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, 2017 and December 31, 2016.

Age Analysis of Past Due Loans Receivable



June 30, 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)	$	1,626	$	164	$	861	$	2,651	$	83,970	$	86,621	$	-
Acquired residential mortgage with credit deterioration		-		-		11		11		-		11		-
Commercial mortgage (less acquired with credit deterioration)		-		-		985		985		451,133		452,118		-
Acquired commercial mortgage with credit deterioration		-		-		620		620		715		1,335		-
Commercial:
Commercial term		-		-		1,378		1,378		117,112		118,490		-
Commercial construction		1,041		-		447		1,488		90,669		92,157		-
Consumer:
Home equity		222		87		300		609		59,220		59,829		-
Other		8		99		173		280		5,684		5,964		-
Total	$	2,897	$	350	$	4,775	$	8,022	$	808,503	$	816,525	$	-



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 $479,000 of residential mortgage loans in the process of foreclosure and $92,000 of residential mortgage loans in other real estate owned as of June 30, 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 six months ended June 30, 2017 and 2016 and as of December 31, 2016.

Impaired Loans



		June 30, 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	$	1,595	$	1,894	$	-	$	653	$	680	$	-
Acquired residential mortgage with credit deterioration		11		11		-		11		11
Commercial mortgage		1,753		1,994		-		2,919		3,330		-
Acquired commercial mortgage with credit deterioration		1,140		1,140		-		1,674		1,680
Commercial:
Commercial term		1,510		1,944		-		22		24		-
Commercial construction		447		2,833		-		795		795		-
Consumer:
Home equity		552		571		-		544		595		-
Other		75		75		-		114		122		-
Total	$	7,083	$	10,462	$	-	$	6,732	$	7,237	$	-
With allowance recorded:
Residential mortgage		209		209		38		1,107		1,368		143
Commercial:
Commercial term		-		-		-		176		196		97
Commercial construction		-		-		-		447		2,833		89
Consumer:
Other		236		236		29		142		142		5
Total	$	445	$	445	$	67	$	1,872	$	4,539	$	334
Total:
Residential mortgage		1,804		2,103		38		1,760		2,048		143
Acquired residential mortgage with credit deterioration		11		11		-		11		11		-
Commercial mortgage		1,753		1,994		-		2,919		3,330		-
Acquired commercial mortgage with credit deterioration		1,140		1,140		-		1,674		1,680		-
Commercial:
Commercial term		1,510		1,944		-		198		220		97
Commercial construction		447		2,833		-		1,242		3,628		89
Consumer:
Home equity		552		571		-		544		595		-
Other		311		311		29		256		264		5
Total	$	7,528	$	10,907	$	67	$	8,604	$	11,776	$	334



		Three Months Ended				Three Months Ended				Six Months Ended				Six Months Ended
		June 30, 2017				June 30, 2016				June 30, 2017				June 30, 2016
	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	$	1,610	$	-	$	1,284	$	-	$	1,291	$	-	$	1,396	$	-
Acquired residential mortgage with credit deterioration		11				-		-		11				-		-
Commercial mortgage		1,253		-		2,083		-		1,808		-		1,782		-
Acquired commercial mortgage with credit deterioration		1,137				-		-		1,316				-		-
Commercial:
Commercial term		1,192		-		24		-		802		-		16		-
Commercial construction		848		-		934		-		830		-		1,002		-
Consumer:
Home equity		580		2		671		1		568		4		678		2
Other		94		-		104		-		100		-		97		-
Total	$	6,725	$	2	$	5,100	$	1	$	6,726	$	4	$	4,971	$	2
With allowance recorded:
Residential mortgage		210		-		493		-		509		-		329		-
Commercial:
Commercial term		557		-		185		-		430		-		190		-
Commercial construction		-		-		447		-		149		-		298		-
Consumer:
Other		189		-		107		-		173		-		107		-
Total	$	956	$	-	$	1,232	$	-	$	1,261	$	-	$	924	$	-
Total:
Residential mortgage		1,820		-		1,777		-		1,800		-		1,725		-
Acquired residential mortgage with credit deterioration		11		-		-		-		11		-		-		-
Commercial mortgage		1,253		-		2,083		-		1,808		-		1,782		-
Acquired commercial mortgage with credit deterioration		1,137		-		-		-		1,316		-		-		-
Commercial:
Commercial term		1,749		-		209		-		1,232		-		206		-
Commercial construction		848		-		1,381		-		979		-		1,300		-
Consumer:
Home equity		580		2		671		1		568		4		678		2
Other		283		-		211		-		273		-		204		-
Total	$	7,681	$	2	$	6,332	$	1	$	7,987	$	4	$	5,895	$	2

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, 2017 and December 31, 2016.

Credit Quality Indicators



	June 30, 2017
			Special
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Residential mortgage	$	84,751	$	-	$	1,881	$	-	$	86,632
Commercial mortgage		443,866		3,697		5,890		-		453,453
Commercial:
Commercial term		114,330		657		3,503		-		118,490
Commercial construction		91,597		-		560		-		92,157
Consumer:
Home equity		59,129		-		700		-		59,829
Other		5,653		-		311		-		5,964
Total	$	799,326	$	4,354	$	12,845	$	-	$	816,525



	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 June 30, 2017 and December 31, 2016 are as follows:



	June 30, 2017
	Pre-Modification		Post-Modification
(Dollars in thousands)	Outstanding Recorded Investment		Outstanding Recorded Investment		Recorded Investment
Residential mortgage	$	754	$	883	$	709
Consumer:
Home equity		148		148		147
Other		40		42		39
Total	$	942	$	1,073	$	895

	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 June 30, 2017, DNB had five TDRs with recorded investment totaling $895,000, one of which totaled $102,000, represented an accruing impaired home equity loan in compliance with the terms of the modification. The remaining $793,000 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. 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 on the last remaining TDR. As of June 30, 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 six months ended June 30, 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 on 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 the six months ended June 30, 2016.

The following tables set forth the composition of DNB’s allowance for credit losses as of June 30, 2017 and December 31, 2016, the activity for the three and six months ended June 30, 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 - April 1, 2017	$	247	$	2,597	$	774	$	1,059	$	-	$	196	$	63	$	482	$	5,418
Charge-offs		-		(249)		(491)		-		-		-		-		-		(740)
Recoveries		-		-		3		-		-		-		1		-		4
Provisions		(2)		286		339		149		-		(7)		20		(200)		585
Ending balance - June 30, 2017	$	245	$	2,634	$	625	$	1,208	$	-	$	189	$	84	$	282	$	5,267



	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		-		(483)		(596)		-		-		-		(10)		-		(1,089)
Recoveries		2		50		19		-		1		-		1		-		73
Provisions		(106)		536		493		239		(1)		(7)		32		(276)		910
Ending balance - June 30, 2017	$	245	$	2,634	$	625	$	1,208	$	-	$	189	$	84	$	282	$	5,267
Ending balance: individually evaluated for impairment	$	38	$	-	$	-	$	-	$	-	$	-	$	29	$	-	$	67
Ending balance: collectively evaluated for impairment	$	207	$	2,634	$	625	$	1,208	$	-	$	189	$	55	$	282	$	5,200
Loans receivables:
Ending balance	$	86,632	$	453,453	$	118,490	$	92,157	$	-	$	59,829	$	5,964			$	816,525
Ending balance: individually evaluated for impairment	$	1,804	$	1,753	$	1,510	$	447	$	-	$	552	$	311			$	6,377
Ending balance: acquired with credit deterioration	$	11	$	1,140	$	-	$	-	$	-	$	-	$	-			$	1,151
Ending balance: collectively evaluated for impairment	$	84,817	$	450,560	$	116,980	$	91,710	$	-	$	59,277	$	5,653			$	808,997
Reserve for unfunded loan commitments included in other liabilities	$	-	$	9	$	140	$	173	$	-	$	18	$	-			$	340



	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
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:
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