		70		65		35		21
Loss on sale or write down of OREO, net		160		154		164		154
Gain on sale or write down of OREO, net										(1)		-
Due diligence and merger expense		1,498		-		1,961		-		51		-
Other expenses		509		400		1,390		1,263		685		409
Total non-interest expense		6,704		4,759		17,294		14,307		6,745		5,418
Income before income tax expense		82		1,628		3,605		4,881		3,468		2,036
Income tax expense		81		359		939		1,125		1,027		480
Net income	$	1	$	1,269	$	2,666	$	3,756	$	2,441	$	1,556
Preferred stock dividends and accretion of discount		-		8		-		42
Net income available to common shareholders	$	1	$	1,261	$	2,666	$	3,714
Earnings per common share:
Basic	$	0.00	$	0.45	$	0.94	$	1.33	$	0.57	$	0.55
Diluted	$	0.00	$	0.44	$	0.93	$	1.31	$	0.57	$	0.54
Cash dividends per common share	$	0.07	$	0.07	$	0.21	$	0.21	$	0.07	$	0.07
Weighted average common shares outstanding:
Basic	2,853,080		2,806,549		2,844,780		2,798,360		4,246,593		2,832,521
Diluted	2,885,799		2,852,237		2,879,240		2,844,319		4,274,209		2,869,119

See accompanying notes to unaudited consolidated financial ~~statement.s~~statements.



	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(Dollars in thousands)	2016		2015		2016		2015		2017		2016
Net income	$	1	$	1,269	$	2,666	$	3,756	$	2,441	$	1,556
Other Comprehensive (Loss) Income:
Unrealized holding (losses) gains arising during the period
Other Comprehensive Income:
Unrealized holding gains arising during the period
Before tax amount		(288)		767		1,786		714		151		1,469
Tax effect		99		(261)		(607)		(243)		(51)		(499)
		(189)		506		1,179		471		100		970
Accretion of discount on AFS to HTM reclassification(1)
Before tax amount		6		2		9		6		1		2
Tax effect(2)		(2)		(1)		(3)		(2)		(1)		(1)
		4		1		6		4		-		1
Less reclassification for gains included in net income
Less reclassification for gains on sales of AFS investment securities included in net income(3)
Before tax amount		(176)		(10)		(410)		(74)		-		(31)
Tax effect(2)		59		4		139		25		-		10
		(117)		(6)		(271)		(49)		-		(21)
Total other comprehensive (loss) income		(302)		501		914		426
Total comprehensive (loss) income	$	(301)	$	1,770	$	3,580	$	4,182
Total other comprehensive income										100		950
Total comprehensive income									$	2,541	$	2,506
(1) Amounts are included in interest and dividends on investment securities in the consolidated statements of income.	(1) Amounts are included in interest and dividends on investment securities in the consolidated statements of income.								(1) Amounts are included in interest and dividends on investment securities in the consolidated statements of income.
(2) Amounts are included in income tax expense in the consolidated statements of (loss) income.
(2) Amounts are included in income tax expense in the consolidated statements of income.									(2) Amounts are included in income tax expense in the consolidated statements of income.
(3) Amounts are included in "Gains on sale of investment securities, net" in the consolidated statements of income.									(3) Amounts are included in "Gains on sale of investment securities, net" in the consolidated statements of income.

Accumulated

Other

Preferred
Common
Treasury

Retained
Comprehensive

(Dollars in thousands)
Stock
Stock
Stock
Surplus
Earnings
Loss
Total
Balance at January 1, 2016
$
-
$
2,955
$
(2,015)
$
35,097
$
21,436
$
(1,985)
$
55,488
Net income for nine months ended September 30, 2016

-

-

-

-

2,666

-

2,666
Other comprehensive income

-

-

-

-

-

914

914
Restricted stock compensation expense (18,079 shares vested)

-

36

-

765

-

-

801
Taxes on share award vest

-

(16)

-

(421)

-

-

(437)
Tax benefit for restricted stock vest

-

-

-

64

-

-

64
Cash dividends - common ($0.21 per share)

-

-

-

-

(598)

-

(598)
Sale of treasury shares to 401(k) (7,111 shares)

-

-

130

68

-

-

198
Sale of treasury shares to deferred comp. plan (4,404 shares)

-

-

80

41

-

-

121
Balance at September 30, 2016
$
-
$
2,975
$
(1,805)
$
35,614
$
23,504
$
(1,071)
$
59,217



									Accumulated
									Other
	Common		Treasury				Retained		Comprehensive
(Dollars in thousands)	Stock		Stock		Surplus		Earnings		Loss		Total
Balance at January 1, 2017	$	4,351	$	(1,730)	$	68,973	$	25,520	$	(2,274)	$	94,840
Net income for three months ended March 31, 2017		-		-		-		2,441		-		2,441
Other comprehensive income		-		-		-		-		100		100
Restricted stock compensation expense		4		-		103		-		-		107
Exercise of stock options (6,623 shares)		7		-		(7)		-		-		-
Taxes on exercise of stock options		-		-		(135)		-		-		(135)
Tax benefit for stock option exercises		-		-		110		-		-		110
Cash dividends - common ($0.07 per share)		-		-		-		(297)		-		(297)
Sale of treasury shares to 401(k) (2,960 shares)		-		54		31		-		-		85
Sale of treasury shares to deferred comp. plan (1,303 shares)		-		23		14		-		-		37
Balance at March 31, 2017	$	4,362	$	(1,653)	$	69,089	$	27,664	$	(2,174)	$	97,288

Accumulated

Other

Preferred
Common
Treasury

Retained
Comprehensive

(Dollars in thousands)
Stock
Stock
Stock
Surplus
Earnings
Loss
Total
Balance at January 1, 2015
$
13,000
$
2,931
$
(2,301)
$
34,745
$
17,132
$
(1,599)
$
63,908
Net income for nine months ended September 30, 2015

-

-

-

-

3,756

-

3,756
Other comprehensive income

-

-

-

-

-

426

426
Redemption of preferred stock (9,750 shares)

(9,750)

-

-

-

-

-

(9,750)
Restricted stock compensation expense

-

14

-

236

-

-

250
Exercise of stock options (95,834 shares)

-

16

-

247

-

-

263
Taxes on stock option exercise and share award vest

-

-

-

(153)

-

-

(153)
Cash dividends - common ($0.21 per share)

-

-

-

-

(587)

-

(587)
Cash dividends SBLF preferred

-

-

-

-

(42)

-

(42)
Sale of treasury shares to 401(k) (8,280 shares)

-

-

151

49

-

-

200
Sale of treasury shares to deferred comp. plan (4,029 shares)

-

-

74

23

-

-

97
Balance at September 30, 2015
$
3,250
$
2,961
$
(2,076)
$
35,147
$
20,259
$
(1,173)
$
58,368



									Accumulated
									Other
	Common		Treasury				Retained		Comprehensive
(Dollars in thousands)	Stock		Stock		Surplus		Earnings		Loss		Total
Balance at January 1, 2016	$	2,955	$	(2,015)	$	35,097	$	21,436	$	(1,985)	$	55,488
Net income for three months ended March 31, 2016		-		-		-		1,556		-		1,556
Other comprehensive income		-		-		-		-		950		950
Restricted stock compensation expense (18,079 shares vested)		29		-		631		-		-		660
Taxes on share award vest		(15)		-		(421)		-		-		(436)
Tax benefit for restricted stock vest		-		-		64		-		-		64
Cash dividends - common ($0.07 per share)		-		-		-		(199)		-		(199)
Sale of treasury shares to 401(k) (2,040 shares)		-		37		28		-		-		65
Sale of treasury shares to deferred comp. plan (1,014 shares)		-		18		14		-		-		32
Balance at March 31, 2016	$	2,969	$	(1,960)	$	35,413	$	22,793	$	(1,035)	$	58,180



	Nine Months Ended
	September 30,				Three Months Ended March 31,
(Dollars in thousands)	2016		2015		2017		2016
Cash Flows From Operating Activities:
Net income	$	2,666	$	3,756	$	2,441	$	1,556
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		1,178		1,385		427		361
Provision for credit losses		630		815		325		330
Stock based compensation		801		250		107		660
Net gain on sale of securities		(431)		(74)		-		(31)
Net loss on sale and write down of OREO and other repossessed property		164		154
Net gain on sale and write down of OREO and other repossessed property						(1)		-
Death benefit proceeds						308		-
Gain on insurance proceeds						(80)		(1,150)
Earnings from investment in BOLI		(166)		(169)		(55)		(55)
Deferred tax benefit		(330)		(285)
Deferred tax expense						301		298
Proceeds from sales of mortgage loans						1,175		889
Mortgage loans originated for sale						(1,339)		(1,216)
Mortgage banking income						(36)		(32)
Proceeds from sales of loans		8,725		14,332		-		525
Loans originated for sale		(8,497)		(13,172)		-		(486)
Gain on sale of loans and mortgage banking income		(228)		(543)
Write-off of property and equipment		-		690
Gain on sale of loans						-		(39)
Increase in accrued interest receivable		(229)		(289)		(23)		(159)
Increase in other assets		(6,505)		(859)		(465)		(271)
Decrease in accrued interest payable		(16)		(29)		(43)		(32)
Increase (decrease) in other liabilities		1,439		(245)		1,055		(53)
Net Cash (Used in) Provided By Operating Activities		(799)		5,717
Net Cash Provided by Operating Activities						4,097		1,095
Cash Flows From Investing Activities:
Activity in available-for-sale securities:
Sales		43,913		17,969		-		12,118
Maturities, repayments and calls		50,660		39,982		4,921		8,867
Purchases		(62,646)		(47,929)		-		(8,687)
Activity in held-to-maturity securities:
Sales		757		-
Maturities, repayments and calls		6,864		1,452		312		2,194
Purchases		(13,507)		(7,209)		(1,407)		-
Net increase in restricted stock		(176)		(377)
Net (increase) decrease in restricted stock						(19)		281
Net increase in loans		(27,979)		(17,273)		(1,268)		(7,701)
Proceeds from insurance						-		1,150
Purchases of property and equipment		(2,892)		(280)		(252)		(1,206)
Costs capitalized in OREO and other repossessed property		(954)		-		(14)		(315)
Proceeds from sale of OREO and other repossessed property		432		-		1		284
Net Cash Used in Investing Activities		(5,528)		(13,665)
Net Cash Provided by Investing Activities						2,274		6,985
Cash Flows From Financing Activities:
Net increase in deposits		39,268		3,375		20,581		30,780
Repayment of FHLBP advances		(10,000)		-		(12,208)		(10,000)
Net (decrease) increase in repurchase agreements		(12,933)		11,280
Proceeds from issuance of subordinated debt		-		9,750
Funding of FHLBP advances						7,848		-
Net decrease in repurchase agreements						(415)		(10,755)
Repayment of other borrowings		(33)		(30)		(12)		(10)
Dividends paid		(598)		(629)		(297)		(199)
Proceeds from the exercise of stock options		-		263
Taxes on exercise of stock options		(437)		(153)		(135)		(436)
Tax benefit for restricted stock vest		64		-
Redemption of preferred stock		-		(9,750)
Tax benefit for stock option exercises						110		64
Sale of treasury stock		319		297		122		97
Net Cash Provided by Financing Activities		15,650		14,403		15,594		9,541
Net Change in Cash and Cash Equivalents		9,323		6,455		21,965		17,621
Cash and Cash Equivalents at Beginning of Period		21,119		12,504		22,103		21,119
Cash and Cash Equivalents at End of Period	$	30,442	$	18,959	$	44,068	$	38,740
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest	$	2,134	$	2,024	$	1,305	$	682
Income taxes		875		1,702		225		150
Supplemental Disclosure of Non-cash Flow Information:
Transfers from loans to real estate owned and other repossessed property		-		1,488		2,219		-

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 ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 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, ~~2015.~~2016.

Subsequent Events-- Management has evaluated events and transactions occurring subsequent to ~~September 30, 2016~~March 31, 2017 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.

~~East River Bank Acquisition~~

Effective October 1, 2016, DNB completed its previously announced merger (the "Merger") with East River Bank (“ERB”). Pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated as of April 4, 2016, at the effective time of the Merger, ERB merged with and into DNB First, N.A., a wholly owned subsidiary of DNB.

ERB was a locally-managed institution, headquartered in Philadelphia, Pennsylvania with three locations in Philadelphia. With this acquisition, DNB will have 15 locations in Chester, Delaware and Philadelphia Counties, Pennsylvania. As of June 30, 2016, ERB had approximately $306.8 million in loans, $229.0 million in deposits and $320.4 million in total assets. In accordance with the terms of the Merger Agreement, holders of East River Bank common shares received, in aggregate, $6.7 million in cash and 1,368,611 shares or approximately 32% of DNB’s outstanding common stock. The transaction was valued at $47.5 million based on DNB’s September 30, 2016 closing share price of $28.42 as quoted on NASDAQ. The results of the combined entity’s operations will be included in DNB’s Consolidated Financial Statements from the date of acquisition.

The acquisition of ERB will be accounted for as a business combination using the acquisition method of accounting, which includes estimating the fair value of assets acquired, liabilities assumed and consideration paid as of the acquisition date. These preliminary estimates will be completed during the fourth quarter of 2016 and will be subject to adjustments during the up to one year measurement period after the acquisition.

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, the FASB issued ASU Nos. 2016-10, 2016-12 and 2016-20 that provide additional guidance related to the identification of performance obligations within a contract, assessing collectability, contract costs, and other technical corrections and improvements. ASU 2014-09 will become effective for the Company for the annual period beginning after December 15, 2017 and for interim periods within the annual period. ASU 2014-09 allows for either full retrospective or modified retrospective adoption. DNB is evaluating the anticipated effects of these ASUs on the Consolidated Financial Statements and related disclosures. DNB is in the process of determining the revenue streams that are in the scope of these updates. Preliminary results indicate that certain noninterest income financial statement line items, including service charges on deposit accounts, card fees, other charges and fees, investment banking income, trust and investment management income, retail investment services, and other noninterest income, contain revenue streams that are in scope of these updates. Preliminary findings indicate that there may be some changes in the presentation of certain revenues and expenses based on the principal versus agent guidance within these updates; the materiality of these changes is still being assessed. DNB plans to adopt the standards beginning January 1, 2018 and expects to use the modified retrospective method of adoption.

DNB adopted ASU 2015-16, Business Combinations (Topic 805): 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 does not anticipate a material impact to the consolidated financial statements at this time.

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. The adoption of this update is not expected to have a material impact on DNB’s consolidated financial position or results of operations.

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 ~~is currently evaluating~~has evaluated the provisions of ASU 2016-02 to determine the potential impact of the ~~pending adoption~~new standard and has determined that it is not expected to have a material impact on DNB’s financial position, results of operations or cash flows. DNB has determined that the provisions of ASU No. 2016-02 may result in an increase in assets to recognize the present value of the ~~ASU~~lease obligations with a corresponding increase in liabilities. DNB is still in the process of determining the impact on ~~its consolidated~~DNB’s financial ~~statements.~~position, results of operations or cash flows.

In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, this ASU is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods therein. Accordingly, effective January of 2017, DNB ~~is currently evaluating~~adopted the ~~impact~~pronouncement. Adoption of ~~this ASU on its~~the new pronouncement was immaterial to DNB’s consolidated financial ~~statements and disclosures.~~statements.

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. While DNB is currently in the process of evaluating the impact of ~~this ASU~~the amended guidance on its consolidated financial statements, it currently expects the ALLL to increase upon adoption given that the allowance will be required to cover the full remaining expected life of the portfolio upon adoption, rather than the incurred loss model under current U.S. GAAP. The extent of this increase is still being evaluated and ~~disclosures.~~will depend on economic conditions and the composition of DNB’s loan portfolio at the time of adoption.

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. DNB ~~is currently assessing~~has evaluated the impact that this guidance will have on its consolidated financial statements ~~but does not expect~~and has determined that the guidance towill not have a material impact on DNB's consolidated financial statements.

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. The adoption of this update is not expected to have a material impact on DNB’s consolidated financial position or results of operations.

In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715)”, which requires employers that offer or maintain defined benefit plans to disaggregate the service component from the other components of net benefit cost and provides guidance on presentation of the service component and the other components of net benefit cost in the statement of operations. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. DNB is currently evaluating the potential impact of this standard on its consolidated financial statements. However, because the Pension plan has been frozen to new accruals since December 31, 2003 (and thus, generated no service cost in any subsequent year), DNB does not anticipate any impact to the consolidated financial statements.

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

NOTE 2: INVESTMENT SECURITIES

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



			September 30, 2016									March 31, 2017
	Amortized			Unrealized						Amortized			Unrealized		Unrealized
(Dollars in thousands)	Cost			Gains		Losses		Fair Value		Cost			Gains		Losses		Fair Value
Held To Maturity
US Government agency obligations	$	8,161		$	480	$	-	$	8,641	$	8,288		$	295	$	-	$	8,583
Government Sponsored Entities (GSE) mortgage-backed securities		1,545			65		-		1,610		1,347			35		-		1,382
Corporate bonds		12,854			414		(6)		13,262		14,139			249		(23)		14,365
Collateralized mortgage obligations GSE		2,148			30		-		2,178		1,806			3		(20)		1,789��
State and municipal taxable		1,009			40		-		1,049		1,008			-		(1)		1,007
State and municipal tax-exempt		48,072			313		(14)		48,371		41,550			40		(1,079)		40,511
Total	$	73,789		$	1,342	$	(20)	$	75,111	$	68,138		$	622	$	(1,123)	$	67,637

Available For Sale
US Government agency obligations	$	52,436		$	121	$	(15)	$	52,542	$	49,423		$	6	$	(145)	$	49,284
GSE mortgage-backed securities		32,605			236		-		32,841		29,640			-		(643)		28,997
Collateralized mortgage obligations GSE		13,834			28		(107)		13,755		12,190			5		(373)		11,822
Corporate bonds		17,522			69		(140)		17,451		15,427			7		(233)		15,201
State and municipal tax-exempt		5,095			8		(4)		5,099		5,073			-		(119)		4,954
Asset-backed security											26			-		-		26
Total	$	121,492		$	462	$	(266)	$	121,688	$	111,779		$	18	$	(1,513)	$	110,284



			December 31, 2015									December 31, 2016
	Amortized			Unrealized						Amortized			Unrealized		Unrealized
(Dollars in thousands)	Cost			Gains		Losses		Fair Value		Cost			Gains		Losses		Fair Value
Held To Maturity
US Government agency obligations	$	7,973		$	320	$	-	$	8,293	$	8,224		$	309	$	-	$	8,533
Government Sponsored Entities (GSE) mortgage-backed securities		2,759			83		-		2,842		1,440			38		-		1,478
Corporate bonds		11,518			234		(42)		11,710		12,825			230		(63)		12,992
Collateralized mortgage obligations GSE		2,623			9		(26)		2,606		1,966			2		(22)		1,946
State and municipal taxable											1,008			6		-		1,014
State and municipal tax-exempt		42,956			300		(276)		42,980		41,559			8		(1,406)		40,161
Total	$	67,829		$	946	$	(344)	$	68,431	$	67,022		$	593	$	(1,491)	$	66,124

Available For Sale
US Government agency obligations	$	58,460		$	-	$	(252)	$	58,208	$	52,428		$	31	$	(150)	$	52,309
GSE mortgage-backed securities		40,663			13		(325)		40,351		30,861			2		(723)		30,140
Collateralized mortgage obligations GSE		16,241			3		(438)		15,806		12,957			3		(387)		12,573
Corporate bonds		20,921			-		(350)		20,571		15,474			5		(299)		15,180
State and municipal tax-exempt		17,274			180		(11)		17,443		5,084			-		(128)		4,956
Asset-backed security											26			-		-		26
Total	$	153,559		$	196	$	(1,376)	$	152,379	$	116,830		$	41	$	(1,687)	$	115,184

Included in unrealized losses are market losses on securities that have been in a continuous unrealized loss position for twelve months or more and those securities that have been in a continuous unrealized loss position for less than twelve months. The following table details the aggregate unrealized losses and aggregate fair value of the underlying securities whose fair values are below their amortized cost at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015.~~2016.



		September 30, 2016											March 31, 2017
					Fair Value		Unrealized		Fair Value		Unrealized						Fair Value		Unrealized		Fair Value		Unrealized
			Total		Impaired		Loss		Impaired		Loss				Total		Impaired		Loss		Impaired		Loss
	Total		Unrealized		Less Than				More Than				Total		Unrealized		Less Than		Less Than		More Than		More Than
(Dollars in thousands)	Fair Value		Loss		12 Months								Fair Value		Loss		12 Months		12 Months		12 Months		12 Months
Held To Maturity
Corporate bonds	$	1,988	$	(6)	$	-	$	-	$	1,988	$	(6)	$	2,472	$	(23)	$	489	$	(11)	$	1,983	$	(12)
Collateralized mortgage obligations GSE		325		-		325		-		-		-		1,019		(20)		1,019		(20)		-		-
State and municipal taxable														1,007		(1)		1,007		(1)		-		-
State and municipal tax-exempt		6,202		(14)		6,202		(14)		-		-		25,832		(1,079)		25,832		(1,079)		-		-
Total	$	8,515	$	(20)	$	6,527	$	(14)	$	1,988	$	(6)	$	30,330	$	(1,123)	$	28,347	$	(1,111)	$	1,983	$	(12)
Available For Sale
US Government agency obligations	$	20,185	$	(15)	$	20,185	$	(15)	$	-	$	-	$	27,275	$	(145)	$	27,275	$	(145)	$	-	$	-
GSE mortgage-backed securities														28,997		(643)		28,997		(643)		-		-
Collateralized mortgage obligations GSE		9,078		(107)		1,734		(14)		7,344		(93)		11,409		(373)		4,615		(98)		6,794		(275)
Corporate bonds		10,752		(140)		5,315		(56)		5,437		(84)		11,268		(233)		5,827		(156)		5,441		(77)
State and municipal tax-exempt		3,087		(4)		3,087		(4)		-		-		4,954		(119)		4,954		(119)		-		-
Total	$	43,102	$	(266)	$	30,321	$	(89)	$	12,781	$	(177)	$	83,903	$	(1,513)	$	71,668	$	(1,161)	$	12,235	$	(352)



		December 31, 2015											December 31, 2016
					Fair Value		Unrealized		Fair Value		Unrealized						Fair Value		Unrealized		Fair Value		Unrealized
			Total		Impaired		Loss		Impaired		Loss				Total		Impaired		Loss		Impaired		Loss
	Total		Unrealized		Less Than				More Than				Total		Unrealized		Less Than		Less Than		More Than		More Than
(Dollars in thousands)	Fair Value		Loss		12 Months								Fair Value		Loss		12 Months		12 Months		12 Months		12 Months
Held To Maturity
Corporate bonds	$	7,597	$	(42)	$	7,597	$	(42)	$	-	$	-	$	5,962	$	(63)	$	3,992	$	(39)	$	1,970	$	(24)
Collateralized mortgage obligations GSE		1,482		(26)		388		(10)		1,094		(16)		1,104		(22)		1,104		(22)		-		-
State and municipal tax-exempt		13,161		(276)		4,380		(34)		8,781		(242)		32,690		(1,406)		32,690		(1,406)		-		-
Total	$	22,240	$	(344)	$	12,365	$	(86)	$	9,875	$	(258)	$	39,756	$	(1,491)	$	37,786	$	(1,467)	$	1,970	$	(24)
Available For Sale
US Government agency obligations	$	58,208	$	(252)	$	58,208	$	(252)	$	-	$	-	$	27,270	$	(150)	$	27,270	$	(150)	$	-	$	-
GSE mortgage-backed securities		38,307		(325)		33,984		(238)		4,323		(87)		29,145		(723)		29,145		(723)		-		-
Collateralized mortgage obligations GSE		15,231		(438)		4,187		(41)		11,044		(397)		12,116		(387)		4,868		(94)		7,248		(293)
Corporate bonds		20,571		(350)		16,157		(264)		4,414		(86)		13,031		(299)		7,593		(218)		5,438		(81)
State and municipal tax-exempt		6,660		(11)		6,660		(11)		-		-		4,956		(128)		4,956		(128)		-		-
Asset-backed security														26		-		26		-		-		-
Total	$	138,977	$	(1,376)	$	119,196	$	(806)	$	19,781	$	(570)	$	86,544	$	(1,687)	$	73,858	$	(1,313)	$	12,686	$	(374)

As of ~~September 30, 2016,~~March 31, 2017, there were ~~twelve~~seventeen collateralized mortgage obligations GSE, ~~two~~sixteen mortgage-backed securities, six U.S. agency obligations, ~~seven~~forty-three tax-exempt municipalities, one taxable municipality, and ~~seven~~nine corporate bonds which were in an unrealized loss position. DNB does not intend to sell these securities and management of DNB does not expect to be required to sell any of these securities prior to a recovery of its cost basis. Management has reviewed all of these securities and believes that DNB will collect all principal and interest that is due on debt securities on a timely basis. Management does not believe any individual unrealized loss as of ~~September 30, 2016~~March 31, 2017 represents an other-than-temporary impairment (OTTI). DNB reviews its investment portfolio on a quarterly basis judging each investment for OTTI. The OTTI analysis focuses on condition of the issuers as well as duration and severity of impairment in determining OTTI. As of ~~September 30, 2016,~~March 31, 2017, the following securities were reviewed:

Collateralized mortgage obligations GSE There are ~~twelve~~seventeen impaired securities classified as collateralized mortgage obligations, ~~eight~~nine of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is ~~1.84%~~4.54% of its book value. All of these securities were issued and insured by FNMA, FHLMC or GNMA. DNB receives monthly principal and interest payments on all of these securities on a timely basis and none of these agencies ~~has~~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 ~~September 30, 2016~~March 31, 2017 levels. Management concluded that these securities were not other-than-temporarily impaired at ~~September 30, 2016.~~March 31, 2017.

GSE mortgage-backed securities There are sixteen impaired securities classified as GSE mortgage-backed securities, all of which have been impaired for less than 12 months. The largest unrealized loss of a security in this group is 3.29% of its book 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 recover in the market value as the securities approach their maturity dates or if interest rates decline from March 31, 2017 levels. Management concluded that these securities were not other-than-temporarily impaired at March 31, 2017.

US Government agency obligations There are ~~two~~six impaired securities classified as agencies, none of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is ~~0.11%~~0.72% of its book value. All of these securities were issued and insured by FHLB, FNMA, or FHLMC. DNB has received timely interest payments on all of these securities

and none of these agencies 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 ~~September 30, 2016.~~March 31, 2017.

State and municipal tax-exempt There are ~~seven~~forty-three impaired securities in this category, which are comprised of intermediate to long-term municipal bonds, all of which have been impaired for less than 12 months. The largest unrealized loss of a security in this group is ~~0.47%~~7.93% of its book value. All of the issues carry ~~an “A”~~a “BBB” or better underlying credit rating and/or have strong underlying fundamentals; included but not limited to annual financial reports, geographic location, population and debt ratios. In certain cases, options for calls reduce the effective duration and in turn, future market value fluctuations. All issues are performing and are expected to continue to perform in accordance with their respective contractual terms and conditions. There have not been disruptions of any payments associated with any of these municipal securities. These bonds are investment grade and the value decline is related to the changes in interest rates. Of the ~~seven~~forty-three municipal securities, there are ~~three~~seventeen insured school districts, thirteen uninsured school districts, ~~two~~four insured townships, and ~~two~~nine uninsured townships, all of which have strong underlying ratings. Management concluded that these securities were not other-than-temporarily impaired at ~~September 30, 2016.~~March 31, 2017.

State and municipal taxable There is one impaired security in this category, which has been impaired for less than 12 months. The unrealized loss of this security is 0.16% of its book value. This security is an insured township and carries an “A-” underlying credit. It is performing and is expected to continue to perform in accordance with its contractual terms and conditions. There have not been disruptions of any payments associated with this municipal security.Management concluded that this security was not other-than-temporarily impaired at March 31, 2017.

Corporate bonds There are ~~seven~~nine impaired bonds classified as corporate bonds, four of which have been impaired for more than 12 months. The largest unrealized loss of a security in this group is ~~2.98%~~4.63% of its book value. The bonds are investment grade and the value decline is related to the changes in interest rates that occurred since the time of purchase and subsequent changes in spreads affecting the market prices. All of the issues carry a "BBB+" or better underlying credit support and were evaluated on the basis on their underlying fundamentals; included but not limited to annual financial reports, rating agency reports, capital strength and debt ratios. DNB anticipates a recovery in the market value as the securities approach their maturity dates or if interest rates decline from ~~September 30,~~March 31, 2016 levels. Management concluded that these securities were not other-than-temporarily impaired at ~~September 30, 2016.~~March 31, 2017.

The amortized cost and fair value of investment securities as of ~~September 30, 2016,~~March 31, 2017, by final contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid without penalties.



	Held to Maturity				Available for Sale
	Amortized				Amortized				Held to Maturity				Available for Sale
(Dollars in thousands)	Cost		Fair Value		Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	-	$	-	$	12,751	$	12,732	$	-	$	-	$	19,708	$	19,689
Due after one year through five years		22,695		23,572		58,429		58,504		23,830		24,344		46,374		46,113
Due after five years through ten years		30,108		30,460		7,295		7,336		29,210		28,930		8,282		8,139
Due after ten years		20,986		21,079		43,017		43,116		15,098		14,363		37,415		36,343
Total investment securities	$	73,789	$	75,111	$	121,492	$	121,688	$	68,138	$	67,637	$	111,779	$	110,284

The HTM security that was sold during the nine months ended September 30, 2016 was permissible because DNB collected greater than 85% of the original recorded investment on the HTM security prior to the sale. Gains and losses resulting from investment sales, redemptions or calls were as follows:



	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(Dollars in thousands)	2016		2015		2016		2015		2017		2016
Gross realized gains-AFS	$	176	$	13	$	440	$	77	$	-	$	61
Gross realized gains-HTM		21		-		21		-
Gross realized losses-AFS		-		(3)		(30)		(3)		-		(30)
Net realized gain	$	197	$	10	$	431	$	74	$	-	$	31

At ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, investment securities with a carrying value of approximately ~~$111.3~~$117.3 million and ~~$147.9~~$116.7 million, respectively, were pledged to secure public funds, repurchase agreements and for other purposes as required by law.

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



(Dollars in thousands)	September 30, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Residential mortgage	$	28,379	$	28,651	$	87,607	$	87,581
Commercial mortgage		287,638		274,132		461,467		465,486
Commercial:
Commercial term		104,755		102,178		114,130		123,175
Commercial construction		29,677		20,364		85,185		72,755
Consumer:
Home equity		53,175		51,270		61,919		62,560
Other		5,851		5,163		6,055		5,972
Total loans	$	509,475	$	481,758	$	816,363	$	817,529
Less allowance for credit losses		(5,303)		(4,935)		(5,418)		(5,373)
Net loans	$	504,172	$	476,823	$	810,945	$	812,156



					Three Months Ended September 30, 2016						Nine Months Ended September 30, 2016										Three Months Ended March 31, 2017
(Dollars in thousands)	December 31, 2015		September 30, 2016		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		March 31, 2017		December 31, 2016		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	$	1,619	$	1,759	$	15	$	-	$	15	$	51	$	-	$	51	$	1,845	$	1,770	$	21	$	-	$	21
Commercial mortgage		1,048		3,061		74		-		74		139		-		139		1,885		4,593		41		-		41
Commercial:
Commercial term		188		202		3		-		3		9		-		9		1,986		198		38		-		38
Commercial construction		1,028		1,217		46		-		46		134		-		134		1,248		1,242		45		-		45
Consumer:
Home equity		563		492		7		-		7		23		-		23		460		442		6		-		6
Other		189		221		5		-		5		14		-		14		254		256		5		-		5
Total non-accrual loans	$	4,635	$	6,952	$	150	$	-	$	150	$	370	$	-	$	370	$	7,678	$	8,501	$	156	$	-	$	156
Loans 90 days past due and accruing		457		-		-		-		-		2		2		-		-		-		-		-		-
Total non-performing loans	$	5,092	$	6,952	$	150	$	-	$	150	$	372	$	2	$	370	$	7,678	$	8,501	$	156	$	-	$	156



			Three Months Ended September 30, 2015						Nine Months Ended September 30, 2015								Three Months Ended March 31, 2016
(Dollars in thousands)	September 30, 2015		Interest income that would have been recorded under original terms		Interest income recorded during the period		Net impact on interest income		Interest income that would have been recorded under original terms		Interest income recorded during the period		Net impact on interest income		March 31, 2016		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	$	1,600	$	10	$	-	$	10	$	50	$	-	$	50	$	1,781	$	19	$	-	$	19
Commercial mortgage		1,075		21		-		21		64		-		64		1,025		20		-		20
Commercial:
Commercial term		191		2		-		2		7		-		7		210		3		-		3
Commercial construction		451		56		-		56		226		-		226		1,237		41		-		41
Consumer:
Home equity		313		7		-		7		19		-		19		574		16		-		16
Other		120		6		-		6		14		-		14		199		5		-		5
Total non-accrual loans	$	3,750	$	102	$	-	$	102	$	380	$	-	$	380	$	5,026	$	104	$	-	$	104
Loans 90 days past due and accruing		498		-		-		-		5		5		-		164		1		1		-
Total non-performing loans	$	4,248	$	102	$	-	$	102	$	385	$	5	$	380	$	5,190	$	105	$	1	$	104

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a scheduled payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015.~~2016.



September 30, 2016
March 31, 2017															March 31, 2017
														Loans													Loans
														Receivable													Receivable
		30-59		60-89		Greater						Total		> 90	30-59		60-89		Greater						Total		> 90
		Days Past		Days Past		than		Total				Loans		Days and	Days Past				than		Total				Loans		Days and
(Dollars in thousands)		Due		Due		90 Days		Past Due		Current		Receivable		Accruing	Due				90 Days		Past Due		Current		Receivable		Accruing
Residential mortgage	$	135	$	377	$	1,686	$	2,198	$	26,181	$	28,379	$	-
Commercial mortgage		-		-		2,294		2,294		285,344		287,638		-
Residential mortgage (less acquired with credit deterioration)															$	1,238	$	467	$	555	$	2,260	$	85,336	$	87,596	$	-
Acquired residential mortgage with credit deterioration																-		-		11		11		-		11		-
Commercial mortgage (less acquired with credit deterioration)																184		227		-		411		459,923		460,334		-
Acquired commercial mortgage with credit deterioration																-		-		611		611		522		1,133		-
Commercial:
Commercial term		-		-		23		23		104,732		104,755		-		-		22		1,850		1,872		112,258		114,130		-
Commercial construction		-		-		1,217		1,217		28,461		29,677		-		-		-		1,248		1,248		83,937		85,185		-
Consumer:
Home equity		-		-		344		344		52,831		53,175		-		3		-		319		322		61,597		61,919		-
Other		123		6		181		310		5,541		5,851		-		-		-		215		215		5,840		6,055		-
Total	$	258	$	383	$	5,745	$	6,386	$	503,090	$	509,475	$	-	$	1,425	$	716	$	4,809	$	6,950	$	809,413	$	816,363	$	-



December 31, 2015
December 31, 2016															December 31, 2016
														Loans													Loans
														Receivable													Receivable
		30-59		60-89		Greater						Total		> 90	30-59		60-89		Greater						Total		> 90
		Days Past		Days Past		than		Total				Loans		Days and	Days Past				than		Total				Loans		Days and
(Dollars in thousands)		Due		Due		90 Days		Past Due		Current		Receivable		Accruing	Due				90 Days		Past Due		Current		Receivable		Accruing
Residential mortgage	$	502	$	552	$	2,076	$	3,130	$	25,521	$	28,651	$	457
Commercial mortgage		36		86		96		218		273,914		274,132		-
Residential mortgage (less acquired with credit deterioration)															$	728	$	374	$	491	$	1,593	$	85,977	$	87,570	$	-
Acquired residential mortgage with credit deterioration																-		-		11		11		-		11		-
Commercial mortgage (less acquired with credit deterioration)																1,202		762		2,169		4,133		459,679		463,812		-
Acquired commercial mortgage with credit deterioration																389		83		673		1,145		529		1,674		-
Commercial:
Commercial term		-		-		-		-		102,178		102,178		-		747		377		23		1,147		122,028		123,175		-
Commercial construction		-		581		447		1,028		19,336		20,364		-		112		-		1,242		1,354		71,401		72,755		-
Consumer:
Home equity		7		310		153		470		50,800		51,270		-		263		-		300		563		61,997		62,560		-
Other		100		-		148		248		4,915		5,163		-		27		65		151		243		5,729		5,972		-
Total	$	645	$	1,529	$	2,920	$	5,094	$	476,664	$	481,758	$	457	$	3,468	$	1,661	$	5,060	$	10,189	$	807,340	$	817,529	$	-

DNB had $11,000 of residential mortgage loans in the process of foreclosure and $170,000 of residential mortgage loans in other real estate owned as of March 31, 2017. DNB had no residential mortgage loans in the process of foreclosure and $170,000 of residential mortgage loans in other real estate owned as of December 31, 2016.

The following tables summarize information in regards to impaired loans by loan portfolio class as of and for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~ and as of December 31, ~~2015.~~2016.



		September 30, 2016						December 31, 2015						March 31, 2017						December 31, 2016
	Recorded		Unpaid		Related		Recorded		Unpaid		Related		Recorded		Unpaid		Related		Recorded		Unpaid		Related
	Investment		Principal		Allowance		Investment		Principal		Allowance		Investment		Principal		Allowance		Investment		Principal		Allowance
(Dollars in thousands)			Balance						Balance						Balance						Balance
With no related allowance recorded:
Residential mortgage	$	829	$	867	$	-	$	1,620	$	1,919	$	-	$	1,624	$	1,925	$	-	$	653	$	680	$	-
Acquired residential mortgage with credit deterioration														11		11		-		11		11
Commercial mortgage		3,061		3,433		-		1,181		1,461		-		752		973		-		2,919		3,330		-
Acquired commercial mortgage with credit deterioration														1,133		1,145		-		1,674		1,680
Commercial:
Commercial term		23		25		-		-		-		-		873		875		-		22		24		-
Commercial construction		770		770		-		1,140		3,526		-		1,248		3,634		-		795		795		-
Consumer:
Home equity		595		647		-		691		716		-		607		635		-		544		595		-
Other		115		123		-		82		90		-		112		112		-		114		122		-
Total	$	5,393	$	5,865	$	-	$	4,714	$	7,712	$	-	$	6,360	$	9,310	$	-	$	6,732	$	7,237	$	-
With allowance recorded:
Residential mortgage		930		1,191		194		-		-		-		210		210		39		1,107		1,368		143
Commercial:
Commercial term		179		197		100		200		211		110		1,113		1,136		203		176		196		97
Commercial construction		447		2,833		89		-		-		-		-		-		-		447		2,833		89
Consumer:
Other		106		106		3		107		107		4		142		142		5		142		142		5
Total	$	1,662	$	4,327	$	386	$	307	$	318	$	114	$	1,465	$	1,488	$	247	$	1,872	$	4,539	$	334
Total:
Residential mortgage		1,759		2,058		194		1,620		1,919		-		1,834		2,135		39		1,760		2,048		143
Acquired residential mortgage with credit deterioration														11		11		-		11		11		-
Commercial mortgage		3,061		3,433		-		1,181		1,461		-		752		973		-		2,919		3,330		-
Acquired commercial mortgage with credit deterioration														1,133		1,145		-		1,674		1,680		-
Commercial:
Commercial term		202		222		100		200		211		110		1,986		2,011		203		198		220		97
Commercial construction		1,217		3,603		89		1,140		3,526		-		1,248		3,634		-		1,242		3,628		89
Consumer:
Home equity		595		647		-		691		716		-		607		635		-		544		595		-
Other		221		229		3		189		197		4		254		254		5		256		264		5
Total	$	7,055	$	10,192	$	386	$	5,021	$	8,030	$	114	$	7,825	$	10,798	$	247	$	8,604	$	11,776	$	334



		Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended				Three Months Ended				Three Months Ended
		September 30, 2016				September 30, 2015				September 30, 2016				September 30, 2015				March 31, 2017				March 31, 2016
	Average		Interest		Average		Interest		Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
(Dollars in thousands)	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Residential mortgage	$	880	$	-	$	1,577	$	-	$	1,254	$	-	$	1,948	$	-	$	1,139	$	-	$	1,629	$	-
Acquired residential mortgage with credit deterioration																		11				-		-
Commercial mortgage		3,101		-		2,277		28		2,102		-		2,831		85		1,836		-		1,103		-
Acquired commercial mortgage with credit deterioration																		1,404				-		-
Commercial:
Commercial term		24		-		-		-		18		-		-		-		448		-		12		-
Commercial construction		924		-		125		-		944		-		763		-		1,022		-		965		-
Lease financing		-		-		-		-		-		-		-		-
Consumer:
Home equity		631		1		489		1		657		3		497		3		576		2		684		1
Other		116		-		125		-		101		-		134		-		113		-		87		-
Total	$	5,676	$	1	$	4,593	$	29	$	5,076	$	3	$	6,173	$	88	$	6,549	$	2	$	4,480	$	1
With allowance recorded:
Residential mortgage		886		-		59		-		479		-		131		-		659		-		72		-
Commercial mortgage		-		-		101		-		-		-		151		-
Commercial:
Commercial term		181		-		200		-		187		-		200		-		645		-		193		-
Commercial construction		447		-		588		-		335		-		672		-		224		-		224		-
Lease financing		-		-		-		-		-		-		-		-
Home equity		-		-		-		-		-		-		22		-
Consumer:
Other		106		-		20		-		107		-		10		-		142		-		107		-
Total	$	1,620	$	-	$	968	$	-	$	1,108	$	-	$	1,186	$	-	$	1,670	$	-	$	596	$	-
Total:
Residential mortgage		1,766		-		1,636		-		1,733		-		2,079		-		1,798		-		1,701		-
Acquired residential mortgage with credit deterioration																		11		-		-		-
Commercial mortgage		3,101		-		2,378		28		2,102		-		2,982		85		1,836		-		1,103		-
Acquired commercial mortgage with credit deterioration																		1,404		-		-		-
Commercial:
Commercial term		205		-		200		-		205		-		200		-		1,093		-		205		-
Commercial construction		1,371		-		713		-		1,279		-		1,435		-		1,246		-		1,189		-
Lease financing		-		-		-		-		-		-		-		-
Consumer:
Home equity		631		1		489		1		657		3		519		3		576		2		684		1
Other		222		-		145		-		208		-		144		-		255		-		194		-
Total	$	7,296	$	1	$	5,561	$	29	$	6,184	$	3	$	7,359	$	88	$	8,219	$	2	$	5,076	$	1

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within DNB’s internal risk rating system as of ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015.~~2016.



	September 30, 2016										March 31, 2017
			Special										Special
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total		Pass		Mention		Substandard		Doubtful		Total
Residential mortgage	$	26,357	$	-	$	2,022	$	-	$	28,379	$	85,249	$	-	$	2,358	$	-	$	87,607
Commercial mortgage		272,094		4,771		10,773		-		287,638		448,555		3,730		9,182		-		461,467
Commercial:
Commercial term		96,873		592		7,290		-		104,755		107,524		559		5,909		138		114,130
Commercial construction		26,945		-		2,732		-		29,677		83,824		-		1,361		-		85,185
Consumer:
Home equity		52,522		-		653		-		53,175		61,128		-		791		-		61,919
Other		5,630		-		221		-		5,851		5,801		-		254		-		6,055
Total	$	480,421	$	5,363	$	23,691	$	-	$	509,475	$	792,081	$	4,289	$	19,855	$	138	$	816,363



	December 31, 2015										December 31, 2016
			Special										Special
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total		Pass		Mention		Substandard		Doubtful		Total
Residential mortgage	$	26,762	$	-	$	1,889	$	-	$	28,651	$	85,259	$	-	$	2,322	$	-	$	87,581
Commercial mortgage		262,036		4,802		7,294		-		274,132		450,124		3,763		11,599		-		465,486
Commercial:
Commercial term		93,025		2,555		6,598		-		102,178		116,522		591		6,062		-		123,175
Commercial construction		17,521		-		2,843		-		20,364		71,400		-		1,355		-		72,755
Consumer:
Home equity		50,551		-		719		-		51,270		61,782		-		778		-		62,560
Other		4,974		-		189		-		5,163		5,716		-		256		-		5,972
Total	$	454,869	$	7,357	$	19,532	$	-	$	481,758	$	790,803	$	4,354	$	22,372	$	-	$	817,529

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 ~~considered~~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. Loans classified as troubled debt restructurings are designated as impaired. ~~As of September 30,~~The recorded investments in troubled debt restructured loans at March 31, 2017 and December 31, 2016 are as follows:

At March 31, 2017, DNB had five TDRs with recorded investment totaling $904,000, one ~~consumer~~of which totaled $102,000, represented an accruing impaired home equity loan classified as a TDR totaling $102,000, compared to one consumer home equity loan classified as a TDR totaling $102,000 (the same loan) at December 31, 2015, and one consumer home equity loan classified as a TDR totaling $102,000 (the same loan) at September 30, 2015. The monthly payment on this loan was reduced for 36 months andin compliance with the ~~borrower will resume making contractual payments at the end of this period. The loan was extended and there was no reduction of principal. This loan was classified a TDR in June of 2014. The balance~~terms of the ~~loan~~modification. The remaining $802,000 represents four loans that were nonaccrual impaired loans and resulted in collateral evaluations. As a result of the evaluations, specific reserves and charge-offs have been taken where appropriate. During the quarter ended March 31, 2017, DNB recognized partial charge-offs

totaling $151,000 on two residential loans prior to ~~modification was $102,000~~their restructuring and ~~the balance after the modification was $102,000. During the nine months ended September 30, 2016 and 2015, there were no defaults on any terms of this loan.~~

~~As of September 30, 2016, DNB had one consumer installment loan classified as a TDR totaling $40,000 compared~~$2,000 to one consumer installment loan classified as a TDR totaling $40,000 (the same loan) at December 31, 2015, and no such loans at September 30, 2015. The interest rate on the loan was reduced. The loan was extended and there was no reduction of principal. This loan was classified as a TDR in December of 2015. The balance of the loan prior to modification was $42,000 and the balance after ~~the modification was $42,000.~~its restructuring. DNB ~~recognized a partial~~did not recognize any charge-off on the ~~loan in the amount~~last remaining TDR. As of ~~$2,000. During the nine months ended September 30, 2016 and 2015,~~March 31, 2017, there were no defaulted TDRs as all TDRs were current with respect to their associated forbearance agreements. There were no defaults on ~~any~~TDRs during the three months ended March 31, 2017.

At December 31, 2016, DNB had five TDRs with recorded investment totaling $914,000, one of which totaled $102,000, represented an accruing impaired home equity loan in compliance with the terms of ~~this loan.~~the modification. The remaining $812,000 represents four loans that were nonaccrual impaired loans and resulted in collateral evaluations. As a result of the evaluations, specific reserves and charge-offs have been taken where appropriate. As of December 31, 2016, 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. DNB did not recognize any charge-off to the last remaining TDR. As of December 31, 2016, 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 2016.

The following tables set forth the composition of DNB’s allowance for credit losses as of ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, the activity for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~ and as of and for the year ended December 31, ~~2015.~~



	Residential		Commercial						Lease		Consumer								Residential		Commercial						Lease		Consumer
(Dollars in thousands)	Mortgage				Term		Construction		Financing		Home Equity		Other		Unallocated		Total		Mortgage				Term		Construction		Financing		Home Equity		Other		Unallocated		Total
Allowance for credit losses:
Beginning balance - January 1, 2016	$	216	$	2,375	$	989	$	569	$	-	$	195	$	64	$	527	$	4,935
Beginning balance - January 1, 2017																			$	349	$	2,531	$	709	$	969	$	-	$	196	$	61	$	558	$	5,373
Charge-offs		(206)		(39)		(32)		-		-		-		-		-		(277)		-		(234)		(105)		-		-		-		(10)		-		(349)
Recoveries		10		-		1		1		2		-		1		-		15		2		50		16		-		1		-		-		-		69
Provisions		383		136		(165)		303		(2)		7		(3)		(29)		630		(104)		250		154		90		(1)		-		12		(76)		325
Ending balance - September 30, 2016	$	403	$	2,472	$	793	$	873	$	-	$	202	$	62	$	498	$	5,303
Ending balance - March 31, 2017																			$	247	$	2,597	$	774	$	1,059	$	-	$	196	$	63	$	482	$	5,418
Ending balance: individually evaluated for impairment	$	194	$	-	$	100	$	89	$	-	$	-	$	3	$	-	$	386	$	39	$	-	$	203	$	-	$	-	$	-	$	5	$	-	$	247
Ending balance: collectively evaluated for impairment	$	209	$	2,472	$	693	$	784	$	-	$	202	$	59	$	498	$	4,917	$	208	$	2,597	$	571	$	1,059	$	-	$	196	$	58	$	482	$	5,171
Loans receivables:
Ending balance	$	28,379	$	287,638	$	104,755	$	29,677	$	-	$	53,175	$	5,851			$	509,475	$	87,607	$	461,467	$	114,130	$	85,185	$	-	$	61,919	$	6,055			$	816,363
Ending balance: individually evaluated for impairment	$	1,759	$	3,061	$	202	$	1,217	$	-	$	595	$	221			$	7,055	$	1,834	$	752	$	1,986	$	1,248	$	-	$	607	$	254			$	6,681
Ending balance: acquired with credit deterioration																			$	11	$	1,133	$	-	$	-	$	-	$	-	$	-			$	1,144
Ending balance: collectively evaluated for impairment	$	26,620	$	284,577	$	104,553	$	28,460	$	-	$	52,580	$	5,630			$	502,420	$	85,762	$	459,582	$	112,144	$	83,937	$	-	$	61,312	$	5,801			$	808,538
Reserve for unfunded loan commitments included in other liabilities	$	-	$	3	$	119	$	64	$	-	$	13	$	-			$	199	$	-	$	10	$	147	$	202	$	-	$	17	$	-			$	376



	Residential		Commercial						Lease		Consumer								Residential		Commercial						Lease		Consumer
(Dollars in thousands)	Mortgage				Term		Construction		Financing		Home Equity		Other		Unallocated		Total		Mortgage				Term		Construction		Financing		Home Equity		Other		Unallocated		Total
Allowance for credit losses:
Beginning balance - January 1, 2015	$	269	$	2,300	$	709	$	881	$	-	$	189	$	70	$	488	$	4,906
Beginning balance - January 1, 2016																			$	216	$	2,375	$	989	$	569	$	-	$	195	$	64	$	527	$	4,935
Charge-offs		(69)		(105)		(190)		(577)		-		(11)		(60)		-		(1,012)		(84)		-		(13)		-		-		-		-		-		(97)
Recoveries		2		-		10		5		2		-		1		-		20		1		-		1		1		1		-		-		-		4
Provisions		(8)		296		190		369		(2)		22		55		(107)		815		87		1		(29)		195		(1)		(7)		3		81		330
Ending balance - September 30, 2015	$	194	$	2,491	$	719	$	678	$	-	$	200	$	66	$	381	$	4,729
Ending balance - March 31, 2016																			$	220	$	2,376	$	948	$	765	$	-	$	188	$	67	$	608	$	5,172
Reserve for unfunded loan commitments included in other liabilities	$	-	$	4	$	105	$	57	$	-	$	12	$	-			$	178	$	-	$	3	$	115	$	55	$	-	$	13	$	-			$	186



	Residential		Commercial						Lease		Consumer								Residential		Commercial						Lease		Consumer
(Dollars in thousands)	Mortgage				Term		Construction		Financing		Home Equity		Other		Unallocated		Total		Mortgage				Term		Construction		Financing		Home Equity		Other		Unallocated		Total
Allowance for credit losses:
Ending balance - December 31, 2015	$	216	$	2,375	$	989	$	569	$	-	$	195	$	64	$	527	$	4,935
Ending balance - December 31, 2016																			$	349	$	2,531	$	709	$	969	$	-	$	196	$	61	$	558	$	5,373
Ending balance: individually evaluated for impairment	$	-	$	-	$	110	$	-	$	-	$	-	$	4	$	-	$	114	$	143	$	-	$	97	$	89	$	-	$	-	$	5	$	-	$	334
Ending balance: collectively evaluated for impairment	$	216	$	2,375	$	879	$	569	$	-	$	195	$	60	$	527	$	4,821	$	206	$	2,531	$	612	$	880	$	-	$	196	$	56	$	558	$	5,039
Loans receivables:
Ending balance	$	28,651	$	274,132	$	102,178	$	20,364	$	-	$	51,270	$	5,163			$	481,758	$	87,581	$	465,486	$	123,175	$	72,755	$	-	$	62,560	$	5,972			$	817,529
Ending balance: individually evaluated for impairment	$	1,620	$	1,181	$	200	$	1,140	$	-	$	691	$	189			$	5,021	$	1,760	$	2,919	$	198	$	1,242	$	-	$	544	$	256			$	6,919
Ending balance: acquired with credit deterioration																			$	11	$	1,674	$	-	$	-	$	-	$	-	$	-			$	1,685
Ending balance: collectively evaluated for impairment	$	27,031	$	272,951	$	101,978	$	19,224	$	-	$	50,579	$	4,974			$	476,737	$	85,810	$	460,893	$	122,977	$	71,513	$	-	$	62,016	$	5,716			$	808,925
Reserve for unfunded loan commitments included in other liabilities	$	-	$	2	$	115	$	58	$	-	$	13	$	-			$	188	$	-	$	4	$	135	$	190	$	-	$	16	$	-			$	345

Basic earnings per share (“EPS”) is computed based on the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the treasury stock method and reflects the potential dilution that could occur from the exercise of stock options, and warrants and the amortized portion of unvested stock awards. Stock options and unvested stock awards for which the exercise or the grant price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation. Treasury shares are not deemed outstanding for calculations. There were no outstanding stock warrants, no anti-dilutive stock options outstanding, and ~~16,595 anti-dilutive stock awards outstanding at September 30, 2016. There were no anti-dilutive stock warrants outstanding, no anti-dilutive stock options outstanding, and~~ no anti-dilutive stock awards outstanding at ~~September 30, 2015.~~March 31, 2017 or 2016. The following table sets forth the computation of basic and diluted earnings per share:



	Three Months Ended					Nine Months Ended					Three Months Ended
	September 30, 2016					September 30, 2016					March 31, 2017
(In thousands, except per-share data)	Income		Shares	Amount		Income		Shares	Amount		Income		Shares	Amount
Basic EPS
Income available to common stockholders	$	1	2,853	$	0.00	$	2,666	2,845	$	0.94	$	2,441	4,247	$	0.57
Effect of potential dilutive common stock equivalents – stock options and restricted shares		-	33		(0.00)		-	34		(0.01)		-	27		-
Diluted EPS
Income available to common stockholders after assumed conversions	$	1	2,886	$	0.00	$	2,666	2,879	$	0.93	$	2,441	4,274	$	0.57



	Three Months Ended					Nine Months Ended					Three Months Ended
	September 30, 2015					September 30, 2015					March 31, 2016
(In thousands, except per-share data)	Income		Shares	Amount		Income		Shares	Amount		Income		Shares	Amount
Basic EPS
Income available to common stockholders	$	1,261	2,807	$	0.45	$	3,714	2,798	$	1.33	$	1,556	2,833	$	0.55
Effect of potential dilutive common stock equivalents – stock options and restricted shares		-	45		(0.01)		-	46		(0.02)		-	36		(0.01)
Diluted EPS
Income available to common stockholders after assumed conversions	$	1,261	2,852	$	0.44	$	3,714	2,844	$	1.31	$	1,556	2,869	$	0.54

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



Accumulated Other Comprehensive Loss	Before-Tax		Tax		Net-of-Tax		Before-Tax		Tax		Net-of-Tax
(Dollars in thousands)	Amount		Effect		Amount		Amount		Effect		Amount
September 30, 2016
Net unrealized gain on AFS securities	$	196	$	(66)	$	130
Discount on AFS to HTM reclassification		(8)		3		(5)
Unrealized actuarial losses-pension		(1,812)		616		(1,196)
	$	(1,624)	$	553	$	(1,071)
December 31, 2015
March 31, 2017
Net unrealized loss on AFS securities	$	(1,180)	$	402	$	(778)	$	(1,495)	$	509	$	(986)
Discount on AFS to HTM reclassification		(17)		6		(11)		(7)		2		(5)
Unrealized actuarial losses-pension		(1,812)		616		(1,196)		(1,792)		609		(1,183)
	$	(3,009)	$	1,024	$	(1,985)	$	(3,294)	$	1,120	$	(2,174)
December 31, 2016
Net unrealized loss on AFS securities							$	(1,646)	$	560	$	(1,086)
Discount on AFS to HTM reclassification								(8)		3		(5)
Unrealized actuarial losses-pension								(1,792)		609		(1,183)
							$	(3,446)	$	1,172	$	(2,274)

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’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’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.

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

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

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

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


(Dollars in thousands)	Overnight and Continuous		Up to 30 days		30 - 90 days		Greater than 90 days		Total		Overnight and Continuous		Up to 30 days		30 - 90 days		Greater than 90 days		Total
September 30, 2016
March 31, 2017
Repurchase agreements and repurchase-to-maturity transactions	$	19,483	$	-	$	-	$	-	$	19,483	$	11,474	$	-	$	-	$	-	$	11,474
Gross amount of recognized liabilities for repurchase agreements
in statement of condition	$	19,483							$	19,483	$	11,474							$	11,474
December 31, 2015
December 31, 2016
Repurchase agreements and repurchase-to-maturity transactions	$	32,416	$	-	$	-	$	-	$	32,416	$	11,889	$	-	$	-	$	-	$	11,889
Gross amount of recognized liabilities for repurchase agreements
in statement of condition	$	32,416							$	32,416	$	11,889							$	11,889

As of ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, DNB had ~~$19.5~~$11.5 million and ~~$32.4~~$11.9 million of repurchase agreements, respectively. In conjunction with these repurchase agreements, ~~$19.9~~$11.7 million and ~~$33.1~~$12.1 million of state and municipal securities were sold on an overnight basis as of ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, respectively, which represents 102% of the repurchase agreement amounts.

DNB has a Stock Option Plan for employees and directors. Under the plan, options (both qualified and non-qualified) to purchase a maximum of 793,368 (as adjusted for subsequent stock dividends) shares of DNB’s common stock could be issued to employees and directors. Under the plan, option exercise prices must equal the fair market value of the shares on the date of option grant and the option exercise period may not exceed ten years. Vesting of options under the plan is determined by the Plan Committee. There were 354,090 shares available for grant at ~~September 30, 2016.~~March 31, 2017. All options are immediately exercisable. During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2017 and 2016, ~~and 2015,~~ DNB had no expenses related to the plan. DNB has no anticipated additional expense related to the plan. Stock option activity is indicated below.



	Number		Weighted Average		Number		Weighted Average
	Outstanding		Exercise Price		Outstanding		Exercise Price
Outstanding January 1, 2016		64,500	$	8.67
Outstanding January 1, 2017						49,700	$	9.18
Issued		-		-		-		-
Exercised		-		-		13,700		7.42
Forfeited		-		-		-		-
Expired		-		-		-		-
Outstanding September 30, 2016		64,500	$	8.67
Outstanding March 31, 2017						36,000	$	9.85



	Number		Weighted Average		Number		Weighted Average
	Outstanding		Exercise Price		Outstanding		Exercise Price
Outstanding January 1, 2015		163,586	$	15.13
Outstanding January 1, 2016						64,500	$	8.67
Issued		-		-		-		-
Exercised		95,834		19.40		-		-
Forfeited		-		-		-		-
Expired		-		-		-		-
Outstanding September 30, 2015		67,752	$	9.09
Outstanding March 31, 2016						64,500	$	8.67

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

September 30, 2016

March 31, 2017

Range of

Weighted Average

Range of

Weighted Average

Exercise

Number

Exercise

Remaining

Intrinsic

Exercise

Number

Exercise

Remaining

Intrinsic

Prices

Outstanding

Exercisable

Price

Contractual Life

Value

Prices

Outstanding

Exercisable

Price

Contractual Life

Value

6.93-10.99

64,500

8.67

1.40 years

1,077,000

6.93-10.99

36,000

9.85

1.48 years

869,000

December 31, 2015

December 31, 2016

Range of

Weighted Average

Range of

Weighted Average

Exercise

Number

Exercise

Remaining

Intrinsic

Exercise

Number

Exercise

Remaining

Intrinsic

Prices

Outstanding

Exercisable

Price

Contractual Life

Value

Prices

Outstanding

Exercisable

Price

Contractual Life

Value

6.93-10.99

64,500

8.67

2.15 years

1,344,000

6.93-10.99

49,700

9.18

1.40 years

955,000

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

Share awards granted by the Plan were recorded at the date of award based on the market value of shares. Awards are being amortized to expense over a three or four year cliff-vesting period. DNB records compensation expense equal to the value of the shares being amortized. For the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2016, $71,000 and $801,000~~March 31, 2017, $107,000 was amortized to ~~expense, respectively.~~expense. For the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2015, $85,000 and $250,000~~March 31, 2016, $660,000 was amortized to ~~expense, respectively.~~ expense.

DNB issued 3,000 restricted stock awards during the first quarter of 2016 and 26,595 restricted stock awards in December 2015 that required the award recipient to hold the shares for one additional year after vesting. These awards cliff vest in three years. For these

shares, DNB adopted the Chaffe Model to measure the fair value by applying a 9.1% discount due to the lack of marketability when these transactions took place. The input assumptions used and resulting fair values were an expected life of 5 years, volatility of 19.37%, annual rate of quarterly dividends of 1.01%, and bond equivalent yield of 1.742%.

As of ~~September 30, 2016,~~March 31, 2017, there was approximately ~~$523,000~~$907,000 in additional compensation that will be

recognized over the remaining service period of approximately ~~1.66~~1.99 years. At ~~September 30, 2016, 87,629~~March 31, 2017, 64,929 shares were reserved for future grants under the Plan.

~~The~~During the three months ended March 31, 2016, the shares awarded from the vesting resulted in an increase in shares outstanding of 18,079. There was a cash equivalent of 15,621 shares used to pay all applicable taxes on the ~~transaction.~~transactions. There were no such transactions during the three months ended March 31, 2017. Stock grant activity is indicated below:



		Weighted Average			Weighted Average
	Shares	Stock Price		Shares	Stock Price
Non-vested stock awards—January 1, 2016	77,255	$	22.71
Non-vested stock awards—January 1, 2017				55,775	$	25.63
Granted	3,540		28.33	-		-
Forfeited	-		-	-		-
Vested	33,700		23.66	-		-
Non-vested stock awards—September 30, 2016	47,095	$	22.46
Non-vested stock awards—March 31, 2017				55,775	$	25.63



		Weighted Average			Weighted Average
	Shares	Stock Price		Shares	Stock Price
Non-vested stock awards—January 1, 2015	75,930	$	17.66
Non-vested stock awards—January 1, 2016				77,255	$	22.71
Granted	-		-	3,000		28.75
Forfeited	1,270		19.21	-		-
Vested	-		-	33,700		23.66
Non-vested stock awards—September 30, 2015	74,660	$	17.63
Non-vested stock awards—March 31, 2016				46,555	$	22.42

As of ~~September 30, 2016,~~March 31, 2017, 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 ~~2012~~2013 through ~~2015~~2016 were open for examination as of ~~September 30, 2016.~~March 31, 2017.

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 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.

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

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

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

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

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

The following table summarizes the assets at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015~~2016 that are recognized on DNB’s statement of financial condition using fair value measurement determined based on the differing levels of input:



		September 30, 2016								March 31, 2017

(Dollars in thousands)		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3		Fair Value
Assets Measured at Fair Value on a Recurring Basis
AFS Investment Securities:
US Government agency obligations	$	-	$	52,542	$	-	$	52,542	$	-	$	49,284	$	-	$	49,284
GSE mortgage-backed securities		-		32,841		-		32,841		-		28,997		-		28,997
Collateralized mortgage obligations GSE		-		13,755		-		13,755		-		11,822		-		11,822
Corporate bonds		-		17,451		-		17,451		-		15,201		-		15,201
State and municipal tax-exempt		-		5,099		-		5,099		-		4,954		-		4,954
Asset-backed security										-		26		-		26
Total	$	-	$	121,688	$	-	$	121,688	$	-	$	110,284	$	-	$	110,284


Assets Measured at Fair Value on a Nonrecurring Basis
Impaired loans	$	-	$	-	$	1,333	$	1,333	$	-	$	-	$	1,218	$	1,218
Total	$	-	$	-	$	1,333	$	1,333	$	-	$	-	$	1,218	$	1,218



		December 31, 2015								December 31, 2016
											��
(Dollars in thousands)		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3		Fair Value
Assets Measured at Fair Value on a Recurring Basis
AFS Investment Securities:
US Government agency obligations	$	-	$	58,208	$	-	$	58,208	$	-	$	52,309	$	-	$	52,309
GSE mortgage-backed securities		-		40,351		-		40,351		-		30,140		-		30,140
Collateralized mortgage obligations GSE		-		15,806		-		15,806		-		12,573		-		12,573
Corporate bonds		-		20,571		-		20,571		-		15,180		-		15,180
State and municipal tax-exempt		-		17,443		-		17,443		-		4,956		-		4,956
Asset-backed security										-		26		-		26
Total	$	-	$	152,379	$	-	$	152,379	$	-	$	115,184	$	-	$	115,184


Assets Measured at Fair Value on a Nonrecurring Basis
Impaired loans	$	-	$	-	$	964	$	964	$	-	$	-	$	1,538	$	1,538
OREO and other repossessed property		-		-		682		682		-		-		2,485		2,485
Total	$	-	$	-	$	1,646	$	1,646	$	-	$	-	$	4,023	$	4,023

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



September 30, 2016
March 31, 2017									March 31, 2017
Quantitative Information about Level 3 Fair Value Measurement	Quantitative Information about Level 3 Fair Value Measurement								Quantitative Information about Level 3 Fair Value Measurement

		Fair Value	Valuation		Range					Fair Value	Valuation		Range
(Dollars in thousands)		Estimate	Techniques	Unobservable Input	(Weighted Average)					Estimate	Techniques	Unobservable Input	(Weighted Average)
Impaired loans - Residential mortgage	$	736	Appraisal of	Appraisal adj. (2)	-25%	to	-25%	(-25%)	$	171	Appraisal of	Appraisal adj. (2)	0%	to	0%	(0%)
			collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)			collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)
Impaired loans - Commercial mortgage		57	Appraisal of	Appraisal adj. (2)	0%	to	0%	(0%)
			collateral (1)	Disposal costs (2)	-13%	to	-13%	(-13%)
Impaired loans - Commercial term		79	Appraisal of	Appraisal adj. (2)	-72%	to	-72%	(-72%)		910	Appraisal of	Appraisal adj. (2)	0%	to	-50%	(-11%)
			collateral (1)	Disposal costs (2)	-11%	to	-11%	(-11%)
Impaired loans - Commercial construction		358	Appraisal of	Appraisal adj. (2)	-20%	to	-20%	(-20%)
			collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)			collateral (1)	Disposal costs (2)	8%	to	10%	(-10%)
Impaired loans - Consumer other		103	Appraisal of	Appraisal adj. (2)	0%	to	0%	(0%)		137	Appraisal of	Appraisal adj. (2)	0%	to	0%	(0%)
			collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)			collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)
Impaired loan total	$	1,333							$	1,218



December 31, 2015
December 31, 2016									December 31, 2016
Quantitative Information about Level 3 Fair Value Measurement	Quantitative Information about Level 3 Fair Value Measurement								Quantitative Information about Level 3 Fair Value Measurement

		Fair Value	Valuation		Range					Fair Value	Valuation		Range
(Dollars in thousands)		Estimate	Techniques	Unobservable Input	(Weighted Average)					Estimate	Techniques	Unobservable Input	(Weighted Average)
Impaired loans - Residential mortgage	$	115	Appraisal of	Appraisal adj. (2)	0%	to	0%	(0%)	$	964	Appraisal of	Appraisal adj. (2)	0%	to	-25%	(-22%)
			collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)
Impaired loans - Commercial mortgage		97	Appraisal of	Appraisal adj. (2)	0%	to	0%	(0%)
			collateral (1)	Disposal costs (2)	-13%	to	-13%	(-13%)			collateral (1)	Disposal costs (2)	-8%	to	-12%	(-9%)
Impaired loans - Commercial term		90	Appraisal of	Appraisal adj. (2)	-72%	to	-72%	(-72%)		79	Appraisal of	Appraisal adj. (2)	-72%	to	-72%	(-72%)
			collateral (1)	Disposal costs (2)	-11%	to	-11%	(-11%)			collateral (1)	Disposal costs (2)	-11%	to	-11%	(-11%)
Impaired loans - Commercial construction		559	Appraisal of	Appraisal adj. (2)	0%	to	0%	(0%)		358	Appraisal of	Appraisal adj. (2)	0%	to	0%	(0%)
			collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)			collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)
Impaired loans - Consumer other		103	Appraisal of	Appraisal adj. (2)	0%	to	0%	(0%)		137	Appraisal of	Appraisal adj. (2)	0%	to	0%	(0%)
			collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)			collateral (1)	Disposal costs (2)	-8%	to	-8%	(-8%)
Impaired loan total	$	964							$	1,538
Other real estate owned	$	682		Disposal costs (2)	-8%	to	-8%	(-8%)	$	2,485		Disposal costs (2)	-8%	to	-8%	(-8%)

Impaired loans. Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of ~~$7.1~~$7.8 million at ~~September 30, 2016.~~March 31, 2017. Of this, ~~$1.7~~$1.5 million had specific valuation allowances of ~~$386,000,~~$247,000, leaving a fair value of ~~$1.3~~$1.2 million as of ~~September,~~March 31, 2017. One of these impaired loans that has a specific valuation allowance, with a value of $171,000, was partially charged down by $57,000, leaving $114,000 at fair value as of March 31, 2017, which is already included in the $1.2 million fair value previously referenced. DNB did not have any partial charge-offs to impaired loans that didn’t already have a specific reserve during the three months ended March 31, 2017. Impaired loans had a carrying amount of $8.6 million at December 31, 2016. ~~In addition,~~Of this, $1.9 million had specific valuation allowances of $334,000, leaving a fair value of $1.5 million at December 31, 2016. DNB ~~had $96,000 in~~did not have any impaired loans that were partially charged down ~~by $39,000, leaving $57,000 at fair value as of September 30, 2016. Impaired loans had a carrying amount of $5.0 million at~~during the year ended December 31, 2015. Of this, $307,000 had specific valuation allowances of $114,000, leaving a fair value of $193,000 at December 31, 2015. In addition, DNB had $931,000 in impaired loans that were partially charged down by $160,000, leaving $771,000 at fair value as of December 31, 2015.2016.

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 ~~$2.9~~$5.0 million of such assets at ~~September 30, 2016, $2.8~~March 31, 2017, $4.8 million of which was OREO and ~~$165,000~~$191,000 was in other repossessed property. DNB had ~~$2.6~~$2.8 million of such assets at December 31, ~~2015,~~2016, which consisted of ~~$2.4~~$2.6 million in OREO and ~~$165,000~~$191,000 in other repossessed property. Subsequent to the repossession of these assets, DNB did not write down the carrying values of OREO during the ~~nine~~three month period ended ~~September 30, 2016.~~March 31, 2017. DNB ~~wrote~~did not write down the carrying ~~value~~values of ~~one~~ OREO ~~property by $154,000 to $453,000~~ during the ~~nine months~~three month period ended ~~September 30, 2015.~~March 31, 2016.

DNB's policy is to recognize transfer between levels as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers between Level 1 and 2 for the three ~~and nine~~ months ended ~~September 30, 2016.~~March 31, 2017.

Below is management’s estimate of the fair value of all financial instruments, whether carried at cost or fair value on the Company’s consolidated balance sheet. The carrying amounts and fair values of financial instruments at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015~~2016 are as follows:



		September 30, 2016										March 31, 2017

		Carrying		Fair								Carrying		Fair
(Dollars in thousands)		Amount		Value		Level 1		Level 2		Level 3		Amount		Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	30,442	$	30,442	$	30,442	$	-	$	-	$	44,068	$	44,068	$	44,068	$	-	$	-
AFS investment securities		121,688		121,688		-		121,688		-		110,284		110,284		-		110,284		-
HTM investment securities		73,789		75,111		-		73,111		2,000		68,138		67,637		-		65,637		2,000
Restricted stock		3,623		3,623		-		3,623		-		5,400		5,400		-		5,400		-
Loans, net of allowance, including impaired		504,172		492,616		-		-		492,616		810,945		793,783		-		-		793,783
Accrued interest receivable		2,639		2,639		-		2,639		-		3,590		3,590		-		3,590		-
Financial liabilities
Deposits:
Non-interest-bearing deposits		146,731		146,731		-		146,731		-		176,199		176,199		-		176,199		-
Interest-bearing deposits		403,579		403,579		-		403,579		-		524,189		524,189		-		524,189		-
Time deposits		71,920		71,751		-		71,751		-		177,335		176,820		-		176,820		-
Brokered deposits		23,313		23,235		-		23,235		-		28,045		27,743		-		27,743		-
Repurchase agreements		19,483		19,483		-		19,483		-		11,474		11,474		-		11,474		-
FHLBP advances		20,000		20,222		-		20,222		-		50,972		50,925		-		50,925		-
Junior subordinated debentures and other borrowings		9,279		8,431		-		8,431		-		9,279		8,814		-		8,814		-
Subordinated debt		9,750		9,472		-		9,472		-		9,750		10,601		-		10,601		-
Accrued interest payable		329		329		-		329		-		491		491		-		491		-
Off-balance sheet instruments		-		-		-		-		-		-		-		-		-		-



		December 31, 2015										December 31, 2016

		Carrying		Fair								Carrying		Fair
(Dollars in thousands)		Amount		Value		Level 1		Level 2		Level 3		Amount		Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	21,119	$	21,119	$	21,119	$	-	$	-	$	22,103	$	22,103	$	22,103	$	-	$	-
AFS investment securities		152,379		152,379		-		152,379		-		115,184		115,184		-		115,184		-
HTM investment securities		67,829		68,431		-		66,431		2,000		67,022		66,124		-		64,124		2,000
Restricted stock		3,447		3,447		-		3,447		-		5,381		5,381		-		5,381		-
Loans, net of allowance, including impaired		476,823		461,925		-		-		461,925		812,156		792,190		-		-		792,190
Accrued interest receivable		2,410		2,410		-		2,410		-		3,567		3,567		-		3,567		-
Financial liabilities
Deposits:
Non-interest-bearing deposits		125,581		125,581		-		125,581		-		173,467		173,467		-		173,467		-
Interest-bearing deposits		396,188		396,188		-		396,188		-		495,178		495,178		-		495,178		-
Time deposits		66,018		65,697		-		65,697		-		187,256		186,012		-		186,012		-
Brokered deposits		18,488		18,327		-		18,327		-		29,286		28,873		-		28,873		-
Repurchase agreements		32,416		32,416		-		32,416		-		11,889		11,889		-		11,889		-
FHLBP advances		30,000		30,210		-		30,210		-		55,332		54,734		-		54,734		-
Junior subordinated debentures and other borrowings		9,279		7,889		-		7,889		-		9,279		8,637		-		8,637		-
Subordinated debt		9,750		9,999		-		9,999		-		9,750		10,493		-		10,493		-
Accrued interest payable		345		345		-		345		-		534		534		-		534		-
Off-balance sheet instruments		-		-		-		-		-		-		-		-		-		-

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

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

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

Investment Securities The fair value of investment securities are determined by an independent third party (“preparer”). The preparer’s evaluations are based on market data. They utilize evaluated pricing models that vary by asset and incorporate available trade, bid and other market information. For securities that do not trade on a daily basis, their evaluated pricing applications apply available information such as benchmarking and matrix pricing. The market inputs normally sought in the evaluation of securities include benchmark yields, reported trades, broker/dealer quotes (only obtained from market makers or broker/dealers recognized as market participants), issuer spreads, two-sided markets, benchmark securities, bid, offers and reference data. For certain securities additional inputs may be used or some market inputs may not be applicable. Inputs are prioritized differently on any given day based on market conditions.

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

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

Loans Held-for-Sale (Carried at Lower of Cost or Fair Value) The fair value of loans held-for-sale is determined, when possible, using quoted secondary-marketprices. If no such quotes prices exist, the fair value of a loan is determined using quoted prices fora similar loan or loans, adjusted for the specific attributes of that loan.

Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial mortgages, residential mortgages, consumer and non-accrual loans. The fair value of performing loans is calculated by discounting expected cash flows using an estimated market discount rate. Expected cash flows include both contractual

~~contractual~~ cash flows and prepayments of loan balances. Prepayments on consumer loans were determined using the median of estimates of securities dealers for mortgage-backed investment pools.

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

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

Deposits The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate money market accounts, savings accounts, and interest checking accounts approximate their fair values at the reporting date. Fair values for fixed-rate CDs and brokered deposits (all of which are CDs) are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Of the ~~$23.3~~$28.0 million in brokered deposits, ~~$10.0~~$12.2 million matures in 2017, ~~$3.2~~$4.0 million matures in 2018, ~~$5.2~~$1.5 million matures in 2019, $5.3 million matures in 2020, and $5.0 million matures in 2021.

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

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

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

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

Accrued Interest Receivable and Payable The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

Off-balance-sheet Instruments (Disclosed at Cost) Off-balance-sheet instruments are primarily comprised of loan commitments, which are generally priced at market at the time of funding. Fees on commitments to extend credit and stand-by letters of credit are deemed to be immaterial and these instruments are expected to be settled at face value or expire unused. It is impractical to assign any fair value to these instruments. At ~~September 30, 2016,~~March 31, 2017, un-funded loan commitments totaled ~~$122.1~~$191.8 million and stand-by letters of credit totaled ~~$2.7~~$3.0 million. At December 31, ~~2015,~~2016, un-funded loan commitments totaled ~~$116.4~~$185.8 million and stand-by letters of credit totaled ~~$3.2~~$2.8 million.

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

On August 4, 2011, DNB entered into a Securities Purchase Agreement with the Secretary of the Treasury, pursuant to which DNB issued and sold to the Treasury 13,000 shares of its Non-Cumulative Perpetual Preferred Stock, Series 2011A (“Series 2011A Preferred Stock”), having a liquidation preference of $1,000 per share for aggregate proceeds of $13.0 million. The Securities Purchase Agreement was entered into, and the Series 2011A Preferred Stock was issued, pursuant to the Treasury’s Small Business Lending Fund program (“SBLF”), a $30 billion fund established under the Small Business Jobs Act of 2010, that encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion. The securities sold in this transaction were exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a transaction by DNB not involving a public offering. Of the $13.0 million in aggregate proceeds, $11,879,000 was used on August 4, 2011 to repurchase all

shares issued and sold in 2009 to the United States Department of the Treasury in connection with the U. S. Treasury Capital Purchase Program (“CPP Shares”) ($11,750,000 was paid in principal and $128,900 in dividends related to the CPP Shares) held by the Treasury as described above. As of December 31, 2015, DNB had redeemed all of the Series 2011A Preferred Stock issued to the U.S. Treasury.

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

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

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

DNB Financial Corporation (the “Registrant” or “DNB”), a Pennsylvania business corporation, is a bank holding company ~~whose bank subsidiary,~~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 ~~nationally chartered commercial bank with trust powers, and~~national banking association that is a member of the ~~FDIC. DNB provides a broad range~~Federal Reserve System, the deposits of ~~banking services to individual and corporate customers through its twelve community offices located throughout Chester and Delaware Counties, Pennsylvania. DNB~~which are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is a community banking organization that focuses its lending and other services on businesses and consumers in the local market area. DNB funds all these activities with retail and business deposits and borrowings. Through its DNB First Investment Management & Trust division, the Bank provides investment management and trust administrationfull service commercial bank providing a wide range of services to individuals and ~~non-profit organizations.~~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 fifteen (15) full service branches and a full-service wealth management group known as “DNB First Wealth Management”. The ~~Bank and its~~Bank’s financial subsidiary, DNB Financial Services, Inc., (also known as “DNB Investments & ~~Insurance, provide brokerage, retirement~~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 ~~insurance services.~~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.

On April 4, 2016, DNB ~~earns revenues~~Financial Corporation (the “Company” or “DNBF”), the parent company of DNB First, N.A. (“DNB First”), entered into an Agreement and ~~generates cash flows by lending funds to commercial~~Plan of Merger (the “Merger Agreement”) with East River Bank (“ERB”). Under the transaction, ERB merged with and ~~consumer customers in its marketplace.~~into DNB ~~generates its largest source of interest income through its lending function. A secondary source of interest income is DNB’s investment portfolio, which provides liquidity and cash flows~~First. The merger was consummated on October 1, 2016. The acquisition was an opportunity for ~~future lending needs.~~

to strengthen its competitive position as one of the premier community banks headquartered in Southeastern Pennsylvania. Additionally, the ERB acquisition enhanced DNB's footprint in Southeastern Pennsylvania.

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. This served to not only retain our existing, customer base, but to position ourselves as an attractive financial institution on which younger individuals and families can build their dreams. To that end, DNB continues to make appropriate investments in all areas of our business, including people, technology, facilities and marketing.

Comprehensive 5-Year Plan. During the ~~third~~fourth quarter of ~~2015,~~2016, management updated the 5-year strategic plan that was designed to reposition its balance sheet and improve core earnings. Through the plan, management will endeavor to expand its loan portfolio through new originations, increased loan participations, as well as strategic loan and lease purchases. Management also plans to reduce the absolute level of borrowings and brokered deposits with cash flows from existing loans and investments as well as from new core deposit growth. A discussion on DNB’s Key Strategies ~~follows below:~~follows:

Strategic Plan ~~Update~~Update. ~~. DNB reported net~~Net income ~~available to common stockholders of $1,000,~~was $2.4 million or ~~less than a penny~~$0.57 per diluted share, for the quarter ~~ending September 30, 2016,~~ended March 31, 2017, compared with ~~$1.3~~$1.6 million, or ~~$0.44~~$0.54 per diluted share for the same quarter last year. ~~Results~~The net interest margin for the ~~three months~~quarter ended ~~September 30, 2016 included merger-related costs~~March 31, 2017 was 3.67%, compared to 3.15% for the same period in 2016. This increase is primarily due to the acquisition of ~~$1.5 million associated with~~ East River Bank, and ~~gains from insurance proceeds~~includes purchase accounting fair value adjustments. The composite cost of ~~$30,000. There was an associated income tax adjustment of $259,000 for these two items. See DNB’s 8-K filed on October 20, 2016.~~

On both a year-over-year and sequential quarter basis, the net interest margin remained relatively stable despite continuing pressure from ultra-low interest rates and the flattening yield curve. The net interest margin was 3.06%funds for the ~~third~~quarter ended March 31, 2017 was 0.53%, compared to 0.38% for the same period in 2016. The increase in the composite cost of funds was due largely to the acquisition of East River Bank in the fourth quarter of 2016, ~~compared~~coupled with ~~3.13% for the same quarter, last year. On~~ a ~~sequential quarter basis, the net interest margin slipped only two~~25 basis points ~~from 3.08%~~increase in the federal funds rate, which has impacted the rates DNB pays on the majority of non-maturity deposit accounts. The allowance for ~~the three months ending June 30,~~credit losses at March 31, 2017 was $5.4 million compared to $5.4 million at December 31, 2016.

OnThe allowance as a ~~sequential quarter basis,~~percentage of total loans ~~increased $15.1 million, or 3.0% (not annualized),~~and leases was 0.66% at March 31, 2017, compared to $509.2 million as of September 30, 2016. As of the same date, total loans were 66.1% of total assets. The loan growth occurred primarily in the commercial real estate and consumer loan categories. The Company remains disciplined and intends to maintain conservative underwriting standards while growing commercial-oriented loans in a competitive market.

Asset quality remained solid as net charge-offs were only 0.03% of total average loans for the quarter ending September 30, 2016, compared with 0.10% for the quarter ending June 30, 2016, and 0.40% for the quarter ending September 30, 2015. Total non-performing assets, including loans and other real estate property, were $9.9 million as of September 30, 2016, compared with $10.5 million as of June 30, 2016 and $7.7 million as of0.66% at December 31, ~~2015.~~2016. The ~~ratio~~level of non-performing loans to total loans ~~was 1.36%~~decreased to 0.94% as of ~~September 30, 2016,~~March 31, 2017, as compared ~~with 1.54%~~to 1.04% at December 31, 2016.

DNB’s most significant revenue source continues to be net interest income, defined as ~~of June 30, 2016. As of September 30, 2016, the allowance~~total interest income less total interest expense, which accounted for ~~loan losses to total loans ratio was 1.04%.~~

~~On a sequential quarter basis, total core deposits increased $5.5 million to $550.3 million and were 85.3%~~approximately 88% of total ~~deposits as of September 30, 2016. Total deposits were $645.5 million as of September 30, 2016, compared with $606.3 million as of December 31, 2015.~~

~~Total non-interest income for~~revenue during the ~~third~~first quarter of ~~2016 was $1.4 million, compared with $1.4 million for~~2017. To produce net interest income and consistent earnings growth over the ~~prior quarter~~long-term, DNB must generate loan and ~~$1.0 million for the quarter ended September 30, 2015. Total non-interest income for the third quarter~~deposit growth at acceptable economic spreads within its market area. To generate and grow loans and deposits, DNB must focus on a number of 2016 included a $30,000 gain from the insurance proceeds associated with the fire at our West Chester location. Wealth management fees were $393,000 for the third quarter of 2016 compared with $441,000 for the second quarter of 2016, and $317,000 for the quarter ending September 30, 2015. Wealth management fees represented approximately one-third of total fee income. Net gains from the sale of investment securities were $197,000 for the three months ending September 30, 2016, compared with $203,000 for the quarter ending June 30, 2016, and $10,000 for the same quarter, last year.

Non-interest expense was $6.7 million for the third quarter of 2016, compared with $5.2 million for the second quarter of 2016, and $4.8 million for the quarter ending September 30, 2015. Non-interest expense for the quarter ending September 30, 2016 included merger-related costs of $1.5 million associated with East River Bank. Excluding these items, non-interest expense was $5.2 million for the quarter ending September 30, 2016. On a sequential quarter basis, salary and employee benefits expense increased $124,000, or 4.6% (not annualized), primarily due to new hires and incentives. Occupancy and equipment increased $137,000, or 16.9% (not annualized), largely dueareas including, but not limited to, the ~~West Chester~~economy, branch ~~office being reopened in the second quarter~~expansion, sales practices, customer satisfaction and retention, competition, customer behavior, technology, product innovation and credit performance of ~~2016 following a fire, which occurred in the second quarter of 2015. Rent and depreciation expense had been suspended since that time.~~its customers.

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

The following is a summary of material challenges, risks and opportunities DNB has faced during the ~~nine~~three month period ended ~~September 30, 2016:~~March 31, 2017:

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

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

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

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

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

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

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

To attract these customers, DNB ~~has introduced new~~offers deposit products and services, such as ~~Mobile Money~~Choice Checking relationship products with ATM surcharge rebates, and ~~Mobile Deposit, Popmoney~~Online Banking with bill payment, external transfer and ~~instant issue debit cards.~~account aggregation functionality. DNB also offers a complete package of cash management services including automated clearing house services, remote deposit, payroll services, and 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 Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the maximum deposit insurance amount was permanently increased from $100,000 to $250,000.

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

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

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

In addition to deposit insurance assessments, banks are subject to assessments to pay the interest on Financing Corporation bonds. The Financing Corporation was created by Congress to issue bonds to finance the resolution of failed thrift institutions. The FDIC sets the Financing Corporation assessment rate every quarter. The current annual Financing Corporation assessment rate is 5654 basis points on the deposit insurance assessment base, as defined above, which we anticipate will result in an aggregate estimated FICO assessment payment by the Bank of ~~$38,000~~$53,000 in ~~2016.~~2017.

~~Completion of Acquisition.~~On October 1, 2016, DNB completed its previously announced merger (the "Merger") with East River Bank (“ERB”). Pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated as of April 4, 2016, at the effective time of the Merger, ERB merged with and into DNB First, N.A., a wholly owned subsidiary of DNB.

Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of ERB common stock was converted into the right to receive, at the election of the ERB shareholder (subject to certain conditions, including conditions relating to pro-ration): (i) 0.6562 shares of DNB common stock or (ii) $18.65 in cash. The Merger Agreement provides that election of shares of DNB stock or cash is subject to pro-ration such that 2,085,662 ERB shares of common stock, or approximately 85.3% of the current outstanding ERB shares, will be exchanged for DNB common stock with the remaining ERB shares to be exchanged for cash and that the aggregate cash consideration payable to ERB shareholders will be $6.7 million (subject to adjustment for outstanding options exercised prior to closing). The Merger Agreement also provides that options to purchase ERB common stock outstanding at the effective time of the Merger will be exchanged for a cash payment equal to the difference between the per share cash consideration under the Merger Agreement and the corresponding exercise price of such option. Options to acquire an aggregate of 248,000 shares of ERB common stock were exchanged for such cash payment. DNB is also required under the Merger Agreement to make a cash payment to ERB shareholders who would otherwise be entitled to a fractional share of DNB common stock. The aggregate payment made by DNB for these fractional shares is approximately $2,080.Material Trends and Uncertainties.

DNB reported net income available to common stockholders of ~~$1,000,~~$2.4 million, or ~~less than a penny~~$0.57 per diluted share, for the quarter ending ~~September 30, 2016,~~March 31, 2017, compared with ~~$1.3~~$1.6 million, or ~~$0.44~~$0.54 per diluted share, for the same quarter, last year. Results for the three months ended September 30, 2016 included merger-related costs of $1.5 million associated with East River Bank and $30,000 of gains from insurance proceeds (There was an associated income tax adjustment of $259,000 for these two items). Even though DNB’s quarterly earnings have increased compared to the same quarter last year (absent merger costs and insurance proceeds, net of taxes), there

There are many aspects of the economy and the Federal Reserve’s monetary policy that hinder DNB’s ability to grow revenues and net income. One of the most significant factors is that the global and U.S. economies have experienced reduced business activity as a result of disruptions in the financial system during the past ~~seven~~nine years. The United States, Europe, China and many other countries across the globe are struggling with too much debt and weaker streams of revenues as a result of recessionary pressures, falling oil prices and high unemployment. Overall economic growth continues to be slow at a time when national and regional unemployment rates have improved, however labor participation rates remain at historically low levels. The risks associated with our business remain acute in periods of slow ~~wage and~~ economic growth. ~~Moreover, financial institutions continue to be affected by a sluggish real estate market.~~ While we are continuing to take steps to decrease and limit our exposure to problem loans, we nonetheless retain direct exposure to the residential and commercial real estate markets, and we are affected by these events.

~~The September 7, 2016 Beige Book indicated that aggregate~~Aggregate business activity in the Third District ~~grew slightly~~continued at a modest pace during the ~~period--a bit slower than the~~March 1, 2017 Beige Book reporting period. Notable shifts in activity included manufacturing and homebuilding, which improved to a moderate pace of growth. Four sectors: non-auto consumer spending, lending, nonresidential construction and leasing, were essentially unchanged, after growing at a modest pace ~~reported during~~in the ~~July 13, 2016~~January 18, 2017 Beige Book period. ~~Similarly, overall hiring slowed~~Existing home sales appeared to ~~a slight pace~~have declined. According to most of ~~growth. Staffing firms reported a modest increase in activity, while manufacturers continued to report job cuts,~~the Federal Reserve Bank’s contacts, employment, wages, and ~~other sectors noted mixed trends. On balance, firms reported that~~ prices continued to ~~rise slightly over~~grow at a modest pace. Expectations for firm growth have risen recently; however, the September 7, 2016 Beige Book period, as did home prices. Other than health-care costs and wages for certain skilled positions, the Federal Reserve’s banking and staffing contacts reported that wages continued to rise modestly. Overall, firms expect moderateanticipated pace of growth over the next six ~~months--a little higher than they reported during the July 13, 2016 Beige Book period.~~months remains moderate on average.

Overall, Third District homebuilders ~~reported that activity~~ continued to ~~rise slightly, although prospective traffic slowed more than expected~~note the greatest price pressures for their inputs, especially for subcontracted labor. Overall, the late summer season. Builders noted few cost pressures, other than for some subcontractors with skilled labor positions; material costs pressures remained subdued. Brokers in the major Third District housing markets noted thatsales prices of existing home sales activity had leveled off since the July 13, 2016 Beige Book period. A major Philadelphia-area broker as well as bankers throughout the Third District noted that sales continued to be weak because of the lack of inventory for mid-priced housing and a lack of demand for high-priced homes. Overall, home prices are still risinghomes decreased slightly, although this varies across markets and price categories.

~~The~~Third District financial firms reported little or no change in overall loan volumes, after posting modest increases during the January 18, 2017 Beige Book period. This excludes the typically large seasonal decrease observed in credit card volumes, which follows the annual holiday season. Consumer lending (other than for credit cards and autos) was the only loan category to grow significantly during the period. Commercial real estate loan volume grew a bit, but less so than the same period last year. Home equity loans and auto loans decreased slightly, while volumes of home mortgages and of commercial and industrial loans were mostly unchanged. Most of

the Federal Reserve’s ~~nonresidential real estate~~ contacts ~~predominately in~~continued to note the ~~Greater Philadelphia area,~~increased optimism of Wall Street investors and larger Main Street businesses but also noted increased uncertainty, especially for consumers and small businesses. In general, the Federal Reserve’s banking contacts continued to express cautious optimism for slow, steady growth.

Third District manufacturers reported ~~that construction~~increased activity ~~remained steady at healthy levels, while leasing activity was flat to up slightly.~~over the January 18, 2017 Beige Book period, suggesting moderate growth overall. The Federal Reserve’s contacts reported that ~~activity in both segments was growing~~new orders picked up to a moderate pace of growth, while shipments continued at a ~~somewhat softer pace compared with July 13, 2016 Beige Book period's~~ modest ~~growth. Contacts noted that more projects are~~pace. Overall, gains in ~~the pipeline for future groundbreaking, which should keep the level of new construction relatively high. The Federal Reserve’s contacts noted a critical mass of deals from a variety of~~activity were indicated by most major sectors, including ~~health~~the makers of lumber products, paper products, chemicals, primary and ~~finance, which are creating demand beyond Center City Philadelphia to include the inner-ring transit suburbs.~~

Third District financial firms continued to report moderate growth of total loan volumes over the July 13, 2016 Beige Book period. Volumes within all lending categories have grown since the July 13, 2016 Beige Book period except for home equity loansfabricated metal products, industrial machinery, and ~~commercial and industrial (C&I) loans, which tailed off in August. All categories except C&I loans and automobile loans grew at a faster pace~~electronic products. More than during the same period one year ago. The strongest growth during the September 7, 2016 Beige Book period was for credit card debt, commercial real estate, automobile loans, and other consumer lending. Mortgage lending was up slightly during the period, while home equity loans were down slightly; both have declined since last year. On balance, banking contacts continued to describe their loan portfolios as healthy and their customers' financials as improving. Mosthalf of the Federal Reserve’s manufacturing contacts state they have left their loan standards unchanged for most loan categories, and few expressed concerns about riskier loans by their competitors. Many continued to characterize the lending environment as competitive. Most bankers described the confidence of their business and

~~consumer customers as low; some said that confidence was steady, if not rising, but that customers remained cautious of borrowing and investing. Bankers remained cautiously~~were optimistic that ~~slow, steady growth would continue.~~

~~Third District manufacturers reported that overall activity had changed little since the July 13, 2016 Beige Book period. Reports indicated that~~orders, shipments, and general activity fell and then rose during the September 7, 2016 Beige Book period, orders rose and then fell, and shipments increased throughout. Along with these offsetting trends, firms reported to the Federal Reserve that the number of employees and the average employee work hours continued to fall. The makers of paper products, fabricated metal products, and electronic equipment noted overall gains in activity from the July 13, 2016 Beige Book, while the makers of lumber, chemicals, and primary metals noted weaker activity. The Federal Reserve’s contacts expressed higher expectations of growthwould grow over the next six months, ~~than they did during~~similar to the ~~July 13, 2016~~January 18, 2017 Beige Book period. ~~Expectations~~About one-third of ~~future~~the contacts expressed expectations for increased capital expenditures, ~~also rose; however, those for future employment did not.~~

Although DNB’s earnings have been impacted by the general economic conditions, the impact has not been as severe as it has been in many parts of the nation, largely due to a relatively healthier economic climate in the Third Federal Reserve ~~District and specifically Chester County.~~District. DNB’s franchise spans ~~both~~ Chester, Philadelphia and Delaware counties in southeastern ~~Pennsylvania. The majority of loans have been made to businesses and individuals in Chester County~~Pennsylvania and the majority of the loan and deposits relationships are ~~from~~with businesses and individuals within the County. According to census data, Chester County’s population has grown at approximately 15%, compared to 13% for the nation and 3% for the Commonwealth of Pennsylvania. The median household income in Chester County is $85,373 and the County ranks 14th nationally in disposable income. The unemployment rate for Chester County stood at 3.8% as of March 2016, compared to a Pennsylvania unemployment rate of 5.3% and a national unemployment rate of 5.1%. Traditionally, the unemployment rate has been the lowest in the surrounding five-county area and it ranks among the lowest unemployment rates in the Commonwealth. Chester County has a civilian labor force of 285,486, with manufacturing jobs representing 23.1% of the workforce and retail shopping comprising 13.8% of the total employment. During the last few years, the County has been able to keep most of its major employers; however some of them have downsized in order to remain competitive. Chester County is home to several Fortune 500 companies. Thirteen Chester County employers have 1,000 employees or more. Of these 13 companies, two companies have more than 5,000 employees.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 Initiatives Related to Our Industry. The federal government continues to consider a variety of reforms related to banking and the financial industry including, without limitation, the Dodd-Frank Act. The Dodd-Frank Act is intended to promote financial stability in the U.S., reduce the risk of bailouts and protect against abusive financial services practices by improving accountability and transparency in the financial system and ending “too big to fail” institutions. It is the broadest overhaul of the U.S. financial system since the Great Depression, and although enacted more than five years ago, much of its impact will be determined by the scope and substance of many regulations that still need to be adopted by various regulatory agencies to implement its provisions. For these reasons, the overall impact on DNB and its subsidiaries remains unknown at this time.

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

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

Capital Rules. On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Corporation and the Bank. The FDIC and the OCC have subsequently approved these rules. The final rules were adopted following the issuance of proposed rules by the Federal Reserve in June 2012, and implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to two consultative documents released by

the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.

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

the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

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

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

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

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

The following discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principals. Generally accepted accounting principles are complex and require management to apply significant judgment to various accounting, reporting and disclosure matters. Management must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. Actual results may differ from these estimates under different assumptions or conditions.

In ~~management's opinion,~~preparing the ~~most critical accounting policies and estimates impacting DNB's~~ consolidated financial statements, ~~are listed below. These policies are critical because they are highly dependent upon subjective or complex judgments,~~management is required to make estimates and assumptions that affect the reported amounts of assets and ~~estimates. Changes in such estimates may have a significant impact on~~liabilities, the ~~financial statements. For a complete discussion~~disclosure of ~~DNB's significant accounting policies, see~~contingent assets and liabilities at the ~~notes to~~date of the Consolidated Statements of Financial ~~Statements included in DNB's 10-K~~

~~Determination~~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. ~~Credit loss allowance policies involve significant judgments, estimates~~ and ~~assumptions by management which may have a material impact on~~lending related commitments, the ~~carrying~~fair value of ~~net loans~~repossessed assets, pension and ~~potentially, on~~post-retirement obligations, the ~~net income recognized by DNB from period to period. The allowance~~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 ~~is based on management’s ongoing evaluation~~and lending related commitments as well as increased benefit plans’ expenses. The comparability of the ~~loan portfolio~~results of operations for the quarters ended March 31, 2017 compared to March 31, 2016, in general, have been impacted by the acquisition of ERB on October 1, 2016. The assets and ~~reflects an amount considered by management to be its best estimate~~liabilities of ERB were recorded on the ~~amount necessary to absorb known~~consolidated balance sheet at their established fair value as of October 1, 2016, and ~~inherent losses~~their results of operations have been included in the portfolio. Management considers a variety of factors when establishing the allowance, such as the impact of current economic conditions, diversification of the portfolios, delinquency statistics, results of loan review and related classifications, and historic loss rates. In addition, certain individual loans which management has identified as problematic are specifically provided for, based upon an evaluation of the borrower’s perceived ability to pay, the estimated adequacy of the underlying collateral and other relevant factors. In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for credit losses. They may require additions to the allowance based upon their judgments about information available to them at the time of examination. Although provisions have been established and segmented by type of loan, based upon management’s assessment of their differing inherent loss characteristics, the entire allowance for credit losses is available to absorb further losses in any category.

~~Management uses significant estimates to determine the allowance for credit losses. Because the allowance for credit losses is dependent, to a great extent, on conditions~~consolidated income statement since that may be beyond DNB’s control, management’s estimate of the amount necessary to absorb credit losses and actual credit losses could differ. DNB’s current judgment is that the allowance for credit losses remains appropriate at September 30, 2016. For a description of DNB’s accounting policies in connection with its allowance for credit losses, see, “Allowance for Credit Losses” in Management’s Discussion and Analysis.date

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.

DNB's total assets were ~~$770.3 million~~$1.09 billion at ~~September 30, 2016,~~March 31, 2017, compared to ~~$748.8 million~~$1.07 billion at December 31, ~~2015.~~2016. The ~~$21.5~~$19.2 million increase in total assets was primarily attributable to a ~~$27.7 million increase in loans before allowance for credit losses, a $9.3~~$22.0 million increase in cash and cash equivalents, a ~~$6.5~~$2.2 million increase in other ~~assets (primarily related to the future cash consideration payable to ERB shareholders per the merger agreement),~~real estate owned and ~~a $2.2 million increase in office~~other repossessed property, ~~and equipment,~~ offset by a $3.8 million decrease ~~of $24.7 million~~ in investment securities ~~(excluding restricted stock)~~ and a ~~$368,000 increase~~$1.3 million decrease in ~~allowance for credit losses.~~net loans.

Investment Securities. Investment securities, including restricted stock, at ~~September 30, 2016~~March 31, 2017 were ~~$199.1~~$183.8 million, compared to ~~$223.7~~$187.6 million at December 31, ~~2015.~~2016. The ~~$24.6~~$3.8 million decrease in investment securities and restricted stock was primarily due to ~~$76.2 million in purchases of investment securities and a $1.4 million change in fair value, and a $176,000 net increase in restricted stock, offset by $102.2~~$5.2 million in sales, principal pay-downs, calls and ~~maturities.~~maturities, offset by $1.4 million in purchases of investment securities.

Gross Loans. DNB’s loans ~~increased $27.7~~decreased $1.2 million to ~~$509.5~~$816.4 million at ~~September 30, 2016,~~March 31, 2017, compared to ~~$481.8~~$817.5 million at December 31, ~~2015.~~2016. Total commercial loans ~~increased $25.4 million and~~decreased $634,000, consumer loans ~~increased $2.6 million~~decreased $558,000, while residential loans ~~decreased $272,000.~~increased $26,000.

Deposits. Deposits were ~~$645.5~~$905.8 million at ~~September 30, 2016,~~March 31, 2017, compared to ~~$606.3~~$885.2 million at December 31, ~~2015.~~2016. Deposits increased ~~$39.3~~$20.6 million or ~~6.48%~~2.33% during the ~~nine-month~~three-month period ended ~~September 30, 2016.~~March 31, 2017. Core deposits, which are comprised of demand, NOW, money markets and savings accounts, increased by ~~$28.5~~$31.7 million, while time deposits ~~increased~~decreased by ~~$5.9~~$9.9 million and brokered deposits ~~increased~~decreased by ~~$4.8~~$1.2 million.

Borrowings. Borrowings were ~~$58.9~~$81.9 million at ~~September 30, 2016,~~March 31, 2017, compared to ~~$81.9~~$86.7 million at December 31, ~~2015.~~2016. The decrease of ~~$23.0~~$4.8 million or ~~28.0%~~5.5% was primarily due to a ~~$12.9 million decrease in repurchase agreements and a $10.0~~$4.4 million decrease in FHLBP ~~advances.~~advances and a $415,000 decrease in repurchase agreements.

Stockholders’ Equity. Stockholders' equity was ~~$59.2~~$97.3 million at ~~September 30, 2016,~~March 31, 2017, compared to ~~$55.5~~$94.8 million at December 31, ~~2015.~~2016. The increase in stockholders’ equity was primarily a result of year-to-date earnings of ~~$2.7~~$2.4 million, ~~and $914,000~~sales of ~~other comprehensive (loss) income, and~~treasury shares totaling $122,000, tax benefit for restricted stock vest of $110,000, restricted stock compensation expense of ~~$801,000.~~$107,000, and $100,000 of other comprehensive income. These additions to stockholders’ equity were partially offset by taxes on share award vesting of ~~$437,000~~$135,000 and ~~$598,000~~$297,000 of dividends paid on DNB’s common stock.

Net income for the three ~~and nine-month periods~~month period ended ~~September 30, 2016~~March 31, 2017 was ~~$1,000 and $2.7~~$2.4 million compared to ~~$1.3~~

~~million and $3.7~~$1.6 million for the same ~~periods~~period in ~~2015.~~ 2016. The comparability of the results of operations for the three month period ended March 31, 2017 compared to the same period in 2016, in general, have been impacted by the acquisition of ERB on October 1, 2016. Diluted earnings per share for the three ~~and nine-month periods~~month period ended ~~September 30, 2016~~March 31, 2017 were ~~$0.00 and $0.93~~$0.57 compared to ~~$0.44 and $1.31~~$0.54 for the same ~~periods~~period in ~~2015.~~2016. The ~~$1.3 million decrease~~$885,000 increase in net income in the ~~third~~first quarter of ~~2016~~2017 compared to the ~~third~~first quarter of ~~2015~~2016 was primarily attributable to a ~~$1.9~~$3.8 million increase in net interest income after provision (primarily due to interest and fees on loans), offset by a $547,000 increase in income tax expense, a $1.0 million decrease in non-interest income (primarily due to significantly higher gains on insurance proceeds in 2016), and a $1.3 million increase in non-interest expense (primarily due ~~diligence~~to salary and merger expenses) , offset by a $332,000 increase in non-interest income a $278,000 decrease in income tax expense, and a $67,000 increase in net interest income. The $1.1 million decrease in net income during the nine-month period was primarily attributable to a $3.0 million increase in non-interest expense (primarily due diligence and merger expenses) offset by a $1.4 million increase in non-interest income (primarily gains from insurance proceeds), a $186,000 decrease in income tax expense, a $185,000 decrease in the provision for credit losses, and a $151,000 increase in net interest income.employee benefits).

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

Net interest income for the three ~~and nine-month periods~~month period ended ~~September 30, 2016~~March 31, 2017 was ~~$5.5 million and $16.4~~$9.2 million, compared to $5.5 million ~~and $16.3 million~~ for the same ~~periods~~period in ~~2015.~~2016. Interest income for the three ~~and nine-month periods~~month period ended ~~September 30, 2016~~March 31, 2017 was ~~$6.3 million and $18.6~~$10.5 million, compared to ~~$6.2 million and $18.3~~$6.1 million for the same ~~periods~~period in ~~2015.~~2016. The $4.4 million increase was primarily due to a 68.7% rise in total average loans and a 0.52% increase in the net interest margin to 3.67% for the three month period ended March 31, 2017, compared to 3.15% for the same period in 2016. The main driver for the increase in both volume and rate was the East River Bank (“ERB”) acquisition, which took place October 1, 2016. For the three month period ended March 31, 2017, the weighted average yield on total interest-earning assets was 4.16%, which included purchase accounting adjustments of $611,000. Interest expense for the three ~~and nine-month periods~~month period ended ~~September 30, 2016~~March 31, 2017 was ~~$760,000 and $2.1~~$1.3 million, compared to ~~$711,000 and $2.0 million~~$650,000 for the same ~~periods~~period in ~~2015.~~2016. The composite cost of funds for the three ~~and nine-month periods~~month period ended ~~September 30, 2016~~March 31, 2017 was ~~0.43% and 0.41%~~0.53%, compared to ~~0.42% and 0.39%~~0.38% for the same ~~periods~~period in ~~2015. The net interest margin for the three and nine-month periods ended September 30, 2016 was 3.06% and 3.10%, compared to 3.13% and 3.13% for the same periods in 2015.~~2016.

Interest on loans was ~~$5.2 million and $15.4~~$9.5 million for the three ~~and nine-month periods~~month period ended ~~September 30, 2016,~~March 31, 2017, compared to $5.1 million ~~and $15.0 million~~ for the same ~~periods~~period in ~~2015.~~2016. The average balance of loans was ~~$498.6~~$815.0 million with an average yield of ~~4.18%~~4.71% for the ~~third~~first quarter of ~~2016,~~ 2017,compared to ~~$469.9~~$483.1 million with an average yield of ~~4.32%~~4.24% for the same period in ~~2015.~~2016. The increases in average balance ~~of loans was $490.1 million with an~~and average yield were

attributable to the acquisition of ~~4.21% for the nine months ended September 30, 2016, compared to $463.3 million with an average yield of 4.33% for the same period in 2015.~~ERB effective October 1, 2016.

Interest and dividends on investment securities was ~~$1.0 million and $3.1 million~~$939,000 for the three ~~and nine-month periods~~month period ended ~~September 30, 2016,~~March 31, 2017, compared to ~~$1.1 million and $3.3~~$1.0 million for the same ~~periods~~period in ~~2015.~~2016. The average balance of investment securities was ~~$215.0~~$187.2 million with a tax equivalent average yield of ~~2.19%~~2.26% for the ~~third~~first quarter of ~~2016,~~2017, compared to ~~$225.8~~$210.5 million with a tax equivalent average yield of ~~2.17%~~2.20% for the same period in 2015. The average balance of investment securities was $213.3 million with a tax equivalent average yield 2.24% for the nine months ended September 30, 2016, compared to $230.9 million with a tax equivalent average yield of 2.11% for the same period in 2015.2016.

Interest on deposits was ~~$450,000 and $1.2 million~~$877,000 for the three ~~and nine-month periods~~month period ended ~~September 30, 2016,~~March 31, 2017, compared to ~~$300,000 and $859,000~~$343,000 for the same ~~periods~~period in ~~2015.~~2016. The average balance of deposits was ~~$640.8~~$883.4 million with an average rate of ~~0.28%~~0.40% for the ~~third~~first quarter of ~~2016,~~2017, compared to ~~$607.3~~$615.1 million with an average rate of ~~0.20%~~0.22% for the same period in ~~2015.~~2016. The increases in average balance and average rate were attributable to the acquisition of ERB on October 1, 2016, coupled with a 25 basis points increase in the federal funds rate, which has impacted the rates DNB pays on the majority of non-maturity deposit accounts.

Interest on borrowings was $385,000 for the three month period ended March 31, 2017, compared to $307,000 for the same period in 2016. The average balance of ~~deposits~~borrowings was ~~$631.3~~$87.8 million with an average rate of ~~0.25%~~1.77% for the ~~nine months ended September 30, 2016,~~first quarter of 2017, compared to ~~$616.0~~$66.7 million with an average rate of ~~0.19%~~1.85% for the same period in ~~2015.~~

Interest on borrowings was $310,000 and $920,000 for the three and nine-month periods ended September 30, 2016, compared to $411,000 and $1.1 million for the same periods in 2015. The average balance of borrowings was $58.5 million with an average rate of 2.10% for the third quarter of 2016, compared to $71.5 million with an average rate of 2.29% for the same period in 2015. The average balance of borrowings was $61.2 million with an average rate of 2.00% for the nine months ended September 30, 2016, compared to $60.9 million with an average rate of 2.49% for the same period in 2015.2016.

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”).

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:

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

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

Given the contraction in real estate values, DNB closely monitors the loan to value ratios of all classified assets and requires periodic current appraisals to monitor underlying collateral values. Management also reviews borrower, sponsorship and guarantor’s

financial strength along with their ability and willingness to provide financial support of their obligations on an immediate and continuing basis.

There was a ~~$100,000 and $630,000~~$325,000 provision made during the three ~~and nine~~ months ended ~~September 30, 2016,~~March 31, 2017, compared to ~~$100,000 and $815,000~~$330,000 for the same ~~periods~~period in ~~2015.~~2016. DNB’s percentage of allowance for credit losses to total loans was ~~1.04%~~0.66% at ~~September 30, 2016~~March 31, 2017 compared to ~~1.02%~~0.66% and ~~1.01%~~1.06% at December 31, ~~2015~~2016 and ~~September 30, 2015,~~March 31, 2016, respectively. The decline in this ratio from 1.06% at March 31, 2016 to 0.66% at March 31, 2017 was primarily due to the acquisition of ERB. 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.Net charge-offs were ~~$262,000, $1.1 million,~~$280,000, $292,000, and ~~$992,000~~$93,000 during the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2017, year ended December 31, ~~2015,~~2016, and ~~nine~~three months ended ~~September 30, 2015,~~March 31, 2016, respectively. The percentage of net charge-offs to total average loans were ~~0.05%~~0.03%, ~~0.23%~~0.05%, and ~~0.21%~~0.02% 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 ~~September 30, 2016,~~March 31, 2017, 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 $1.9 million~~decreased $823,000 during the ~~nine~~three month period ended ~~September 30, 2016.~~March 31, 2017. 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, which has been impacted by a slow economy, a weakened housing market and deterioration in income-producing properties.

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

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

As of ~~September 30, 2016,~~March 31, 2017, DNB had ~~$9.9~~$12.7 million of non-performing assets, which included ~~$7.0~~$7.7 million of non-performing loans and ~~$2.9~~$5.0 million of OREO and other repossessed assets. This compares to ~~$7.7~~$11.3 million of non-performing assets at December 31, ~~2015~~2016 which included ~~$5.1~~$8.5 million of non-performing ~~or impaired~~ loans and ~~$2.6~~$2.8 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, not including large groups of smaller balance loans that are collectively evaluated. Impairment is measured by the difference between the loan amount and the

present value of the future cash flow discounted at the loan’s effective interest rate. Management measures loans for impairment by using the fair value of collateral for collateral dependent loans. In general, management reduces the amount of the appraisal by the estimated cost of acquisition and disposition of the underlying collateral and compares that adjusted value with DNB’s carrying value. DNB establishes a specific valuation allowance on impaired loans that have a collateral shortfall and/or ~~statement~~ cashflow shortfalls, including estimated costs to sell in comparison to the carrying value of the loan. Of the ~~$7.1~~$7.8 million of impaired loans ($~~7.0~~7.7 million of non-performing loans and ~~$104,000~~$147,000 of performing TDRs) at ~~September 30, 2016, $1.7~~March 31, 2017, $1.5 million had valuation allowances of ~~$386,000~~$247,000 and ~~$5.4~~$6.4 million had no specific allowance. Of the ~~$5.0~~$8.6 million of impaired loans at December 31, ~~2015, $307,000~~2016, $1.9 million had valuation allowances of ~~$114,000~~$334,000 and ~~$4.7~~$6.7 million had no specific allowance. For those impaired loans that management determined that no specific valuation allowance was necessary, management has reviewed the present value of the future cash flows or the appraisal for each loan and determined that there is no shortfall in the collateral. During the quarter ended ~~September 30, 2016,~~March 31, 2017, DNB recognized ~~$47,000~~$349,000 in total charge-offs, ~~$39,000~~$330,000 of which related to impaired loans. An impaired loan may not represent an expected loss.

We typically order new third-party appraisals or collateral valuations when a loan becomes impaired or is transferred to Other Real Estate Owned ("OREO"). This is done within two weeks of a loan becoming impaired or a loan moving to OREO. It generally takes two to eight weeks to receive the appraisals, depending on the type of property being appraised. We recognize any provision or related charge-off within two weeks of receiving the appraisal after the appraisal has been reviewed by DNB. We generally order a

new appraisal for all impaired real estate loans having a balance of $100,000 or higher, every twelve months, unless management determines more frequent appraisals are necessary. We use updated valuations when time constraints do not permit a full appraisal process, to reflect rapidly changing market conditions. Because appraisals and updated valuations utilize historical data in reaching valuation conclusions, the appraised or updated value may or may not reflect the actual sales price that we will receive at the time of sale. Management uses the qualitative factor “Changes in the value of underlying collateral for collateral-dependent loans” to calculate any required reserve to mitigate this risk.

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

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

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

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



	Nine Months Ended		Year Ended		Nine Months Ended		Three Months Ended		Year Ended		Three Months Ended
	September 30, 2016		December 31, 2015		September 30, 2015		March 31, 2017		December 31, 2016		March 31, 2016
Beginning balance	$	4,935	$	4,906	$	4,906	$	5,373	$	4,935	$	4,935
Provisions:		630		1,105		815
Provisions								325		730		330
Loans charged off:
Residential mortgage		(206)		(194)		(69)		-		(206)		(84)
Commercial mortgage		(39)		(105)		(105)		(234)		(39)		-
Commercial:
Commercial term		(32)		(200)		(190)		(105)		(45)		(13)
Commercial construction		-		(581)		(577)		-		-		-
Lease financing		-		-		-		-		-		-
Consumer:
Home equity		-		(11)		(11)		-		-		-
Other		-		(63)		(60)		(10)		(21)		-
Total charged off		(277)		(1,154)		(1,012)		(349)		(311)		(97)
Recoveries:
Residential mortgage		10		4		2		2		13		1
Commercial mortgage		-		-		-		50		-		-
Commercial:
Commercial term		1		13		10		16		1		1
Commercial construction		1		10		5		-		1		1
Lease financing		2		49		2		1		3		1
Consumer:
Home Equity		-		-		-		-		-		-
Other		1		2		1		-		1		-
Total recoveries		15		78		20		69		19		4
Ending balance	$	5,303	$	4,935	$	4,729	$	5,418	$	5,373	$	5,172
Reserve for unfunded loan commitments	$	199	$	188	$	178

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



		September 30, 2016				December 31, 2015				September 30, 2015				March 31, 2017				December 31, 2016				March 31, 2016
			Percent of				Percent of				Percent of				Percent of				Percent of				Percent of
			Loan Type				Loan Type				Loan Type				Loan Type				Loan Type				Loan Type
			to Total				to Total				to Total				to Total				to Total				to Total
		Amount	Loans			Amount	Loans			Amount	Loans			Amount	Loans			Amount	Loans			Amount	Loans
Residential mortgage	$	403	6	%	$	216	6	%	$	194	6	%	$	247	11	%	$	349	11	%	$	220	6	%
Commercial mortgage		2,472	56			2,375	57			2,491	61			2,597	57			2,531	57			2,376	56
Commercial:
Commercial term		793	21			989	21			719	16			774	14			709	15			948	22
Commercial construction		873	6			569	4			678	5			1,059	10			969	9			765	5
Consumer:
Home equity		202	10			195	11			200	11			196	7			196	7			188	10
Other		62	1			64	1			66	1			63	1			61	1			67	1
Unallocated		498	-			527	-			381	-			482	-			558	-			608	-
Total	$	5,303	100	%	$	4,935	100	%	$	4,729	100	%	$	5,418	100	%	$	5,373	100	%	$	5,172	100	%
Reserve for unfunded loan commitments	$	199			$	188			$	178			$	376			$	345			$	186

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 nine-month periods~~month period ended ~~September 30, 2016~~March 31, 2017 was ~~$1.4 million and $5.1~~$1.3 million, compared to ~~$1.0 million and $3.7~~$2.3 million for the same ~~periods~~period in ~~2015.~~2016. The ~~$332,000 increase~~$1.0 million decrease during the three months ended ~~September 30, 2016~~March 31, 2017 was mainly attributable to ~~increases~~decreases of ~~$187,000~~$1.1 million in ~~net~~gains on insurance proceeds (DNB received $1.15 million in gains on insurance proceeds in 2016 as a result of a fire at our West Chester offices that occurred during the second quarter of 2015), $39,000 in gains on sale of loans, $31,000 in gains on sale of investments, ~~$76,000~~and $23,000 in wealth ~~management, $38,000 in mortgage banking, $30,000 in gains on insurance proceeds, and $14,000~~management. These decreases were offset by increases of $80,000 in other fees (mostly servicing fee income)~~. These increases were offset by a decrease of $12,000~~ and $56,000 in service charges on deposits (mostly NSF fees and business analysis charges). The $1.4 million increase during the nine months ended September 30, 2016 was mainly attributable to increases of $1.2 million in gains from insurance proceeds related to the fire in the West Chester office, $357,000 in net gain on sale of investments, $140,000 in wealth management, $62,000 in mortgage banking, and $48,000 in other fees (mostly servicing fee income, Visa debit interchange, and merchant card processing).

Non-interest expense for the three ~~and nine-month periods~~month period ended ~~September 30, 2016~~March 31, 2017 was $6.7 million, ~~and $17.3 million,~~ compared to ~~$4.8 million and $14.3~~$5.4 million for the same ~~periods~~period in ~~2015.~~2016. During the three months ended ~~September 30, 2016,~~March 31, 2017, total non-interest expense increased by ~~$1.9~~$1.3 million. Compared to the three month period ended March 31, 2016, the increase in non-interest expense was largely due to the addition of ERB staff, offices and equipment as well as due diligence and merger related expenses and Core deposit intangible amortization expense. The increase was primarily due to increases of ~~$1.5 million in due diligence and merger expense, $202,000~~$515,000 in salary and employee benefits, ~~$119,000 in furniture and equipment, $109,000~~$276,000 in other expenses (mostly OREO expense, Visa debit charge-off expense, director’s fees, and miscellaneous expense), $251,000 in occupancy (mostly office building (“O.B.”) rental expense), $167,000 in furniture and ~~$93,000~~equipment (mostly maintenance agreements and depreciation), $66,000 in ~~occupancy.~~FDIC insurance, $63,000 in PA shares tax, $51,000 in due diligence and merger expenses, $29,000 in telecommunications, $17,000 in printing and supplies, and $14,000 in postage. These increases were partially offset by decreases of ~~$56,000~~$104,000 in ~~FDIC insurance, $30,000~~professional and consulting and $17,000 in advertising and marketing, and $11,000 in professional and consulting. During the nine months ended September 30, 2016, total non-interest expense increased $3.0 million. The increase was primarily due to increases of $2.0 million in due diligence and merger expenses, $739,000 in salary and employee benefits (restricted stock vestings, normal merit increases, and higher commissions), $185,000 in furniture and equipment, $127,000 in other expenses (mostly charge-off expenses and director’s fees), and $42,000 in professional and consulting.marketing.

Income tax expense for the three ~~and nine-month periods~~month period ended ~~September 30, 2016~~March 31, 2017 was ~~$81,000 and $939,000,~~$1.0 million, compared to ~~$359,000 and $1.1 million~~$480,000 for the same ~~periods~~period in ~~2015.~~2016. The effective tax rate for the three ~~and nine-month periods~~month period ended ~~September 30, 2016~~March 31, 2017 was ~~99.1% and 26.0%~~29.6% compared to ~~22.1% and 23.0%~~23.6% for the same ~~periods~~period in ~~2015.~~2016. The effective tax rate increased to ~~99.1%~~29.6%, primarily due to ~~an increased taxable adjustment~~a smaller percentage of tax exempt items in ~~the~~relation to of our pre-tax income, quarter ~~for non-deductible due diligence and merger expense of $313,000.~~over quarter. Income tax expense for each period differs from the amount determined at the statutory rate of 34.0% due to tax-exempt income on loans and investment securities, DNB's ownership of BOLI policies, and tax credits recognized on a low-income housing limited partnership.

DNB continues to work diligently to improve asset quality by adhering to strict underwriting standards and improving lending policies and procedures. Non-performing assets totaled ~~$9.9~~$12.7 million at ~~September 30, 2016~~March 31, 2017 compared to ~~$7.7~~$11.3 million at December 31, ~~2015~~2016 and ~~$6.5~~$7.8 million at ~~September 30, 2015.~~March 31, 2016. The non-performing loans to total loans ratio was ~~1.36%~~0.94% at ~~September 30, 2016, 1.06%~~March 31, 2017, 1.04% at December 31, ~~2015~~2016 and ~~0.90%~~1.06% at ~~September 30, 2015.~~March 31, 2016. The non-performing assets to total assets ratio was ~~1.28%~~1.16% at ~~September 30, 2016, 1.02%~~March 31, 2017, 1.05% at December 31, ~~2015,~~2016, and ~~0.87%~~1.02% at ~~September 30, 2015.~~March 31, 2016. The allowance to non-performing loans ratio was ~~76.3%~~70.6% at ~~September 30, 2016, 96.9%~~March 31, 2017, 63.2% at December 31, ~~2015~~2016 and ~~111.3%~~99.7% at ~~September 30, 2015.~~March 31, 2016. These ratios have declined primarily due to the acquisition of ERB. 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 ~~September 30, 2016,~~March 31, 2017, DNB had ~~$23.7~~$19.9 million of substandard loans. Of the ~~$23.7~~$19.9 million, ~~$16.4~~$11.5 million are performing and are believed to require ~~increased~~ supervision and ~~review;~~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, ~~2015~~2016 was ~~$14.6~~$13.5 million. The majority of the loans are secured by commercial real estate, with lesser amounts being secured by residential real estate, inventory and receivables.

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



	September 30, 2016			December 31, 2015			September 30, 2015			March 31, 2017			December 31, 2016			March 31, 2016
Non-accrual loans:
Residential mortgage	$	1,759		$	1,619		$	1,600		$	1,845		$	1,770		$	1,781
Commercial mortgage		3,061			1,048			1,075			1,885			4,593			1,025
Commercial:
Commercial term		202			188			191			1,986			198			210
Commercial construction		1,217			1,028			451			1,248			1,242			1,237
Consumer:
Home equity		492			563			313			460			442			574
Other		221			189			120			254			256			199
Total non-accrual loans		6,952			4,635			3,750			7,678			8,501			5,026
Loans 90 days past due and still accruing		-			457			498			-			-			164
Total non-performing loans		6,952			5,092			4,248			7,678			8,501			5,190
Other real estate owned & other repossessed property		2,939			2,581			2,235			5,000			2,767			2,612
Total non-performing assets	$	9,891		$	7,673		$	6,483		$	12,678		$	11,268		$	7,802
Asset quality ratios:
Non-performing loans to total loans		1.36	%		1.06	%		0.90	%		0.94	%		1.04	%		1.06	%
Non-performing assets to total assets		1.28			1.02			0.87			1.16			1.05			1.02
Allowance for credit losses to:
Total loans		1.04			1.02			1.01			0.66			0.66			1.06
Non-performing loans		76.3			96.9			111.3			70.6			63.2			99.7

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 ~~September 30,~~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. Loans classified as troubled debt restructurings are designated as impaired. The recorded investments in troubled debt restructured loans at March 31, 2017 and December 31, 2016 are as follows:

At March 31, 2017, DNB had five TDRs with recorded investment totaling $904,000, one ~~consumer~~of which totaled $102,000, represented an accruing impaired home equity loan classified as a TDR totaling $102,000, compared to one consumer home equity loan classified as a TDR totaling $102,000 (the same loan) at December 31, 2015, and one consumer home equity loan classified as a TDR totaling $102,000 (the same loan) at September 30, 2015. The monthly payment on this loan was reduced for 36 months andin compliance with the ~~borrower will resume making contractual payments at the end of this period. The loan was extended and there was no reduction of principal. This loan was classified a TDR in June of 2014. The balance~~terms of the ~~loan~~modification. The remaining $802,000 represents four loans that were nonaccrual impaired loans and resulted in collateral evaluations. As a result of the evaluations, specific reserves and charge-offs have been taken where appropriate. As of March 31, 2017, DNB recognized partial charge-offs totaling $151,000 on two residential loans prior to ~~modification was $102,000~~their restructuring and ~~the balance after the modification was $102,000. During the nine months ended September 30, 2016 and 2015, there were no defaults on any terms of this loan.~~

~~As of September 30, 2016, DNB had one consumer installment loan classified as a TDR totaling $40,000 compared~~$2,000 to one consumer installment loan classified as a TDR totaling $40,000 (the same loan) at December 31, 2015, and no such loans at September 30, 2015. The interest rate on the loan was reduced. The loan was extended and there was no reduction of principal. This loan was classified as a TDR in December of 2015. The balance of the loan prior to modification was $42,000 and the balance after ~~the modification was $42,000.~~its restructuring. DNB ~~recognized a partial~~did not recognize any charge-off on the ~~loan~~last remaining TDR. As of March 31, 2017, none of the TDRs are in ~~the amount of $2,000. During the nine months ended September 30, 2016~~default and ~~2015, there~~are current with respect to their associated forbearance agreements. There were no defaults on ~~any~~TDRs during the three months ended March 31, 2017.

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
	Nine Months Ended		Year Ended		Nine Months Ended		Three Months Ended		Year Ended		Three Months Ended
(Dollars in thousands)	September 30, 2016		December 31, 2015		September 30, 2015		March 31, 2017		December 31, 2016		March 31, 2016
Total recorded investment	$	7,055	$	5,021	$	4,105	$	7,825	$	8,604	$	5,128
Impaired loans with a specific allowance		1,662		307		920		1,465		1,872		884
Impaired loans without a specific allowance		5,393		4,714		3,185		6,360		6,732		4,244
Average recorded investment		6,184		6,891		7,359		8,219		6,669		5,076
Specific allowance allocation		386		114		120		247		334		200
Total principal and interest collected		772		2,878		2,830		83		852		43
Interest income recorded		3		96		88		2		4		1

Management maintains liquidity to meet depositors’ needs for funds, to satisfy or fund loan commitments, and for other operating purposes. DNB’s foundation for liquidity is a stable and loyal customer deposit base, cash and cash equivalents, and a marketable investment portfolio that provides periodic cash flow through regular maturities and amortization, or that can be used as collateral to secure funding. As part of its liquidity management, DNB maintains assets that comprise its ~~primary~~ liquidity, which totaled ~~$118.2~~$123.0 million at ~~September 30, 2016~~March 31, 2017 compared to ~~$96.8~~$101.4 million at December 31, ~~2015. Primary liquidity~~2016. Liquidity includes investments and restricted stock, Federal funds sold and cash and due from banks, less the amount of securities required to be pledged ~~securities of $111.3 million.~~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 ~~$312.9~~$508.9 million at ~~September 30, 2016.~~March 31, 2017. As a member of the FHLB, we are eligible to borrow up to a specific credit limit which is determined by the amount of our residential mortgages, commercial mortgages and other loans that have been pledged as collateral. As of ~~September 30, 2016, our~~March 31, 2017, DNB’s Maximum Borrowing Capacity with the ~~FHLB~~FHLBP was ~~$266.9~~$448.9 million. At ~~September 30, 2016,~~March 31, 2017, DNB had borrowed ~~$20.0~~$51.0 million and the FHLB had issued letters of credit, on DNB's behalf, totaling ~~$70.0~~$95.0 million against its available credit lines. At ~~September 30, 2016, we~~March 31, 2017, DNB also had available ~~$46.0~~$60.0 million of unsecured federal funds lines of credit with other financial institutions as well as ~~$104.0~~$155.3 million of available short or long term funding through the Certificate of Deposit Account Registry Service (CDARS) program and ~~$129.1~~$159.2 million of available short or long term funding through Raymond James’ brokered CDs agreement. Management believes that DNB has adequate resources to meet its short-term and long-term funding requirements.

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

At ~~September 30, 2016,~~March 31, 2017, DNB had ~~$122.1~~$191.8 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 ~~September 30, 2016~~March 31, 2017 totaled ~~$40.2~~$69.6 million. Management believes that the majority of such deposits will be reinvested with DNB and that certificates that are not renewed will be funded by a reduction in cash and cash equivalents or by pay-downs and maturities of loans and investments.

The Corporation and the Bank have each met the definition of “well capitalized” for regulatory purposes on ~~September 30, 2016.~~March 31, 2017. The Bank’s capital category is determined for the purposes of applying the bank regulators’ “prompt corrective action” regulations and for determining levels of deposit insurance assessments and may not constitute an accurate representation of the Corporation’s or the Bank’s overall financial condition or prospects. The Corporation’s capital exceeds the FRB’s minimum leverage ratio requirements for bank holding companies (see additional discussion included in Note 1617 of DNB’s December 31, ~~2015~~2016 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% ~~for 2015~~ to 2.50% by 2019. The capital conservation buffer is 1.25% and 0.625% for 2017 and 2016, ~~is 0.625%.~~respectively.

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



										To Be Well												To Be Well
						For Capital				Capitalized Under								For Capital				Capitalized Under
						Adequacy				Prompt Corrective								Adequacy				Prompt Corrective
		Actual				Purposes				Action Provisions				Actual				Purposes*				Action Provisions
(Dollars in thousands)		Amount	Ratio			Amount	Ratio			Amount	Ratio			Amount	Ratio			Amount	Ratio			Amount	Ratio
DNB Financial Corporation
September 30, 2016
March 31, 2017
Total risk-based capital	$	84,509	14.7	%	$	49,511	8.625	%		N/A	N/A		$	108,122	12.56	%	$	79,602	9.250	%		N/A	N/A
Common Equity Tier 1 capital		60,257	10.5			29,420	5.125			N/A	N/A			83,528	9.71			49,482	5.750			N/A	N/A
Tier 1 risk-based capital		69,257	12.1			38,030	6.625			N/A	N/A			92,528	10.75			62,391	7.250			N/A	N/A
Tier 1 (leverage) capital		69,257	9.1			30,574	4.000			N/A	N/A			92,528	8.75			42,289	4.000			N/A	N/A
December 31, 2015
December 31, 2016
Total risk-based capital	$	81,321	14.8	%	$	44,003	8.0	%		N/A	N/A		$	105,669	12.50	%	$	72,924	8.625	%		N/A	N/A
Common equity tier 1 capital		57,448	10.4			24,752	4.5			N/A	N/A			81,201	9.60			43,332	5.125			N/A	N/A
Tier 1 risk-based capital		66,448	12.1			33,002	6.0			N/A	N/A			90,201	10.67			56,014	6.625			N/A	N/A
Tier 1 (leverage) capital		66,448	8.9			29,717	4.0			N/A	N/A			90,201	8.42			42,864	4.000			N/A	N/A
DNB First, N.A.
September 30, 2016
March 31, 2017
Total risk-based capital	$	74,870	13.2	%	$	48,806	8.625	%	$	56,587	10.0	%	$	105,838	12.32	%	$	79,442	9.250	%	$	96,619	11.25	%
Common Equity Tier 1 capital		69,368	12.3			29,001	5.125			36,782	6.5			99,994	11.64			49,383	5.750			66,560	7.75
Tier 1 risk-based capital		69,368	12.3			37,489	6.625			45,270	8.0			99,994	11.64			62,266	7.250			79,442	9.25
Tier 1 (leverage) capital		69,368	9.1			30,519	4.000			38,148	5.0			99,994	9.47			42,240	4.000			52,800	5.00
December 31, 2015
December 31, 2016
Total risk-based capital	$	80,286	14.6	%	$	43,904	8.0	%	$	54,880	10.0	%	$	103,094	12.22	%	$	72,785	8.625	%	$	84,388	10.00	%
Common equity tier 1 capital		75,163	13.7			24,696	4.5			35,672	6.5			97,376	11.54			43,249	5.125			54,852	6.50
Tier 1 risk-based capital		75,163	13.7			32,928	6.0			43,904	8.0			97,376	11.54			55,907	6.625			67,511	8.00
Tier 1 (leverage) capital		75,163	10.1			29,670	4.0			37,087	5.0			97,376	9.09			42,830	4.000			53,537	5.00
*Capital conversion buffer of 1.25% and 0.625% included for March 31, 2017 and December 31, 2016, respectively.													*Capital conversion buffer of 1.25% and 0.625% included for March 31, 2017 and December 31, 2016, respectively.

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

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.

To measure the impacts of longer-term asset and liability mismatches beyond two years, DNB utilizes an Economic Value of Equity ("EVE") model. The EVE model measures the potential price risk of equity to changes in interest rates and factors in the optionality included on the balance sheet. EVE analysis is used to dynamically model the present value of asset and liability cash flows, with rates ranging up or down 200 basis points. The EVE is likely to be different if rates change. Results falling outside prescribed ranges may require action by management. At ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, 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 withinDNB's negative 25% guideline at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015.~~2016.



(Dollars in thousands)		September 30, 2016						December 31, 2015						March 31, 2017						December 31, 2016
Change in rates		Flat		-200bp		+200bp		Flat		-200bp		+200bp		Flat		-200bp		+200bp		Flat		-200bp		+200bp
EVE	$	70,092	$	73,738	$	70,205	$	68,118	$	58,298	$	58,936	$	124,670	$	115,887	$	122,079	$	118,298	$	111,279	$	114,771
Change				3,646		113				(9,820)		(9,182)				(8,783)		(2,591)				(7,019)		(3,527)
Change as % of assets				0.5%		0.0%				(1.3%)		(1.2%)				(0.8%)		(0.2%)				(0.7%)		(0.3%)
Change as % of PV equity				5.2%		0.2%				(14.4%)		(13.5%)				(7.0%)		(2.1%)				(5.9%)		(3.0%)

DNB’s Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of ~~September 30, 2016,~~March 31, 2017, the end of the period covered by this report, in accordance with the requirements of Exchange Act Rule 240.13a-15(b). Based on that evaluation, Management has concluded that DNB’s current disclosure controls and procedures are effective.

Management of DNB is responsible for establishing and maintaining adequate internal control over financial reporting for DNB, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. There was no change in DNB’s “internal control over financial reporting” (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fiscal quarter ended ~~September 30, 2016,~~March 31, 2017, that has materially affected, or is reasonably likely to materially affect, DNB’s internal control over financial reporting.

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.

~~Not applicable~~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 2016 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.

There were no unregistered sales of equity securities during the quarter ended ~~September 30, 2016.~~March 31, 2017. The following table provides information on repurchases by DNB of its common stock in each month of the quarter ended ~~September 30, 2016:~~

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.

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.



											Accumulated
											Other
	Preferred		Common		Treasury				Retained		Comprehensive
(Dollars in thousands)	Stock		Stock		Stock		Surplus		Earnings		Loss		Total
Balance at January 1, 2016	$	-	$	2,955	$	(2,015)	$	35,097	$	21,436	$	(1,985)	$	55,488
Net income for nine months ended September 30, 2016		-		-		-		-		2,666		-		2,666
Other comprehensive income		-		-		-		-		-		914		914
Restricted stock compensation expense (18,079 shares vested)		-		36		-		765		-		-		801
Taxes on share award vest		-		(16)		-		(421)		-		-		(437)
Tax benefit for restricted stock vest		-		-		-		64		-		-		64
Cash dividends - common ($0.21 per share)		-		-		-		-		(598)		-		(598)
Sale of treasury shares to 401(k) (7,111 shares)		-		-		130		68		-		-		198
Sale of treasury shares to deferred comp. plan (4,404 shares)		-		-		80		41		-		-		121
Balance at September 30, 2016	$	-	$	2,975	$	(1,805)	$	35,614	$	23,504	$	(1,071)	$	59,217



	March 31, 2017
	Pre-Modification		Post-Modification
(Dollars in thousands)	Outstanding Recorded Investment		Outstanding Recorded Investment		Recorded Investment
Residential mortgage	$	754	$	883	$	717
Consumer:
Home equity		148		148		148
Other		40		42		39
Total	$	942	$	1,073	$	904

	December 31, 2016
	Pre-Modification		Post-Modification
(Dollars in thousands)	Outstanding Recorded Investment		Outstanding Recorded Investment		Recorded Investment
Residential mortgage	$	754	$	883	$	726
Consumer:
Home equity		148		148		148
Other		40		42		40
Total	$	942	$	1,073	$	914



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

~~July~~January 1, ~~2016~~2017 – ~~July~~January 31, ~~2016~~2017	-	$	-	-	$	63,016
		��
~~August~~February 1, ~~2016~~2017 – ~~August 31, 2016~~February 28, 2017	-		-	-	$	63,016

~~September~~March 1, ~~2016~~2017 – ~~September 30, 2016~~March 31, 2017	-		-	-	$	63,016

Total	-	$	-	-	$	63,016


Exhibit Number		Description

2.1		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 ~~(No. 1-34242)~~ on April 5, 2016 and incorporated herein by reference.
3.1		Amended and Restated Articles of Incorporation, as amended effective December 8, 2008, filed March 31, 2009 as ~~item~~Exhibit 3(i) to Form 10-K for the fiscal year-ended December 31, 2008 ~~(No. 1-34242)~~ and incorporated herein by reference.
3.2		Bylaws of the Registrant as amended ~~December 8, 2008, filed March 31, 2009 as item 3(ii) to Form 10-K for the fiscal year-ended December 31, 2008 (No. 1-34242) and incorporated herein by reference.~~
~~3.3~~		~~Certificate of Designations of Fixed Rate Cumulative Preferred Stock, Series 2008A of DNB Financial Corporation,~~January 27, 2016, filed as Exhibit ~~4.3~~3.1 to Form 8-K ~~(No. 1-34242)~~ on January ~~26, 2009~~29, 2016 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


overmber
		DNB FINANCIAL CORPORATION

~~November 7, 2016~~May 15, 2017	BY:	/s/ William J. Hieb
		William J. Hieb, Chief Executive Officer, President and Director



~~November 7, 2016~~May 15, 2017	BY:	/s/ Gerald F. Sopp
		Gerald F. Sopp, Chief Financial Officer and Executive Vice President


Exhibit Number			Exhibit Index Description
2.1			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 ~~(No. 1-34242)~~ on April 5, 2016 and incorporated herein by reference.
3.1			Amended and Restated Articles of Incorporation, as amended effective December 8, 2008, filed March 31, 2009 as ~~item~~Exhibit 3(i) to Form 10-K for the fiscal year-ended December 31, 2008 ~~(No. 1-34242)~~ and incorporated herein by reference.
3.2			Bylaws of the Registrant as amended ~~December 8, 2008, filed March 31, 2009 as item 3(ii) to Form 10-K for the fiscal year-ended December 31, 2008 (No. 1-34242) and incorporated herein by reference.~~
~~3.3~~			~~Certificate of Designations of Fixed Rate Cumulative Preferred Stock, Series 2008A of DNB Financial Corporation,~~January 27, 2016, filed as Exhibit ~~4.3~~3.1 to Form 8-K ~~(No. 1-34242)~~ on January ~~26, 2009~~29, 2016 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