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COVID-19 Pandemic Implications

3 Months Ended

Mar. 31, 2022

(15) 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.

After initially closing its branch lobbies beginning on March 17, 2020 to curtail the spread of the virus, Mid Penn reopened its branch lobbies effective April 19, 2021 given the extensive measures taken to ensure the safety of the Bank’s customers and employees. Additionally, higher vaccination rates have resulted in lifting many state restrictions related to mask requirements, limited occupany levels, and social distancing.

The full impact of the coronavirus and its variants 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 2022.

Coronavirus Aid, Relief, and Economic Security Act

Mid Penn has been a significant participating lender under the Paycheck Protection Program which was created when the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law on March 27, 2020 and concluded August 8, 2020. The PPP program was reinstated under the Consolidated Appropriations Act, 2021 which was signed into law on December 27, 2020 and concluded on May 31, 2021. 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 SBA also provided a processing fee per loan to financial institutions who participated in the PPP, with the amount of such fee generally ranging from 1 percent to 5 percent as pre-determined by the SBA dependent upon the size of each respective credit. As of March 31, 2022, Mid Penn received $41,869,000 of nonrefundable loan processing fees related to the loans disbursed as a result of Mid Penn’s participation in the SBA’s Payroll Protection Program (“PPP”), consisting of (i) $20,883,000 of loan processing fees received during the year ended December 31, 2020, (ii) $17,997,000 of loan processing fees received during the year ended December 31, 2021, and (iii) $2,989,000 during the three months ended March 31, 2022. In addition to receiving and deferring the processing fees, Mid Penn recorded and deferred related loan origination costs, and in accordance with ASC 310-20, Receivables—Nonrefundable Fees and Other Costs, the processing fees and loan origination costs are being amortized to interest and fees on loans and leases on the Consolidated Statements of Income over the life of each respective loan. As of March 31, 2022, Mid Penn had $822,000 of PPP deferred loan processing fees not yet realized as income, compared to $3,811,000 of PPP deferred loan processing fees not yet realized as income as of December 31, 2021. Mid Penn recognized $2,989,000 of PPP processing fees during the quarter ended March 31, 2022, within interest and fees on loans and leases on the Consolidated Statements of Income, compared to $5,047,000 of PPP processing fees recognized for the same period of 2021.

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.