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 March 31, 2017 and December 31, 2016.

Age Analysis of Past Due Loans Receivable



March 31, 2017
													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 (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		-		22		1,850		1,872		112,258		114,130		-
Commercial construction		-		-		1,248		1,248		83,937		85,185		-
Consumer:
Home equity		3		-		319		322		61,597		61,919		-
Other		-		-		215		215		5,840		6,055		-
Total	$	1,425	$	716	$	4,809	$	6,950	$	809,413	$	816,363	$	-



December 31, 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 (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		747		377		23		1,147		122,028		123,175		-
Commercial construction		112		-		1,242		1,354		71,401		72,755		-
Consumer:
Home equity		263		-		300		563		61,997		62,560		-
Other		27		65		151		243		5,729		5,972		-
Total	$	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 months ended March 31, 2017 and 2016 and as of December 31, 2016.

Impaired Loans



		March 31, 2017						December 31, 2016
	Recorded		Unpaid		Related		Recorded		Unpaid		Related
	Investment		Principal		Allowance		Investment		Principal		Allowance
(Dollars in thousands)			Balance						Balance
With no related allowance recorded:
Residential mortgage	$	1,624	$	1,925	$	-	$	653	$	680	$	-
Acquired residential mortgage with credit deterioration		11		11		-		11		11
Commercial mortgage		752		973		-		2,919		3,330		-
Acquired commercial mortgage with credit deterioration		1,133		1,145		-		1,674		1,680
Commercial:
Commercial term		873		875		-		22		24		-
Commercial construction		1,248		3,634		-		795		795		-
Consumer:
Home equity		607		635		-		544		595		-
Other		112		112		-		114		122		-
Total	$	6,360	$	9,310	$	-	$	6,732	$	7,237	$	-
With allowance recorded:
Residential mortgage		210		210		39		1,107		1,368		143
Commercial:
Commercial term		1,113		1,136		203		176		196		97
Commercial construction		-		-		-		447		2,833		89
Consumer:
Other		142		142		5		142		142		5
Total	$	1,465	$	1,488	$	247	$	1,872	$	4,539	$	334
Total:
Residential mortgage		1,834		2,135		39		1,760		2,048		143
Acquired residential mortgage with credit deterioration		11		11		-		11		11		-
Commercial mortgage		752		973		-		2,919		3,330		-
Acquired commercial mortgage with credit deterioration		1,133		1,145		-		1,674		1,680		-
Commercial:
Commercial term		1,986		2,011		203		198		220		97
Commercial construction		1,248		3,634		-		1,242		3,628		89
Consumer:
Home equity		607		635		-		544		595		-
Other		254		254		5		256		264		5
Total	$	7,825	$	10,798	$	247	$	8,604	$	11,776	$	334



		Three Months Ended				Three Months Ended
		March 31, 2017				March 31, 2016
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Dollars in thousands)	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Residential mortgage	$	1,139	$	-	$	1,629	$	-
Acquired residential mortgage with credit deterioration		11				-		-
Commercial mortgage		1,836		-		1,103		-
Acquired commercial mortgage with credit deterioration		1,404				-		-
Commercial:
Commercial term		448		-		12		-
Commercial construction		1,022		-		965		-
Consumer:
Home equity		576		2		684		1
Other		113		-		87		-
Total	$	6,549	$	2	$	4,480	$	1
With allowance recorded:
Residential mortgage		659		-		72		-
Commercial:
Commercial term		645		-		193		-
Commercial construction		224		-		224		-
Consumer:
Other		142		-		107		-
Total	$	1,670	$	-	$	596	$	-
Total:
Residential mortgage		1,798		-		1,701		-
Acquired residential mortgage with credit deterioration		11		-		-		-
Commercial mortgage		1,836		-		1,103		-
Acquired commercial mortgage with credit deterioration		1,404		-		-		-
Commercial:
Commercial term		1,093		-		205		-
Commercial construction		1,246		-		1,189		-
Consumer:
Home equity		576		2		684		1
Other		255		-		194		-
Total	$	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 March 31, 2017 and December 31, 2016.

Credit Quality Indicators



	March 31, 2017
			Special
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Residential mortgage	$	85,249	$	-	$	2,358	$	-	$	87,607
Commercial mortgage		448,555		3,730		9,182		-		461,467
Commercial:
Commercial term		107,524		559		5,909		138		114,130
Commercial construction		83,824		-		1,361		-		85,185
Consumer:
Home equity		61,128		-		791		-		61,919
Other		5,801		-		254		-		6,055
Total	$	792,081	$	4,289	$	19,855	$	138	$	816,363



	December 31, 2016
			Special
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Residential mortgage	$	85,259	$	-	$	2,322	$	-	$	87,581
Commercial mortgage		450,124		3,763		11,599		-		465,486
Commercial:
Commercial term		116,522		591		6,062		-		123,175
Commercial construction		71,400		-		1,355		-		72,755
Consumer:
Home equity		61,782		-		778		-		62,560
Other		5,716		-		256		-		5,972
Total	$	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 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. The recorded investments in troubled debt restructured loans at March 31, 2017 and December 31, 2016 are as follows:



	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

At March 31, 2017, DNB had five TDRs with recorded investment totaling $904,000, one of which totaled $102,000, represented an accruing impaired home equity loan in compliance with the terms of the 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 their restructuring and $2,000 to one consumer installment loan after its restructuring. DNB did not recognize any charge-off on the last remaining TDR. As of 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 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 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 March 31, 2017 and December 31, 2016, the activity for the three months ended March 31, 2017 and 2016 and as of and for the year ended December 31, 2016.

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 - January 1, 2017	$	349	$	2,531	$	709	$	969	$	-	$	196	$	61	$	558	$	5,373
Charge-offs		-		(234)		(105)		-		-		-		(10)		-		(349)
Recoveries		2		50		16		-		1		-		-		-		69
Provisions		(104)		250		154		90		(1)		-		12		(76)		325
Ending balance - March 31, 2017	$	247	$	2,597	$	774	$	1,059	$	-	$	196	$	63	$	482	$	5,418
Ending balance: individually evaluated for impairment	$	39	$	-	$	203	$	-	$	-	$	-	$	5	$	-	$	247
Ending balance: collectively evaluated for impairment	$	208	$	2,597	$	571	$	1,059	$	-	$	196	$	58	$	482	$	5,171
Loans receivables:
Ending balance	$	87,607	$	461,467	$	114,130	$	85,185	$	-	$	61,919	$	6,055			$	816,363
Ending balance: individually evaluated for impairment	$	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	$	85,762	$	459,582	$	112,144	$	83,937	$	-	$	61,312	$	5,801			$	808,538
Reserve for unfunded loan commitments included in other liabilities	$	-	$	10	$	147	$	202	$	-	$	17	$	-			$	376



	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		(84)		-		(13)		-		-		-		-		-		(97)
Recoveries		1		-		1		1		1		-		-		-		4
Provisions		87		1		(29)		195		(1)		(7)		3		81		330
Ending balance - March 31, 2016	$	220	$	2,376	$	948	$	765	$	-	$	188	$	67	$	608	$	5,172
Reserve for unfunded loan commitments included in other liabilities	$	-	$	3	$	115	$	55	$	-	$	13	$	-			$	186



	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, 2016	$	349	$	2,531	$	709	$	969	$	-	$	196	$	61	$	558	$	5,373
Ending balance: individually evaluated for impairment	$	143	$	-	$	97	$	89	$	-	$	-	$	5	$	-	$	334
Ending balance: collectively evaluated for impairment	$	206	$	2,531	$	612	$	880	$	-	$	196	$	56	$	558	$	5,039
Loans receivables:
Ending balance	$	87,581	$	465,486	$	123,175	$	72,755	$	-	$	62,560	$	5,972			$	817,529
Ending balance: individually evaluated for impairment	$	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	$	85,810	$	460,893	$	122,977	$	71,513	$	-	$	62,016	$	5,716			$	808,925
Reserve for unfunded loan commitments included in other liabilities	$	-	$	4	$	135	$	190	$	-	$	16	$	-			$	345