Allowance for Credit Losses

9 Months Ended

Sep. 30, 2011

Allowance for Credit Losses

ALLOWANCE FOR CREDIT LOSSES

NOTE 4: ALLOWANCE FOR CREDIT LOSSES

Changes in the allowance for credit losses, for the periods indicated, are as follows:

	Nine Months Ended September 30
(Dollars in thousands)	2011			2010
Beginning balance	$	5,884		$	5,477
Provision		1,278			1,441
Loans charged off		(698	)		(801	)
Leases charged off		(196	)		(48	)
Recoveries		103			41
Net charge-offs		(791	)		(808	)
Ending balance	$	6,371		$	6,110
Reserve for unfunded loan commitments	$	109		$	122

Impaired loans are loans individually evaluated for collectability, and which will probably not be collected in accordance with their contractual terms. Information regarding impaired loans is for the periods indicated is as follows:

	Nine Months Ended September 30
(Dollars in thousands)	2011		2010
Total recorded investment	$	8,134	$	9,029
Impaired loans with a specific allowance		4,992		4,145
Impaired loans without a specific allowance		3,142		4,884
Average recorded investment		7,301		9,085
Specific allowance allocation		355		517
Total cash collected		1,527		1,813
Interest income recorded		59		79

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 recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of September 30, 2011 and December 31, 2010:

Age Analysis of Past Due Loans Receivables

									September 30, 2011
													Loans Receivable
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivables		> 90 Days and Accruing
Residential mortgage	$	550	$	—	$	1,917	$	2,467	$	24,508	$	26,975	$	—
Commercial mortgage		594		—		2,114		2,708		226,659		229,367		—
Commercial:
Commercial term		—		—		540		540		80,968		81,508		—
Commercial construction		—		—		465		465		26,343		26,808		—
Lease financing		—		—		65		65		199		264		—
Consumer:
Home equity		71		—		60		131		38,478		38,609		—
Other		26		—		151		177		7,666		7,843		1
Total	$	1,241	$	—	$	5,312	$	6,553	$	404,821	$	411,374	$	1

									December 31, 2010
													Loans Receivable
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivables		> 90 Days and Accruing
Residential mortgage	$	77	$	110	$	2,334	$	2,521	$	28,408	$	30,929	$	—
Commercial mortgage		175		—		834		1,009		217,090		218,099		—
Commercial:
Commercial term		73		182		360		615		69,965		70,580		—
Commercial construction		—		—		3,180		3,180		23,784		26,964		—
Lease financing		41		—		273		314		584		898		—
Consumer:
Home equity		33		—		58		91		40,306		40,397		—
Other		71		—		2		73		8,231		8,304		—
Total	$	470	$	292	$	7,041	$	7,803	$	388,368	$	396,171	$	—

The following table sets forth those assets that are: (i) placed on non-accrual status, (ii) contractually delinquent by 90 days or more and still accruing, (iii) troubled debt restructurings other than those included in items (i) and (ii), and (iv) OREO as a result of foreclosure or voluntary transfer to DNB as well as other repossessed assets.

Non-Performing Assets

(Dollars in thousands)	Sept. 30, 2011			Dec. 31, 2010
Non-accrual loans:
Residential mortgage	$	1,917		$	2,334
Commercial mortgage		2,114			834
Commercial		3,725			3,722
Lease financing		65			273
Consumer		210			60
Total non-accrual loans		8,031			7,223
Loans 90 days past due and still accruing (*)		1			—
Troubled debt restructurings		—			—
Total non-performing loans		8,032			7,223
Other real estate owned & other repossessed property		3,968			4,324
Total non-performing assets	$	12,000		$	11,547
Asset quality ratios:
Non-performing loans to total loans		1.95	%		1.82	%
Non-performing assets to total assets		1.97			1.92
Allowance for credit losses to:
Total loans and leases		1.55			1.49
Non-performing loans and leases		79.3			81.5

(*) One loan at December 31, 2010 had a balance less than $1,000

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, 2011 and as of and for the year ended December 31, 2010.

Impaired Loans

					September 30, 2011
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment 3 months ended Sept. 30, 2011		Average Recorded Investment 9 months ended Sept. 30, 2011		Interest Income Recognized 3 months ended Sept. 30, 2011		Interest Income Recognized 9 months ended Sept. 30, 2011
With no related allowance recorded:
Residential mortgage	$	596	$	747	$	—	$	1,270	$	865	$	—	$	—
Commercial mortgage		2,114		2,168		—		1,359		1,026		53		58
Commercial:
Commercial term		157		190		—		195		208		—		1
Commercial construction		—		—		—		232		346		—		—
Lease financing		65		74		—		71		138		—		—
Consumer		210		211		—		63		61		—		—
With allowance recorded:
Residential mortgage		1,424		1,780		101		755		1,199		—		—
Commercial mortgage		—		—		—		26		26		—		—
Commercial:
Commercial term		383		753		78		559		563		—		—
Commercial construction		3,185		3,620		176		2,952		2,836		—		—
Lease financing		—		—		—		—		33		—		—
Consumer		—		—		—		—		—		—		—
Total:
Residential mortgage		2,020		2,527		101		2,025		2,064		—		—
Commercial mortgage		2,114		2,168		—		1,385		1,052		53		58
Commercial:
Commercial term		540		943		78		754		771		—		1
Commercial construction		3,185		3,620		176		3,184		3,182		—		—
Lease financing		65		74		—		71		171		—		—
Consumer		210		211		—		63		61		—		—
Total	$	8,134	$	9,543	$	355	$	7,482	$	7,301	$	53	$	59

	December 31, 2010
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential mortgage	$	638	$	780	$	—	$	1,092	$	—
Commercial mortgage		782		792		—		916		70
Commercial:
Commercial term		197		250		—		282		3
Commercial construction		460		895		—		818		31
Lease financing		273		826		—		335		7
Consumer		60		61		—		43		1
With allowance recorded:
Residential mortgage		1,696		2,071		103		1,606		—
Commercial mortgage		52		52		22		39		—
Commercial:
Commercial term		345		345		145		369		1
Commercial construction		2,720		2,720		223		3,063		—
Lease financing		—		—		—		—		—
Consumer		—		—		—		—		—
Total:
Residential mortgage		2,334		2,851		103		2,698		—
Commercial mortgage		834		844		22		955		70
Commercial:
Commercial term		542		595		145		651		4
Commercial construction		3,180		3,615		223		3,881		31
Lease financing		273		826		—		335		7
Consumer		60		61		—		43		1
Total	$	7,223	$	8,792	$	493	$	8,563	$	113

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, 2011 and December 31, 2010.

Credit Quality Indicators

	September 30, 2011
(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Residential mortgage	$	25,059	$	—	$	1,916	$	—	$	26,975
Commercial mortgage		210,372		12,101		6,894		—		229,367
Commercial:
Commercial term		79,788		702		821		197		81,508
Commercial construction		19,302		300		7,206		—		26,808
Lease financing		264		—		—		—		264
Consumer:
Home equity		38,542		—		67		—		38,609
Other		7,843		—		—		—		7,843
Total	$	381,170	$	13,103	$	16,904	$	197	$	411,374

	December 31, 2010
(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Residential mortgage	$	28,595	$	—	$	2,334	$	—	$	30,929
Commercial mortgage		202,062		10,054		5,983		—		218,099
Commercial:
Commercial term		68,916		241		1,423		—		70,580
Commercial construction		18,294		—		8,670		—		26,964
Lease financing		765		—		—		133		898
Consumer:
Home equity		40,386		—		11		—		40,397
Other		8,304		—		—		—		8,304
Total	$	367,322	$	10,295	$	18,421	$	133	$	396,171

The following tables sets forth the composition of DNB's allowance for credit losses as of September 30, 2011 and activity for the three and nine months ended September 30, 2011.

Allowance for Credit Losses and Recorded Investment in Loans Receivables

(Dollars in thousands)	Commercial			Lease financing			Residential mortgage			Consumer			Unallocated		Total
Allowance for credit losses:
Beginning balance - July 1, 2011	$	4,685		$	19		$	386		$	482		$	871	$	6,443
Charge-offs		(408	)		(9	)		(72	)		(32	)		—		(521	)
Recoveries		2			1			12			8			—		23
Provisions		(21	)		15			171			(12	)		273		426
Ending balance - September 30, 2011	$	4,258		$	26		$	497		$	446		$	1,144	$	6,371

(Dollars in thousands)	Commercial			Lease financing			Residential mortgage			Consumer			Unallocated		Total
Allowance for credit losses:
Beginning balance - January 1, 2011	$	4,387		$	86		$	454		$	482		$	475	$	5,884
Charge-offs		(428	)		(196	)		(238	)		(32	)		—		(894	)
Recoveries		7			2			74			20			—		103
Provisions		292			134			207			(24	)		669		1,278
Ending balance - September 30, 2011	$	4,258		$	26		$	497		$	446		$	1,144	$	6,371
Ending balance: individually evaluated for impairment	$	254		$	—		$	101		$	—		$	—	$	355
Ending balance: collectively evaluated for impairment	$	4,004		$	26		$	396		$	446		$	1,144	$	6,016
Loans receivables:
Ending balance	$	337,683		$	264		$	26,975		$	46,452				$	411,374
Ending balance: individually evaluated for impairment	$	5,839		$	65		$	2,020		$	210				$	8,134
Ending balance: collectively evaluated for impairment	$	331,844		$	199		$	24,955		$	46,242				$	403,240
Reserve for unfunded loan commitments	$	92		$	—		$	—		$	17				$	109

During the three months ended September 30, 2011, DNB's unallocated reserve increased to 18% of the total reserve.  Historically, the unallocated reserve has ranged from 6%-14%.  Due to the rise in the level of non-performing assets at the bank during the quarter, coupled with continued asset quality and delinquency levels at other banks nationwide, Management had decided to keep the overall level of the reserve at its present third quarter level, rather than reduce the unallocated, and, hence the overall reserve level.  Management will continue to monitor its specific asset quality level and trends during the fourth quarter to assess its required and overall level of reserve.  Management believes it prudent to increase its level of unallocated reserve as of September 30, 2011 to slightly higher than historical levels due to these factors.