4. Loans, net and allowance for loan losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at December 31, 2017 and 2016 are summarized as follows. Net deferred loan costs included in loan balances were $575 and $579 in 2017 and 2016, respectively.


		December 31, 2017		December 31, 2016
Commercial	$	476,199	$	408,814
Real estate:
Commercial		786,210		700,144
Residential		287,935		289,781
Consumer		142,721		134,226
Total	$	1,693,065	$	1,532,965

Loans outstanding to directors, executive officers, principal stockholders or to their affiliates totaled $15,169 and $15,614 at December 31, 2017 and 2016, respectively. Advances and repayments during 2017 totaled $1,133 and $1,578 respectively. There were no related party loans that were classified as nonaccrual, past due, or restructured at December 31, 2017 and 2016. During 2017, the Company made donations of $1.1 million to a community foundation of which one of the Company’s directors is Chairman and CEO. The community foundation is a charitable organization approved by the Pennsylvania Department of Community and Economic Development under the Educational Improvement Tax Credit (EITC) program, which permits the Company to receive tax credits toward Pennsylvania state taxes while its donations are used to improve local education. During 2016, the Company made donations of $0.9 million to the community foundation.

Deposits from related parties held by Peoples Bank amounted to $10.0 million at December 31, 2017 and $9.3 million at December 31, 2016.

At December 31, 2017, the majority of the Company’s loans were at least partially secured by real estate in the eastern Pennsylvania and southern tier New York counties that make up the market serviced by Peoples Security Bank & Trust Company. Therefore, a primary concentration of credit risk is directly related to the real estate market in these regions. Changes in the general economy, local economy or in the real estate market could affect the ultimate collectability of this portion of the loan portfolio. Management does not believe there are any other significant concentrations of credit risk that could affect the loan portfolio.

The changes in the allowance for loan losses account by major classification of loan for the year ended December 31, 2017, 2016, and 2015 were as follows:


			Real estate
December 31, 2017	Commercial		Commercial		Residential		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	3,799	$	5,847	$	4,707	$	1,608	$	—	$	15,961
Charge-offs		(173)		(706)		(533)		(737)				(2,149)
Recoveries		20		124		44		160				348
Provisions		1,406		2,283		762		349		—		4,800
Ending balance	$	5,052	$	7,548	$	4,980	$	1,380	$		$	18,960
Ending balance: individually evaluated for impairment		159		263		336		8				766
Ending balance: collectively evaluated for impairment		4,893		7,285		4,644		1,372				18,194
Ending balance: loans acquired with deteriorated credit quality	$		$		$				$		$	—
Loans receivable:
Ending balance	$	476,199	$	786,210	$	287,935	$	142,721	$		$	1,693,065
Ending balance: individually evaluated for impairment		2,121		3,644		3,763		177				9,705
Ending balance: collectively evaluated for impairment		473,736		781,921		284,142		142,544				1,682,343
Ending balance: loans acquired with deteriorated credit quality	$	342	$	645	$	30	$		$		$	1,017


			Real estate
December 31, 2016	Commercial		Commercial		Residential		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	3,042	$	4,245	$	4,082	$	1,583	$	23	$	12,975
Charge-offs		(776)		(858)		(339)		(495)				(2,468)
Recoveries		86		122		69		177				454
Provisions		1,447		2,338		895		343		(23)		5,000
Ending balance	$	3,799	$	5,847	$	4,707	$	1,608	$		$	15,961
Ending balance: individually evaluated for impairment		225		1,197		520						1,942
Ending balance: collectively evaluated for impairment		3,574		4,650		4,187		1,608				14,019
Ending balance: loans acquired with deteriorated credit quality	$		$		$				$		$	—
Loans receivable:
Ending balance	$	408,814	$	700,144	$	289,781	$	134,226	$		$	1,532,965
Ending balance: individually evaluated for impairment		1,724		5,820		3,543		155				11,242
Ending balance: collectively evaluated for impairment		406,127		692,987		286,201		134,071				1,519,386
Ending balance: loans acquired with deteriorated credit quality	$	963	$	1,337	$	37			$		$	2,337


			Real estate
December 31, 2015	Commercial		Commercial		Residential		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	2,321	$	3,037	$	3,690	$	1,290	$		$	10,338
Charge-offs		(246)		(325)		(523)		(333)				(1,427)
Recoveries		77		144		26		117				364
Provisions		890		1,389		889		509		23		3,700
Ending balance	$	3,042	$	4,245	$	4,082	$	1,583	$	23	$	12,975
Ending balance: individually evaluated for impairment		759		126		1,138		117				2,140
Ending balance: collectively evaluated for impairment		2,283		4,012		2,944		1,466		23		10,728
Ending balance: loans acquired with deteriorated credit quality	$		$	107	$		$		$		$	107
Loans receivable:
Ending balance	$	365,767	$	567,277	$	306,218	$	101,603	$		$	1,340,865
Ending balance: individually evaluated for impairment		1,196		4,006		4,917		148				10,267
Ending balance: collectively evaluated for impairment		363,620		561,903		301,252		101,455				1,328,230
Ending balance: loans acquired with deteriorated credit quality	$	951	$	1,368	$	49	$		$		$	2,368

The following tables present the major classification of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at December 31, 2017 and 2016:


			Special
December 31, 2017	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	472,185	$	1,958	$	2,056	$	$	476,199
Real estate:
Commercial		764,320		13,015		8,875			786,210
Residential		282,484		18		5,433			287,935
Consumer		142,507				214			142,721
Total	$	1,661,496	$	14,991	$	16,578	$	$	1,693,065


			Special
December 31, 2016	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	398,867	$	6,222	$	3,725	$	$	408,814
Real estate:
Commercial		674,914		10,392		14,838			700,144
Residential		282,737		233		6,811			289,781
Consumer		133,983				243			134,226
Total	$	1,490,501	$	16,847	$	25,617	$	$	1,532,965

Information concerning nonaccrual loans by major loan classification at December 31, 2017 and 2016 is summarized as follows:


		December 31, 2017		December 31, 2016
Commercial	$	860	$	934
Real estate:
Commercial		3,821		7,016
Residential		2,994		3,003
Consumer		177		155
Total	$	7,852	$	11,108

The major classification of loans by past due status at December 31, 2017 and 2016 are summarized as follows:


					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
December 31, 2017	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	124	$	216	$	860	$	1,200	$	474,999	$	476,199
Real estate:
Commercial		1,722		194		3,821		5,737		780,473		786,210
Residential		1,134		1,551		3,543		6,228		281,707		287,935	$	549
Consumer		1,101		364		363		1,828		140,893		142,721		186
Total	$	4,081	$	2,325	$	8,587	$	14,993	$	1,678,072	$	1,693,065	$	735


					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
December 31, 2016	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	249	$	75	$	934	$	1,258	$	407,556	$	408,814
Real estate:
Commercial		4,782		527		7,016		12,325		687,819		700,144
Residential		2,100		354		3,561		6,015		283,766		289,781	$	558
Consumer		962		259		441		1,662		132,564		134,226		286
Total	$	8,093	$	1,215	$	11,952	$	21,260	$	1,511,705	$	1,532,965	$	844

The following tables summarize information concerning impaired loans as of and for the years ended December 31, 2017, 2016 and 2015 by major loan classification:


							For the Year Ended
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2017	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial	$	1,279	$	1,439			$	1,668	$	43
Real estate:
Commercial		2,888		3,190				2,985		24
Residential		2,196		2,672				2,227		21
Consumer		169		181				173
Total		6,532		7,482				7,053		88
With an allowance recorded:
Commercial		1,184		1,218		159		991		50
Real estate:
Commercial		1,401		1,496		263		2,202		18
Residential		1,597		1,759		336		1,335		23
Consumer		8		8		8		20
Total		4,190		4,481		766		4,548		91
Commercial		2,463		2,657		159		2,659		93
Real estate:
Commercial		4,289		4,686		263		5,187		42
Residential		3,793		4,431		336		3,562		44
Consumer		177		189		8		193
Total	$	10,722	$	11,963	$	766	$	11,601	$	179


							For the Year Ended
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2016	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial	$	2,404	$	3,213			$	1,461	$	48
Real estate:
Commercial		2,364		3,018				4,300		71
Residential		2,205		2,388				2,133		35
Consumer		155		155				147
Total		7,128		8,774				8,041		154
With an allowance recorded:
Commercial		283		283		225		859
Real estate:
Commercial		4,793		4,793		1,197		2,366		2
Residential		1,375		1,376		520		1,185		7
Consumer								50
Total		6,451		6,452		1,942		4,460		9
Commercial		2,687		3,496		225		2,320		48
Real estate:
Commercial		7,157		7,811		1,197		6,666		73
Residential		3,580		3,764		520		3,318		42
Consumer		155		155				197
Total	$	13,579	$	15,226	$	1,942	$	12,501	$	163


							For the Year Ended
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2015	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial	$	1,352	$	2,720			$	1,848	$	87
Real estate:
Commercial		2,731		3,408				2,394		95
Residential		3,048		3,231				2,664		4
Consumer		31		31				17
Total		7,162		9,390				6,923		186
With an allowance recorded:
Commercial		795		795	$	759		1,680		40
Real estate:
Commercial		2,643		2,643		233		4,155		86
Residential		1,918		1,918		1,138		1,776		30
Consumer		117		117		117		126
Total		5,473		5,473		2,247		7,737		156
Commercial		2,147		3,515		759		3,528		127
Real estate:
Commercial		5,374		6,051		233		6,549		181
Residential		4,966		5,149		1,138		4,440		34
Consumer		148		148		117		143
Total	$	12,635	$	14,863	$	2,247	$	14,660	$	342

There were no amounts of interest income recognized using the cash-basis method on impaired loans for the years ended December 31, 2017, 2016 and 2015.

As a part of the Merger, an adjustment was made to reflect the elimination of the allowance for loan losses related to the Peoples Neighborhood Bank loan portfolio, as required by purchase accounting standards. As a result, the acquired loan portfolio was evaluated based on risk characteristics and other credit and market criteria to determine a credit quality adjustment to the fair value of the loans acquired. The acquired loan balance was reduced by the aggregate amount of the credit quality adjustment in determining the fair value of the loans. The credit quality adjustment does not account for acquired loans deemed to be impaired in accordance with Accounting Standard Codification 310-30-30, previously known as Statement of Position (SOP) 03-3, “Accounting for Certain Loans Acquired in a Transfer.” These impaired loans are accounted for in the credit adjustment on distressed loans, which represents the portion of the loan balance that has been deemed uncollectible based on the management’s expectations of future cash flows for each respective loan. Based on management’s evaluation of the acquired loan portfolio, 29 loans were deemed impaired resulting in a credit adjustment on distressed loans of $6,892. As of December 31, 2017, there were a total of nine loans remaining with a credit adjustment of $1,430. Management performed an evaluation of expected future cash flows, including the anticipated cash flow from the sale of collateral, and compared that to the carrying amount of the impaired loans. Based on these evaluations, the Company has determined that no additional reserve was required against the acquired impaired loans at December 31, 2017.

The changes in the accretable yield of acquired loans accounted for under ASC310-30 for the years ended December 31, 2017, 2016 and 2015, were as follows:


Year ended December 31	2017		2016		2015
Beginning Balance, January 1	$	185	$		$	60
Reclassification from Nonaccretable				554
Accretion		(185)		(369)		(60)
Charge-offs
Payments
Ending Balance, December 31	$	—	$	185	$	—

Included in the commercial loan, commercial real estate and residential real estate categories are troubled debt restructurings that were classified as impaired. Trouble debt restructurings totaled $3,074, $1,909 and $2,861 at December 31, 2017, 2016 and 2015, respectively.

There were six loans modified in 2017, three loans modified in 2016 and nine loans modified in 2015 that resulted in troubled debt restructurings. The following tables summarize the loans whose terms have been modified resulting in troubled debt restructurings during the year ended December 31, 2017 and 2016.


		Pre-Modification		Post-Modification
	Number	Outstanding Recorded		Outstanding		Recorded
December 31, 2017	of Contracts	Investment		Recorded Investment		Investment
Commercial	2	$	885	$	885	$	864
Commercial real estate	3		721		721		700
Residential mortgage	1		64		64		64
Total	6	$	1,670	$	1,670	$	1,628

		Pre-Modification		Post-Modification
	Number	Outstanding Recorded		Outstanding		Recorded
December 31, 2016	of Contracts	Investment		Recorded Investment		Investment
Commercial	1	$	1,500	$	1,150	$	1,150
Commercial real estate
Residential mortgage	2		216		216		207
Total	3	$	1,716	$	1,366	$	1,357

There were no payment defaults within 12 months of its modification on loans considered troubled debt restructurings for the year ended December 31, 2017, one payment default for the year ended December 31, 2016 totaling $43 and two payment defaults for the year ended December 31, 2015 totaling $166.

The amount of residential loans in the formal process of foreclosure totaled $1,684 at December 31, 2017 and $1,529 at December 31, 2016.