NOTE 4: ALLOWANCE FOR CREDIT LOSSES

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

Age Analysis of Past Due Loans Receivable



September 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		Receivable		Accruing
Residential mortgage	$	943	$	145	$	2,144	$	3,232	$	22,578	$	25,810	$	105
Commercial mortgage		2		166		35		203		257,405		257,608		-
Commercial:
Commercial term		30		-		-		30		87,366		87,396		-
Commercial construction		-		-		2,043		2,043		23,975		26,018		-
Lease financing		-		-		-		-		-		-		-
Consumer:
Home equity		160		-		268		428		46,370		46,798		-
Other		68		-		94		162		5,615		5,777		-
Total	$	1,203	$	311	$	4,584	$	6,098	$	443,309	$	449,407	$	105



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		Receivable		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 nine months ended September 30, 2014 and as of and for the year ended December 31, 2013.

Impaired Loans





		September 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	$	2,117	$	2,763	$	-	$	2,250	$	2,848	$	-
Commercial mortgage		3,428		3,509		-		2,502		2,574		-
Commercial:
Commercial term		-		-		-		-		3		-
Commercial construction		2,156		6,853		-		499		3,355		-
Consumer:
Home equity		458		472		-		434		442		-
Other		94		94		-		78		78		-
Total	$	8,253	$	13,691	$	-	$	5,763	$	9,300	$	-
With allowance recorded:
Residential mortgage		-		-		-		-		-		-
Commercial mortgage		-		-		-		36		36		14
Commercial:
Commercial term		200		200		121		-		-		-
Commercial construction		-		-		-		2,055		3,386		361
Consumer:
Home equity		-		-		-		-		-		-
Other		-		-		-		4		4		4
Total	$	200	$	200	$	121	$	2,095	$	3,426	$	379
Total:
Residential mortgage		2,117		2,763		-		2,250		2,848		-
Commercial mortgage		3,428		3,509		-		2,538		2,610		14
Commercial:
Commercial term		200		200		121		-		3		-
Commercial construction		2,156		6,853		-		2,554		6,741		361
Consumer:
Home equity		458		472		-		434		442		-
Other		94		94		-		82		82		4
Total	$	8,453	$	13,891	$	121	$	7,858	$	12,726	$	379




		Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
		September 30, 2014				September 30, 2013				September 30, 2014				September 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	$	1,926	$	-	$	2,472	$	-	$	1,899	$	-	$	2,428	$	-
Commercial mortgage		2,964		29		1,218		-		2,736		76		1,897		-
Commercial:
Commercial term		-		-		-		-		-		-		-		-
Commercial construction		1,625		-		1,277		-		1,211		-		1,184		-
Lease financing		-		-		-		-		-		-		14		-
Consumer:
Home equity		459		1		60		-		437		7		62		-
Other		61		-		102		-		54		-		124		3
Total	$	7,034	$	30	$	5,129	$	-	$	6,337	$	83	$	5,709	$	3
With allowance recorded:
Residential mortgage		-		-		-		-		188		-		80		-
Commercial mortgage		-		-		566		-		18		-		1,837		-
Commercial:
Commercial term		100		-		-		-		50		-		50		-
Commercial construction		656		-		2,163		-		1,170		-		3,245		-
Lease financing		-		-		-		-		-		-		-		-
Consumer:
Home equity		-		-		-		-		-		-		-		-
Other		36		-		-		-		53		-		-		-
Total	$	792	$	-	$	2,729	$	-	$	1,479	$	-	$	5,212	$	-
Total:
Residential mortgage		1,926		-		2,472		-		2,087		-		2,508		-
Commercial mortgage		2,964		29		1,784		-		2,754		76		3,734		-
Commercial:
Commercial term		100		-		-		-		50		-		50		-
Commercial construction		2,281		-		3,440		-		2,381		-		4,429		-
Lease financing		-		-		-		-		-		-		14		-
Consumer:
Home equity		459		1		60		-		437		7		62		-
Other		97		-		102		-		107		-		124		3
Total	$	7,826	$	30	$	7,858	$	-	$	7,816	$	83	$	10,921	$	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 September 30, 2014 and December 31, 2013.

Credit Quality Indicators



		September 30, 2014
				Special
(Dollars in thousands)		Pass		Mention		Substandard		Doubtful		Total
Residential mortgage	$	23,413	$	-	$	2,397	$	-	$	25,810
Commercial mortgage		247,899		405		9,304		-		257,608
Commercial:
Commercial term		81,831		72		5,493		-		87,396
Commercial construction		21,777		-		4,241		-		26,018
Lease financing		-		-		-		-		-
Consumer:
Home equity		46,306		-		492		-		46,798
Other		5,683		-		94		-		5,777
Total	$	426,909	$	477	$	22,021	$	-	$	449,407



		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 September 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 commenced normal principal and interest payments in June 2014. The loan was extended and there was no reduction of principal. The balance of the loan prior to modification was $2,272,000 and the balance after the modification was $2,272,000. During the three and nine months ended September 30, 2014, there were no defaults on any terms of this loan. DNB had no TDRs as of September 30, 2013.

As of September 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. The monthly payment on this loan was reduced for 36 months and the borrower will resume making contractual payments at the end of this period. The loan was extended and there was no reduction of principal. This loan was classified a TDR in June of 2014. The balance of the loan prior to modification was $102,000 and the balance after the modification was $102,000. During the three and nine months ended September 30, 2014, there were no defaults on any terms of this loan.

Loans classified as TDR, are considered impaired. The following tables set forth the composition of DNB’s allowance for credit losses as of September 30, 2014 and December 31, 2013, the activity for the three and nine months ended September 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 - July 1, 2014	$	315	$	2,131	$	641	$	1,019	$	-	$	176	$	98	$	507	$	4,887
Charge-offs		(59)		-		(13)		(250)		(1)		-		(71)		-		(394)
Recoveries		-		-		-		93		1		-		-		-		94
Provisions		63		53		121		(86)		-		-		44		105		300
Ending balance - September 30, 2014	$	319	$	2,184	$	749	$	776	$	-	$	176	$	71	$	612	$	4,887



	Residential		Commercial		Commercial		Commercial		Lease		Consumer		Consumer
(Dollars in thousands)	mortgage		mortgage		term		construction		financing		home equity		Other		Unallocated		Total
Allowance for credit losses:
Beginning balance - January 1, 2014	$	285	$	2,010	$	621	$	1,033	$	-	$	156	$	78	$	440	$	4,623
Charge-offs		(159)		(8)		(31)		(511)		(1)		-		(82)		-		(792)
Recoveries		5		-		2		103		7		-		9		-		126
Provisions		188		182		157		151		(6)		20		66		172		930
Ending balance - September 30, 2014	$	319	$	2,184	$	749	$	776	$	-	$	176	$	71	$	612	$	4,887

Ending balance: individually evaluated for impairment	$	-	$	-	$	121	$	-	$	-	$	-	$	-	$	-	$	121

Ending balance: collectively evaluated for impairment	$	319	$	2,184	$	628	$	776	$	-	$	176	$	71	$	612	$	4,766
Loans receivables:
Ending balance	$	25,810	$	257,608	$	87,396	$	26,018	$	-	$	46,798	$	5,777			$	449,407

Ending balance: individually evaluated for impairment	$	2,117	$	3,428	$	200	$	2,156	$	-	$	458	$	94			$	8,453

Ending balance: collectively evaluated for impairment	$	23,693	$	254,180	$	87,196	$	23,862	$	-	$	46,340	$	5,683			$	440,954

Reserve for unfunded loan commitments included in other liabilities	$	-	$	9	$	85	$	40	$	-	$	11	$	-			$	145



	Residential		Commercial		Commercial		Commercial		Lease		Consumer		Consumer
(Dollars in thousands)	mortgage		mortgage		term		construction		financing		home equity		Other		Unallocated		Total
Allowance for credit losses:
Beginning balance - July 1, 2013	$	309	$	3,110	$	484	$	2,004	$	-	$	181	$	80	$	522	$	6,690
Charge-offs		1		(322)		(13)		(3,648)		-		-		(12)		-		(3,994)
Recoveries		5		-		-		-		4		-		1		-		10
Provisions		(132)		(155)		99		1,846		(4)		11		9		(74)		1,600
Ending balance - September 30, 2013	$	183	$	2,633	$	570	$	202	$	-	$	192	$	78	$	448	$	4,306



	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		(183)		(716)		(235)		(3,648)		(26)		-		(17)		-		(4,825)
Recoveries		75		-		5		-		57		-		1		-		138
Provisions		(15)		255		294		2,314		(34)		14		8		(681)		2,155
Ending balance - September 30, 2013	$	183	$	2,633	$	570	$	202	$	-	$	192	$	78	$	448	$	4,306
Reserve for unfunded loan commitments included in other liabilities	$	-	$	17	$	88	$	37	$	-	$	10	$	-			$	152



	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