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, 2016 and December 31, 2015.

Age Analysis of Past Due Loans Receivable



June 30, 2016
														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	$	134	$	381	$	1,860	$	2,375	$	24,563	$	26,938	$	162
Commercial mortgage		-		2,140		210		2,350		273,339		275,689		-
Commercial:
Commercial term		-		-		24		24		105,965		105,989		-
Commercial construction		-		-		1,524		1,524		28,248		29,772		-
Consumer:
Home equity		84		-		411		495		49,753		50,248		-
Other		72		62		158		292		5,489		5,781		-
Total	$	290	$	2,583	$	4,187	$	7,060	$	487,357	$	494,417	$	162



December 31, 2015
														Loans
														Receivable
		30-59		60-89		Greater						Total		> 90
		Days Past		Days Past		than		Total				Loans		Days and
(Dollars in thousands)		Due		Due		90 Days		Past Due		Current		Receivable		Accruing
Residential mortgage	$	502	$	552	$	2,076	$	3,130	$	25,521	$	28,651	$	457
Commercial mortgage		36		86		96		218		273,914		274,132		-
Commercial:
Commercial term		-		-		-		-		102,178		102,178		-
Commercial construction		-		581		447		1,028		19,336		20,364		-
Consumer:
Home equity		7		310		153		470		50,800		51,270		-
Other		100		-		148		248		4,915		5,163		-
Total	$	645	$	1,529	$	2,920	$	5,094	$	476,664	$	481,758	$	457

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, 2016 and 2015 and as of December 31, 2015.

Impaired Loans





		June 30, 2016						December 31, 2015
	Recorded		Unpaid		Related		Recorded		Unpaid		Related
	Investment		Principal		Allowance		Investment		Principal		Allowance
(Dollars in thousands)			Balance						Balance
With no related allowance recorded:
Residential mortgage	$	930	$	968	$	-	$	1,620	$	1,919	$	-
Commercial mortgage		3,140		3,451		-		1,181		1,461		-
Commercial:
Commercial term		24		25		-		-		-		-
Commercial construction		1,077		1,077		-		1,140		3,526		-
Consumer:
Home equity		666		690		-		691		716		-
Other		116		124		-		82		90		-
Total	$	5,953	$	6,335	$	-	$	4,714	$	7,712	$	-
With allowance recorded:
Residential mortgage		842		1,103		101		-		-		-
Commercial:
Commercial term		183		199		104		200		211		110
Commercial construction		447		2,833		89		-		-		-
Consumer:
Other		106		106		3		107		107		4
Total	$	1,578	$	4,241	$	297	$	307	$	318	$	114
Total:
Residential mortgage		1,772		2,071		101		1,620		1,919		-
Commercial mortgage		3,140		3,451		-		1,181		1,461		-
Commercial:
Commercial term		207		224		104		200		211		110
Commercial construction		1,524		3,910		89		1,140		3,526		-
Consumer:
Home equity		666		690		-		691		716		-
Other		222		230		3		189		197		4
Total	$	7,531	$	10,576	$	297	$	5,021	$	8,030	$	114




		Three Months Ended				Three Months Ended				Six Months Ended				Six Months Ended
		June 30, 2016				June 30, 2015				June 30, 2016				June 30, 2015
	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	$	1,284	$	-	$	1,927	$	-	$	1,396	$	-	$	2,103	$	-
Commercial mortgage		2,083		-		3,367		29		1,782		-		3,378		57
Commercial:
Commercial term		24		-		-		-		16		-		-		-
Commercial construction		934		-		672		-		1,002		-		1,017		-
Consumer:
Home equity		671		1		503		1		678		2		518		2
Other		104		-		182		-		97		-		152		-
Total	$	5,100	$	1	$	6,651	$	30	$	4,971	$	2	$	7,168	$	59
With allowance recorded:
Residential mortgage		493		-		204		-		329		-		136		-
Commercial mortgage		-		-		202		-		-		-		201		-
Commercial:
Commercial term		185		-		200		-		190		-		200		-
Commercial construction		447		-		837		-		298		-		708		-
Consumer:
Home equity		-		-		44		-		-		-		29		-
Other		107		-		-		-		107		-		-		-
Total	$	1,232	$	-	$	1,487	$	-	$	924	$	-	$	1,274	$	-
Total:
Residential mortgage		1,777		-		2,131		-		1,725		-		2,239		-
Commercial mortgage		2,083		-		3,569		29		1,782		-		3,579		57
Commercial:
Commercial term		209		-		200		-		206		-		200		-
Commercial construction		1,381		-		1,509		-		1,300		-		1,725		-
Consumer:
Home equity		671		1		547		1		678		2		547		2
Other		211		-		182		-		204		-		152		-
Total	$	6,332	$	1	$	8,138	$	30	$	5,895	$	2	$	8,442	$	59

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, 2016 and December 31, 2015.

Credit Quality Indicators



		June 30, 2016
				Special
(Dollars in thousands)		Pass		Mention		Substandard		Doubtful		Total
Residential mortgage	$	24,901	$	-	$	2,037	$	-	$	26,938
Commercial mortgage		260,724		3,298		11,667		-		275,689
Commercial:
Commercial term		99,943		48		5,998		-		105,989
Commercial construction		26,433		-		3,339		-		29,772
Consumer:
Home equity		49,531		-		717		-		50,248
Other		5,559		-		222		-		5,781
Total	$	467,091	$	3,346	$	23,980	$	-	$	494,417



		December 31, 2015
				Special
(Dollars in thousands)		Pass		Mention		Substandard		Doubtful		Total
Residential mortgage	$	26,762	$	-	$	1,889	$	-	$	28,651
Commercial mortgage		262,036		4,802		7,294		-		274,132
Commercial:
Commercial term		93,025		2,555		6,598		-		102,178
Commercial construction		17,521		-		2,843		-		20,364
Consumer:
Home equity		50,551		-		719		-		51,270
Other		4,974		-		189		-		5,163
Total	$	454,869	$	7,357	$	19,532	$	-	$	481,758

Loans classified as troubled debt restructurings (“TDR”) are considered impaired. As of June 30, 2016, DNB had no commercial mortgages classified as a TDR, compared to no commercial mortgages classified as a TDR at December 31, 2015, and one commercial mortgage classified as a TDR totaling $2,222,000 at June 30, 2015. This loan paid off during the third quarter of 2015. The rate on this loan was modified and the terms of the loans were changed to interest only while the project was being built out. The loan commenced normal principal and interest payments in June 2014. The loan was extended and there was no reduction of principal. The balance of the loan prior to modification was $2,272,000 and the balance after the modification was $2,272,000. During the six months ended June 30, 2015, there were no defaults on any terms of this loan.

As of June 30, 2016, DNB had one consumer home equity loan classified as a TDR totaling $102,000, compared to one consumer home equity loan classified as a TDR totaling $102,000 (the same loan) at December 31, 2015, and one consumer home equity loan classified as a TDR totaling $102,000 (the same loan) at June 30, 2015. 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 months ended March 31, 2016 and 2015, there were no defaults on any terms of this loan.

As of June 30, 2016, DNB had one consumer installment loan classified as a TDR totaling $40,000 compared to one consumer installment loan classified as a TDR totaling $40,000 (the same loan) at December 31, 2015, and no such loans at June 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. DNB recognized a partial charge-off on the loan in the amount of $2,000. During the six months ended June 30, 2016 and 2015, 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, 2016 and December 31, 2015, the activity for the three and six months ended June 30, 2016 and 2015 and as of and for the year ended December 31, 2015.

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, 2016	$	220	$	2,376	$	948	$	765	$	-	$	188	$	67	$	608	$	5,172
Charge-offs		(122)		-		(11)		-		-		-		-		-		(133)
Recoveries		7		-		-		-		-		-		1		-		8
Provisions		209		(6)		(46)		101		-		3		(4)		(57)		200
Ending balance - June 30, 2016	$	314	$	2,370	$	891	$	866	$	-	$	191	$	64	$	551	$	5,247



	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, 2016	$	216	$	2,375	$	989	$	569	$	-	$	195	$	64	$	527	$	4,935
Charge-offs		(206)		-		(24)		-		-		-		-		-		(230)
Recoveries		8		-		1		1		1		-		1		-		12
Provisions		296		(5)		(75)		296		(1)		(4)		(1)		24		530
Ending balance - June 30, 2016	$	314	$	2,370	$	891	$	866	$	-	$	191	$	64	$	551	$	5,247
Ending balance: individually evaluated for impairment	$	101	$	-	$	104	$	89	$	-	$	-	$	3	$	-	$	297
Ending balance: collectively evaluated for impairment	$	213	$	2,370	$	787	$	777	$	-	$	191	$	61	$	551	$	4,950
Loans receivables:
Ending balance	$	26,938	$	275,689	$	105,989	$	29,772	$	-	$	50,248	$	5,781			$	494,417
Ending balance: individually evaluated for impairment	$	1,772	$	3,140	$	207	$	1,524	$	-	$	666	$	222			$	7,531
Ending balance: collectively evaluated for impairment	$	25,166	$	272,549	$	105,782	$	28,248	$	-	$	49,582	$	5,559			$	486,886
Reserve for unfunded loan commitments included in other liabilities	$	-	$	3	$	117	$	57	$	-	$	13	$	-			$	190



	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, 2015	$	269	$	2,398	$	705	$	922	$	-	$	224	$	66	$	606	$	5,190
Charge-offs		(35)		-		(163)		(278)		-		(1)		(24)		-		(501)
Recoveries		-		-		2		-		1		-		1		-		4
Provisions		31		164		177		130		(1)		(33)		22		(75)		415
Ending balance - June 30, 2015	$	265	$	2,562	$	721	$	774	$	-	$	190	$	65	$	531	$	5,108



	Residential		Commercial		Commercial		Commercial		Lease		Consumer		Consumer
(Dollars in thousands)	Mortgage		Mortgage		Term		Construction		Financing		Home Equity		Other		Unallocated		Total
Allowance for credit losses:
Beginning balance - January 1, 2015	$	269	$	2,300	$	709	$	881	$	-	$	189	$	70	$	488	$	4,906
Charge-offs		(35)		-		(174)		(278)		-		(1)		(30)		-		(518)
Recoveries		-		-		2		-		2		-		1		-		5
Provisions		31		262		184		171		(2)		2		24		43		715
Ending balance - June 30, 2015	$	265	$	2,562	$	721	$	774	$	-	$	190	$	65	$	531	$	5,108
Reserve for unfunded loan commitments included in other liabilities	$	-	$	4	$	107	$	56	$	-	$	13	$	-			$	180



	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, 2015	$	216	$	2,375	$	989	$	569	$	-	$	195	$	64	$	527	$	4,935
Ending balance: individually evaluated for impairment	$	-	$	-	$	110	$	-	$	-	$	-	$	4	$	-	$	114
Ending balance: collectively evaluated for impairment	$	216	$	2,375	$	879	$	569	$	-	$	195	$	60	$	527	$	4,821
Loans receivables:
Ending balance	$	28,651	$	274,132	$	102,178	$	20,364	$	-	$	51,270	$	5,163			$	481,758
Ending balance: individually evaluated for impairment	$	1,620	$	1,181	$	200	$	1,140	$	-	$	691	$	189			$	5,021
Ending balance: collectively evaluated for impairment	$	27,031	$	272,951	$	101,978	$	19,224	$	-	$	50,579	$	4,974			$	476,737
Reserve for unfunded loan commitments included in other liabilities	$	-	$	2	$	115	$	58	$	-	$	13	$	-			$	188