Loans and Allowance for Loan and Lease Losses | (5) Loans and Allowance for Loan and Lease Losses As of March 31, 2022 and December 31, 2021, the types of loans in Mid Penn’s portfolio, summarized using Mid Penn’s internal risk rating system between those rated “pass” (net of deferred fees and costs of $3,619,000 as of March 31, 2022 and $6,264,000 as of December 31, 2021), which comprise the vast majority of the portfolio, and those classified as “special mention” and “substandard”, are as follows: (Dollars in thousands) Special March 31, 2022 Pass Mention Substandard Total Commercial and industrial $ 572,596 $ 10,899 $ 2,949 $ 586,444 Commercial real estate 1,672,461 20,770 29,437 1,722,668 Commercial real estate - construction 380,910 — 1,221 382,131 Residential mortgage 301,442 317 3,552 305,311 Home equity 112,133 681 705 113,519 Consumer 11,458 — — 11,458 $ 3,051,000 $ 32,667 $ 37,864 $ 3,121,531 (Dollars in thousands) Special December 31, 2021 Pass Mention Substandard Total Commercial and industrial $ 606,484 $ 10,321 $ 2,757 $ 619,562 Commercial real estate 1,601,196 35,508 31,438 1,668,142 Commercial real estate - construction 371,337 — 1,397 372,734 Residential mortgage 319,862 294 3,067 323,223 Home equity 106,853 534 2,919 110,306 Consumer 10,429 — — 10,429 $ 3,016,161 $ 46,657 $ 41,578 $ 3,104,396 All PPP loans, whether disbursed in 2020 or 2021, 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 March 31, 2022. Mid Penn had no loans classified as “doubtful” as of March 31, 2022 and December 31, 2021. Impaired loans by loan portfolio class as of March 31, 2022 and December 31, 2021 are summarized as follows: March 31, 2022 December 31, 2021 (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 $ — $ — $ — $ — $ 31 $ — Commercial real estate 821 1,213 — 854 1,243 — Commercial real estate - construction — 5 — 22 27 — Residential mortgage 1,338 1,377 — 1,259 1,295 — Home equity 99 99 — 2,377 2,377 — Consumer — — — — — — With no related allowance recorded and acquired with credit deterioration: Commercial and industrial $ — $ — $ — $ — $ — $ — Commercial real estate 2,109 2,826 — 2,231 2,909 — Commercial real estate - construction 1,221 1,463 — 1,196 1,469 — Residential mortgage 1,285 1,863 — 1,362 1,847 — Home equity 85 107 — 86 111 — Consumer — — — — — — With an allowance recorded: Commercial and industrial $ 523 $ 554 $ 75 $ 308 $ 339 $ 67 Commercial real estate 280 345 114 287 359 121 Commercial real estate - construction — — — — — — Residential mortgage — — — — — — Home equity — — — — — — Consumer — — — — — — Total Impaired Loans: Commercial and industrial $ 523 $ 554 $ 75 $ 308 $ 370 $ 67 Commercial real estate 3,210 4,384 114 3,372 4,511 121 Commercial real estate - construction 1,221 1,468 — 1,218 1,496 — Residential mortgage 2,623 3,240 — 2,621 3,142 — Home equity 184 206 — 2,463 2,488 — Consumer — — — — — — The average recorded investment of impaired loans and related interest income recognized for the three months ended March 31, 2022 and 2021 are summarized as follows: Three Months Ended March 31, 2022 March 31, 2021 (Dollars in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial and industrial $ — $ — $ 753 $ — Commercial real estate 838 — 4,405 — Commercial real estate - construction 11 — 31 — Residential mortgage 1,346 6 787 8 Home equity 1,237 84 2,350 — Consumer — — — — With no related allowance recorded and acquired with credit deterioration: Commercial and industrial $ — $ — $ — $ — Commercial real estate 2,186 — 1,414 — Commercial real estate - construction 1,205 — — — Residential mortgage 1,335 — 317 — Home equity 85 — — — Consumer — — — — With an allowance recorded: Commercial and industrial $ 528 $ — $ 157 $ — Commercial real estate 283 — 880 — Commercial real estate - construction — — — — Residential mortgage — — — — Home equity — — — — Consumer — — — — Total Impaired Loans: Commercial and industrial $ 528 $ — $ 910 $ — Commercial real estate 3,307 — 6,699 — Commercial real estate - construction 1,216 — 31 — Residential mortgage 2,681 6 1,104 8 Home equity 1,322 84 2,350 — Consumer — — — — Nonaccrual loans by loan portfolio class, including loans acquired with credit deterioration, as of March 31, 2022 and December 31, 2021 are summarized as follows: (Dollars in thousands) March 31, 2022 December 31, 2021 Commercial and industrial $ 523 $ 308 Commercial real estate 3,210 3,372 Commercial real estate - construction 1,221 1,218 Residential mortgage 2,143 2,186 Home equity 410 2,463 $ 7,507 $ 9,547 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 March 31, 2022 and December 31, 2021 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 March 31, 2022 Due Due Days Due Current Total Loans Accruing Commercial and industrial $ 1,053 $ 220 $ 436 $ 1,709 $ 584,735 $ 586,444 $ 133 Commercial real estate 315 40 679 1,034 1,719,525 1,720,559 — Commercial real estate - construction 220 — — 220 380,690 380,910 — Residential mortgage 1,218 148 876 2,242 301,784 304,026 — Home equity 829 — 255 1,084 112,350 113,434 — Consumer 12 — — 12 11,446 11,458 — Loans acquired with credit deterioration: Commercial and industrial — — — — — — — Commercial real estate 18 — 1,532 1,550 559 2,109 — Commercial real estate - construction — — — — 1,221 1,221 — Residential mortgage 166 — 421 587 698 1,285 — Home equity 14 — 56 70 15 85 — Consumer — — — — — — — Total $ 3,845 $ 408 $ 4,255 $ 8,508 $ 3,113,023 $ 3,121,531 $ 133 Loans (Dollars in thousands) 30-59 60-89 Greater Receivable > Days Past Days Past than 90 Total Past 90 Days and December 31, 2021 Due Due Days Due Current Total Loans Accruing Commercial and industrial $ 1,378 $ 62 $ 404 $ 1,844 $ 617,718 $ 619,562 $ 96 Commercial real estate 32 55 769 856 1,665,055 1,665,911 — Commercial real estate - construction — — 205 205 371,333 371,538 205 Residential mortgage 1,246 205 1,002 2,453 319,408 321,861 212 Home equity 403 — 2,377 2,780 107,440 110,220 — Consumer 6 2 2 10 10,419 10,429 2 Loans acquired with credit deterioration: Commercial and industrial — — — — — — — Commercial real estate — 3 1,628 1,631 600 2,231 — Commercial real estate - construction — — — — 1,196 1,196 — Residential mortgage 54 — 818 872 490 1,362 — Home equity — — — — 86 86 — Consumer — — — — — — — Total $ 3,119 $ 327 $ 7,205 $ 10,651 $ 3,093,745 $ 3,104,396 $ 515 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, and Mid Penn has not elected to early adopt CECL. PPP loans, both those disbursed in 2020 and those disbursed in 2021, 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 $34,124,000 balance of PPP loans outstanding (net of related deferred PPP fees) as of March 31, 2022. The following tables summarize the allowance and recorded investments in loans receivable. (Dollars in thousands) As of, and for the three months ended, March 31, 2022 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, 2022 $ 3,439 $ 9,415 $ 38 $ 459 $ 560 $ 2 $ 684 $ 14,597 Charge-offs — — — — — (57 ) — (57 ) Recoveries 13 65 24 — 1 4 — 107 Provisions (credits) 359 511 (21 ) 24 1 53 (427 ) 500 Ending balance, March 31, 2022 3,811 9,991 41 483 562 2 257 15,147 Individually evaluated for impairment 75 114 — — — — — 189 Ending balance: Collectively evaluated for impairment $ 3,736 $ 9,877 $ 41 $ 483 $ 562 $ 2 $ 257 $ 14,958 Loans receivables: Ending balance $ 586,444 $ 1,722,668 $ 382,131 $ 305,311 $ 113,519 $ 11,458 $ — $ 3,121,531 Ending balance: individually evaluated for impairment 523 1,101 — 1,338 99 — — 3,061 Ending balance: acquired with credit deterioration — 2,109 1,221 1,285 85 — — 4,700 Ending balance: collectively evaluated for impairment $ 585,921 $ 1,719,458 $ 380,910 $ 302,688 $ 113,335 $ 11,458 $ — $ 3,113,770 (Dollars in thousands) December 31, 2021 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 $ 3,439 $ 9,415 $ 38 $ 459 $ 560 $ 2 $ 684 $ 14,597 Ending balance: individually evaluated for impairment 67 121 — — — — — 188 Ending balance: collectively evaluated for impairment $ 3,372 $ 9,294 $ 38 $ 459 $ 560 $ 2 $ 684 $ 14,409 Loans receivable: Ending balance $ 619,562 $ 1,668,142 $ 372,734 $ 323,223 $ 110,306 $ 10,429 $ — $ 3,104,396 Ending balance: individually evaluated for impairment 308 1,141 22 1,259 2,377 — — 5,107 Ending balance: acquired with credit deterioration — 2,231 1,196 1,362 86 — — 4,875 Ending balance: collectively evaluated for impairment $ 619,254 $ 1,664,770 $ 371,516 $ 320,602 $ 107,843 $ 10,429 $ — $ 3,094,414 (Dollars in thousands) As of, and for the three months ended, March 31, 2021 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, 2021 $ 3,066 $ 8,655 $ 134 $ 429 $ 507 $ 1 $ 590 $ 13,382 Charge-offs (859 ) — — (3 ) — (3 ) — (865 ) Recoveries 1 56 — 9 — 8 — 74 Provisions (credits) 780 233 (12 ) 3 21 (5 ) (20 ) 1,000 Ending balance, March 31, 2021 2,988 8,944 122 438 528 1 570 13,591 Individually evaluated for impairment 68 263 — — — — — 331 Ending balance: collectively evaluated for impairment $ 2,920 $ 8,681 $ 122 $ 438 $ 528 $ 1 $ 570 $ 13,260 Loans receivables: Ending balance $ 964,045 $ 1,135,660 $ 264,945 $ 197,788 $ 75,423 $ 8,375 $ — $ 2,646,236 Ending balance: individually evaluated for impairment 368 1,469 30 758 2,334 — — 4,959 Ending balance: acquired with credit deterioration — 1,408 — 309 — — — 1,717 Ending balance: collectively evaluated for impairment $ 963,677 $ 1,132,783 $ 264,915 $ 196,721 $ 73,089 $ 8,375 $ — $ 2,639,560 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 March 31, 2022 totaled $774,000 and included: (i) two accruing impaired residential mortgage loans to unrelated borrowers in compliance with the terms of the modifications totaling $430,000, and (ii) $344,000 of troubled debt restructurings attributable to six loans among four relationships which were classified as nonaccrual impaired based upon a collateral evaluation in accordance with the guidance on impaired loans. The balance of these nonaccrual impaired troubled debt restructured loans as of March 31, 2022 was comprised of $309,000 in commercial real estate loans amongst two borrowers and two residential mortgage loans for $35,000. As of March 31, 2022, there were no defaulted troubled debt restructured loans, as all troubled debt restructured loans were current with respect to their associated forbearance agreements. In addition to contractual paydowns, the decrease in Mid Penn’s troubled debt restructured loan balance since December 31, 2021 reflects the successful workout of two nonaccrual impaired loans. Mid Penn’s troubled debt restructured loans at December 31, 2021 totaled $819,000, and included (i) two accruing impaired residential mortgage loans to unrelated borrowers in compliance with the terms of the modifications totaling $435,000, and (ii) $384,000 of troubled debt restructurings attributable to eight loans among six relationships which were classified as nonaccrual impaired based upon a collateral evaluation in accordance with the guidance on impaired loans. The balance of these nonaccrual impaired troubled debt restructured loans as of December 31, 2021 was comprised of $320,000 in commercial real estate loans amongst two borrowers, one commercial real estate construction loan for $22,000, two residential mortgage loans for $37,000, and one commercial and industrial loan for $5,000. As of December 31, 2021, 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 2021. The recorded investments in troubled debt restructured loans at March 31, 2022 and December 31, 2021 are as follows: (Dollars in thousands) Pre-Modification Post-Modification March 31, 2022 Outstanding Recorded Investment Outstanding Recorded Investment Recorded Investment Commercial real estate $ 1,213 $ 1,115 $ 309 Residential mortgage 647 645 465 $ 1,860 $ 1,760 $ 774 (Dollars in thousands) Pre-Modification Post-Modification December 31, 2021 Outstanding Recorded Investment Outstanding Recorded Investment Recorded Investment Commercial and industrial $ 8 $ 8 $ 5 Commercial real estate 1,214 1,115 320 Commercial real estate - construction 40 40 22 Residential mortgage 647 645 472 $ 1,909 $ 1,808 $ 819 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 granted by Mid Penn were 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 does continue to accrue on loans modified under the CARES Act during the deferral period. The principal balance of loans remaining in a CARES Act qualifying deferment status totaled $3,571,000, or less than 1 percent of the total loan portfolio, as of March 31, 2022 and December 31, 2021. One loan remains in deferment status, and the remainder of borrowers who were granted a CARES Act deferral have returned to regular payment status. Mid Penn remains in communication with the borrower still in deferral status to assess the ongoing credit standing of the borrowers, and may make further adjustments to a borrower’s relationship at some future time if warranted for the specific situation. The following tables provide activity for the accretable yield of acquired impaired loans from the Phoenix (March 2015), Scottdale (January 2018), First Priority (July 2018), and Riverview (November 2021) acquisitions for the three months ended March 31, 2022 and 2021. (Dollars in thousands) Three Months Ended March 31, 2022 2021 Accretable yield, beginning of period $ 580 $ 40 Accretable yield amortized to interest income (81 ) — Accretable yield, end of period $ 499 $ 40 |