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COVID-19 Pandemic Implications

6 Months Ended

Jun. 30, 2020

(14) COVID-19 Pandemic Implications

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency due the Novel Coronavirus (“COVID-19”), and on March 11, 2020, the WHO classified COVID-19 as a pandemic based on the rapid increase in exposure globally.

To curtail the spread of the virus, beginning March 17, 2020, Mid Penn temporarily closed all bank branch lobbies, and the branch lobbies have remained closed through June 30, 2020 with no targeted time frame for reopening them. Our retail employees continue to work providing access to customers through drive-through banking services and night depositories. Services that cannot be performed through drive-through (i.e. business cash orders, loan closings and new account openings) are accommodated in the branches by appointment. We are continuously cleaning bank facilities during business hours with disinfecting wipes to sanitize all facets of our common areas, including door handles, work stations, ATM’s and service counters. We have mandated that all employees who handle cash use latex gloves when doing so, and we are requiring all employees to use hand sanitizer after each transaction and wash their hands with soap and hot water several times every hour. Additionally, employees having face-to-face interaction with customers are required to wear a mask. Importantly, we maintain appropriate social distancing standards when individuals are required by their job duties to be in the same location.

Mid Penn was a significant lender under the federal Paycheck Protection Program (“PPP”) which was created when the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law on March 27, 2020, by President Trump. Asset growth during the second quarter of 2020 included the significant volume of $588,667,000 of PPP loans still outstanding, net of deferred fees, as of June 30, 2020. The Paycheck Protection Program permitted eligible business entities to apply for loans through a participating financial institution to cover payroll, rent, and other business expenses during the COVID-19 pandemic. The PPP loans, which are 100 percent guaranteed by the SBA, have up to a five-year term to maturity and carry a low interest rate of 1 percent throughout the loan term. The vast majority of Mid Penn’s PPP loans have a two-year term to maturity. The SBA may forgive the PPP loans if at least 60 percent of the proceeds are used for payroll costs. Also, the borrowers will not have to make any payments for six months following the date of disbursement of the loan, though interest will continue to accrue during the deferment period.

The SBA provided a processing fee to financial institutions who participated in the PPP, with the amount of such fee pre-determined by the SBA dependent upon the size of each credit. As of June 30, 2020, Mid Penn had received $20,329,000 of nonrefundable loan processing fees related to the loans disbursed as a result of Mid Penn’s participation in the PPP initiative. These fees are offset against loan origination costs, and are deferred in accordance with FASB ASC 310-20, Receivables—Nonrefundable Fees and Other Costs. The PPP loan processing fees will be amortized over the life of the loan. During the three and six months ended June 30, 2020, Mid Penn recognized $2,371,000 of PPP processing fees within interest and fees on loans and leases on the Consolidated Statements of Income. As of June 30, 2020, the balance of deferred PPP processing fees totaled $17,958,000 and are offset against loan origination costs as a component of Loans and leases, net of unearned interest on the Consolidated Balance Sheet.

On March 22, 2020, the federal financial institution regulatory agencies and the state banking regulators issued an interagency statement encouraging financial institutions to work constructively with borrowers affected by COVID-19 and providing additional information regarding loan modifications. Concurrently, the Financial Accounting Standards Board (FASB) released a statement indicating that the interagency guidance was developed in consultation with the FASB staff. The banking agencies encouraged financial institutions to work with borrowers, and indicated that they will not criticize institutions for doing so in a safe and sound manner, and will not direct supervised institutions to automatically categorize loan modifications as troubled debt restructurings (TDRs). The statement indicated that the agencies view prudent loan modification programs offered to financial institution customers affected by COVID-19 as positive and proactive actions that can manage or mitigate adverse impacts on borrowers, and lead to improved loan performance and reduced credit risk. Prior to this interagency guidance being issued, Mid Penn had proactively reached out to its borrowers to assess how the COVID-19 situation was impacting them, and was evaluating taking similar forbearance and payment deferral measures. In response to these customer outreaches and respectful of the interagency guidance, Mid Penn has provided related loan modifications to over 1,000 borrowers, and as of June 30, 2020, the amount of loans outstanding which had such a deferral totaled $444,886,000. Depending upon the specific needs and circumstances affecting each borrower, the majority of these modifications range from deferrals of both principal and interest payments for three to six months, or borrowers reverting to interest-only payments for a period of three to six months. Interest will continue to accrue on loans modified under the CARES Act during the deferral period. 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.

The full impact of the coronavirus continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Corporation’s financial condition, liquidity, capital position, and future results of operations. In addition, the adverse economic effects of the coronavirus may lead to an increase in credit risk on the Corporation’s commercial and residential loan portfolios. Also, the Corporation is also monitoring the fluctuations in the markets as it pertains to interest rates and the fair value of our investments, as well as the impact of the pandemic of underlying bond issuers and the potential for OTTI.

Management is actively monitoring the global situation on its financial condition, liquidity, capital position, operations, industry, and workforce. Given the daily evolution of the coronavirus and the global responses to curb its spread, the Corporation is not able to estimate the effects of the coronavirus on its results of operations, financial condition, capital position, or liquidity for fiscal year 2020.