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Loans and Allowance for Credit Losses - Loans
 6 Months Ended
Jun. 30, 2023
Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]  
Loans and Allowance for Credit Losses - Loans Loans and Allowance for Credit Losses - LoansMid Penn adopted the amendments of FASB ASU 2016-13, on January 1, 2023. The amendments of ASU 2016-13 created FASB ASC Topic 326, "Financial Instruments – Credit Losses," which, among other things, replace much of the guidance and disclosures previously provided in FASB ASC Topic 310, "Receivables." The guidance in FASB ASC Topic 326 replaces the incurred loss methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit losses. In accordance with FASB ASC Subtopic 326-20, "Financial Instruments – Credit Losses – Measured at Amortized Cost," Mid Penn has developed an ACL methodology effective January 1, 2023, which replaces its previous allowance for loan losses methodology. See the section captioned "Allowance for Credit Losses, effective January 1, 2023" within this note for additional information regarding Mid Penn’s ACL. Mid Penn adopted FASB ASC Topic 326 using the modified retrospective approach prescribed by the
amendments of ASU 2016-13; therefore, prior period balances are presented under legacy GAAP and may not be comparable to current period presentation.
Loans, net of unearned income, are summarized as follows by portfolio segment:
(In thousands)June 30, 2023December 31, 2022
Commercial real estate (1)
$2,145,272 $2,052,934 
Commercial and industrial
635,929 596,042 
Construction
515,398 441,246 
Residential mortgage (1)
730,176 416,221 
Consumer7,735 7,676 
Total loans$4,034,510 $3,514,119 
(1) In accordance with the guidance in FASB ASC Topic 326, Mid Penn redefined its loan portfolio segments and related loan classes based on the level at which risk is monitored within the ACL methodology. As such, $181.9 million of loans were reclassified from Commercial real estate to Residential mortgage upon adoption of CECL on January 1, 2023. Prior periods were not reclassified.
Total loans are stated at the amount of unpaid principal, adjusted for net deferred fees and costs. Net deferred loan fees of $4.4 million and $3.9 million reduced the carrying value of loans as of June 30, 2023 and December 31, 2022, respectively.
Accrued interest receivable is not included in the amortized cost basis of Mid Penn's loans. At June 30, 2023, accrued interest receivable for loans totaled $16.5 million with no related ACL and was reported in other assets on the accompanying Consolidated Balance Sheet.
Past Due and Nonaccrual Loans
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, 2023 and December 31, 2022, are summarized as follows:
(In thousands)30-59
Days Past
Due		60-89
Days Past
Due		Greater
than 90
Days		Total Past
Due		CurrentTotal LoansLoans
Receivable
> 90 Days and
Accruing
June 30, 2023
Commercial real estate$3,688 $— $3,097 $6,785 $2,138,487 $2,145,272 $1 
Commercial and industrial2,985 — 1,543 4,528 631,401 635,929 1 
Construction— — 2,257 2,257 513,141 515,398 — 
Residential mortgage3,209 106 1,779 5,094 725,082 730,176 7 
Consumer15 3 — 18 7,717 7,735 — 
Total$9,897 $109 $8,676 $18,682 $4,015,828 $4,034,510 $9 
(In thousands)30-59
Days Past
Due		60-89
Days Past
Due		Greater
than 90
Days		Total Past
Due		CurrentTotal LoansLoans
Receivable
> 90 Days and
Accruing
December 31, 2022
Commercial real estate$1,792 $— $1,438 $3,230 $2,047,167 $2,050,397 $— 
Commercial and industrial1,808 3 1,854 3,665 592,377 596,042 654 
Construction2,258 — — 2,258 438,988 441,246 — 
Residential mortgage3,826 955 670 5,451 409,630 415,081 — 
Consumer44 19 — 63 7,613 7,676 — 
Loans acquired with credit deterioration:
Commercial real estate78 — 826 904 1,633 2,537 — 
Commercial and industrial— — — — — — — 
Construction— — — — — — — 
Residential mortgage223 228 241 692 448 1,140 — 
Consumer— — — — — — — 
Total$10,029 $1,205 $5,029 $16,263 $3,497,856 $3,514,119 $654 
Loans are placed on nonaccrual status when management determines that the full repayment of principal and collection of interest according to contractual terms is no longer likely, generally when the loan becomes 90 days or more past due. Nonaccrual loans by loan portfolio class, including loans acquired with credit deterioration, as of June 30, 2023 and December 31, 2022 are summarized as follows:
June 30, 2023December 31, 2022
Non-accrual LoansTotal non-accrual Loans
(In thousands)With a Related AllowanceWithout a Related AllowanceTotal
Commercial real estate$466 $8,079 $8,545 $4,864 
Commercial and industrial1,329 214 1,543 1,222 
Construction— 2,256 2,256 — 
Residential mortgage2 3,122 3,124 1,698 
Consumer— — — 411 
$1,797 $13,671 $15,468 $8,195 
The amount of interest income recognized on nonaccrual loans was approximately $281 thousand and $127 thousand during the three months ended June 30, 2023 and 2022, respectively. During the six months ended June 30, 2023 and 2022, the amount of interest income recognized on nonaccrual loans was approximately $463 thousand and $384 thousand, respectively.
Credit Quality Indicators
Mid Penn categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. On a minimum of a quarterly basis, Mid Penn analyzes loans individually to classify the loans as to their credit risk. The following table presents risk ratings by loan portfolio segment and origination year, which is the year of origination or renewal.
June 30, 2023
Term Loans Amortized Cost Basis by Origination YearRevolving Loans Amortized
Cost Basis
(In thousands)20232022202120202019PriorTotal
Commercial real estate
Pass$154,942 $543,710 $325,310 $296,602 $194,714 $561,115 $31,100 $2,107,493 
Special mention— — — — — 13,246 — 13,246 
Substandard or lower201 2,268 — 3,206 2,193 13,537 3,128 24,533 
Total commercial real estate155,143 545,978 325,310 299,808 196,907 587,898 34,228 2,145,272 
Gross charge offs— — — — — (16)— (16)
Net charge offs— — — — — (16)— (16)
Commercial and industrial
Pass87,344 115,946 86,019 33,854 54,005 65,412 174,518 617,098 
Special mention— 171 892 — — 2,294 4,296 7,653 
Substandard or lower— 150 — — 5,899 1,849 3,280 11,178 
Total commercial and industrial87,344 116,267 86,911 33,854 59,904 69,555 182,094 635,929 
Gross charge offs— (100)— (111)— (9)— (220)
Net charge offs— (100)— (111)— (9)— (220)
Construction
Pass63,195 198,348 152,167 39,314 10,295 14,754 33,377 511,450 
Special mention— — — — — — 1,692 1,692 
Substandard or lower— — — — — 2,256 — 2,256 
Total construction63,195 198,348 152,167 39,314 10,295 17,010 35,069 515,398 
Residential mortgage
Performing102,765 136,479 90,145 90,748 30,485 197,858 78,572 727,052 
Non-performing— — 38 227 20 2,824 15 3,124 
Total residential mortgage102,765 136,479 90,183 90,975 30,505 200,682 78,587 730,176 
Gross charge offs— — — — — (4)— (4)
Current period recoveries— — — — — 30 — 30 
Net recoveries— — — — — 26 — 26 
Consumer
Performing1,238 980 877 365 287 437 3,551 7,735 
Non-performing— — — — — — — — 
Total consumer1,238 980 877 365 287 437 3,551 7,735 
Gross charge offs(56)— (3)(4)— (21)— (84)
Current period recoveries11 — — — — — — 11 
Net charge offs(45)— (3)(4)— (21)— (73)
Total
Pass$305,481 $858,004 $563,496 $369,770 $259,014 $641,281 $238,995 $3,236,041 
Special mention— 171 892 — — 15,540 5,988 22,591 
Substandard or lower201 2,418 — 3,206 8,092 17,642 6,408 37,967 
Performing104,003 137,459 91,022 91,113 30,772 198,295 82,123 734,787 
Nonperforming— — 38 227 20 2,824 15 3,124 
Total$409,685 $998,052 $655,448 $464,316 $297,898 $875,582 $333,529 $4,034,510 
Mid Penn had no loans classified as "doubtful" as of June 30, 2023 and December 31, 2022.
Collateral-Dependent Loans
A financial asset is considered to be collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For all classes of financial assets deemed collateral-dependent, Mid Penn elected the practical expedient to estimate expected credit losses based on the collateral’s fair value less cost to sell. In most cases, Mid Penn records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less cost to sell. Substantially all of the collateral supporting collateral-dependent financial assets consists of various types of real estate, including residential properties; commercial properties such as retail centers, office buildings, and lodging; agriculture land; and vacant land.
Allowance for Credit Losses, effective January 1, 2023

Mid Penn’s ACL - loans methodology is based upon guidance within FASB ASC Subtopic 326-20, as well as regulatory guidance from the FDIC, its primary federal regulator. The ACL - loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Credit quality within the loan portfolio is continuously monitored by management and is reflected within the ACL - loans. The ACL - loans is an estimate of expected losses inherent within Mid Penn’s existing loan portfolio. The ACL - loans is adjusted through the PCL and reduced by the charge off of loan amounts, net of recoveries.
The loan loss estimation process involves procedures to appropriately consider the unique characteristics of Mid Penn’s loan portfolio segments. When computing allowance levels, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Evaluations of the portfolio and individual credits are inherently subjective, as they require estimates, assumptions and judgments as to the facts and circumstances of particular situations. Determining the appropriateness of the allowance is complex and requires judgement by management about the effect of matters that are inherently uncertain. In future periods, evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the ACL and credit loss expense.
Mid Penn estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Mid Penn uses a third-party software application to calculate the quantitative portion of the ACL using a methodology and assumptions specific to each loan pool. The qualitative portion of the allowance is based on general economic conditions and other internal and external factors affecting Mid Penn as a whole, as well as specific loans. Factors considered include the following: lending process, concentrations of credit, and credit quality. The quantitative and qualitative portions of the allowance are added together to determine the total ACL, which reflects management’s expectations of future conditions based on reasonable and supportable forecasts.
The methodology for estimating the amount of expected credit losses reported in the ACL has two basic components: a collective, or pooled, component for estimated expected credit losses for pools of loans that share similar risk characteristics, and an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans. In estimating the ACL for the collective component, loans are segregated into loan pools based on loan purpose codes and similar risk characteristics.
The commercial real estate and residential mortgage loan portfolio segments include loans for both commercial and residential properties that are secured by real estate. The underwriting process for these loans includes analysis of the financial position and strength of both the borrower and, if applicable, guarantor, experience with similar projects in the past, market demand and prospects for successful completion of the proposed project within the established budget and schedule, values of underlying collateral, availability of permanent financing, maximum loan-to-value ratios, minimum equity requirements, acceptable amortization periods and minimum debt service coverage requirements, based on property type. The borrower’s financial strength and capacity to repay their obligations remain the primary focus of underwriting. Financial strength is evaluated based upon analytical tools that consider historical and projected cash flows and performance, in addition to analysis of the proposed project for income-producing properties. Additional support offered by guarantors is also considered when applicable. Ultimate repayment of these loans is sensitive to interest rate changes, general economic conditions, liquidity and availability of long-term financing.
The commercial and industrial loan portfolio segment includes commercial loans made to many types of businesses for various purposes, such as short-term working capital loans that are usually secured by accounts receivable and inventory, equipment and fixed asset purchases that are secured by those assets, and term financing for those within Mid Penn’s
geographic markets. Mid Penn’s credit underwriting process for commercial and industrial loans includes analysis of historical and projected cash flows and performance, evaluation of financial strength of both borrowers and guarantors as reflected in current and detailed financial information, and evaluation of underlying collateral to support the credit.
The consumer loan portfolio segment is comprised of loans which are underwritten after evaluating a borrower’s capacity, credit and collateral. Several factors are considered when assessing a borrower’s capacity, including the borrower’s employment, income, current debt, assets and level of equity in the property. Credit is assessed using a credit report that provides credit scores and the borrower’s current and past information about their credit history. Loan-to-value and debt-to-income ratios, loan amount and lien position are also considered in assessing whether to originate a loan. These borrowers are particularly susceptible to downturns in economic trends, such as conditions that negatively affect housing prices and demand and levels of unemployment.
Mid Penn utilizes a DCF method to estimate the quantitative portion of the allowance for credit losses for loan pools. The DCF is based off of historical losses, including peer data, which is correlated to national unemployment and GDP.
The PD and LGD measures are used in conjunction with prepayment data as inputs into the DCF model to calculate the cash flows at the individual loan level. Contractual cash flows based on loan terms are adjusted for PD, LGD and prepayments to derive loss cash flows. These loss cash flows are discounted by the loan’s coupon rate to arrive at the discounted cash flow based quantitative loss. The prepayment studies are updated quarterly by a third-party for each applicable pool.
Mid Penn determined that reasonable and supportable forecasts could be made for a twelve-month period for all of its loan pools. To the extent the lives of the loans in the LHFI portfolio extend beyond this forecast period, Mid Penn uses a reversion period of four quarters and reverts to the historical mean on a straight-line basis over the remaining life of the loans.
Qualitative factors used in the ACL methodology include the following:
•Lending process
•Concentrations of credit
•Credit Quality
The ACL for individual loans, such as non-accrual and PCD, that do not share risk characteristics with other loans is measured as the difference between the discounted value of expected future cash flows, based on the effective interest rate at origination, and the amortized cost basis of the loan, or the net realizable value. The ACL is the difference between the loan’s net realizable value and its amortized cost basis (net of previous charge-offs and deferred loan fees and costs), except for collateral-dependent loans. A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment of the loan is expected to be provided substantially through the sale of the collateral. The expected credit loss for collateral-dependent loans is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral, adjusted for the estimated cost to sell. Fair value estimates for collateral-dependent loans are derived from appraised values based on the current market value or the "as is" value of the collateral, normally from recently received and reviewed appraisals. Current appraisals are ordered on a regular basis based on the inspection date or more often if market conditions necessitate. Appraisals are obtained from state-certified appraisers and are based on certain assumptions, which may include construction or development status and the highest and best use of the property. These appraisals are reviewed by Mid Penn’s Appraisal Review Department to ensure they are acceptable, and values are adjusted down for costs associated with asset disposal. If the calculated expected credit loss is determined to be permanent or not recoverable, the amount of the expected credit loss is charged off.
Mid Penn may also purchase loans or acquire loans through a business combination. At the purchase or acquisition date, loans are evaluated to determine whether there has been more than insignificant credit deterioration since origination. Loans that have experienced more than insignificant credit deterioration since origination are referred to as PCD loans. In its evaluation of whether a loan has experienced more than insignificant deterioration in credit quality since origination, Mid Penn takes into consideration loan grades, past due and nonaccrual status. Mid Penn may also consider external credit rating agency ratings for borrowers and for non-commercial loans, FICO score or band, probability of default levels, and number of times past due. At the purchase or acquisition date, the amortized cost basis of PCD loans is equal to the purchase price and an initial estimate of credit losses. The initial recognition of expected credit losses on PCD loans has no impact on net income. When the initial measurement of expected credit losses on PCD loans is calculated on a pooled loan basis, the expected credit losses are allocated to each loan within the pool. Any difference between the initial amortized cost basis and the unpaid principal balance of the loan represents a noncredit discount or premium, which is accreted (or
amortized) into interest income over the life of the loan. Subsequent changes to the ACL on PCD loans are recorded through the PCL. For purchased loans that are not deemed to have experienced more than insignificant credit deterioration since origination and are therefore not deemed PCD, any discounts or premiums included in the purchase price are accreted (or amortized) over the contractual life of the individual loan.
Loans are charged off against the ACL, with any subsequent recoveries credited back to the ACL account. Expected recoveries may not exceed the aggregate of amounts previously charged off and expected to be charged off.
The following table presents the activity in the ACL - loans by portfolio segment for the three and six months ended June 30, 2023:
(In thousands)Commercial real estateCommercial and industrialConstruction Residential mortgageConsumerTotal
Balance at March 31, 2023$13,312 $11,269 $3,631 $2,874 $179 $31,265 
Purchase credit deteriorated loans314 5 13 4 — 336 
Loans charged off— (109)— — (65)(174)
Recoveries— — — — 4 4 
Net loans (charged off) recovered — (109)— — (61)(170)
Provision for credit losses (1)
571 238 23 267 58 1,157 
Balance at June 30, 2023$14,197 $11,403 $3,667 $3,145 $176 $32,588 
(In thousands)Commercial real estateCommercial and industrialConstruction Residential mortgageConsumerUnallocatedTotal
Balance at December 31, 2022$13,142 $4,593 $— $1,319 $29 $(126)$18,957 
Impact of adopting CECL288 6,600 3,201 1,562 154 126 11,931 
Purchase credit deteriorated loans314 5 13 4 — — 336 
Loans charged off(16)(220)— (4)(84)— (324)
Recoveries— — — 30 11 — 41 
Net loans (charged off) recovered(16)(220)— 26 (73)— (283)
Provision for credit losses (1)
469 425 453 234 66 — 1,647 
Balance at June 30, 2023$14,197 $11,403 $3,667 $3,145 $176 $— $32,588 
(1) Includes a $2.0 million initial provision for credit losses on non-PCD loans acquired in the Brunswick Acquisition.
The following table presents the ACL for loans and the amortized cost basis of the loans by the measurement methodology used as of June 30, 2023:
(In thousands)ACL - LoansLoans
June 30, 2023Collectively Evaluated for Credit LossIndividually Evaluated for Credit LossTotal ACL - LoansCollectively Evaluated for Credit LossIndividually Evaluated for Credit LossTotal Loans
Commercial Real Estate$13,945 $252 $14,197 $2,136,727 $8,545 $2,145,272 
Commercial & Industrial 10,686 717 11,403 634,386 1,543 635,929 
Construction 3,667 — 3,667 513,142 2,256 515,398 
Residential Mortgage3,143 2 3,145 726,674 3,502 730,176 
Consumer176 — 176 7,735 — 7,735 
Total$31,617 $971 $32,588 $4,018,664 $15,846 $4,034,510 
Allowance for Credit Losses, prior to January 1, 2023
The following table summarizes the allowance and recorded investments in loans receivable:
(In thousands)
As of, and for the
three months ended,
June 30, 2022		Commercial Real EstateCommercial and industrialConstructionResidential mortgageConsumer Unallocated Total
Allowance for loan and lease losses:
April 1, 2022$9,991 $3,811 $41 $1,045 $2 $257 $15,147 
Charge-offs— — — — (9)— (9)
Recoveries— — — 3 10 — 13 
Provisions 2,000 (140)5 95 (1)(234)1,725 
June 30, 202211,991 3,671 46 1,143 2 23 16,876 
Individually evaluated for impairment892 118 — — — — 1,010 
Collectively evaluated for impairment$11,099 $3,553 $46 $1,143 $2 $23 $15,866 
(In thousands)
As of, and for the
six months ended,
June 30, 2022		Commercial Real EstateCommercial and industrialConstructionResidential mortgageConsumerUnallocatedTotal
Allowance for loan and lease losses:
January 1, 2022$9,415 $3,439 $38 $1,019 $2 $684 $14,597 
Charge-offs— — — — (66)— (66)
Recoveries65 13 24 4 14 — 120 
Provisions2,511 219 (16)120 52 (661)2,225 
June 30, 202211,991 3,671 46 1,143 2 23 16,876 
Individually evaluated for impairment892 118 — — — — 1,010 
Collectively evaluated for impairment$11,099 $3,553 $46 $1,143 $2 $23 $15,866 
Loans Receivable
Ending Balance$1,825,944 $549,881 $376,117 $418,815 $9,276 $— $3,180,033 
Individually Evaluated for impairment2,106 507 — 1,413 — — 4,026 
Acquired with credit deterioration2,109 — 1,221 1,370 — — 4,700 
$1,821,729 $549,374 $374,896 $416,032 $9,276 $— $3,171,307 
The information presented in the designated internal risk categories by portfolio segment table presented above is not required for periods prior to the adoption of CECL. The following table presents the most comparable required information for the prior period, internal credit risk ratings, for the indicated loan portfolio segments as of December 31, 2022:
(In thousands)PassSpecial
Mention		SubstandardTotal
December 31, 2022
Commercial real estate$2,018,088 $12,325 $22,521 $2,052,934 
Commercial and industrial582,540 4,212 9,290 596,042 
Construction438,990 2,256 — 441,246 
Residential mortgage409,259 3,104 3,858 416,221 
Consumer7,676 — — 7,676 
Total loans$3,456,553 $21,897 $35,669 $3,514,119 
Modifications to Borrowers Experiencing Financial Difficulty
From time to time, we may modify certain loans to borrowers who are experiencing financial difficulty. In some cases, these modifications may result in new loans. Loan modifications to borrowers experiencing financial difficulty may be in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension, or a combination thereof, among other things.

Information related to loans modified (by type of modification), whereby the borrower was experiencing financial difficulty at the time of modification, is set forth in the following table:

(In thousands)Interest Only
Term Extension		Combination:
Interest Only and
Term Extension		Total% of Total Class of Financing Receivable
Three months ended June 30, 2023
Commercial and industrial
$— $150 $— $150 0.02 %
  Total$— $150 $— $150 0.02 %
Six months ended June 30, 2023
Commercial real estate$51 $— $180 $231 0.01 %
Commercial and industrial
— 150 — 150 0.02 
Total$51 $150 $180 $381 0.01 %

The financial effects of the interest only loan modifications reduced the monthly payment amounts for the borrower and the term extensions in the table above added a weighted-average of 2.0 years to the life of the loans, which also reduced the monthly payment amounts for the borrowers.