(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. These amounts are 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 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 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 credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan and lease losses. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are 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 six 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 lines of credit is one year. The loan-to-value ratio on such loans and lines of credit generally may not exceed 80% of the value of the collateral securing the loan. The Bank’s commercial business lending policy includes credit file documentation and analysis of the borrower’s character, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of conditions affecting the borrower. Analysis of the borrower’s past, present, and future cash flows is also an important aspect of the Bank’s current credit analysis. Nonetheless, such loans are believed to carry higher credit risk than more traditional investments.

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 family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. In addition, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

Lease financing

Mid Penn originates leases for select commercial and state and municipal government lessees. The nature of the leased asset is often subject to rapid depreciation in salvage value over a relatively short time frame or may be of an industry specific nature, making appraisal or liquidation of the asset difficult. These factors have led the Bank to severely curtail the origination of new leases to state or municipal government agencies where default risk is extremely limited and to only the most credit-worthy commercial customers. These commercial customers are primarily leasing fleet vehicles for use in their primary line of business, mitigating some of the asset value concerns within the portfolio. Leasing has been a declining percentage of the Mid Penn’s portfolio since 2006, representing 0.25% of the portfolio at March 31, 2013.

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 ratios up to 100% of the lesser of the appraised value of the security property or the contract price. Private mortgage insurance is generally required in an amount sufficient to reduce the Bank’s exposure to at or below the 85% loan to value level. Residential mortgage loans generally do not include prepayment penalties.

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 an attorney’s title opinion or 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 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 second mortgages on principal residences. The Bank will lend amounts, which, together with all prior liens, typically may be up to 85% 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.

The allowance for credit losses consists of the allowance for loan and lease losses and 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 allowance for loan and lease losses 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 for loan and lease losses, 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 consumer loans are generally charged off no later than 120 days past due on a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed uncollectible. Because all identified losses are immediately charged off, no portion of the allowance for loan and lease losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

The allowance for credit losses is maintained at a level considered 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 the experience of the lending staff and loan review systems, growth or changes in the mix of loans originated, and shifting industry or portfolio concentrations.

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.

Mid Penn 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. This methodology assumes the borrower cannot or will not continue to make additional payments. At that time the loan would be considered collateral dependent as the discounted cash flow (“DCF”) method indicates no operating income is available for evaluating the collateral position; therefore, all impaired loans are deemed to be collateral dependent.

In addition, Mid Penn’s rating system assumes any loans classified as sub-standard non-accrual to be impaired, and all of these loans are considered collateral dependent; therefore, all of Mid Penn’s impaired loans, whether reporting a specific allocation or not, are considered collateral dependent.

Mid Penn evaluates loans for charge-off on a monthly basis. Policies that govern the recommendation for charge-off are unique to the type of loan being considered. Commercial loans rated as nonaccrual or lower will first have a collateral evaluation completed in accordance with the guidance on impaired loans. Once the collateral evaluation has been completed, a specific allocation of allowance is made based upon the results of the evaluation. In the event the loan is unsecured, the loan would have been charged-off at the recognition of impairment. If the loan is secured, it will undergo a 90 day waiting period to ensure the collateral shortfall identified in the evaluation is accurate and then charged down by the specific allocation. Once the charge down is taken, the remaining balance remains a nonperforming loan with the original terms and interest rate intact (not restructured). Commercial loans secured by real estate rated as impaired will also have an initial collateral evaluation completed in accordance with the guidance on impaired loans. An updated real estate valuation is ordered and the collateral evaluation is modified to reflect any variations in value. A specific allocation of allowance is made for any anticipated collateral shortfall and a 90 day waiting period begins to ensure the accuracy of the collateral shortfall. The loan is then charged down by the specific allocation. Once the charge down is taken, the remaining balance remains a nonperforming loan with the original terms and interest rate intact (not restructured). The process of charge-off for residential mortgage loans begins upon a loan becoming delinquent for 90 days and not in the process of collection. The existing appraisal is reviewed and a lien search is obtained to determine lien position and any instances of intervening liens. A new appraisal of the property will be ordered if deemed necessary by management and a collateral evaluation is completed. The loan will then be charged down to the value indicated in the evaluation. Consumer loans (including home equity loans and other consumer loans) are recommended for charge-off after reaching delinquency of 90 days and the loan is not in the process of collection. The entire balance of the consumer loan is recommended for charge-off at this point.

As noted above, Mid Penn assesses a specific allocation for commercial loans prior to charging down or charging off the loan. Once the charge down is taken, 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 within 30 days of the credit being classified as sub-standard non-accrual. 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 which time Mid Penn is in receipt of the updated valuation. The credit department employs an electronic tracking system to monitor the receipt of and need for updated appraisals. To date, there have been no significant 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 within 30 days of being placed on non-accrual 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 18 months for possible revaluation by an independent third party.

Mid Penn does not currently, or plan in the future to, use automated valuation methodologies as a method of valuing real estate collateral.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

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. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six 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 for loan and lease losses 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.

The classes of the loan portfolio, summarized by the aggregate pass rating and the classified ratings of special mention, substandard, and doubtful within Mid Penn’s internal risk rating system as of March 31, 2013 and December 31, 2012 are as follows:



(Dollars in thousands) March 31, 2013	Pass		Special Mention		Substandard		Doubtful		Total

Commercial and industrial	$	80,475	$	1,221	$	1,783	$	-	$	83,479
Commercial real estate		262,338		4,672		18,863		-		285,873
Commercial real estate - construction		34,813		411		54		-		35,278
Lease financing		1,256		-		-		-		1,256
Residential mortgage		59,210		25		124		-		59,359
Home equity		22,233		183		384		-		22,800
Consumer		6,867		284		-		-		7,151
	$	467,192	$	6,796	$	21,208	$	-	$	495,196



(Dollars in thousands) December 31, 2012	Pass		Special Mention		Substandard		Doubtful		Total

Commercial and industrial	$	74,763	$	1,651	$	1,469	$	-	$	77,883
Commercial real estate		260,941		5,375		18,551		-		284,867
Commercial real estate - construction		32,767		410		54		-		33,231
Lease financing		1,305		-		-		-		1,305
Residential mortgage		57,455		-		-		-		57,455
Home equity		22,336		188		396		-		22,920
Consumer		6,267		292		-		-		6,559
	$	455,834	$	7,916	$	20,470	$	-	$	484,220

Impaired loans by loan portfolio class as of March 31, 2013 and December 31, 2012 are summarized as follows:



	March 31, 2013						December 31, 2012
(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	$	187	$	689	$	-	$	192	$	870	$	-
Commercial real estate		6,398		9,832		-		6,570		10,773		-
Home equity		122		260		-		124		261		-
Consumer		-		-		-		-		578		-

With an allowance recorded:
Commercial and industrial	$	206	$	333	$	83	$	223	$	351	$	111
Commercial real estate		4,230		4,412		1,580		2,514		2,672		1,200
Commercial real estate - construction		54		54		28		54		54		54
Residential mortgage		60		60		5		-		-		-
Home equity		66		71		17		67		71		18

Total:
Commercial and industrial	$	393	$	1,022	$	83	$	415	$	1,221	$	111
Commercial real estate		10,628		14,244		1,580		9,084		13,445		1,200
Commercial real estate - construction		54		54		28		54		54		54
Residential mortgage		60		60		5		-		-		-
Home equity		188		331		17		191		332		18
Consumer		-		-		-		-		578		-

Average recorded investment of impaired loans and related interest income recognized for the three months ended March 31, 2013 and March 31, 2012 are summarized as follows:



	March 31, 2013				March 31, 2012
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	196	$	-	$	99	$	-
Commercial real estate		6,450		17		5,755		-
Commercial real estate - construction		-		-		129		-
Home equity		123		-		249		-

With an allowance recorded:
Commercial and industrial	$	206	$	-	$	1,189	$	-
Commercial real estate		4,246		-		2,797		-
Commercial real estate - construction		54		-		-		-
Residential mortgage		86		-		17		-
Home equity		67		-		89		-
Consumer		-		-		585		-

Total:
Commercial and industrial	$	402	$	-	$	1,288	$	-
Commercial real estate		10,696		17		8,552		-
Commercial real estate - construction		54		-		129		-
Residential mortgage		86		-		17		-
Home equity		190		-		338		-
Consumer		-		-		585		-

Non-accrual loans by loan portfolio class as of March 31, 2013 and December 31, 2012 are summarized as follows:



(Dollars in thousands)	March 31, 2013		December 31, 2012

Commercial and industrial	$	241	$	264
Commercial real estate		10,780		10,785
Commercial real estate - construction		54		54
Residential mortgage		538		537
Home equity		189		191
	$	11,802	$	11,831

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 March 31, 2013 and December 31, 2012 are summarized as follows:



(Dollars in thousands) March 31, 2013	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Loans Receivable > 90 Days and Accruing
Commercial and industrial	$	463	$	-	$	211	$	674	$	82,805	$	83,479	$	-
Commercial real estate		3,115		3,379		8,735		15,229		270,644		285,873		-
Commercial real estate - construction		-		-		54		54		35,224		35,278		-
Lease financing		38		-		-		38		1,218		1,256		-
Residential mortgage		1,291		96		473		1,860		57,499		59,359		-
Home equity		121		-		147		268		22,532		22,800		-
Consumer		16		-		-		16		7,135		7,151		-
Total	$	5,044	$	3,475	$	9,620	$	18,139	$	477,057	$	495,196	$	-



(Dollars in thousands) December 31, 2012	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Loans Receivable > 90 Days and Accruing
Commercial and industrial	$	123	$	361	$	234	$	718	$	77,165	$	77,883	$	-
Commercial real estate		1,785		5,618		8,248		15,651		269,216		284,867		-
Commercial real estate - construction		-		-		54		54		33,177		33,231		-
Lease financing		1				-		1		1,304		1,305		-
Residential mortgage		495		35		531		1,061		56,394		57,455		-
Home equity		96		-		147		243		22,677		22,920		-
Consumer		1		2		-		3		6,556		6,559		-
Total	$	2,501	$	6,016	$	9,214	$	17,731	$	466,489	$	484,220	$	-

The following tables summarize the allowance for loan and lease losses and recorded investments in loans receivable.



(Dollars in thousands)
As of, and for the period ended, March 31, 2013	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	$	1,298	$	3,112	$	64	$	1	$	581	$	343	$	101	$	9	$	5,509
Charge-offs		(21)		(25)		-		-		(104)		-		(5)		-		(155)
Recoveries		7		3		-		-		-		3		8		-		21
Provisions		(3)		453		(25)		-		126		3		1		(60)		495
Ending balance	$	1,281	$	3,543	$	39	$	1	$	603	$	349	$	105	$	(51)	$	5,870
Ending balance: individually evaluated for impairment	$	83	$	1,580	$	28	$	-	$	5	$	17	$	-	$	-	$	1,713
Ending balance: collectively evaluated for impairment	$	1,198	$	1,963	$	11	$	1	$	598	$	332	$	105	$	(51)	$	4,157

Loans receivables:
Ending balance	$	83,479	$	285,873	$	35,278	$	1,256	$	59,359	$	22,800	$	7,151	$	-	$	495,196
Ending balance: individually evaluated for impairment	$	393	$	10,628	$	54	$	-	$	60	$	188	$	-	$	-	$	11,323
Ending balance: collectively evaluated for impairment	$	83,086	$	275,245	$	35,224	$	1,256	$	59,299	$	22,612	$	7,151	$	-	$	483,873



(Dollars in thousands)
As of, and for the period ended, March 31, 2012	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	$	2,274	$	3,544	$	23	$	2	$	362	$	337	$	87	$	143	$	6,772
Charge-offs		(204)		(306)		-		-		(10)		-		(2)		-		(522)
Recoveries		4		3		2		-		-		8		10		-		27
Provisions		(319)		121		2		-		102		(22)		429		(13)		300
Ending balance	$	1,755	$	3,362	$	27	$	2	$	454	$	323	$	524	$	130	$	6,577
Ending balance: individually evaluated for impairment	$	320	$	975	$	-	$	-	$	2	$	15	$	445	$	-	$	1,757
Ending balance: collectively evaluated for impairment	$	1,435	$	2,387	$	27	$	2	$	452	$	308	$	79	$	130	$	4,820

Loans receivables:
Ending balance	$	77,481	$	297,373	$	30,304	$	1,724	$	49,778	$	24,115	$	7,895	$	-	$	488,670
Ending balance: individually evaluated for impairment	$	1,374	$	8,470	$	115	$	-	$	17		335	$	585	$	-	$	10,896
Ending balance: collectively evaluated for impairment	$	76,107	$	288,903	$	30,189	$	1,724	$	49,761	$	23,780	$	7,310	$	-	$	477,774



(Dollars in thousands)
As of December 31, 2012	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	$	1,298	$	3,112	$	64	$	1	$	581	$	343	$	101	$	9	$	5,509
Ending balance: individually evaluated for impairment	$	111	$	1,200	$	54	$	-	$	-	$	18	$	-	$	-	$	1,383
Ending balance: collectively evaluated for impairment	$	1,187	$	1,912	$	10	$	1	$	581	$	325	$	101	$	9	$	4,126

Loans receivables:
Ending balance	$	77,883	$	284,867	$	33,231	$	1,305	$	57,455	$	22,920	$	6,559	$	-	$	484,220
Ending balance: individually evaluated for impairment	$	415	$	9,084	$	54	$	-	$	-	$	191	$	-	$	-	$	9,744
Ending balance: collectively evaluated for impairment	$	77,468	$	275,783	$	33,177	$	1,305	$	57,455	$	22,729	$	6,559	$	-	$	474,476

The recorded investments in troubled debt restructured loans at March 31, 2013 and December 31, 2012 are as follows:



(Dollars in thousands) March 31, 2013	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Recorded Investment
Commercial and industrial	$	40	$	35	$	30
Commercial real estate		7,326		3,748		2,857
Residential mortgage		618		612		475
	$	7,984	$	4,395	$	3,362


(Dollars in thousands) December 31, 2012	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Recorded Investment
Commercial and industrial	$	40	$	35	$	30
Commercial real estate		7,326		3,748		2,916
Residential mortgage		558		552		448
	$	7,924	$	4,335	$	3,394

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.

Mid Penn’s troubled debt restructured loans at March 31, 2013 totaled $3,362,000, of which, $347,000, representing six loans to unrelated borrowers, are accruing residential mortgages in compliance with the terms of the modification. The remaining $3,015,000, representing 12 loans, are nonaccrual impaired loans, and resulted in a collateral evaluation in accordance with the guidance on impaired loans. Of these 12 loans, one business relationship accounted for five loans totaling $620,000, a large commercial participation totaling $1,616,000 accounted for three loans, and the remaining four unrelated loans totaled $779,000.

At December 31, 2012, troubled debt restricted loans totaled $3,394,000, of which, $426,000, representing seven loans to unrelated borrowers, are accruing residential mortgages in compliance with the terms of the modification. The remaining $2,968,000, representing 10 loans, are nonaccrual impaired loans, and resulted in a collateral evaluation in accordance with the guidance on impaired loans. Of these 10 loans, one business relationship accounted for five loans totaling $634,000, a large commercial participation totaling $1,663,000 accounted for three loans, and the remaining two unrelated loans totaled $671,000.

As a result of the evaluations at March 31, 2013 and December 31, 2012, a specific allocation and, subsequently, charge-offs have been taken as appropriate. As of March 31, 2013 and December 31, 2012, charge-offs associated with troubled debt restructured loans while under forbearance agreement totaled $0 and there were no defaulted troubled debt restructured loans as all troubled debt restructured loans were current with respect to their associated forbearance agreements. As of March 31, 2013, one forbearance agreement was negotiated during 2008, 12 forbearance agreements were negotiated during 2009, four forbearance agreements were negotiated in 2010, and one forbearance agreement was negotiated in 2013.

The following table summarizes loans whose terms have been modified resulting in troubled debt restructurings during the three months ended March 31, 2013:



(Dollars in thousands)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Recorded Investment
Residential mortgage	1	$	60	$	60	$	60