NOTE 4: ALLOWANCE FOR CREDIT LOSSES

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a scheduled payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of June 30, 2014 and December 31, 2013.

Age Analysis of Past Due Loans Receivables



June 30, 2014
														Loans
														Receivable
		30-59		60-89		Greater						Total		> 90
		Days Past		Days Past		than		Total				Loans		Days and
(Dollars in thousands)		Due		Due		90 Days		Past Due		Current		Receivables		Accruing
Residential mortgage	$	306	$	465	$	2,234	$	3,005	$	22,332	$	25,337	$	500
Commercial mortgage		1,322		202		35		1,559		248,455		250,014		-
Commercial:
Commercial term		-		-		-		-		87,912		87,912		-
Commercial construction		-		-		2,293		2,293		20,549		22,842		-
Lease financing		-		-		1		1		-		1		1
Consumer:
Home equity		6		-		263		269		46,588		46,857		-
Other		114		69		99		282		5,777		6,059		-
Total	$	1,748	$	736	$	4,925	$	7,409	$	431,613	$	439,022	$	501



December 31, 2013
														Loans
														Receivable
		30-59		60-89		Greater						Total		> 90
		Days Past		Days Past		than		Total				Loans		Days and
(Dollars in thousands)		Due		Due		90 Days		Past Due		Current		Receivables		Accruing
Residential mortgage	$	507	$	865	$	1,757	$	3,129	$	21,548	$	24,677	$	-
Commercial mortgage		358		192		74		624		233,975		234,599		-
Commercial:
Commercial term		50		-		-		50		89,229		89,279		-
Commercial construction		-		-		2,554		2,554		16,563		19,117		-
Lease financing		-		-		2		2		-		2		2
Consumer:
Home equity		-		50		376		426		40,992		41,418		67
Other		80		-		77		157		6,105		6,262		72
Total	$	995	$	1,107	$	4,840	$	6,942	$	408,412	$	415,354	$	141

The following tables summarize information in regards to impaired loans by loan portfolio class as of and for the three and six months ended June 30, 2014 and as of and for the year ended December 31, 2013.

Impaired Loans





		June 30, 2014						December 31, 2013
		Recorded		Unpaid		Related		Recorded		Unpaid		Related
		Investment		Principal		Allowance		Investment		Principal		Allowance
(Dollars in thousands)				Balance						Balance
With no related allowance recorded:
Residential mortgage	$	1,734	$	2,321	$	-	$	2,250	$	2,848	$	-
Commercial mortgage		2,499		2,579		-		2,502		2,574		-
Commercial:
Commercial term		-		-		-		-		3		-
Commercial construction		1,094		1,877		-		499		3,355		-
Consumer:
Home equity		460		472		-		434		442		-
Other		27		31		-		78		78		-
Total	$	5,814	$	7,280	$	-	$	5,763	$	9,300	$	-
With allowance recorded:
Residential mortgage		-		-		-		-		-		-
Commercial mortgage		-		-		-		36		36		14
Commercial:
Commercial term		-		-		-		-		-		-
Commercial construction		1,312		4,976		276		2,055		3,386		361
Consumer:
Home equity		-		-		-		-		-		-
Other		72		72		24		4		4		4
Total	$	1,384	$	5,048	$	300	$	2,095	$	3,426	$	379
Total:
Residential mortgage		1,734		2,321		-		2,250		2,848		-
Commercial mortgage		2,499		2,579		-		2,538		2,610		14
Commercial:
Commercial term		-		-		-		-		3		-
Commercial construction		2,406		6,853		276		2,554		6,741		361
Consumer:
Home equity		460		472		-		434		442		-
Other		99		103		24		82		82		4
Total	$	7,198	$	12,328	$	300	$	7,858	$	12,726	$	379




		Three Months Ended				Three Months Ended				Six Months Ended				Six Months Ended
		June 30, 2014				June 30, 2013				June 30, 2014				June 30, 2013
		Average		Interest		Average		Interest		Average		Interest		Average		Interest
		Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
(Dollars in thousands)		Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Residential mortgage	$	1,614	$	-	$	2,414	$	-	$	1,826	$	-	$	2,405	$	-
Commercial mortgage		2,508		-		2,250		-		2,506		-		2,436		-
Commercial:
Commercial term		-		-		-		-		-		-		-		-
Commercial construction		1,094		-		1,091		-		896		-		727		-
Lease financing		-		-		13		-		-		-		18		-
Consumer:
Home equity		428		2		61		-		430		3		62		-
Other		22		-		124		3		40		-		132		3
Total	$	5,666	$	2	$	5,953	$	3	$	5,698	$	3	$	5,780	$	3
With allowance recorded:
Residential mortgage		377		-		159		-		251		-		106		-
Commercial mortgage		18		-		2,392		-		24		-		2,449		-
Commercial:
Commercial term		-		-		100		-		-		-		67		-
Commercial construction		1,312		-		4,326		-		1,560		-		4,326		-
Lease financing		-		-		-		-		-		-		-		-
Consumer:
Home equity		-		-		-		-		-		-		-		-
Other		105		-		-		-		71		-		-		-
Total	$	1,811	$	-	$	6,977	$	-	$	1,906	$	-	$	6,948	$	-
Total:
Residential mortgage		1,991		-		2,573		-		2,077		-		2,511		-
Commercial mortgage		2,526		-		4,642		-		2,530		-		4,885		-
Commercial:
Commercial term		-		-		100		-		-		-		67		-
Commercial construction		2,406		-		5,417		-		2,456		-		5,053		-
Lease financing		-		-		13		-		-		-		18		-
Consumer:
Home equity		428		2		61		-		430		3		62		-
Other		127		-		124		3		111		-		132		3
Total	$	7,477	$	2	$	12,930	$	3	$	7,604	$	3	$	12,728	$	3

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within DNB’s internal risk rating system as of June 30, 2014 and December 31, 2013.

Credit Quality Indicators



		June 30, 2014
				Special
(Dollars in thousands)		Pass		Mention		Substandard		Doubtful		Total
Residential mortgage	$	23,321	$	-	$	2,016	$	-	$	25,337
Commercial mortgage		240,201		415		9,398		-		250,014
Commercial:
Commercial term		82,192		72		5,648		-		87,912
Commercial construction		18,767		-		3,375		700		22,842
Lease financing		1		-		-		-		1
Consumer:
Home equity		46,362		-		495		-		46,857
Other		5,961		-		98		-		6,059
Total	$	416,805	$	487	$	21,030	$	700	$	439,022



		December 31, 2013
				Special
(Dollars in thousands)		Pass		Mention		Substandard		Doubtful		Total
Residential mortgage	$	22,142	$	-	$	2,535	$	-	$	24,677
Commercial mortgage		224,868		5,028		4,703		-		234,599
Commercial:
Commercial term		88,657		419		203		-		89,279
Commercial construction		16,450		-		1,967		700		19,117
Lease financing		2		-		-		-		2
Consumer:
Home equity		40,940		-		478		-		41,418
Other		6,180		-		82		-		6,262
Total	$	399,239	$	5,447	$	9,968	$	700	$	415,354

As of June 30, 2014, DNB had one commercial mortgage classified as a TDR totaling $2,269,000, compared to one commercial mortgage classified as a TDR totaling $2,272,000 (the same loan) at December 31, 2013. The rate on this loan was modified and the terms of the loans were changed to interest only while the project was being built out. The loan was extended and there was no reduction of principal. The balance of the loan prior to modification was $2,272,000 and the balance after the modification was $2,272,000. During the three and six months ended June 30, 2014, there were no defaults on any terms of this loan. DNB had no TDRs as of June 30, 2013.

As of June 30, 2014, DNB had one consumer home equity loan classified as a TDR totaling $102,000, compared to no such loans at December 31, 2013 and March 31, 2014. The monthly payment on this loan was reduced for 36 months and the borrower will resume making contractual payments at the end of this period. The loan was extended and there was no reduction of principal. This loan was classified a TDR in June of 2014. The balance of the loan prior to modification was $102,000 and the balance after the modification was $102,000. During the three and six months ended June 30, 2014, there were no defaults on any terms of this loan.

The following tables set forth the composition of DNB’s allowance for credit losses as of June 30, 2014 and December 31, 2013, the activity for the three and six months ended June 30, 2014 and 2013 and as of and for the year ended December 31, 2013.

Allowance for Credit Losses and Recorded Investment in Loans Receivables



	Residential		Commercial		Commercial		Commercial		Lease		Consumer		Consumer
(Dollars in thousands)	mortgage		mortgage		term		construction		financing		home equity		Other		Unallocated		Total
Allowance for credit losses:
Beginning balance - April 1, 2014	$	347	$	2,146	$	652	$	806	$	-	$	167	$	125	$	507	$	4,750
Charge-offs		(100)		(8)		(11)		-		-		-		(11)		-		(130)
Recoveries		2		-		2		-		5		-		3		-		12
Provisions		66		(7)		(2)		213		(5)		9		(19)		-		255
Ending balance - June 30, 2014	$	315	$	2,131	$	641	$	1,019	$	-	$	176	$	98	$	507	$	4,887



	Residential		Commercial		Commercial		Commercial		Lease		Consumer		Consumer
(Dollars in thousands)	mortgage		mortgage		term		construction		financing		home equity		Other		Unallocated		Total
Allowance for credit losses:
Beginning balance - January 1, 2014	$	285	$	2,010	$	621	$	1,033	$	-	$	156	$	78	$	440	$	4,623
Charge-offs		(100)		(8)		(18)		(261)		-		-		(11)		-		(398)
Recoveries		5		-		2		10		6		-		9		-		32
Provisions		125		129		36		237		(6)		20		22		67		630
Ending balance - June 30, 2014	$	315	$	2,131	$	641	$	1,019	$	-	$	176	$	98	$	507	$	4,887

Ending balance: individually evaluated for impairment	$	-	$	-	$	-	$	276	$	-	$	-	$	24	$	-	$	300

Ending balance: collectively evaluated for impairment	$	315	$	2,131	$	641	$	743	$	-	$	176	$	74	$	507	$	4,587
Loans receivables:
Ending balance	$	25,337	$	250,014	$	87,912	$	22,842	$	1	$	46,857	$	6,059			$	439,022

Ending balance: individually evaluated for impairment	$	1,734	$	2,499	$	-	$	2,406	$	-	$	460	$	99			$	7,198

Ending balance: collectively evaluated for impairment	$	23,603	$	247,515	$	87,912	$	20,436	$	1	$	46,397	$	5,960			$	431,824

Reserve for unfunded loan commitments included in other liabilities	$	-	$	10	$	79	$	60	$	-	$	11	$	-			$	160



	Residential		Commercial		Commercial		Commercial		Lease		Consumer		Consumer
(Dollars in thousands)	mortgage		mortgage		term		construction		financing		home equity		Other		Unallocated		Total
Allowance for credit losses:
Beginning balance - April 1, 2013	$	327	$	3,248	$	711	$	1,930	$	2	$	180	$	83	$	642	$	7,123
Charge-offs		(184)		(394)		(212)		-		(26)		-		-		-		(816)
Recoveries		5		-		1		-		2		-		-		-		8
Provisions		161		256		(16)		74		22		1		(3)		(120)		375
Ending balance - June 30, 2013	$	309	$	3,110	$	484	$	2,004	$	-	$	181	$	80	$	522	$	6,690



	Residential		Commercial		Commercial		Commercial		Lease		Consumer		Consumer
(Dollars in thousands)	mortgage		mortgage		term		construction		financing		home equity		Other		Unallocated		Total
Allowance for credit losses:
Beginning balance - January 1, 2013	$	306	$	3,094	$	506	$	1,536	$	3	$	178	$	86	$	1,129	$	6,838
Charge-offs		(184)		(394)		(222)		-		(26)		-		(5)		-		(831)
Recoveries		70		-		5		-		53		-		-		-		128
Provisions		117		410		195		468		(30)		3		(1)		(607)		555
Ending balance - June 30, 2013	$	309	$	3,110	$	484	$	2,004	$	-	$	181	$	80	$	522	$	6,690
Reserve for unfunded loan commitments included in other liabilities	$	-	$	11	$	81	$	41	$	-	$	9	$	-			$	142



	Residential		Commercial		Commercial		Commercial		Lease		Consumer		Consumer
(Dollars in thousands)	mortgage		mortgage		term		construction		financing		home equity		Other		Unallocated		Total
Allowance for credit losses:
Ending balance - December 31, 2013	$	285	$	2,010	$	621	$	1,033	$	-	$	156	$	78	$	440	$	4,623
Ending balance: individually evaluated for impairment	$	-	$	14	$	-	$	361	$	-	$	-	$	4	$	-	$	379
Ending balance: collectively evaluated for impairment	$	285	$	1,996	$	621	$	672	$	-	$	156	$	74	$	440	$	4,244
Loans receivables:
Ending balance	$	24,677	$	234,599	$	89,279	$	19,117	$	2	$	41,418	$	6,262			$	415,354
Ending balance: individually evaluated for impairment	$	2,250	$	2,538	$	-	$	2,554	$	-	$	434	$	82			$	7,858
Ending balance: collectively evaluated for impairment	$	22,427	$	232,061	$	89,279	$	16,563	$	2	$	40,984	$	6,180			$	407,496
Reserve for unfunded loan commitments included in other liabilities	$	-	$	9	$	68	$	57	$	-	$	9	$	-			$	143