Loans and Allowance for Loan and Lease Losses | ( 4 ) 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 $16,536,000 as of September 30, 2020 and $1,081,000 as of December 31, 2019), and the loans classified as “special mention” and “substandard” within Mid Penn’s internal risk rating system as of September 30, 2020 and December 31, 2019, are as follows: (Dollars in thousands) Special September 30, 2020 Pass Mention Substandard Total Commercial and industrial $ 956,097 $ 9,657 $ 3,121 $ 968,875 Commercial real estate 1,004,999 2,406 14,013 1,021,418 Commercial real estate - construction 238,176 — 32 238,208 Residential mortgage 214,177 53 1,359 215,589 Home equity 68,002 5 2,393 70,400 Consumer 7,337 — — 7,337 $ 2,488,788 $ 12,121 $ 20,918 $ 2,521,827 (Dollars in thousands) Special December 31, 2019 Pass Mention Substandard Total Commercial and industrial $ 326,573 $ 9,558 $ 3,016 $ 339,147 Commercial real estate 913,001 2,426 13,711 929,138 Commercial real estate - construction 181,650 — 40 181,690 Residential mortgage 235,252 55 1,417 236,724 Home equity 68,224 — 47 68,271 Consumer 7,786 — — 7,786 $ 1,732,486 $ 12,039 $ 18,231 $ 1,762,756 The increase in deferred fees and costs from December 31, 2019 to September 30, 2020 was the result of collected but unearned PPP loan processing fees related to the PPP loans which Mid Penn processed and disbursed during the second and third quarters of 2020. PPP loans are included in commercial and industrial loans and are fully guaranteed by the SBA; therefore, all PPP loans outstanding (net of the related deferred PPP fees) are classified as “pass” within Mid Penn’s internal risk rating system as of September 30, 2020. Mid Penn had no loans classified as doubtful as of September 30, 2020 and December 31, 2019. Impaired loans by loan portfolio class as of September 30, 2020 and December 31, 2019 are summarized as follows: September 30, 2020 December 31, 2019 (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 $ 859 $ 891 $ — $ 890 $ 890 $ — Commercial real estate 7,074 7,425 — 7,973 8,366 — Commercial real estate - construction 32 34 — 40 61 — Residential mortgage 834 859 — 817 838 — Home equity 2,386 2,417 — 25 27 — Consumer — — — — — — With no related allowance recorded and acquired with credit deterioration: Commercial and industrial $ — $ — $ — $ 3 $ 68 $ — Commercial real estate 1,426 1,698 — 1,423 1,708 — Commercial real estate - construction — — — — — — Residential mortgage 342 585 — 381 578 — Home equity — 14 — 1 5 — Consumer — — — — — — With an allowance recorded: Commercial and industrial $ 53 $ 73 $ 41 $ — $ — $ — Commercial real estate 360 405 141 338 380 166 Commercial real estate - construction — — — — — — Residential mortgage — — — — — — Home equity — — — — — — Consumer — — — — — — Total Impaired Loans: Commercial and industrial $ 912 $ 964 $ 41 $ 893 $ 958 $ — Commercial real estate 8,860 9,528 141 9,734 10,454 166 Commercial real estate - construction 32 34 — 40 61 — Residential mortgage 1,176 1,444 — 1,198 1,416 — Home equity 2,386 2,431 — 26 32 — Consumer — — — — — — The average recorded investment of impaired loans and related interest income recognized for the three and nine months ended September 30, 2020 and 2019 are summarized as follows: Three Months Ended September 30, 2020 September 30, 2019 (Dollars in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial and industrial $ 932 $ — $ — $ — Commercial real estate 7,171 5 1,917 — Commercial real estate - construction 32 — 40 4 Residential mortgage 805 6 889 7 Home equity 2,396 — 27 — Consumer — — — — With no related allowance recorded and acquired with credit deterioration: Commercial and industrial $ — $ — $ 11 $ — Commercial real estate 1,428 — 1,630 — Commercial real estate - construction — — — — Residential mortgage 347 — 1,055 — Home equity — — 4 — Consumer — — — — With an allowance recorded: Commercial and industrial $ 130 $ — $ 38 $ — Commercial real estate 560 — 617 — Commercial real estate - construction — — — — Residential mortgage — — — — Home equity — — — — Consumer — — — — Total Impaired Loans: Commercial and industrial $ 1,062 $ — $ 49 $ — Commercial real estate 9,159 5 4,164 — Commercial real estate - construction 32 — 40 4 Residential mortgage 1,152 6 1,944 7 Home equity 2,396 — 31 — Consumer — — — — Nine Months Ended September 30, 2020 September 30, 2019 (Dollars in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial and industrial $ 911 $ — $ — $ — Commercial real estate 7,325 5 2,697 11 Commercial real estate - construction 36 — 40 — Residential mortgage 794 19 1,151 21 Home equity 1,210 — 38 — Consumer — — — — With no related allowance recorded and acquired with credit deterioration: Commercial and industrial $ 1 $ — $ 22 $ — Commercial real estate 1,423 — 1,602 — Commercial real estate - construction — — — — Residential mortgage 361 — 1,152 — Home equity 1 — 4 — Consumer — — — — With an allowance recorded: Commercial and industrial $ 67 $ — $ 1,202 $ 3 Commercial real estate 530 — 633 — Commercial real estate - construction — — 183 — Residential mortgage — — — — Home equity — — — — Consumer — — — — Total Impaired Loans: Commercial and industrial $ 979 $ — $ 1,224 $ 3 Commercial real estate 9,278 5 4,932 11 Commercial real estate - construction 36 — 223 — Residential mortgage 1,155 19 2,303 21 Home equity 1,211 — 42 — Consumer — — — — Nonaccrual loans by loan portfolio class, including loans acquired with credit deterioration, as of September 30, 2020 and December 31, 2019 are summarized as follows: (Dollars in thousands) September 30, 2020 December 31, 2019 Commercial and industrial $ 913 $ 894 Commercial real estate 8,859 9,800 Commercial real estate - construction 32 40 Residential mortgage 706 711 Home equity 2,386 26 $ 12,896 $ 11,471 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 September 30, 2020 and December 31, 2019 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 September 30, 2020 Due Due Days Due Current Total Loans Accruing Commercial and industrial $ — $ 1,490 $ 866 $ 2,356 $ 966,519 $ 968,875 $ — Commercial real estate — 1,029 6,842 7,871 1,012,121 1,019,992 — Commercial real estate - construction — — — — 238,208 238,208 — Residential mortgage — 2 328 330 214,917 215,247 — Home equity — 16 2,364 2,380 68,020 70,400 — Consumer 3 1 — 4 7,333 7,337 — Loans acquired with credit deterioration: Commercial and industrial — — — — — — — Commercial real estate — — 1,417 1,417 9 1,426 — Commercial real estate - construction — — — — — — — Residential mortgage — — 182 182 160 342 — Home equity — — — — — — — Consumer — — — — — — — Total $ 3 $ 2,538 $ 11,999 $ 14,540 $ 2,507,287 $ 2,521,827 $ — Loans (Dollars in thousands) 30-59 60-89 Greater Receivable > Days Past Days Past than 90 Total Past 90 Days and December 31, 2019 Due Due Days Due Current Total Loans Accruing Commercial and industrial $ — $ 1,059 $ 890 $ 1,949 $ 337,195 $ 339,144 $ — Commercial real estate 1,298 11 7,819 9,128 918,587 927,715 — Commercial real estate - construction — — — — 181,690 181,690 — Residential mortgage 145 — 326 471 235,872 236,343 — Home equity 34 — — 34 68,236 68,270 — Consumer 5 3 — 8 7,778 7,786 — Loans acquired with credit deterioration: Commercial and industrial — — 3 3 — 3 — Commercial real estate 16 473 934 1,423 — 1,423 — Commercial real estate - construction — — — — — — — Residential mortgage 5 — 203 208 173 381 — Home equity — — — — 1 1 — Consumer — — — — — — — Total $ 1,503 $ 1,546 $ 10,175 $ 13,224 $ 1,749,532 $ 1,762,756 $ — The allowance for loan losses and the related loan loss provision for the periods presented reflect Mid Penn’s continued application of the incurred loss method for estimating credit losses , as Mid Penn is not required to adopt the current expected credit loss (“CECL”) accounting standard until January 1, 2023 . PPP loans are included in the commercial and industrial classification and, as the PPP loans are fully guaranteed by the Small Business Administration, no allowance for loan losses was recorded against the $ balance of PPP loans outstanding (net of related deferred PPP fees) as of September 30 , 2020. The following tables summarize the allowance and recorded investments in loans receivable. (Dollars in thousands) As of, and for the three months ended, September 30, 2020 Commercial and industrial Commercial real estate Commercial real estate - construction Residential mortgage Home equity Consumer Unallocated Total Allowance for loan and lease losses: Beginning balance, July 1, 2020 $ 2,786 $ 7,241 $ 65 $ 427 $ 517 $ 2 $ 29 $ 11,067 Charge-offs — — — (4 ) — (4 ) — (8 ) Recoveries — — — — — 11 — 11 Provisions (credits) 138 529 (4 ) 47 14 (7 ) 383 1,100 Ending balance, September 30, 2020 $ 2,924 $ 7,770 $ 61 $ 470 $ 531 $ 2 $ 412 $ 12,170 (Dollars in thousands) As of, and for the nine months ended, September 30, 2020 Commercial and industrial Commercial real estate Commercial real estate - construction Residential mortgage Home equity Consumer Unallocated Total Allowance for loan and lease losses: Beginning balance, January 1, 2020 $ 2,341 $ 6,259 $ 51 $ 417 $ 442 $ 2 $ 3 $ 9,515 Charge-offs (45 ) — (7 ) (4 ) — (22 ) — (78 ) Recoveries 2 1 2 3 1 24 — 33 Provisions (credits) 626 1,510 15 54 88 (2 ) 409 2,700 Ending balance, September 30, 2020 2,924 7,770 61 470 531 2 412 12,170 Individually evaluated for impairment 41 141 — — — — — 182 Ending balance: Collectively evaluated for impairment $ 2,883 $ 7,629 $ 61 $ 470 $ 531 $ 2 $ 412 $ 11,988 Loans receivables: Ending balance $ 968,875 $ 1,021,418 $ 238,208 $ 215,589 $ 70,400 $ 7,337 $ — $ 2,521,827 Ending balance: individually evaluated for impairment 912 7,434 32 834 2,386 — — 11,598 Ending balance: acquired with credit deterioration — 1,426 — 342 — — — 1,768 Ending balance: collectively evaluated for impairment $ 967,963 $ 1,012,558 $ 238,176 $ 214,413 $ 68,014 $ 7,337 $ — $ 2,508,461 (Dollars in thousands) December 31, 2019 Commercial and industrial Commercial real estate Commercial real estate - construction Residential mortgage Home equity Consumer Unallocated Total Allowance for loan and lease losses: Ending balance $ 2,341 $ 6,259 $ 51 $ 417 $ 442 $ 2 $ 3 $ 9,515 Ending balance: individually evaluated for impairment — 166 — — — — — 166 Ending balance: collectively evaluated for impairment $ 2,341 $ 6,093 $ 51 $ 417 $ 442 $ 2 $ 3 $ 9,349 Loans receivable: Ending balance $ 339,147 $ 929,138 $ 181,690 $ 236,724 $ 68,271 $ 7,786 $ — $ 1,762,756 Ending balance: individually evaluated for impairment 890 8,311 40 817 25 — — 10,083 Ending balance: acquired with credit deterioration 3 1,423 — 381 1 — — 1,808 Ending balance: collectively evaluated for impairment $ 338,254 $ 919,404 $ 181,650 $ 235,526 $ 68,245 $ 7,786 $ — $ 1,750,865 (Dollars in thousands) As of, and for the three months ended, September 30, 2019 Commercial and industrial Commercial real estate Commercial real estate - construction Residential mortgage Home equity Consumer Unallocated Total Allowance for loan and lease losses: Beginning balance, July 1, 2019 $ 2,448 $ 5,312 $ 45 $ 476 $ 482 $ 7 $ 1 $ 8,771 Charge-offs (12 ) (42 ) — (3 ) — (9 ) — (66 ) Recoveries 1 41 — 2 1 1 — 46 Provisions (credits) 6 544 1 (7 ) 13 6 2 565 Ending balance, September 30, 2019 $ 2,443 $ 5,855 $ 46 $ 468 $ 496 $ 5 $ 3 $ 9,316 (Dollars in thousands) As of, and for the nine months ended, September 30, 2019 Commercial and industrial Commercial real estate Commercial real estate - construction 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 (217 ) (53 ) (40 ) (3 ) — (57 ) — (370 ) Recoveries 44 74 — 2 2 12 — 134 Provisions (credits) 225 1,131 11 16 (34 ) 43 (237 ) 1,155 Ending balance, September 30, 2019 2,443 5,855 46 468 496 5 3 9,316 Individually evaluated for impairment — 336 — — — — — 336 Ending balance: collectively evaluated for impairment $ 2,443 $ 5,519 $ 46 $ 468 $ 496 $ 5 $ 3 $ 8,980 Loans receivables: Ending balance $ 320,400 $ 892,060 $ 177,151 $ 243,729 $ 69,240 $ 7,854 $ — $ 1,710,434 Ending balance: individually evaluated for impairment — 2,324 40 881 26 — — 3,271 Ending balance: acquired with credit deterioration 5 1,643 — 494 4 — — 2,146 Ending balance: collectively evaluated for impairment $ 320,395 $ 888,093 $ 177,111 $ 242,354 $ 69,210 $ 7,854 $ — $ 1,705,017 Mid Penn entered into forbearance or modification agreements on loans currently classified as troubled debt restructures and 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 September 30, 2020 totaled $928,000 and included three accruing impaired residential mortgage loans to unrelated borrowers in compliance with the terms of the modifications totaling $470,000. The remaining $458,000 of troubled debt restructurings was attributable to seven loans among five relationships which were classified as nonaccrual impaired based upon a collateral evaluation in accordance with the guidance on impaired loans. The balance of nonaccrual impaired troubled debt restructured loans as of September 30, 2020 was comprised of $409,000 in commercial real estate loans amongst two borrowers, one commercial real estate construction loan for $31,000, one residential mortgage loan for $11,000, and one commercial and industrial loan for $7,000. As of September 30, 2020, 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 2020. Mid Penn’s troubled debt restructured loans at December 31, 2019 totaled $2,238,000, and included three accruing impaired residential mortgage loans to unrelated borrowers in compliance with the terms of the modifications totaling $490,000. The remaining $1,748,000 of troubled debt restructurings was attributable to eight loans among five 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 $1,252,000 of the total $1,748,000 in nonaccrual impaired troubled debt restructured loans. As of December 31, 2019, 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 2019. The recorded investments in troubled debt restructured loans at September 30, 2020 and December 31, 2019 are as follows: (Dollars in thousands) Pre-Modification Post-Modification September 30, 2020 Outstanding Recorded Investment Outstanding Recorded Investment Recorded Investment Commercial and industrial $ 8 $ 8 $ 7 Commercial real estate 1,214 1,115 409 Commercial real estate - construction 40 40 31 Residential mortgage 689 687 481 $ 1,951 $ 1,850 $ 928 (Dollars in thousands) Pre-Modification Post-Modification December 31, 2019 Outstanding Recorded Investment Outstanding Recorded Investment Recorded Investment Commercial and industrial $ 3 $ 3 $ 3 Commercial real estate 2,562 2,463 1,705 Commercial real estate - construction 40 40 40 Residential mortgage 677 675 490 $ 3,282 $ 3,181 $ 2,238 The CARES Act, along with a joint agency statement issued by banking agencies, provides that short-term modifications made in response to COVID-19 do not need to be accounted for as troubled debt restructurings. Depending upon the specific needs and circumstances affecting each borrower, the majority of these modifications ranged from deferrals of both principal and interest payments with some borrowers reverting to interest-only payments. The majority of the deferrals were granted for a period of three months, but some as long as six months, depending upon management’s specific evaluation of each borrower’s circumstances. Interest has and will continue to accrue on loans modified under the CARES Act during the deferral period. During 2020, Mid Penn had provided loan modifications meeting the CARES Act qualifications to over 1,000 borrowers. Mid Penn remains in communication with each of these borrowers to assess the ongoing credit status of the borrowers, and may make further adjustments to a borrower’s modification at some future time if warranted for the specific situation. As of September 30, 2020, the principal balance of loans remaining in this CARES Act qualifying deferment status totaled $32,851,000, or 1 percent of the total loan portfolio, a significant reduction compared to June 30, 2020, when $444,486,000 of loans, representing 18 percent of the total loan portfolio, were in this deferment status, as most borrowers have returned to regular payment status. The following tables provide activity for the accretable yield of acquired impaired loans from the Phoenix ( March 2015), Scottdale (January 2018), and First Priority (July 2018) acquisitions for the three and nine months ended September 30, 2020 . (Dollars in thousands) Three Months Ended September 30, 2020 2019 Accretable yield, beginning of period $ 56 $ 197 Accretable yield amortized to interest income (7 ) (55 ) Accretable yield, end of period $ 49 $ 142 (Dollars in thousands) Nine Months Ended September 30, 2020 2019 Accretable yield, beginning of period $ 89 $ 309 Accretable yield amortized to interest income (40 ) (167 ) Accretable yield, end of period $ 49 $ 142 |