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, 2018 and December 31, 2017.

Age Analysis of Past Due Loans Receivable



	September 30, 2018
													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	$	1,063	$	261	$	585	$	1,909	$	101,184	$	103,093	$	-
Commercial mortgage (less acquired with credit deterioration)		177		-		960		1,137		522,861		523,998		-
Acquired commercial mortgage with credit deterioration		-		-		-		-		674		674		-
Commercial:
Commercial term		354		172		1,094		1,620		139,190		140,810		-
Commercial construction		-		-		-		-		81,297		81,297		-
Consumer:
Home equity		152		-		481		633		52,577		53,210		-
Other		5		-		109		114		5,097		5,211		-
Total	$	1,751	$	433	$	3,229	$	5,413	$	902,880	$	908,293	$	-



	December 31, 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)	$	887	$	349	$	1,148	$	2,384	$	91,568	$	93,952	$	-
Acquired residential mortgage with credit deterioration		-		-		7		7		-		7		-
Commercial mortgage (less acquired with credit deterioration)		221		-		1,126		1,347		483,105		484,452		-
Acquired commercial mortgage with credit deterioration		-		-		416		416		-		416		-
Commercial:
Commercial term		381		13		1,654		2,048		127,487		129,535		-
Commercial construction		514		-		-		514		74,500		75,014		-
Consumer:
Home equity		15		-		386		401		56,443		56,844		-
Other		13		139		156		308		5,369		5,677		54
Total	$	2,031	$	501	$	4,893	$	7,425	$	838,472	$	845,897	$	54

DNB had $64,000 of residential mortgage loans in the process of foreclosure and no residential mortgage loans in other real estate owned as of September 30, 2018. DNB had $638,000 residential mortgage loans in the process of foreclosure and $149,000 of residential mortgage loans in other real estate owned as of December 31, 2017.

The following tables summarize information in regards to impaired loans by loan portfolio class as of September 30, 2018 and December 31, 2017, and for the three and nine months ended September 30, 2018 and 2017.

Impaired Loans



		September 30, 2018						December 31, 2017
	Recorded		Unpaid		Related		Recorded		Unpaid		Related
	Investment		Principal		Allowance		Investment		Principal		Allowance
(Dollars in thousands)			Balance						Balance
With no related allowance recorded:
Residential mortgage	$	1,573	$	1,909	$	-	$	1,908	$	2,210	$	-
Commercial mortgage		2,406		2,706		-		2,809		3,207		-
Acquired commercial mortgage with credit deterioration		521		535		-		936		950
Commercial:
Commercial term		1,367		1,848		-		1,743		2,253		-
Commercial construction		479		514		-		514		514		-
Consumer:
Home equity		772		776		-		612		632		-
Other		159		207		-		117		117		-
Total	$	7,277	$	8,495	$	-	$	8,639	$	9,883	$	-
With allowance recorded:
Residential mortgage		74		74		1		-		-		-
Acquired residential mortgage with credit deterioration		-		-		-		7		26		3
Commercial mortgage		122		237		18		19		93		19
Commercial:
Commercial term		1,257		1,379		319		337		343		123
Consumer:
Other		42		42		3		128		129		12
Total	$	1,495	$	1,732	$	341	$	491	$	591	$	157
Total:
Residential mortgage		1,647		1,983		1		1,908		2,210		-
Acquired residential mortgage with credit deterioration		-		-		-		7		26		3
Commercial mortgage		2,528		2,943		18		2,828		3,300		19
Acquired commercial mortgage with credit deterioration		521		535		-		936		950		-
Commercial:
Commercial term		2,624		3,227		319		2,080		2,596		123
Commercial construction		479		514		-		514		514		-
Consumer:
Home equity		772		776		-		612		632		-
Other		201		249		3		245		246		12
Total	$	8,772	$	10,227	$	341	$	9,130	$	10,474	$	157



		Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
		September 30, 2018				September 30, 2017				September 30, 2018				September 30, 2017
	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	$	1,748	$	6	$	1,758	$	-	$	1,925	$	12	$	1,448	$	-
Acquired residential mortgage with credit deterioration		-		-		6		-		-		-		8		-
Commercial mortgage		2,446		13		2,210		3		2,602		37		2,023		3
Acquired commercial mortgage with credit deterioration		521		9		1,141		-		691		24		1,272		-
Commercial:
Commercial term		1,662		-		1,508		-		1,790		-		978		-
Commercial construction		484		-		447		-		495		-		734		-
Consumer:
Home equity		706		1		584		3		658		5		580		7
Other		182		1		94		-		173		1		103		-
Total	$	7,749	$	30	$	7,748	$	6	$	8,334	$	79	$	7,146	$	10
With allowance recorded:
Residential mortgage		74		1		174		-		37		1		416		-
Acquired residential mortgage with credit deterioration		-		-		6		-		2		-		3		-
Commercial mortgage		100		-		11		-		76		-		6		-
Acquired commercial mortgage with credit deterioration		-		-		-		-		-		-		-		-
Commercial:
Commercial term		941		-		-		-		786		-		322		-
Commercial construction		-		-		-		-		-		-		112		-
Consumer:
Other		42		-		216		-		78		-		179		-
Total	$	1,157	$	1	$	407	$	-	$	979	$	1	$	1,038	$	-
Total:
Residential mortgage		1,822		7		1,932		-		1,962		13		1,864		-
Acquired residential mortgage with credit deterioration		-		-		12		-		2		-		11		-
Commercial mortgage		2,546		13		2,221		3		2,678		37		2,029		3
Acquired commercial mortgage with credit deterioration		521		9		1,141		-		691		24		1,272		-
Commercial:
Commercial term		2,603		-		1,508		-		2,576		-		1,300		-
Commercial construction		484		-		447		-		495		-		846		-
Consumer:
Home equity		706		1		584		3		658		5		580		7
Other		224		1		310		-		251		1		282		-
Total	$	8,906	$	31	$	8,155	$	6	$	9,313	$	80	$	8,184	$	10

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, 2018 and December 31, 2017.

Credit Quality Indicators



	September 30, 2018
			Special
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Residential mortgage	$	102,002	$	-	$	1,091	$	-	$	103,093
Commercial mortgage		517,742		1,959		4,971		-		524,672
Commercial:
Commercial term		137,170		346		3,294		-		140,810
Commercial construction		77,171		3,605		521		-		81,297
Consumer:
Home equity		52,420		144		646		-		53,210
Other		5,002		-		209		-		5,211
Total	$	891,507	$	6,054	$	10,732	$	-	$	908,293



	December 31, 2017
			Special
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Residential mortgage	$	91,993	$	-	$	1,966	$	-	$	93,959
Commercial mortgage		479,308		125		5,435		-		484,868
Commercial:
Commercial term		125,926		115		3,494		-		129,535
Commercial construction		73,902		-		1,112		-		75,014
Consumer:
Home equity		56,085		-		759		-		56,844
Other		5,432		-		245		-		5,677
Total	$	832,646	$	240	$	13,011	$	-	$	845,897

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 nine month period ended September 30, 2018 DNB classified one residential mortgage loan totaling $73,000 as TDR. The loan’s rate was changed but the term was not extended. During the nine month period 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, 2018 and December 31, 2017 are as follows:



	September 30, 2018
	Pre-Modification		Post-Modification
(Dollars in thousands)	Outstanding Recorded Investment		Outstanding Recorded Investment		Recorded Investment
Residential mortgage	$	676	$	805	$	643
Commercial mortgage		992		992		967
Consumer:
Home equity		148		148		141
Other		40		42		30
Total	$	1,856	$	1,987	$	1,781

	December 31, 2017
	Pre-Modification		Post-Modification
(Dollars in thousands)	Outstanding Recorded Investment		Outstanding Recorded Investment		Recorded Investment
Residential mortgage	$	603	$	732	$	690
Commercial mortgage		992		992		982
Consumer:
Home equity		148		148		146
Other		40		42		39
Total	$	1,783	$	1,914	$	1,857

At September 30, 2018, DNB had nine TDRs with recorded investment totaling $1,781,000, all of which are accruing loans in compliance with the terms of the modifications. As a result of collateral 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, 2018, 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, 2018.

At December 31, 2017, DNB had eight TDRs with recorded investment totaling $1,857,000, five of which, totaling $1,128,000, were accruing loans in compliance with the terms of the modifications. The remaining $729,000 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. As of December 31, 2017, 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 December 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 within twelve months of restructure during 2017. DNB classified three commercial mortgage loans totaling $992,000 as TDRs during the year ended December 31, 2017.

The following tables set forth the composition of DNB’s allowance for credit losses as of September 30, 2018 and December 31, 2017, the activity for the three and nine months ended September 30, 2018 and 2017 and as of and for the year ended December 31, 2017.

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, 2018	$	207	$	3,076	$	889	$	1,355	$	-	$	196	$	49	$	416	$	6,188
Charge-offs		-		-		(15)		-		-		-		(23)		-		(38)
Recoveries		308		-		-		-		-		-		1		-		309
Provisions		(352)		213		113		(287)		-		-		21		392		100
Ending balance - September 30, 2018	$	163	$	3,289	$	987	$	1,068	$	-	$	196	$	48	$	808	$	6,559



	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, 2018	$	221	$	2,856	$	845	$	1,128	$	-	$	183	$	63	$	547	$	5,843
Charge-offs		(137)		(184)		(79)		-		-		-		(72)		-		(472)
Recoveries		334		-		2		-		-		-		2		-		338
Provisions		(255)		617		219		(60)		-		13		55		261		850
Ending balance - September 30, 2018	$	163	$	3,289	$	987	$	1,068	$	-	$	196	$	48	$	808	$	6,559
Ending balance: individually evaluated for impairment	$	1	$	18	$	319	$	-	$	-	$	-	$	3	$	-	$	341
Ending balance: collectively evaluated for impairment	$	162	$	3,271	$	668	$	1,068	$	-	$	196	$	45	$	808	$	6,218
Loans receivables:
Ending balance	$	103,093	$	524,672	$	140,810	$	81,297	$	-	$	53,210	$	5,211			$	908,293
Ending balance: individually evaluated for impairment	$	1,647	$	2,528	$	2,624	$	479	$	-	$	772	$	201			$	8,251
Ending balance: acquired with credit deterioration	$	-	$	521	$	-	$	-	$	-	$	-	$	-			$	521
Ending balance: collectively evaluated for impairment	$	101,446	$	521,623	$	138,186	$	80,818	$	-	$	52,438	$	5,010			$	899,521
Reserve for unfunded loan commitments included in other liabilities	$	-	$	3	$	176	$	186	$	-	$	21	$	-			$	386



	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
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:
Ending balance - December 31, 2017	$	221	$	2,856	$	845	$	1,128	$	-	$	183	$	63	$	547	$	5,843
Ending balance: individually evaluated for impairment	$	3	$	19	$	123	$	-	$	-	$	-	$	12	$	-	$	157
Ending balance: collectively evaluated for impairment	$	218	$	2,837	$	722	$	1,128	$	-	$	183	$	51	$	547	$	5,686
Loans receivables:
Ending balance	$	93,959	$	484,868	$	129,535	$	75,014	$	-	$	56,844	$	5,677			$	845,897
Ending balance: individually evaluated for impairment	$	1,908	$	2,828	$	2,080	$	514	$	-	$	612	$	245			$	8,187
Ending balance: acquired with credit deterioration	$	7	$	936	$	-	$	-	$	-	$	-	$	-			$	943
Ending balance: collectively evaluated for impairment	$	92,044	$	481,104	$	127,455	$	74,500	$	-	$	56,232	$	5,432			$	836,767
Reserve for unfunded loan commitments included in other liabilities	$	-	$	2	$	155	$	173	$	-	$	18	$	-			$	348