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, 2017 and December 31, 2016.

Age Analysis of Past Due Loans Receivable



September 30, 2017
													Loans
	30-59		60-89										Receivable
	Days		Days		Greater						Total		> 90
	Past		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)	$	428	$	-	$	1,289	$	1,717	$	86,521	$	88,238	$	-
Acquired residential mortgage with credit deterioration		-		-		11		11		-		11		-
Commercial mortgage (less acquired with credit deterioration)		107		178		949		1,234		459,159		460,393		-
Acquired commercial mortgage with credit deterioration		-		58		561		619		-		619		-
Commercial:
Commercial term		465		-		1,378		1,843		118,943		120,786		-
Commercial construction		-		-		447		447		83,981		84,428		-
Consumer:
Home equity		257		-		386		643		58,790		59,433		-
Other		165		35		171		371		5,474		5,845		-
Total	$	1,422	$	271	$	5,192	$	6,885	$	812,868	$	819,753	$	-



December 31, 2016
													Loans
	30-59		60-89										Receivable
	Days		Days		Greater						Total		> 90
	Past		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 $642,000 of residential mortgage loans in the process of foreclosure and $74,000 of residential mortgage loans in other real estate owned as of September 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 nine months ended September 30, 2017 and 2016 and as of December 31, 2016.

Impaired Loans



		September 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	$	1,921	$	2,220	$	-	$	653	$	680	$	-
Acquired residential mortgage with credit deterioration		-		-		-		11		11
Commercial mortgage		2,666		2,894		-		2,919		3,330		-
Acquired commercial mortgage with credit deterioration		1,141		1,141		-		1,674		1,680
Commercial:
Commercial term		1,506		1,943		-		22		24		-
Commercial construction		447		2,833		-		795		795		-
Consumer:
Home equity		616		635		-		544		595		-
Other		112		112		-		114		122		-
Total	$	8,409	$	11,778	$	-	$	6,732	$	7,237	$	-
With allowance recorded:
Residential mortgage		138		138		38		1,107		1,368		143
Acquired residential mortgage with credit deterioration		11		11		7		-		-		-
Commercial mortgage		22		96		22		-		-		-
Commercial:
Commercial term		-		-		-		176		196		97
Commercial construction		-		-		-		447		2,833		89
Consumer:
Other		196		196		28		142		142		5
Total	$	367	$	441	$	95	$	1,872	$	4,539	$	334
Total:
Residential mortgage		2,059		2,358		38		1,760		2,048		143
Acquired residential mortgage with credit deterioration		11		11		7		11		11		-
Commercial mortgage		2,688		2,990		22		2,919		3,330		-
Acquired commercial mortgage with credit deterioration		1,141		1,141		-		1,674		1,680		-
Commercial:
Commercial term		1,506		1,943		-		198		220		97
Commercial construction		447		2,833		-		1,242		3,628		89
Consumer:
Home equity		616		635		-		544		595		-
Other		308		308		28		256		264		5
Total	$	8,776	$	12,219	$	95	$	8,604	$	11,776	$	334



		Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
		September 30, 2017				September 30, 2016				September 30, 2017				September 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	$	1,758	$	-	$	880	$	-	$	1,448	$	-	$	1,254	$	-
Acquired residential mortgage with credit deterioration		6		-		-		-		8				-		-
Commercial mortgage		2,210		3		3,101		-		2,023		3		2,102		-
Acquired commercial mortgage with credit deterioration		1,141		-		-		-		1,272				-		-
Commercial:
Commercial term		1,508		-		24		-		978		-		18		-
Commercial construction		447		-		924		-		734		-		944		-
Consumer:
Home equity		584		3		631		1		580		7		657		3
Other		94		-		116		-		103		-		101		-
Total	$	7,748	$	6	$	5,676	$	1	$	7,146	$	10	$	5,076	$	3
With allowance recorded:
Residential mortgage		174		-		886		-		416		-		479		-
Acquired residential mortgage with credit deterioration		6				-		-		3				-		-
Commercial mortgage		11		-		-		-		6		-		-		-
Acquired commercial mortgage with credit deterioration		-				-		-		-				-		-
Commercial:
Commercial term		-		-		181		-		322		-		187		-
Commercial construction		-		-		447		-		112		-		335		-
Consumer:
Other		216		-		106		-		179		-		107		-
Total	$	407	$	-	$	1,620	$	-	$	1,038	$	-	$	1,108	$	-
Total:
Residential mortgage		1,932		-		1,766		-		1,864		-		1,733		-
Acquired residential mortgage with credit deterioration		12		-		-		-		11		-		-		-
Commercial mortgage		2,221		3		3,101		-		2,029		3		2,102		-
Acquired commercial mortgage with credit deterioration		1,141		-		-		-		1,272		-		-		-
Commercial:
Commercial term		1,508		-		205		-		1,300		-		205		-
Commercial construction		447		-		1,371		-		846		-		1,279		-
Consumer:
Home equity		584		3		631		1		580		7		657		3
Other		310		-		222		-		282		-		208		-
Total	$	8,155	$	6	$	7,296	$	1	$	8,184	$	10	$	6,184	$	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, 2017 and December 31, 2016.

Credit Quality Indicators



	September 30, 2017
			Special
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Residential mortgage	$	86,114	$	-	$	2,135	$	-	$	88,249
Commercial mortgage		447,639		7,821		5,552		-		461,012
Commercial:
Commercial term		116,490		1,399		2,897		-		120,786
Commercial construction		76,759		6,601		1,068		-		84,428
Consumer:
Home equity		58,668		-		765		-		59,433
Other		5,537		-		308		-		5,845
Total	$	791,207	$	15,821	$	12,725	$	-	$	819,753



	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. During the three and nine month periods ended September 30, 2017, DNB classified three commercial mortgage loans totaling $987,000 as TDRs, all of which had rate changes and extensions to their maturity dates, but their balances were unmodified. Loans classified as troubled debt restructurings are designated as impaired. The recorded investments in troubled debt restructured loans at September 30, 2017 and December 31, 2016 are as follows:



	September 30, 2017
	Pre-Modification		Post-Modification
(Dollars in thousands)	Outstanding Recorded Investment		Outstanding Recorded Investment		Recorded Investment
Residential mortgage	$	754	$	883	$	699
Commercial mortgage		992		992		987
Consumer:
Home equity		148		148		147
Other		40		42		39
Total	$	1,934	$	2,065	$	1,872

	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 September 30, 2017, DNB had eight TDRs with recorded investment totaling $1,872,000, five of which, totaling $1,134,000, are accruing loans in compliance with the terms of the modification. The remaining $738,000 represents three 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. As of September 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 nine months ended September 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 nine months ended September 30, 2016.

The following tables set forth the composition of DNB’s allowance for credit losses as of September 30, 2017 and December 31, 2016, the activity for the three and nine months ended September 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 - July 1, 2017	$	245	$	2,634	$	625	$	1,208	$	-	$	189	$	84	$	282	$	5,267
Charge-offs		-		(36)		(14)		-		-		-		-		-		(50)
Recoveries		-		-		1		-		-		-		1		-		2
Provisions		1		200		36		(102)		-		(3)		(4)		247		375
Ending balance - September 30, 2017	$	246	$	2,798	$	648	$	1,106	$	-	$	186	$	81	$	529	$	5,594



	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		-		(519)		(610)		-		-		-		(10)		-		(1,139)
Recoveries		2		50		20		-		1		-		2		-		75
Provisions		(105)		736		529		137		(1)		(10)		28		(29)		1,285
Ending balance - September 30, 2017	$	246	$	2,798	$	648	$	1,106	$	-	$	186	$	81	$	529	$	5,594
Ending balance: individually evaluated for impairment	$	45	$	22	$	-	$	-	$	-	$	-	$	28	$	-	$	95
Ending balance: collectively evaluated for impairment	$	201	$	2,776	$	648	$	1,106	$	-	$	186	$	53	$	529	$	5,499
Loans receivables:
Ending balance	$	88,249	$	461,012	$	120,786	$	84,428	$	-	$	59,433	$	5,845			$	819,753
Ending balance: individually evaluated for impairment	$	2,059	$	2,688	$	1,506	$	447	$	-	$	616	$	308			$	7,624
Ending balance: acquired with credit deterioration	$	11	$	1,141	$	-	$	-	$	-	$	-	$	-			$	1,152
Ending balance: collectively evaluated for impairment	$	86,179	$	457,183	$	119,280	$	83,981	$	-	$	58,817	$	5,537			$	810,977
Reserve for unfunded loan commitments included in other liabilities	$	-	$	3	$	150	$	139	$	-	$	17	$	-			$	309



	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, 2016	$	314	$	2,370	$	891	$	866	$	-	$	191	$	64	$	551	$	5,247
Charge-offs		-		(39)		(8)		-		-		-		-		-		(47)
Recoveries		2		-		-		-		1		-		-		-		3
Provisions		87		141		(90)		7		(1)		11		(2)		(53)		100
Ending balance - September 30, 2016	$	403	$	2,472	$	793	$	873	$	-	$	202	$	62	$	498	$	5,303



	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)		(39)		(32)		-		-		-		-		-		(277)
Recoveries		10		-		1		1		2		-		1		-		15
Provisions		383		136		(165)		303		(2)		7		(3)		(29)		630
Ending balance - September 30, 2016	$	403	$	2,472	$	793	$	873	$	-	$	202	$	62	$	498	$	5,303
Reserve for unfunded loan commitments included in other liabilities	$	-	$	3	$	119	$	64	$	-	$	13	$	-			$	199



	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