Loans and Allowance for Loan and Lease Losses | (3) Loans and Allowance for Loan and Lease Losses Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans, generally being amortized over the contractual life of the loan. Premiums and discounts on purchased loans are amortized as adjustments to interest income using the effective yield method. The loan portfolio is segmented into commercial and consumer loans. Commercial loans consist of the following classes: commercial and industrial, commercial real estate, commercial real estate-construction and lease financing. Consumer loans consist of the following classes: residential mortgage loans, home equity loans and other consumer loans. For all classes of loans, the accrual of interest generally is discontinued when the contractual payment of principal or interest has become 90 days or more past due, or management has serious doubts about further collectability of principal or interest even though the loan is currently performing. A loan past due 90 days or more may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest is credited to income. Interest received on nonaccrual loans, including impaired loans, is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Nonaccrual loans may be restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally, at least nine consecutive months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments. Commercial and industrial Mid Penn originates commercial and industrial loans. Most of the Bank’s commercial and industrial loans have been extended to finance local and regional businesses and include short-term loans to finance machinery and equipment purchases, inventory, and accounts receivable. Commercial loans also involve the extension of revolving credit for a combination of equipment acquisitions and working capital in expanding companies. The maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Generally, the maximum term on non-mortgage loan-to-value Commercial and industrial loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself, which, in turn, is likely to be dependent upon the general economic environment. Mid Penn’s commercial and industrial loans are usually, but not always, secured by business assets and personal guarantees. However, the collateral securing the loans may depreciate over time, may be difficult to appraise, and may fluctuate in value based on the success of the business. Commercial real estate and commercial real estate—construction Commercial real estate and commercial real estate construction loans generally present a higher level of risk than loans secured by one-to-four Residential mortgage Mid Penn offers a wide array of residential mortgage loans for both permanent structures and those under construction. The Bank’s residential mortgage originations are secured primarily by properties located in its primary market and surrounding areas. Residential mortgage loans have terms up to a maximum of 30 years and with loan-to-value In underwriting residential mortgage loans, the Bank evaluates both the borrower’s ability to make monthly payments and the value of the property securing the loan. Most properties securing real estate loans made by Mid Penn are appraised by independent fee appraisers. The Bank generally requires borrowers to obtain title insurance and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. Real estate loans originated by the Bank generally contain a “due on sale” clause allowing the Bank to declare the unpaid principal balance due and payable upon the sale of the security property. The Bank underwrites residential mortgage loans to the standards established by the secondary mortgage market, i.e., Fannie Mae, Ginnie Mae, Freddie Mac, or Pennsylvania Housing Finance Agency standards, with the intention of selling the majority of residential mortgages originated into the secondary market. In the event that the facts and circumstances surrounding a residential mortgage application do not meet all underwriting conditions of the secondary mortgage market, the Bank will evaluate the failed conditions and evaluate the potential risk of holding the residential mortgage in the Bank’s portfolio rather than rejecting the loan request. In the event that the loan is held in the Bank’s portfolio, the interest rate on the residential mortgage would be increased to compensate for the added portfolio risk. Consumer, including home equity Mid Penn offers a variety of secured consumer loans, including home equity, automobile, and deposit secured loans. In addition, the Bank offers other secured and unsecured consumer loans. Most consumer loans are originated in Mid Penn’s primary market and surrounding areas. The largest component of Mid Penn’s consumer loan portfolio consists of fixed rate home equity loans and variable rate home equity lines of credit. Substantially all home equity loans and lines of credit are secured by junior lien mortgages on principal residences. The Bank will lend amounts, which, together with all prior liens, typically may be up to 85 percent of the appraised value of the property securing the loan. Home equity term loans may have maximum terms up to 20 years while home equity lines of credit generally have maximum terms of five years. Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. The underwriting standards employed by the Bank for consumer loans include an application, a determination of the applicant’s payment history on other debts, and an assessment of ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, in relation to the proposed loan amount. Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans. Junior liens inherently have more credit risk by virtue of the fact that another financial institution may have a higher security position in the case of foreclosure liquidation of collateral to extinguish the debt. Generally, foreclosure actions could become more prevalent if the real estate market weakens and property values deteriorate. Allowance for Loan and Lease Losses The allowance for credit losses (“allowance”) consists of (i) the allowance for loan and lease losses, and (ii) the reserve for unfunded lending commitments. The allowance for loan and lease losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet. The reserve for unfunded lending commitments was $127,000 at June 30, 2017 and $120,000 at December 31, 2016. The allowance is increased by the provision for loan and lease losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Non-residential The allowance is maintained at a level considered by management to be adequate to provide for losses that can be reasonably anticipated. Management performs a monthly evaluation of the adequacy of the allowance. The allowance is based on Mid Penn’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include changes in economic conditions, fluctuations in loan quality measures, changes in collateral values, changes in the experience of the lending staff and loan review systems, changes in lending policies and procedures (including underwriting standards), changes in the mix and volume of loans originated, the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing loan portfolio, shifting industry or portfolio concentrations, and other relevant factors. Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation. The unallocated component of the allowance for loan and lease losses covers several considerations that are not specifically measureable through either the specific and general components. For example, we believe that we could face increasing credit risks and uncertainties, not yet reflected in recent historical losses or qualitative factor assessments, associated with unpredictable changes in economic growth or business conditions in our markets or for certain industries in which we have commercial loan borrowers, or unanticipated stresses to the values of real estate held as collateral. Any or all of these additional issues can adversely affect our borrowers’ ability to timely repay their loans. Additionally, we have experienced continued strong commercial loan growth, including growth in newer markets where we have less of a loss history. Also, the unallocated component allocation recognizes the inherent imprecision in our allowance for loan and lease loss methodology, or any alternative methodology, for estimating specific and general loan losses, including the unpredictable timing and amounts of charge-offs, the fact that historical loss averages don’t necessarily correlate to future loss trends, and unexpected changes to specific-credit or general portfolio future cash flows and collateral values which could negatively impact unimpaired portfolio loss factors. Mid Penn generally considers a commercial loan (consisting of commercial and industrial, commercial real estate, commercial real estate-construction, and lease financing loan classes) to be impaired when it becomes 90 days or more past due and not in the process of collection or sooner when it is probable that Mid Penn will be unable to collect all contractual principal and interest due. This methodology assumes the borrower cannot or will not continue to make additional payments. At that time the loan would generally be considered collateral dependent as the discounted cash flow method would generally indicate no operating income available for evaluating the collateral position; therefore, most impaired loans are deemed to be collateral dependent. In addition, Mid Penn’s rating system assumes any loans classified as nonaccrual, included in the substandard rating, to be impaired, and most of these loans are considered collateral dependent; therefore, most of Mid Penn’s impaired loans, whether reporting a specific allocation or not, are considered collateral dependent. Mid Penn evaluates loans for charge-off charge-off charged-off charge-off charge-off As noted above, Mid Penn assesses a specific allocation for commercial loans and commercial real estate loans. The remaining balance remains a nonperforming loan with the original terms and interest rate intact (not restructured). In addition, Mid Penn takes a preemptive step when any commercial loan becomes classified under its internal classification system. A preliminary collateral evaluation, in accordance with the guidance on impaired loans, is prepared using the existing collateral information in the loan file. This process allows Mid Penn to review both the credit and documentation files to determine the status of the information needed to make a collateral evaluation. This collateral evaluation is preliminary but allows Mid Penn to determine if any potential collateral shortfalls exist. It is Mid Penn’s policy to obtain updated third party valuations on all impaired loans collateralized by real estate as soon as practically possible of the credit being classified as substandard nonaccrual. Prior to receipt of the updated real estate valuation Mid Penn will use any existing real estate valuation to determine any potential allowance issues; however, no allowance recommendation will be made until such time Mid Penn is in receipt of the updated valuation. The Asset Recovery department employs an electronic tracking system to monitor the receipt of and need for updated appraisals. To date, there have been no material time lapses noted with the above processes. In some instances Mid Penn is not holding real estate as collateral and is relying on business assets (personal property) for repayment. In these circumstances a collateral inspection is performed by Mid Penn personnel to determine an estimated value. The value is based on net book value, as provided by the financial statements, and discounted accordingly based on determinations made by management. Occasionally, Mid Penn will employ an outside service to provide a fair estimate of value based on auction sales or private sales. Management reviews the estimates of these third parties and discounts them accordingly based on management’s judgment, if deemed necessary. For impaired loans with no valuation allowance required, Mid Penn’s practice of obtaining independent third party market valuations on the subject property as soon as practically possible of the credit being placed on nonaccrual status sometimes indicates that the loan to value ratio is sufficient to obviate the need for a specific allocation in spite of significant deterioration in real estate values in Mid Penn’s primary market area. These circumstances are determined on a case by case analysis of the impaired loans. Mid Penn actively monitors the values of collateral on impaired loans. This monitoring may require the modification of collateral values over time or changing circumstances by some factor, either positive or negative, from the original values. All collateral values will be assessed by management at least every 12 months for possible revaluation by an independent third party. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, Mid Penn does not separately identify individual residential mortgage loans, home equity loans and other consumer loans for impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement. Loans whose terms are modified are classified as troubled debt restructurings if the borrowers have been granted 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. Nonaccrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for nine consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired. The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors, and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful, and loss. Loans criticized as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Any loans not classified as noted above are rated pass. In addition, Federal and State regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance and may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate. Acquired Loans Loans that Mid Penn acquires in connection with business combinations are recorded at fair value with no carryover of the existing related allowance for loan losses. Fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. These loans are accounted for under the ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Loans acquired through business combinations that meet the specific criteria of ASC 310-30 Loans acquired through business combinations that do not meet the specific criteria of ASC 310-30 310-20. Acquired loans that met the criteria for impaired or nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent if Mid Penn expects to fully collect the new carrying value (i.e. fair value) of the loans. As such, Mid Penn may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount. In addition, charge-offs on such loans would be first applied to the nonaccretable difference portion of the fair value adjustment. The classes of the loan portfolio, summarized by the pass rating (net of deferred fees and costs of $435,000 as of June 30, 2017 and $196,000 as of December 31, 2016), and the classified ratings of special mention, substandard, and doubtful within Mid Penn’s internal risk rating system as of June 30, 2017 and December 31, 2016, are as follows: (Dollars in thousands) Pass Special Mention Substandard Doubtful Total June 30, 2017 Commercial and industrial $ 175,700 $ 4,385 $ 1,283 $ — $ 181,368 Commercial real estate 473,078 1,757 7,306 — 482,141 Commercial real estate—construction 52,543 191 571 — 53,305 Lease financing 307 — — — 307 Residential mortgage 101,186 102 1,349 — 102,637 Home equity 38,154 124 393 — 38,671 Consumer 3,878 — — — 3,878 $ 844,846 $ 6,559 $ 10,902 $ — $ 862,307 (Dollars in thousands) Pass Special Mention Substandard Doubtful Total December 31, 2016 Commercial and industrial $ 170,780 $ 937 $ 801 $ — $ 172,518 Commercial real estate 437,592 1,683 7,249 — 446,524 Commercial real estate—construction 52,888 202 1,286 — 54,376 Lease financing 425 — — — 425 Residential mortgage 97,994 107 1,356 — 99,457 Home equity 37,242 142 224 — 37,608 Consumer 3,016 — — — 3,016 $ 799,937 $ 3,071 $ 10,916 $ — $ 813,924 Impaired loans by loan portfolio class as of June 30, 2017 and December 31, 2016 are summarized as follows: June 30, 2017 December 31, 2016 (Dollars in thousands) Recorded Unpaid Related Recorded Unpaid Related With no related allowance recorded Commercial and industrial $ — $ 18 $ — $ 4 $ 9 $ — Commercial real estate: Commercial real estate 900 1,390 — 726 1,792 — Acquired with credit deterioration 573 573 — 842 842 — Commercial real estate—construction 331 334 618 618 Residential mortgage: Residential mortgage 902 931 — 848 882 — Acquired with credit deterioration 324 324 — 389 389 — Home equity 327 369 — 111 129 — With an allowance recorded Commercial and industrial $ — $ — $ — $ 56 $ 62 $ 6 Commercial real estate 2,751 2,915 893 2,520 2,646 711 Commercial real estate—construction 240 242 70 242 242 72 Residential mortgage 66 68 66 68 68 68 Home equity — — — 29 49 1 Total Impaired Loans Commercial and industrial $ — $ 18 $ — $ 60 $ 71 $ 6 Commercial real estate 4,224 4,878 893 4,088 5,280 711 Commercial real estate—construction 571 576 70 860 860 72 Residential mortgage 1,292 1,323 66 1,305 1,339 68 Home equity 327 369 — 140 178 1 The average recorded investment of impaired loans and related interest income recognized for the three and six months ended June 30, 2017 and 2016 are summarized as follows: Three Months Ended June 30, 2017 June 30, 2016 (Dollars in thousands) Average Interest Average Interest With no related allowance recorded Commercial and industrial $ 36 $ — $ 11 $ — Commercial real estate: Commercial real estate 644 — 960 — Acquired with credit deterioration 644 110 943 — Commercial real estate—construction 473 — — — Lease financing — Residential mortgage: Residential mortgage 860 7 831 7 Acquired with credit deterioration 326 2 377 Home equity: 66 — Home equity 90 — — — Acquired with credit deterioration — — — — Consumer — — — — With an allowance recorded Commercial and industrial $ — $ — $ 59 $ — Commercial real estate 2,792 — 2,201 — Commercial real estate—construction 240 — — — Lease financing — — — — Residential mortgage 66 — — — Home equity — — 17 — Consumer — — — — Total Impaired Loans Commercial and industrial $ 36 $ — $ 70 $ — Commercial real estate 4,080 110 4,104 — Commercial real estate—construction 713 — — — Lease financing — — — — Residential mortgage 1,252 9 1,208 7 Home equity 90 — 83 — Six Months Ended June 30, 2017 June 30, 2016 (Dollars in thousands) Average Interest Average Interest With no related allowance recorded Commercial and industrial $ 18 $ — $ 14 $ — Commercial real estate: Commercial real estate 524 279 1,001 — Acquired with credit deterioration 738 110 934 — Commercial real estate—construction 313 — — — Lease financing — — — — Residential mortgage: Residential mortgage 843 18 777 9 Acquired with credit deterioration 350 — 375 4 Home equity 101 2 53 — Consumer — With an allowance recorded Commercial and industrial $ — $ — $ 61 $ — Commercial real estate 2,660 — 1,851 — Commercial real estate—construction 144 — — — Lease financing — — — — Residential mortgage 40 — — — Home equity — — 19 — Consumer — — — — Total Impaired Loans Commercial and industrial $ 18 $ — $ 75 $ — Commercial real estate 3,922 389 3,786 — Commercial real estate—construction 457 — — — Lease financing — — — — Residential mortgage 1,233 18 1,152 13 Home equity 101 2 72 — Nonaccrual loans by loan portfolio class as of June 30, 2017 and December 31, 2016 are summarized as follows: (Dollars in thousands) June 30, 2017 December 31, 2016 Commercial and industrial $ — $ 4 Commercial real estate 3,630 2,939 Commercial real estate—construction 571 860 Residential mortgage 690 715 Home equity 327 140 $ 5,218 $ 4,658 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 classes of the loan portfolio summarized by the past due status as of June 30, 2017 and December 31, 2016 are summarized as follows: (Dollars in thousands) 30-59 60-89 Greater Total Current Total Loans June 30, 2017 Commercial and industrial $ 101 $ 4,083 $ — $ 4,184 $ 177,184 $ 181,368 $ — Commercial real estate: Commercial real estate 250 43 2,502 2,795 478,773 481,568 — Acquired with credit deterioration 516 — 57 573 — 573 57 Commercial real estate—construction 371 120 451 942 52,363 53,305 — Lease financing — — — — 307 307 — Residential mortgage: Residential mortgage 174 — 299 473 101,840 102,313 — Acquired with credit deterioration 32 — 226 258 66 324 — Home equity 13 — 298 311 38,360 38,671 — Consumer — — — — 3,878 3,878 — Total $ 1,457 $ 4,246 $ 3,833 $ 9,536 $ 852,771 $ 862,307 $ 57 (Dollars in thousands) 30-59 60-89 Greater Total Current Total Loans December 31, 2016 Commercial and industrial $ 164 $ 12 $ 4 $ 180 $ 172,338 $ 172,518 $ — Commercial real estate: Commercial real estate 475 — 1,004 1,479 444,203 445,682 — Acquired with credit deterioration — — 59 59 783 842 59 Commercial real estate—construction — 404 84 488 53,888 54,376 — Lease financing — — — — 425 425 — Residential mortgage: Residential mortgage 548 124 237 909 98,159 99,068 — Acquired with credit deterioration — — 238 238 151 389 — Home equity 33 13 125 171 37,437 37,608 — Consumer — — — — 3,016 3,016 — Total $ 1,220 $ 553 $ 1,751 $ 3,524 $ 810,400 $ 813,924 $ 59 The following tables summarize the allowance and recorded investments in loans receivable. (Dollars in thousands) Commercial Commercial Commercial Lease Residential Home Consumer Unallocated Total As of, and for the three months ended, June 30, 2017 Allowance for loan and lease losses: Beginning balance, April 1, 2017 $ 1,630 $ 4,715 $ 101 $ 1 $ 532 $ 364 $ 3 $ 274 $ 7,620 Charge-offs — (30 ) — — — — (10 ) — (40 ) Recoveries 3 22 — — 2 5 1 — 33 Provisions (5 ) 274 39 — 5 35 10 (258 ) 100 Ending balance, June 30, 2017 $ 1,628 $ 4,981 $ 140 $ 1 $ 539 $ 404 $ 4 $ 16 $ 7,713 (Dollars in thousands) Commercial Commercial Commercial Lease Residential Home Consumer Unallocated Total As of, and for the six months ended, June 30, 2017 Allowance for loan and lease losses: Beginning balance, January 1, 2017 $ 1,580 $ 4,323 $ 144 $ 1 $ 541 $ 379 $ 3 $ 212 $ 7,183 Charge-offs (12 ) (30 ) — — (18 ) — (16 ) — (76 ) Recoveries 7 361 — — 4 5 4 — 381 Provisions 53 327 (4 ) — 12 20 13 (196 ) 225 Ending balance, June 30, 2017 1,628 4,981 140 1 539 404 4 16 7,713 Ending balance: individually evaluated for impairment — 893 70 — 66 — — — 1,029 Ending balance: collectively evaluated for impairment $ 1,628 $ 4,088 $ 70 $ 1 $ 473 $ 404 $ 4 $ 16 $ 6,684 Loans receivables: Ending balance $ 181,368 $ 482,141 $ 53,305 $ 307 $ 102,637 $ 38,671 $ 3,878 $ — $ 862,307 Ending balance: individually evaluated for impairment — 3,651 571 — 968 327 — — 5,517 Ending balance: acquired with credit deterioration — 573 — — 324 — — — 897 Ending balance: collectively evaluated for impairment $ 181,368 $ 477,917 $ 52,734 $ 307 $ 101,345 $ 38,344 $ 3,878 $ — $ 855,893 (Dollars in thousands) Commercial Commercial Commercial Lease Residential Home Consumer Unallocated Total As of, and for the three months ended, June 30, 2016 Allowance for loan and lease losses: Beginning balance, April 1, 2016 $ 1,427 $ 3,777 $ 119 $ 1 $ 516 $ 303 $ 9 $ 287 $ 6,439 Charge-offs — (54 ) — — — (25 ) (7 ) — (86 ) Recoveries 1 136 — — 25 — 2 — 164 Provisions (56 ) 382 1 — (20 ) 47 5 36 395 Ending balance, June 30, 2016 $ 1,372 $ 4,241 $ 120 $ 1 $ 521 $ 325 $ 9 $ 323 $ 6,912 (Dollars in thousands) Commercial Commercial Commercial Lease Residential Home Consumer Unallocated Total As of, and for the six months ended, June 30, 2016 Allowance for loan and lease losses: Beginning balance, January 1, 2016 $ 1,393 $ 3,552 $ 153 $ 1 $ 534 $ 317 $ 12 $ 206 $ 6,168 Charge-offs — (150 ) — — — (25 ) (10 ) — (185 ) Recoveries 2 161 — — 25 — 6 — 194 Provisions (23 ) 678 (33 ) — (38 ) 33 1 117 735 Ending balance, June 30, 2016 1,372 4,241 120 1 521 325 9 323 6,912 Ending balance: individually evaluated for impairment 3 769 — — — 2 — — 774 Ending balance: collectively evaluated for impairment $ 1,369 $ 3,472 $ 120 $ 1 $ 521 $ 323 $ 9 $ 323 $ 6,138 Loans receivables: Ending balance $ 160,278 $ 410,786 $ 56,074 $ 565 $ 103,822 $ 34,579 $ 3,049 $ — $ 769,153 Ending balance: individually evaluated for impairment 68 3,657 — — 824 81 — — 4,630 Ending balance: acquired with credit deterioration — 951 — — 370 — — — 1,321 Ending balance: collectively evaluated for impairment $ 160,210 $ 406,178 $ 56,074 $ 565 $ 102,628 $ 34,498 $ 3,049 $ — $ 763,202 (Dollars in thousands) Commercial Commercial Commercial Lease Residential Home Consumer Unallocated Total December 31, 2016 Allowance for loan and lease losses: Ending balance $ 1,580 $ 4,323 $ 144 $ 1 $ 541 $ 379 $ 3 $ 212 $ 7,183 Ending balance: individually evaluated for impairment 6 711 72 — 68 1 — — 858 Ending balance: collectively evaluated for impairment $ 1,574 $ 3,612 $ 72 $ 1 $ 473 $ 378 $ 3 $ 212 $ 6,325 Loans receivable: Ending balance $ 172,518 $ 446,524 $ 54,376 $ 425 $ 99,457 $ 37,608 $ 3,016 $ — $ 813,924 Ending balance: individually evaluated for impairment 60 3,246 860 — 916 140 — — 5,222 Ending balance: acquired with credit deterioration — 842 — — 389 — — — 1,231 Ending balance: collectively evaluated for impairment $ 172,458 $ 442,436 $ 53,516 $ 425 $ 98,152 $ 37,468 $ 3,016 $ — $ 807,471 The recorded investments in troubled debt restructured loans at June 30, 2017 and December 31, 2016 are as follows: (Dollars in thousands) Pre-Modification Post-Modification Recorded Investment June 30, 2017 Commercial real estate $ 3,457 $ 4,003 $ 2,407 Residential mortgage 759 743 623 $4,216 $4,746 $3,030 (Dollars in thousands) Pre-Modification Post-Modification Recorded Investment Decem | (8) Loans and Allowance for Loan and Lease Losses The classes of the loan portfolio, summarized by the aggregate pass rating, net of deferred fees and costs of $196,000 and $178,000 as of December 31, 2016 and 2015, respectively, and the classified ratings of special mention, substandard, and doubtful within Mid Penn’s internal risk rating system as of December 31, 2016 and 2015, are noted below: (Dollars in thousands) December 31, 2016 Pass Special Mention Substandard Doubtful Total Commercial and industrial $ 170,780 $ 937 $ 801 $ — $ 172,518 Commercial real estate 437,592 1,683 7,249 — 446,524 Commercial real estate—construction 52,888 202 1,286 — 54,376 Lease financing 425 — — — 425 Residential mortgage 97,994 107 1,356 — 99,457 Home equity 37,242 142 224 — 37,608 Consumer 3,016 — — 3,016 $ 799,937 $ 3,071 $ 10,916 $ — $ 813,924 (Dollars in thousands) December 31, 2015 Pass Special Mention Substandard Doubtful Total Commercial and industrial $ 158,302 $ 1,289 $ 670 $ — $ 160,261 Commercial real estate 359,859 2,088 7,517 — 369,464 Commercial real estate—construction 65,665 2,403 — — 68,068 Lease financing 727 — — — 727 Residential mortgage 101,507 475 1,361 — 100,665 Home equity 32,928 261 222 — 33,411 Consumer 3,917 — — — 3,917 $ 722,905 $ 6,516 $ 9,770 $ — $ 736,513 Impaired loans by loan portfolio class as of December 31, 2016 and 2015 are summarized as follows: December 31, 2016 December 31, 2015 (Dollars in thousands) Recorded Unpaid Related Recorded Unpaid Related With no related allowance recorded: Commercial and industrial: Commercial and industrial $ 4 $ 9 $ — $ 14 $ 49 $ — Commercial real estate: Commercial real estate 726 1,792 — 1,023 2,020 — Acquired with credit deterioration* 842 842 — 931 931 — Commercial real estate—construction: Commercial real estate—construction 618 618 — — — — Residential mortgage: Residential mortgage 848 882 — 1,329 1,434 — Acquired with credit deterioration* 389 389 — 400 400 — Home equity: Home equity 111 129 — 115 137 — With an allowance recorded: Commercial and industrial $ 56 $ 62 $ 6 $ 113 $ 128 $ 51 Commercial real estate 2,520 2,646 711 1,947 1,981 429 Commercial real estate—construction 242 242 72 — — — Residential mortgage 68 68 68 32 32 23 Home equity 29 49 1 — — — Total: Commercial and industrial $ 60 $ 71 $ 6 $ 127 $ 177 $ 51 Commercial real estate 4,088 5,280 711 3,901 4,001 429 Commercial real estate—construction 860 860 72 — — — Residential mortgage 1,305 1,339 68 1,761 1,466 23 Home equity 140 178 1 115 137 — * Loans acquired with credit deterioration are presented net of credit fair value adjustment. Average recorded investment of impaired loans and related interest income recognized for the years ended December 31, 2016, 2015, and 2014 are summarized as follows: December 31, 2016 December 31, 2015 December 31, 2014 (Dollars in thousands) Average Interest Average Interest Average Interest With no related allowance recorded: Commercial and industrial: Commercial and industrial $ 9 $ — $ 19 $ — $ 72 $ — Acquired with credit deterioration — — — 205 — — Commercial real estate: Commercial real estate 820 — 1,051 14 1,966 346 Acquired with credit deterioration 810 164 926 350 — — Commercial real estate—construction: Commercial real estate—construction 124 — — — — — Residential mortgage: Residential mortgage 821 21 816 8 541 — Acquired with credit deterioration 378 4 400 — — — Home equity: Home equity 75 — 107 — 29 — Acquired with credit deterioration — — — 3 — — With an allowance recorded: Commercial and industrial $ 59 $ — $ 123 $ — $ 93 $ — Commercial real estate 2,177 — 1,721 — 6,823 — Commercial real estate—construction 48 — — — — — Residential mortgage 14 — 25 — — — Home equity 32 — — — 76 — Total: Commercial and industrial $ 68 $ — $ 142 $ 205 $ 165 $ — Commercial real estate 3,807 164 3,698 364 8,789 346 Commercial real estate—construction 172 — — — — — Residential mortgage 1,213 25 1,241 8 541 — Home equity 107 — 107 3 105 — Nonaccrual loans by loan portfolio class as of December 31, 2016 and 2015 are summarized as follows: (Dollars in thousands) 2016 2015 Commercial and industrial $ 4 $ 66 Commercial real estate 2,939 2,607 Commercial real estate—construction 860 — Residential mortgage 715 1,630 Home equity 140 115 $ 4,658 $ 4,418 If nonaccrual loans and leases had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the period, Mid Penn would have recorded interest income on these loans of $666,000, $778,000, and $798,000, in the years ended December 31, 2016, 2015, and 2014, respectively. Mid Penn has no commitments to lend additional funds to borrowers with impaired or nonaccrual loans. The performance and credit quality of the loan portfolio is also monitored by the analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The classes of the loan portfolio summarized by the past due status as of December 31, 2016 and 2015 are summarized as follows: (Dollars in thousands) December 31, 2016 30-59 60-89 Greater Total Current Total Loans Commercial and industrial: Commercial and industrial $ 164 $ 12 $ 4 $ 180 $ 172,338 $ 172,518 $ — Commercial real estate: Commercial real estate 475 — 1,004 1,479 444,203 445,682 — Acquired with credit deterioration — — 59 59 783 842 59 Commercial real estate—construction: Commercial real estate—construction — 404 84 488 53,888 54,376 — Lease financing: Lease financing — — — — 425 425 — Residential mortgage: Residential mortgage 548 124 237 909 98,159 99,068 — Acquired with credit deterioration — — 238 238 151 389 — Home equity: Home equity 33 13 125 171 37,437 37,608 — Consumer: Consumer — — — — 3,016 3,016 — Total $ 1,220 $ 553 $ 1,751 $ 3,524 $ 810,400 $ 813,924 $ 59 (Dollars in thousands) December 31, 2015 30-59 60-89 Greater Total Current Total Loans Commercial and industrial: Commercial and industrial $ 55 $ 204 $ 66 $ 325 $ 159,936 $ 160,261 $ — Commercial real estate: Commercial real estate 211 608 1,456 2,275 366,258 368,533 — Acquired with credit deterioration 215 518 55 788 143 931 55 Commercial real estate—construction: Commercial real estate—construction — — — — 68,068 68,068 — Lease financing: Lease financing — — — — 727 727 — Residential mortgage: Residential mortgage 694 550 778 2,022 98,243 100,265 — Acquired with credit deterioration 12 — 222 234 166 400 — Home equity: Home equity — 50 23 73 33,338 33,411 — Consumer: Consumer 10 5 — 15 3,902 3,917 — Total $ 1,197 $ 1,935 $ 2,600 $ 5,732 $ 730,781 $ 736,513 $ 55 Activity in the allowance for loan and lease losses for the years ended December 31, 2016, 2015, and 2014, and the recorded investment in loans receivable as of December 31, 2016, 2015, and 2014 are as follows: (Dollars in thousands) December 31, 2016 Commercial and industrial Commercial real estate Commercial real estate - construction Lease financing Residential mortgage Home equity Consumer Unallocated Total Allowance for loan and lease losses: Beginning balance $ 1,393 $ 3,552 $ 153 $ 1 $ 534 $ 317 $ 12 $ 206 $ 6,168 Charge-offs (820 ) (216 ) — — (4 ) (25 ) (42 ) — (1,107 ) Recoveries 4 211 — — 26 — 11 — 252 Provisions 1,003 776 (9 ) — (15 ) 87 22 6 1,870 Ending balance 1,580 4,323 144 1 541 379 3 212 7,183 Ending balance: individually evaluated for impairment 6 711 72 — 68 1 — — 858 Ending balance: collectively evaluated for impairment $ 1,574 $ 3,612 $ 72 $ 1 $ 473 $ 378 $ 3 $ 212 $ 6,325 Loans receivable: Ending balance $ 172,518 $ 446,524 $ 54,376 $ 425 $ 99,457 $ 37,608 $ 3,016 $ — $ 813,924 Ending balance: individually evaluated for impairment 60 3,246 860 — 916 140 — — 5,222 Ending balance: acquired with credit deterioration — 842 — — 389 — — — 1,231 Ending balance: collectively evaluated for impairment $ 172,458 $ 442,436 $ 53,516 $ 425 $ 98,152 $ 37,468 $ 3,016 $ — $ 807,471 (Dollars in thousands) December 31, 2015 Commercial Commercial Commercial real estate - Lease Residential Home Consumer Unallocated Total Allowance for loan and lease losses: Beginning balance $ 1,393 $ 3,925 $ 33 $ 2 $ 450 $ 653 $ 35 $ 225 $ 6,716 Charge-offs (130 ) (1,569 ) — — (35 ) (36 ) (14 ) — (1,784 ) Recoveries 12 75 — — 44 29 11 — 171 Provisions 118 1,121 120 (1 ) 75 (329 ) (20 ) (19 ) 1,065 Ending balance 1,393 3,552 153 1 534 317 12 206 6,168 Ending balance: individually evaluated for impairment 51 429 — — 23 — — — 503 Ending balance: collectively evaluated for impairment $ 1,342 $ 3,123 $ 153 $ 1 $ 511 $ 317 $ 12 $ 206 $ 5,665 Loans receivable: Ending balance $ 160,261 $ 369,464 $ 68,068 $ 727 $ 100,665 $ 33,411 $ 3,917 $ — $ 736,513 Ending balance: individually evaluated for impairment 127 2,970 — — 1,361 115 — — 4,573 Ending balance: acquired with credit deterioration — 931 — — 400 — — — 1,331 Ending balance: collectively evaluated for impairment $ 160,134 $ 365,563 $ 68,068 $ 727 $ 98,904 33,296 $ 3,917 $ — $ 730,609 (Dollars in thousands) December 31, 2014 Commercial and industrial Commercial real estate Commercial real estate - construction Lease financing Residential mortgage Home equity Consumer Unallocated Total Allowance for loan and lease losses: Beginning Balance $ 1,187 $ 4,006 $ 9 $ — $ 581 $ 441 $ 72 $ 21 $ 6,317 Charge-offs (62 ) (1,057 ) — — (133 ) (43 ) (33 ) — (1,328 ) Recoveries 13 13 — — 20 1 63 — 110 Provisions 255 963 24 2 (18 ) 254 (67 ) 204 1,617 Ending balance 1,393 3,925 33 2 450 653 35 225 6,716 Ending balance: individually evaluated for impairment 137 1,382 — — — 115 — — 1,634 Ending balance: collectively evaluated for impairment $ 1,256 $ 2,543 $ 33 $ 2 $ 450 $ 538 $ 35 $ 225 $ 5,082 Loans receivable: Ending balance $ 119,010 $ 297,357 $ 56,076 $ 1,121 $ 66,442 $ 28,506 $ 3,021 $ — $ 571,533 Ending balance: individually evaluated for impairment 618 8,925 — — 1,146 240 — — 10,929 Ending balance: collectively evaluated for impairment $ 118,392 $ 288,432 $ 56,076 $ 1,121 $ 65,296 $ 28,266 $ 3,021 $ — $ 560,604 The recorded investments in troubled debt restructured loans at December 31, 2016 and 2015 are as follows: Pre-Modification Post-Modification (Dollars in thousands) December 31, 2016 Outstanding Recorded Investment Outstanding Recorded Investment Recorded Investment Commercial and industrial $ 40 $ 35 $ 5 Commercial real estate 4,569 4,031 2,871 Residential mortgage 759 757 639 $ 5,368 $ 4,823 $ 3,515 Pre-Modification Post-Modification (Dollars in thousands) December 31, 2015 Outstanding Recorded Investment Outstanding Recorded Investment Recorded Investment Commercial and industrial $ 40 $ 35 $ 15 Commercial real estate 3,634 3,117 2,235 Residential mortgage 733 727 555 $ 4,407 $ 3,879 $ 2,805 At December 31, 2016, Mid Penn’s troubled debt restructured loans totaled $3,515,000, including five loans totaling $877,000 represented accruing impaired loans in compliance with the terms of the modification. Of the $877,000, four are accruing impaired residential mortgages to unrelated borrowers totaling $571,000 and the other one is an accruing impaired commercial real estate loan for $306,000. The remaining $2,638,000 of troubled debt restructured loans represent ten loans among four relationships, are nonaccrual impaired loans, and resulted in a collateral evaluation in accordance with the guidance on impaired loans. Two large relationships account for $2,170,000 of the $2,638,000 nonaccrual impaired troubled debt restructured loan total. As a result of the evaluation, a specific allocation and, subsequently, charge-offs have been taken as appropriate. As of December 31, 2016, there were no charge-offs associated with troubled debt restructured loans while under a forbearance agreement. As of December 31, 2016, there were no defaulted troubled debt restructured loans as all troubled debt restructured loans were current with respect to their associated forbearance agreements. There were also no defaults on troubled debt restructured loans within twelve months of restructure during 2016. One forbearance agreement was negotiated during 2008, eight forbearance agreements were negotiated during 2009, two were negotiated during 2013, one was negotiated during 2014, and three were negotiated during 2016. At December 31, 2015, Mid Penn’s troubled debt restructured loans totaled $2,805,000 of which four loans totaling $459,000 represented accruing impaired loans in compliance with the terms of the modification. Of the $459,000, three are accruing impaired residential mortgages to unrelated borrowers totaling $64,000 and the other one is an accruing impaired commercial real estate loan for $395,000. The remaining $2,346,000, representing nine loans among four relationships, are nonaccrual impaired loans, and resulted in a collateral evaluation in accordance with the guidance on impaired loans. One large relationship accounted for $1,370,000 of the $2,346,000 nonaccrual impaired troubled debt restructured loan total. As a result of the evaluation, a specific allocation and, subsequently, charge-offs have been taken as appropriate. As of December 31, 2015, there were no charge-offs associated with troubled debt restructured loans while under a forbearance agreement. As of December 31, 2015, there were no defaulted troubled debt restructured loans as all troubled debt restructured loans were current with respect to their associated forbearance agreements. There were also no defaults on troubled debt restructured loans within twelve months of restructure during 2015. One forbearance agreement was negotiated during 2008, nine forbearance agreements were negotiated during 2009, two were negotiated during 2013, and one was negotiated during 2014. Mid Penn entered into forbearance agreements on all loans currently classified as troubled debt restructures and all of these agreements have resulted in additional principal repayment. The terms of these forbearance agreements vary whereby principal payments have been decreased, interest rates have been reduced and/or the loan will be repaid as collateral is sold. There were three loans modified in 2016 and no loans modified in 2015 that resulted in troubled debt restructurings. The following table summarizes the loans whose terms have been modified resulting in troubled debt restructurings during the year ended December 31, 2016. (Dollars in thousands) December 31, 2016 Number Pre- Post- Recorded Commercial real estate 2 $ 934 $ 914 $ 914 Residential mortgage 1 68 68 68 3 $ 1,002 $ 982 $ 982 The following table provides activity for the accretable yield of purchased impaired loans for the year ended December 31, 2016. (Dollars in thousands) Accretable yield, January 1, 2016 $ 178 Accretable yield amortized to interest income (141 ) Reclassification from nonaccretable difference (a) 30 Accretable yield, December 31, 2016 $ 67 (a) Reclassification from non-accretable difference represents an increase to the estimated cash flows to be collected on the underlying portfolio. The Bank has granted loans to certain of its executive officers, directors, and their related interests. The aggregate amount of these loans was $17,594,000 and $10,657,000 at December 31, 2016 and 2015, respectively. During 2016, $14,479,000 of new loans and advances were extended and repayments totaled $7,542,000. None of these loans were past due, in nonaccrual status, or restructured at December 31, 2016. |