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COVID-19 Pandemic Implications

9 Months Ended

Sep. 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 September 30, 2020. 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 first nine months of 2020 included a significant volume of PPP loans processed by Mid Penn, with $613,924,000 of PPP loans still outstanding, net of deferred fees, as of September 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 per loan ranging from 1 percent to 5 percent 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 September 30, 2020, Mid Penn had received $20,883,000 of nonrefundable loan processing fees related to the loans disbursed as a result of Mid Penn’s participation in the PPP initiative. These fees, which are partially offset by loan origination costs, are deferred in accordance with ASC 310-20, Receivables—Nonrefundable Fees and Other Costs. The PPP loan processing fees will be amortized over the life of the respective loans. During the three months and nine months ended September 30, 2020, Mid Penn recognized $2,583,000 and $4,954,000, respectively, of PPP processing fees within interest and fees on loans and leases on the Consolidated Statements of Income. As of September 30, 2020, the balance of deferred PPP processing fees totaled $15,929,000 and are offset against gross PPP loans outstanding of $629,853,000 which are included in Loans and leases, net of unearned interest on the Consolidated Balance Sheet.

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 were granted 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 has and will continue to accrue on loans modified under the CARES Act during the deferral period. During 2020, Mid Penn had provided loan modifications meeting the CARES Act qualifications to over 1,000 borrowers. 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. As of September 30, 2020, the principal balance of loans remaining in this CARES Act qualifying deferment status totaled $32,851,000, or 1 percent of the total loan portfolio, a significant reduction compared to June 30, 2020, when $444,486,000 of loans, representing 18 percent of the total loan portfolio, were in this deferment status, as most borrowers have returned to regular payment status. Subsequent to September 30, 2020, as more borrowers completed their deferral period, the remaining balances outstanding in deferment under the CARES Act qualifications as of October 26, 2020, totaled $11,804,000 of principal, representing less than 1 percent of the total loan portfolio.

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.