Loans and Allowance for Loan and Lease Losses | (6 ) Loans and Allowance for Loan and Lease Losses The types of loans in Mid Penn’s portfolio, summarized by those rated as “pass” (net of deferred fees and costs of $898,000 as of June 30, 2019 and $647,000 as of December 31, 2018), and the loans classified as “special mention” and “substandard” within Mid Penn’s internal risk rating system as of June 30, 2019 and December 31, 2018, are as follows: (Dollars in thousands) Special June 30, 2019 Pass Mention Substandard Total Commercial and industrial $ 288,672 $ 2,845 $ 9,754 $ 301,271 Commercial real estate 871,633 2,672 9,012 883,317 Commercial real estate - construction 173,860 — 40 173,900 Lease financing — — — — Residential mortgage 246,651 144 2,319 249,114 Home equity 70,373 — 69 70,442 Consumer 10,129 — — 10,129 $ 1,661,318 $ 5,661 $ 21,194 $ 1,688,173 (Dollars in thousands) Special December 31, 2018 Pass Mention Substandard Total Commercial and industrial $ 276,690 $ 2,769 $ 7,059 $ 286,518 Commercial real estate 850,150 2,432 8,787 861,369 Commercial real estate - construction 141,806 — 367 142,173 Lease financing 53 — — 53 Residential mortgage 251,151 147 2,245 253,543 Home equity 70,004 — 92 70,096 Consumer 10,315 — — 10,315 $ 1,600,169 $ 5,348 $ 18,550 $ 1,624,067 Mid Penn had no loans classified as doubtful as of June 30, 2019 and December 31, 2018. Impaired loans by loan portfolio class as of June 30, 2019 and December 31, 2018 are summarized as follows: June 30, 2019 December 31, 2018 (Dollars in thousands) Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Commercial and industrial $ — $ — $ — $ — $ — $ — Commercial real estate 2,236 2,584 — 2,007 2,276 — Commercial real estate - construction 40 — — — — — Lease financing — — — — — — Residential mortgage 897 991 — 657 811 — Home equity 28 29 — 30 106 — Consumer — — — — — — With no related allowance recorded and acquired with credit deterioration: Commercial and industrial $ 29 $ 29 $ — $ 28 $ 28 $ — Commercial real estate 1,616 1,616 — 1,563 1,563 — Commercial real estate - construction — — — — — — Lease financing — — — — — — Residential mortgage 1,234 1,234 — 1,208 1,208 — Home equity 4 4 — 4 4 — Consumer — — — — — — With an allowance recorded: Commercial and industrial $ 76 $ 281 $ 13 $ 4,527 $ 4,635 $ 500 Commercial real estate 509 509 243 721 721 204 Commercial real estate - construction — 23 — 367 370 38 Lease financing — — — — — — Residential mortgage — — — — — — Home equity — — — — — — Consumer — — — — — — Total Impaired Loans: Commercial and industrial $ 105 $ 310 $ 13 $ 4,555 $ 4,663 $ 500 Commercial real estate 4,361 4,709 243 4,291 4,560 204 Commercial real estate - construction 40 23 — 367 370 38 Lease financing — — — — — — Residential mortgage 2,131 2,225 — 1,865 2,019 — Home equity 32 33 — 34 110 — Consumer — — — — — — The average recorded investment of impaired loans and related interest income recognized for the three and six months ended June 30, 2019 and 2018 are summarized as follows: Three Months Ended June 30, 2019 June 30, 2018 (Dollars in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial and industrial $ — $ — $ — $ — Commercial real estate 2,273 — 2,650 3 Commercial real estate - construction 40 — — — Lease financing — — — — Residential mortgage 880 7 699 7 Home equity 29 — 95 — Consumer — — — — With no related allowance recorded and acquired with credit deterioration: Commercial and industrial $ 29 $ — $ 23 $ — Commercial real estate 1,602 — 1,455 7 Commercial real estate - construction — — — — Lease financing — — — — Residential mortgage 1,222 — 639 — Home equity 4 — — — Consumer — — — — With an allowance recorded: Commercial and industrial $ 140 $ — $ 4,349 $ — Commercial real estate 513 — 1,029 — Commercial real estate - construction 183 — 367 — Lease financing — — — — Residential mortgage — — — — Home equity — — — — Consumer — — — — Total Impaired Loans: Commercial and industrial $ 169 $ — $ 4,372 $ — Commercial real estate 4,388 — 5,134 10 Commercial real estate - construction 223 — 367 — Lease financing — — — — Residential mortgage 2,102 7 1,338 7 Home equity 33 — 95 — Consumer — — — — Six Months Ended June 30, 2019 June 30, 2018 (Dollars in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial and industrial $ — $ — $ — $ — Commercial real estate 2,289 — 2,306 3 Commercial real estate - construction 27 — 17 — Lease financing — — — — Residential mortgage 857 14 796 14 Home equity 29 — 208 — Consumer — — — — With no related allowance recorded and acquired with credit deterioration: Commercial and industrial $ 29 $ — $ 20 $ — Commercial real estate 1,589 — 2,001 14 Commercial real estate - construction — — — — Lease financing — — — — Residential mortgage 1,219 — 1,086 — Home equity 4 — — — Consumer — — — — With an allowance recorded: Commercial and industrial $ 1,603 $ 3 $ 3,519 $ — Commercial real estate 477 — 1,367 — Commercial real estate - construction 245 — 366 — Lease financing — — — — Residential mortgage — — — — Home equity — — — — Consumer — — — — Total Impaired Loans: Commercial and industrial $ 1,632 $ 3 $ 3,539 $ — Commercial real estate 4,355 — 5,674 17 Commercial real estate - construction 272 — 383 — Lease financing — — — — Residential mortgage 2,076 14 1,882 14 Home equity 33 — 208 — Consumer — — — — Nonaccrual loans by loan portfolio class, including loans acquired with credit deterioration, as of June 30, 2019 and December 31, 2018 are summarized as follows: (Dollars in thousands) June 30, 2019 December 31, 2018 Commercial and industrial $ 105 $ 4,555 Commercial real estate 4,360 4,291 Commercial real estate - construction 40 367 Residential mortgage 1,628 1,502 Home equity 32 34 $ 6,165 $ 10,749 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, 2019 and December 31, 2018 are summarized as follows: Loans (Dollars in thousands) 30-59 60-89 Greater Receivable > Days Past Days Past than 90 Total Past 90 Days and June 30, 2019 Due Due Days Due Current Total Loans Accruing Commercial and industrial $ 277 $ — $ 76 $ 353 $ 300,889 $ 301,242 $ — Commercial real estate 225 635 1,953 2,813 878,888 881,701 — Commercial real estate - construction — — 40 40 173,860 173,900 — Lease financing — — — — — — — Residential mortgage 87 — 380 467 247,413 247,880 — Home equity 18 10 — 28 70,410 70,438 — Consumer 5 3 — 8 10,121 10,129 — Loans acquired with credit deterioration: Commercial and industrial — 24 5 29 — 29 — Commercial real estate — — 1,050 1,050 566 1,616 — Commercial real estate - construction — — — — — — — Lease financing — — — — — — — Residential mortgage 17 70 832 919 315 1,234 — Home equity — — — — 4 4 — Consumer — — — — — — — Total $ 629 $ 742 $ 4,336 $ 5,707 $ 1,682,466 $ 1,688,173 $ — Loans (Dollars in thousands) 30-59 60-89 Greater Receivable > Days Past Days Past than 90 Total Past 90 Days and December 31, 2018 Due Due Days Due Current Total Loans Accruing Commercial and industrial $ 17 $ — $ 4,527 $ 4,544 $ 281,946 $ 286,490 $ — Commercial real estate 685 — 458 1,143 858,663 859,806 — Commercial real estate - construction — — 367 367 141,806 142,173 — Lease financing — — — — 53 53 — Residential mortgage 461 — 277 738 251,597 252,335 — Home equity 166 22 25 213 69,879 70,092 — Consumer 57 5 — 62 10,253 10,315 — Loans acquired with credit deterioration: Commercial and industrial 23 5 — 28 — 28 — Commercial real estate 29 — 1,534 1,563 — 1,563 — Commercial real estate - construction — — — — — — — Lease financing — — — — — — — Residential mortgage 19 57 913 989 219 1,208 — Home equity — — 4 4 — 4 — Consumer — — — — — — — Total $ 1,457 $ 89 $ 8,105 $ 9,651 $ 1,614,416 $ 1,624,067 $ — The following tables summarize the allowance and recorded investments in loans receivable. (Dollars in thousands) As of, and for the three months ended, June 30, 2019 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, April 1, 2019 $ 2,443 $ 5,031 $ 81 $ — $ 477 $ 450 $ 6 $ 14 $ 8,502 Charge-offs (205 ) — (20 ) — — — (38 ) — (263 ) Recoveries 42 15 — — — 1 9 — 67 Provisions 168 266 (16 ) — (1 ) 31 30 (13 ) 465 Ending balance, June 30, 2019 $ 2,448 $ 5,312 $ 45 $ — $ 476 $ 482 $ 7 $ 1 $ 8,771 (Dollars in thousands) As of, and for the six months ended, June 30, 2019 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, January 1, 2019 $ 2,391 $ 4,703 $ 75 $ — $ 453 $ 528 $ 7 $ 240 $ 8,397 Charge-offs (205 ) (12 ) (40 ) — — — (47 ) — (304 ) Recoveries 43 33 — — — 1 11 — 88 Provisions 219 588 10 — 23 (47 ) 36 (239 ) 590 Ending balance, June 30, 2019 2,448 5,312 45 — 476 482 7 1 8,771 Individually evaluated for impairment 13 243 — — — — — — 256 Ending balance: collectively evaluated for impairment $ 2,435 $ 5,069 $ 45 $ — $ 476 $ 482 $ 7 $ 1 $ 8,515 Loans receivables: Ending balance $ 301,271 $ 883,317 $ 173,900 $ — $ 249,114 $ 70,442 $ 10,129 $ — $ 1,688,173 Ending balance: individually evaluated for impairment 76 2,745 40 — 897 28 — — 3,786 Ending balance: acquired with credit deterioration 29 1,616 — — 1,234 4 — — 2,883 Ending balance: collectively evaluated for impairment $ 301,166 $ 878,956 $ 173,860 $ — $ 246,983 $ 70,410 $ 10,129 $ — $ 1,681,504 (Dollars in thousands) December 31, 2018 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: Ending balance $ 2,391 $ 4,703 $ 75 $ — $ 453 $ 528 $ 7 $ 240 $ 8,397 Ending balance: individually evaluated for impairment 500 204 38 — — — — — 742 Ending balance: collectively evaluated for impairment $ 1,891 $ 4,499 $ 37 $ — $ 453 $ 528 $ 7 $ 240 $ 7,655 Loans receivable: Ending balance $ 286,518 $ 861,369 $ 142,173 $ 53 $ 253,543 $ 70,096 $ 10,315 $ — $ 1,624,067 Ending balance: individually evaluated for impairment 4,527 2,728 367 — 811 30 — — 8,463 Ending balance: acquired with credit deterioration 28 1,563 — — 1,208 4 — — 2,803 Ending balance: collectively evaluated for impairment $ 281,963 $ 857,078 $ 141,806 $ 53 $ 251,524 $ 70,062 $ 10,315 $ — $ 1,612,801 (Dollars in thousands) As of, and for the three months ended, June 30, 2018 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, April 1, 2018 $ 1,977 $ 4,653 $ 183 $ — $ 452 $ 391 $ 4 $ 6 $ 7,666 Charge-offs (129 ) — (40 ) — (3 ) (91 ) (4 ) — (267 ) Recoveries — 788 — — — — 2 — 790 Provisions 272 (718 ) 3 — (8 ) 120 2 329 — Ending balance, June 30, 2018 $ 2,120 $ 4,723 $ 146 $ — $ 441 $ 420 $ 4 $ 335 $ 8,189 (Dollars in thousands) As of, and for the six months ended, June 30, 2018 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, January 1, 2018 1,795 4,435 178 — 428 423 3 344 $ 7,606 Charge-offs (129 ) — (40 ) — (5 ) (167 ) (10 ) — (351 ) Recoveries — 805 — — — — 4 — 809 Provisions 454 (517 ) 8 — 18 164 7 (9 ) 125 Ending balance, June 30, 2018 2,120 4,723 146 — 441 420 4 335 8,189 Individually evaluated for impairment 282 238 54 — — — — — 574 Ending balance: collectively evaluated for impairment $ 1,838 $ 4,485 $ 92 $ — $ 441 $ 420 $ 4 $ 335 $ 7,615 Loans receivables: Ending balance $ 204,724 $ 575,956 $ 82,690 $ 153 $ 120,260 $ 47,815 $ 4,881 $ — $ 1,036,479 Ending balance: individually evaluated for impairment 4,324 2,261 367 — 728 8 — — 7,688 Ending balance: acquired with credit deterioration 23 1,466 — — 493 — — — 1,982 Ending balance: collectively evaluated for impairment $ 200,377 $ 572,229 $ 82,323 $ 153 $ 119,039 $ 47,807 $ 4,881 $ — $ 1,026,809 The recorded investments in troubled debt restructured loans at June 30, 2019 and December 31, 2018 are as follows: (Dollars in thousands) Pre-Modification Post-Modification June 30, 2019 Outstanding Recorded Investment Outstanding Recorded Investment Recorded Investment Commercial real estate $ 2,940 $ 2,841 $ 2,162 Residential mortgage 677 675 503 $ 3,617 $ 3,516 $ 2,665 (Dollars in thousands) Pre-Modification Post-Modification December 31, 2018 Outstanding Recorded Investment Outstanding Recorded Investment Recorded Investment Commercial and industrial $ 4,110 $ 4,460 $ 4,302 Commercial real estate 2,940 2,841 2,201 Residential mortgage 677 675 516 Home equity 14 14 1 $ 7,741 $ 7,990 $ 7,020 Mid Penn entered into forbearance or modification 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 and generally involve modifications from the original loan agreements including either a reduction in the amount of principal payments for certain or extended periods, interest rate reductions, and/or the intent for the loan to be repaid as collateral is sold. Mid Penn’s troubled debt restructured loans at June 30, 2019 totaled $2,665,000 and included $2,162,000 of troubled debt restructurings attributable to nine loans among four relationships which were classified as nonaccrual impaired based upon a collateral evaluation in accordance with the guidance on impaired loans. One large relationship accounted for $1,423,000 of the total $2,162,000 of these nonaccrual impaired troubled debt restructured loans. The remaining troubled debt restructurings were three loans totaling $503,000 representing accruing impaired residential mortgage loans to unrelated borrowers in compliance with the terms of the modification. Mid Penn’s troubled debt restructured loans at December 31, 2018 totaled $7,020,000, and included $6,503,000 of troubled debt restructurings attributable to ten loans among five relationships which were classified as nonaccrual impaired based upon a collateral evaluation in accordance with the guidance on impaired loans. Two large relationships accounted for $5,463,000 of the total $6,503,000 in nonaccrual impaired troubled debt restructured loans. The remaining four loans totaling $517,000 represented accruing impaired loans to unrelated borrowers in compliance with the terms of the modification, with three loans being accruing impaired residential mortgages to unrelated borrowers totaling $516,000 and one loan being an accruing impaired home equity loan of $1,000. As of December 31, 2018, 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 2018. The decrease in the troubled debt restructured loan balance when compared to the December 31, 2018 amount was due to the successful workout of one nonaccrual troubled debt restructured loan totaling $4,302,000 during the first quarter of 2019. There were no troubled debt restructured loans added during the three or six months ended June 30, 2019 or 2018. As a result of management evaluations at June 30, 2019, June 30, 2018, and December 31, 2018, any necessary specific allocations or charge-offs have been taken as appropriate. There were no charge-offs associated with existing troubled debt restructured loan relationships for the three or six months ended June 30, 2019 or 2018. There were no troubled debt restructured loans that defaulted within twelve months of restructure during the three or six months ended June 30, 2019 and 2018. The following tables provide activity for the accretable yield of acquired impaired loans from the Phoenix Bancorp, Inc. (March 2015), Scottdale (January 2018), and First Priority (July 2018) acquisitions for the three and six months ended June 30, 2019. (Dollars in thousands) Three Months Ended June 30, 2019 2018 Accretable yield, beginning of period $ 254 $ 336 Accretable yield amortized to interest income (57 ) (36 ) Accretable yield, end of period $ 197 $ 300 (Dollars in thousands) Six Months Ended June 30, 2019 2018 Accretable yield, beginning of period $ 309 $ 67 Acquisition of impaired loans — 305 Accretable yield amortized to interest income (112 ) (72 ) Accretable yield, end of period $ 197 $ 300 |