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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 0-20141
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MID PENN BANCORP, INC.
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(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 25-1666413
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(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
349 Union Street
Millersburg, Pennsylvania 17601
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(Address of Principal Executive Offices) (Zip Code)
(717) 692-2133
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $1.00 Par Value
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the shares of Common Stock of the Registrant
held by nonaffiliates of the Registrant was $53,322,228 at March 19, 1999 (a
date within 60 days of the date hereof). As of March 19, 1999, the Registrant
had 2,893,197 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Excerpts from the Registrant's 1998 Annual Report to Shareholders are
incorporated herein by reference in response to Part II, hereof. The
Registrant's Proxy Statement to be used in connection with the 1998 Annual
Meeting of Shareholders is incorporated herein by reference in partial response
to Part III, hereof.
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MID PENN BANCORP, INC.
FORM 10-K
INDEX
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PAGE
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PART I
Item 1 - Business...................................................... 1
Item 2 - Properties.................................................... 10
Item 3 - Legal Proceedings............................................. 12
Item 4 - Submission of Matters to a
Vote of Security Holders...................................... 12
PART II
Item 5 - Market for Registrant's Common Equity and
Related Shareholder Matters................................... 13
Item 6 - Selected Financial Data....................................... 13
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of
Operation..................................................... 13
Item 7A - Quantitative and Qualitative Disclosure About Market Risk..... 13
Item 8 - Financial Statements and Supplementary Data................... 13
Item 9 - Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure........................ 13
PART III
Item 10 - Directors and Executive Officers of
the Registrant................................................ 14
Item 11 - Executive Compensation........................................ 14
Item 12 - Security Ownership of Certain Beneficial
Owners and Management......................................... 14
Item 13 - Certain Relationships and
Related Transactions.......................................... 14
PART IV
Item 14 - Exhibits, Financial Statements, Schedules
and Reports on Form 8-K....................................... 15
Signatures................................................................ 17
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PART I
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ITEM 1. BUSINESS.
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General. Mid Penn Bancorp, Inc. is a one bank holding company,
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incorporated in the Commonwealth of Pennsylvania in August, 1991. On December
31, 1991, the Registrant acquired, as part of the holding company formation, all
of the outstanding common stock of Mid Penn Bank, and the Bank became a wholly
owned subsidiary of the Registrant. The Bank is the Registrant's only, direct
or indirect, subsidiary.
Millersburg Bank, the predecessor to Mid Penn Bank, was organized in 1868,
and became a state chartered bank in 1931, obtaining trust powers in 1935, at
which time its name was changed to Millersburg Trust Company. In 1962, the
Lykens Valley Bank merged with and into Millersburg Trust Company. In 1971,
Farmer's State Bank of Dalmatia merged with Millersburg Trust Company and the
resulting entity adopted the name "Mid Penn Bank." In 1985, the Bank acquired
Tower City National Bank. Effective July 10, 1998, the Registrant acquired
Miners Bank of Lykens, which was merged into the Bank. The addition of Miners
approximately $28 million in assets increased the Registrants total assets,
liabilities and shareholders' equity, on a pro forma basis, on the date of
merger to approximately $262 million, $215 million and $25 million. The Bank is
supervised by the Pennsylvania Department of Banking and the Federal Deposit
Insurance Corporation. The Registrant's and the Bank's legal headquarters is
located at 349 Union Street, Millersburg, Pennsylvania 17061.
The Bank presently has 10 offices, including the Miners office, at 550 Main
Street, Lykens, added July 10, 1998. The Bank, headquartered in Millersburg,
Dauphin County, Pennsylvania, offices are in Dauphin, Northumberland,
Schuylkill, and Cumberland Counties, Pennsylvania with total assets of
approximately $270 million as of December 31, 1998.
At December 31, 1998, the Registrant's consolidated assets, deposits and
shareholders' equity were approximately $277,827,000, $216,802,000 and
$31,536,000, respectively. The Registrant's primary business consists of
attracting deposits from its network of community banking offices operated by
the Bank. The Bank engages in a full-service commercial banking and trust
business, making available to the community a wide range of financial services,
including, but not limited to, personal loans, mortgage and home equity loans,
secured and unsecured commercial loans, lines of credit, construction financing,
farm loans, community development and local government loans and various types
of time and demand deposits. Deposits of the Bank are insured by the Bank
Insurance Fund of the FDIC to the maximum extent provided by law.
The Registrant may include forward-looking statements relating to such
matters as anticipated financial performance, business prospects, technological
developments, new products, research and development activities and similar
matters in this and other filings with the Commission. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the
Registrant notes that a variety of factors could cause the Registrant's actual
results and
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experience to differ materially from the anticipated results or other
expectations expressed in the Registrant's forward-looking statements. The risks
and uncertainties that may affect the operations, performance, development and
results of the Registrant's business include the following: general economic
conditions, including their impact on capital expenditures; business conditions
in the banking industry; the regulatory environment; rapidly changing technology
and evolving banking industry standards; competitive factors, including
increased competition with community, regional and national financial
institutions; new service and product offerings by competitors and price
pressures; and similar items.
The Registrant operates in a heavily regulated environment. Changes in
laws and regulations affecting the Registrant and it's subsidiary, the Bank, may
have an impact on operations. See "Supervision and Regulation--The Registrant"
and "Supervision and Regulation--The Bank."
Employees. At December 31, 1998, the Registrant had 80 full-time and 33
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part-time employees. None of these employees is represented by a collective
bargaining agent, and the Registrant believes it enjoys good relations with its
personnel.
The Registrant experiences substantial competition in attracting and
retaining deposits and in lending funds. Primary factors in competing for
deposits are the ability to offer attractive rates and the convenience of office
locations. Direct competition for deposits comes primarily from other
commercial banks and thrift institutions. Competition for deposits also comes
from money market mutual funds, corporate and government securities and credit
unions. The primary factors in the competition for loans are interest rates,
loan origination fees and the range of products and services offered.
Competition for origination of real estate loans normally comes from other
commercial banks, thrift institutions, mortgage bankers, mortgage brokers and
insurance companies.
For additional information with respect to the Registrant's business
activities, see Part II, Item 7 hereof.
Environmental Laws. Neither the Registrant nor the Bank anticipate that
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compliance with environmental laws and regulations will have any material effect
on capital, expenditures, earnings, or on its competitive position. However,
environmentally related hazards have become a source of high risk and
potentially unlimited liability for financial institutions. Environmentally
contaminated properties owned by an institution's borrowers may result in a
drastic reduction in the value of the collateral securing the institution's
loans to such borrowers, high environmental clean up costs to the borrower
affecting its ability to repay the loans, the subordination of any lien in favor
of the institution to a state or federal lien securing clean up costs, and
liability to the institution for clean up costs if it forecloses on the
contaminated property or becomes involved in the management of the borrower. To
minimize this risk, the Bank may require an environmental examination of and
report with respect to the property of any borrower or prospective borrower if
circumstances affecting the property indicate a potential for contamination,
taking into consideration a potential
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loss to the institution in relation to the borrower. Such examination must be
performed by an engineering firm experienced in environmental risk studies and
acceptable to the institution, and the cost of such examinations and reports are
the responsibility of the borrower. These costs may be substantial and may
deter prospective borrower from entering into a loan transaction with the Bank.
The Registrant is not aware of any borrower who is currently subject to any
environmental investigation or clean up proceeding that is likely to have a
material adverse effect on the financial condition or results of operations of
the Bank.
In 1995, the Pennsylvania General Assembly enacted the Economic Development
Agency, Fiduciary and Lender Environmental Liability Protection Act which, among
other things, provides protection to lenders from environmental liability and
remediation costs under the environmental laws for releases and contamination
caused by others. A lender who engages in activities involved in the routine
practices of commercial lending, including, but not limited to, the providing of
financial services, holding of security interests, workout practices,
foreclosure or the recovery of funds from the sale of property shall not be
liable under the environmental acts or common law equivalents to the
Pennsylvania Department of Environmental Resources or to any other person by
virtue of the fact that the lender engages in such commercial lending practice.
A lender, however, will be liable if it, its employees or agents, directly cause
an immediate release or directly exacerbate a release of regulated substances on
or from the property, or knowingly and willfully compelled the borrower to
commit an action which caused such release or violate an environmental act. The
Economic Development Agency, Fiduciary and Lender Environmental Liability
Protection Act, however, does not limit federal liability which still exists
under certain circumstances.
As discussed above, there are several federal and state statutes that
regulate the obligations and liabilities of financial institutions pertaining to
environmental issues. In addition to the potential for attachment of liability
resulting from its own actions, a bank may be held liable under certain
circumstances for the actions of its borrowers, or third parties, when such
actions result in environmental problems on properties that collateralize loans
held by the Bank. Further, the liability has the potential to far exceed the
original amount of the loan issued by the Bank. Currently, neither the
Registrant nor the Bank is a party to any pending legal proceeding pursuant to
any environmental statute, nor is the Registrant or the Bank aware of any
circumstances that may give rise to liability under any such statute.
Supervision and Regulation - The Registrant. The Registrant is subject to
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the provisions of the Bank Holding Company Act of 1956 and to supervision and
regulation by the Board of Governors of the Federal Reserve System. The Bank
Holding Company Act requires the Registrant to secure the prior approval of the
Board before it owns or controls, directly or indirectly, more than 5 % of the
voting shares or substantially all of the assets of any institution, including
another bank. The Holding Company Act prohibits acquisition by the Registrant
of more than 5 % of the voting shares of, or interest in, all or substantially
all of the assets of any bank located outside of Pennsylvania unless such
acquisition is specifically authorized by the laws of the state in which such
bank is located.
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A bank holding company, such as the Registrant, is prohibited from engaging
in or acquiring direct or indirect control of more than 5 percent of the voting
shares of any company engaged in non-banking activities unless the Board, by
order or regulation, has found that such activities are so closely related to
banking, managing or controlling banks as to be a proper incident thereto. In
making this determination, the Board considers whether the performance of these
activities by a bank holding company would offer benefits to the public that
outweigh possible adverse effects. The Registrant does not at this time engage
in any other permissible activities, nor does the Registrant, presently, have
plans to engage in any other permissible activities.
Federal law also prohibits acquisitions of control of a bank holding
company without prior notice to certain federal bank regulators. Control is
defined for this purpose as the power, directly or indirectly, to direct the
management or policies of the bank or bank holding company or to vote 25 % or
more of any class of voting securities.
The Bank, as a subsidiary bank of a bank holding company, is subject to
certain restrictions imposed by the Federal Reserve Act on any extensions of
credit to the Registrant or to any of its subsidiaries, on investments in the
stock or other securities of the Registrant and on taking of such stock or
securities as collateral for loans to any borrower.
The Board, the FDIC and other federal regulators have issued certain risk-
based capital guidelines, which supplement existing capital requirements. The
guidelines require all United States banks and bank holding companies to
maintain a minimum risk-based capital ratio of 8 %, at least 4% of which must
be in the form of common stockholders' equity. The risk-based capital rules are
designed to make regulatory capital requirements more sensitive to differences
in risk profiles among banks and bank holding companies and to minimize
disincentives for holding liquid assets. The Registrant and the Bank have
capital ratios exceeding regulatory requirements. For information concerning
the Registrant's ratios, please see page 39 of the Registrant's 1998 Annual
Report to Shareholders, which page is included at Exhibit 13 hereto and
incorporated herein by reference. We include a detailed discussion of the
Bank's regulatory capital requirements in "Supervision and Regulation--The
Bank," below.
Under the Pennsylvania Banking Code of 1965, the Registrant is permitted to
control an unlimited number of banks. However, as discussed above, the
Registrant would be required, under the Holding Company Act, to obtain the prior
approval of the Board. The Holding Company Act has been amended by The Riegle-
Neal Interstate Banking and Branching Act of 1994 to authorize bank holding
companies, subject to certain limitations and restrictions, to acquire banks
located in any state. The Riegle-Neal Act permitted interstate banking after
September 29, 1995. Bank holding companies can acquire a bank located in any
state, as long as the acquisition does not result in the bank holding company
controlling more than 10 % of the deposits in the United States, or 30 % of the
deposits in the target bank's state. The legislation permits states to waive
the concentration limits and require that the target institution be in existence
for up to five years before it can be acquired by an out-of-state bank or bank
holding company. Interstate branching and merging of existing banks is
permitted after September 29, 1998, if the bank is adequately capitalized and
demonstrates good management. The Riegle-
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Neal Act also amends the International Banking Act to allow a foreign bank to
establish and operate a federal branch or agency upon approval of the
appropriate federal and state banking regulator.
In 1995, the Pennsylvania legislature amended the Code to harmonize
Pennsylvania law with the Riegle-Neal Act to enable Pennsylvania institutions to
participate fully in interstate banking and to remove obstacles to the
selection, by banks from other states engaged in interstate banking, of
Pennsylvania as a head office location. Some of the more salient features of
the amendment are described below.
A bank holding company located in Pennsylvania, another state, the District
of Columbia or a territory or possession of the United States, with the prior
approval of the Department, may control one or more banks, bank and trust
companies, national banks or interstate banks located in Pennsylvania. A
Pennsylvania-chartered institution may maintain branches in any other state, the
District of Columbia, or a territory or possession of the United States upon the
written approval of the Department. A banking institution existing under the
laws of another jurisdiction may establish a branch in Pennsylvania, if the laws
of the jurisdiction in which such institution is located permit establishment
and maintenance of a branch by a Pennsylvania-chartered institution or a
national bank, located in Pennsylvania, in such jurisdiction on substantially
the same terms and conditions.
From time to time, legislation is enacted that has the effect of increasing
the cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, and before various bank regulatory
agencies. The Registrant can not predict the likelihood of any major changes or
the impact such changes might have on the Registrant and/or the Bank. Various
congressional bills and other proposals have proposed a sweeping overhaul of the
banking system, including provisions for: limitations on deposit insurance
coverage; changing the timing and method financial institutions use to pay for
deposit insurance; expanding the power of banks by removing the restrictions on
bank underwriting activities; and tightening the regulation of bank derivatives
activities; and allowing commercial enterprises to own banks. Set forth below
are some of the proposals advanced by the federal banking agencies. Congress is
considering legislative reform centered on repealing the Glass-Steagall Act,
which prohibits commercial banks from engaging in the securities industry.
The Registrant's earnings are and will be affected by domestic economic
conditions and the monetary and fiscal policies of the United States government
and its agencies. The monetary policies of the Board have had, and will likely
continue to have, an impact on the operating results of commercial banks because
of the Board's power to implement national monetary policy, to, among other
things, curb inflation or combat recession. The Board has a major impact on the
levels of bank loans, investments and deposits through its open market
operations in United States
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government securities and through its regulation of, among other things, the
discount rate on borrowings of member banks and the reserve requirements against
member bank deposits. It is not possible to predict the nature and impact of
future changes in monetary and fiscal policies.
Federal Taxation. The Registrant and the Bank are subject to those rules
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of federal income taxation generally applicable to corporations and report their
respective income and expenses on the accrual method of accounting. The
Registrant and its subsidiary file a consolidated federal income tax return on
a calendar year basis. Intercompany distributions (including dividends) and
certain other items of income and loss derived from intercompany transactions
are eliminated upon consolidation of all the consolidated group members'
respective taxable income and losses.
The Internal Revenue Code imposes a corporate alternative minimum tax.
The corporate AMT only applies if such tax exceeds a corporation's regular tax
liability. In general, the tentative AMT is calculated by multiplying the
corporate AMT rate of 20% by an amount equal to the excess of (i) the sum of (a)
regular taxable income plus (b) certain adjustments, as provided in Code
Sections 56 and 58 and tax preference items, as provided in Code Section 57
("alternative minimum taxable income" or "AMTI") over (ii) an exemption amount
($40,000 for a corporation, that such amount is reduced by 25% of the excess of
AMTI over $150,000 and is completely eliminated when AMTI equals $310,000). The
excess of the tentative AMT over the regular tax for the taxable year is the tax
payer's net minimum tax liability.
State Tax. The Registrant is subject to the Pennsylvania Corporate Net
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Income Tax and Capital Stock Tax. The Corporate Net Income Tax rate for 1996
and thereafter is 9.99% and is imposed upon a corporate taxpayer's
unconsolidated taxable income for federal tax purposes with certain
adjustments. In general, the Capital Stock Tax is a property tax imposed on a
corporate taxpayer's capital stock value apportionable to the Commonwealth of
Pennsylvania, which is determined in accordance with a fixed formula based upon
average book income and net worth. In the case of a holding company, an
optional elective method permits the corporate taxpayer to be taxed on only 10%
of such capital stock value. The Capital Stock Tax rate is presently .0125%.
Supervision and Regulation--The Bank The Bank's deposits are insured by
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the BIF of the FDIC. The Bank is not a member of the Federal Reserve System.
The Bank is subject to supervision, regulation and examination by the Department
and by the FDIC. In addition, the Bank is subject to a variety of local, state
and federal laws that affect its operation.
The laws of Pennsylvania applicable to the Bank include provisions that,
among other things:
. require the maintenance of certain reserves against deposits;
. limit the type and amount of loans that may be made and the interest
that may be charged thereon;
. restrict investments and other activities;
. set limits on the payment of dividends; and
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. regulate activities of the Bank with respect to mergers and
consolidations and the establishment of branches.
The amount of funds that the Bank may lend to a single borrower is limited,
generally, under Pennsylvania law, to 15 % of the aggregate of its capital,
surplus, undivided profits and loan loss reserves and capital securities, all
as defined by statute and by regulation.
The Bank, as a subsidiary bank of a bank holding company, is subject to
certain restrictions imposed by the Federal Reserve Act on (1) any extensions of
credit to the Registrant or its subsidiaries; (2) investments in the stock or
other securities of the Registrant or its subsidiaries; and (3) taking such
stock or securities as collateral for loans. The Federal Reserve Act and Board
regulations also place certain limitations and reporting requirements on
extensions of credit by a bank to principal shareholders of its parent holding
company, among others, and to related interests of such principal shareholders.
In addition, legislation and regulations promulgated thereunder may affect the
terms upon which any person becoming a principal shareholder of a holding
company may obtain credit from banks with which the subsidiary bank maintains a
correspondent relationship.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991,
federal regulatory agencies classify institutions into one of five defined
capital categories:
. well capitalized,
. adequately capitalized,
. undercapitalized,
. significantly undercapitalized and
. critically undercapitalized.
The table below illustrates these capital categories.
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<CAPTION>
Total Tier 1 Under a
Risk- Risk- Tier 1 Capital
Based Based Leverage Order or
Ratio Ratio Ratio Directive
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CAPITAL CATEGORY
Well capitalized greater than 10.0 greater than 6.0 greater than 5.0 No
Adequately capitalized greater than 8.0 greater than 4.0 greater than 4.0*
Undercapitalized less than 8.0 less than 4.0 less than 4.0*
Significantly undercapitalized less than 6.0 less than 3.0 less than 3.0
Critically undercapitalized less than 2.0
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* 3.0 for those banks having the highest available regulatory rating.
In the event an institution's capital deteriorates to the undercapitalized
category or below, FDICIA prescribes an increasing amount of regulatory
intervention, including:
. the banks institution of a capital restoration plan and a guarantee of
the plan by a parent institution; and
. the placement of a hold on increases in assets, number of branches or
lines of business.
If capital has reached the significantly or critically undercapitalized level,
further material restrictions can be imposed, including:
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. restrictions on interest payable on accounts,
. dismissal of management and
. in critically undercapitalized situations, the appointment of a
receiver.
For well capitalized institutions, FDICIA provides authority for regulatory
intervention where the institution is deemed to be engaging in unsafe or unsound
practices or receives a less than satisfactory examination report rating for
asset quality, management, earnings or liquidity. All but well capitalized
institutions are prohibited from accepting brokered deposits without prior
regulatory approval.
Under FDICIA, financial institutions are subject to increased regulatory
scrutiny and must comply with certain operational, managerial and compensation
standards to be developed by Federal Reserve Board regulations. FDICIA also
requires the regulators to issue new rules establishing certain minimum
standards to which an institution must adhere including standards requiring a
minimum ratio or classified assets to capital, minimum earnings necessary to
absorb losses and a minimum ratio of market value to book value for publicly
held institutions. Additional regulations are required to be developed relating
to internal controls, loan documentation, credit underwriting, interest rate
exposure, asset growth and excessive compensation, fees and benefits.
A separate subtitle within FDICIA, called the "Bank Enterprise Act of
1991," requires "truth-in-savings" on consumer deposit accounts so that
consumers can make meaningful comparisons between the competing claims of banks
with regard to deposit accounts and products. Under this provision, the Bank
will be required to provide information to depositors concerning the terms of
their deposit accounts, and in particular, to disclose the annual %age yield.
There will inevitably be some operational cost of complying with the Truth-In-
Savings law.
Management believes that full implementation of FDICIA has had no material
impact on the Registrant's or the Bank's liquidity, capital resources or
reported results of operations. If all FDIC insurance premium assessments
increase in the future, Management believes that such increase might have a
material impact on future reported results of operations.
Under the Federal Deposit Insurance Act, federal regulatory agencies
possess the power to prohibit institutions from engaging in any activity that
would be an unsafe or unsound banking practice or would otherwise be in
violation of law. Moreover, the Financial Institutions Regulatory and Interest
Rate Control Act of 1978 generally expanded the circumstances under which
officers or directors of a bank may be removed by the institution's federal
supervisory agency, restricts lending by a bank to its executive officers,
directors, principal shareholders or related interests thereof and restricts
management personnel of a bank from serving as directors or in other management
positions with certain depository institutions whose assets exceed a specified
amount or which have an office within a specified geographic area, and restricts
the relationships of management personnel of a bank with securities companies
and securities dealers. Additionally, FIRA prohibits acquisition of control of
a bank unless the appropriate federal supervisory agency has received 60 days
prior written notice, and, within that time, has not disapproved the acquisition
of control or otherwise extended the period for disapproval.
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Control, for purposes of FIRA, means the power to direct, either directly or
indirectly, the management or policies or to vote 25% or more of any class of
outstanding stock of a financial institution or its respective holding company.
A person or group holding revocable proxies to vote 25% or more of the
outstanding common stock of a financial institution or holding company would be
presumed to be in control the institution for purposes of FIRA.
Under the Community Reinvestment Act of 1977, as amended, an institutions
federal regulator is required to assess a financial institutions record to
determine if the institution is meeting the credit needs of the community,
including low and moderate income neighborhoods, which it serves and to take
this record into account evaluating any application made by an institution for,
among other things, approval of a branch or other deposit facility, office
relocation, a merger or any acquisition of bank shares. The Financial
Institutions Reform, Recovery and Enforcement Act of 1989 amended the CRA to
require, among other things, that a bank's record of meeting the credit needs of
its community, including low and moderate income neighborhoods be made available
to the public. This evaluation includes a descriptive rating:
. "outstanding"
. "satisfactory"
. "needs to improve" or
. "substantial noncompliance"
and a statement describing the basis for the rating. These ratings are publicly
disclosed.
FIRREA was enacted primarily to improve the supervision of savings
associations by strengthening capital, accounting and other supervisory
standards. In addition, FIRREA reorganized the FDIC by creating two deposit
insurance funds to be administered by the FDIC: the Savings Association
Insurance Fund and BIF. Customers' deposits held by the Bank are insured under
the BIF. FIRREA also regulates real estate appraisal standards and the
supervisory/enforcement powers and penalty provisions in connection with the
regulation of the Bank.
In 1995, federal regulators revised the CRA rules to emphasize performance
over process and documentation. Under the revised rules, a five-point rating
scale is used; A bank's compliance is determined by a three-prong test whereby
examiners assign a numerical score for a bank's performance in each of three
areas: lending, service and investment. The area of lending is weighted to
increase its importance in the application of the test. When rating a bank in
the area of lending, regulators examine the number and amount of loan
originations, the location of where the loans were made, and the income levels
of the borrowers. Although banks, under the revised rules, are not required to
make loans in every area, if there are apparent tracts in which there is little
lending, examiners will focus their investigations in that area. The service
prong evaluates how a bank delivers its products to the community through
branching. As with lending, banks are not required to branch in every area,
although conspicuous gaps will be investigated. The third prong, investment in
community, examines how the bank meets the investment needs in the community
within which it operates. Assessment of investment is accomplished using a
"performance context" pursuant to which regulators meet with civic, community
and bank officials in order to determine the credit needs of the community.
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Expanded Home Mortgage Disclosure Act reporting requirements were also
approved for large banks and thrifts which require reporting of census tract
data on mortgages made outside of the delineated communities. In addition,
effective March 1, 1997, institutions with assets above $250 million are
required to report their aggregate small business loans made by geographic
region. Independent banks with total assets of less than $250 million and bank
subsidiaries with total assets of less than $250 million that have holding
companies with total assets of less than $1 billion are subjected to less
stringent CRA examinations.
Under the new regulation, banks enjoy a reduction in compliance burden.
Banks are not required to keep extensive documentation to prove that directors
have participated in drafting and review of CRA policies. A formal CRA
statement need not be prepared. The efforts banks make to market in low - and
moderate-income communities do not have to be documented, nor will banks have to
justify the basis for their community delineation or the methods used to
determine the credit needs of the community.
Under the Bank Secrecy Act, banks and other financial institutions are
required to report to the Internal Revenue Service currency transactions of more
than $10,000 or multiple transactions of which the Bank is aware in any one day
that aggregate in excess of $10,000. Civil and criminal penalties are provided
under the BSA for failure to file a required report, for failure to supply
information required by the BSA or for filing a false or fraudulent report.
The Competitive Equality Banking Act, included the legislation which:
. imposes certain restrictions on transactions between banks and
their affiliates;
. expands the powers available to Federal bank regulators in
assisting failed or failing banks;
. limits the amount of time banks may hold certain deposits prior
to making such funds available for withdrawal and any interest
thereon; and
. requires that any adjustable rate mortgage loan secured by a lien
on a one-to-four family dwelling include a limitation on the
maximum rate at which interest may accrue on the principal
balance during the term of such loan.
From time to time, various types of federal and state legislation have been
proposed that could result in additional regulation of, and restrictions on, the
business of the Bank. It cannot be predicted whether any such legislation will
be adopted or, if adopted, how such legislation would affect the business of the
Bank. As a consequence of the extensive regulation of commercial banking
activities in the United States, the Bank's business is particularly susceptible
to being affected by federal legislation and regulations that may increase the
costs of doing business.
ITEM 2. PROPERTIES.
- ------- ----------
The Bank owns its main office, branch offices and certain parking
facilities related to its banking offices, all of which are free and clear of
any lien. The Bank's main office and all
10
<PAGE>
branch offices are located in Pennsylvania. The table below sets forth the
location of each of the Bank's properties.
Office and Address Description of Property
------------------ -----------------------
Main Office Main Bank Office
349 Union Street
Millersburg, PA 17061
Tremont Branch Office Branch Bank
7-9 East Main Street
Tremont, PA 17981
Elizabethville Branch Office Branch Bank
2 East Main Street
Elizabethville, PA 17023
Elizabethville Branch Offices Drive-In
11 East Main Street
Elizabethville, PA 17023
Dalmatia Branch Office Branch Bank
School House Road
Dalmatia, PA 17017
Halifax Branch Office Branch Bank
Halifax Shopping Center
3763 Peters Mountain Road
Halifax, PA 17032
Carlisle Pike Branch Office Branch Bank
4622 Carlisle Pike
Mechanicsburg, PA 17055
Harrisburg Branch Office Branch Bank
4098 Derry Street
Harrisburg, PA 17111
Tower City Branch Office Branch Bank
545 East Grand Avenue
Tower City, PA 17980
Dauphin Branch Office Branch Bank
1001 Peters Mountain Road
Dauphin, PA 17018
11
<PAGE>
Lykens Branch Office Branch Bank
550 Main Street
Lykens, PA 17048
All of these properties are in good condition and are deemed by management
to be adequate for the Bank's purposes.
ITEM 3. LEGAL PROCEEDINGS.
- ------ -----------------
Management, after consulting with the Registrant's legal counsel, is not
aware of any litigation that would have a material adverse effect on the
consolidated financial position of the Registrant. There are no proceedings
pending other than ordinary routine litigation incident to the business of the
Registrant and of the Bank. In addition, management does not know of any
material proceedings contemplated by governmental authorities against the
Registrant or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
- ------ ---------------------------------------------------
None.
12
<PAGE>
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ------ ----------------------------------------------------------------------
The information required by this Item, regarding market value, dividend
payment, and number of shareholders is set forth on page 3 of the Registrant's
Annual Report to Shareholders, which page is included at Exhibit 13 hereto, and
incorporated herein by reference.
As of March 20, 1999, there were approximately 940 shareholders of record
of the Registrant's common stock.
ITEM 6. SELECTED FINANCIAL DATA.
- ------ -----------------------
The information required by this Item is set forth on page 39 of the
Registrant's Annual Report to Shareholders, which page are included at Exhibit
13 hereto, and incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ---------------------------------------------------------------
RESULTS OF OPERATION.
---------------------
The information required by this Item is set forth on pages 23 through 39
of the Registrant's Annual Report to Shareholders, which pages are included at
Exhibit 13 hereto, and incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
- -------- ----------------------------------------------------------
The information required by this Item is set forth on pages 34 through 36
of the Registrant's Annual Report to Shareholders, which page is included at
Exhibit 13 hereto and incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- -------------------------------------------
The information required by this Item is set forth on pages 5 through 22 of
the Registrant's Annual Report to Shareholders, which pages are included at
Exhibit 13 hereto, and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
None.
13
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------- --------------------------------------------------
The information required by this Item, relating to directors, executive
officers, control persons is set forth on pages 4, 5, 8 and 9 of the
Registrant's Proxy Statement to be used in connection with the 1998 Annual
Meeting of Shareholders, which pages are incorporated herein by reference.
Section 16(a) Beneficial Ownership Compliance. Section 16(a) of the
---------------------------------------------
Securities Exchange Act of 1934, as amended, requires the Registrant's officers
and directors, and persons who own more than 10 % of a registered class of the
Registrant's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, directors and
greater than 10 % shareholders are required by SEC regulation to furnish the
Registrant with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Registrant believes that during the period
January 1, 1996 through December 31, 1996, its officers and directors were in
compliance with all filing requirements applicable to them.
ITEM 11. EXECUTIVE COMPENSATION.
- ------- ----------------------
The information required by this Item, relating to executive compensation,
is set forth in pages 11 through 15, 18 through 20 of the Registrant's Proxy
Statement to be used in connection with the 1998 Annual Meeting of Shareholders,
which pages are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------- --------------------------------------------------------------
The information required by this Item, relating to beneficial ownership of
the Registrant's Common Stock, is set forth in pages 15 through 17of the
Registrant's Proxy Statement to be used in connection with the 1998 Annual
Meeting of Shareholders, which pages are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ------- ----------------------------------------------
The information required by this Item, relating to transactions with
management and others, certain business relationships and indebtedness of
management, is set forth on pages 9 and 15, of the Registrant's Proxy Statement
to be used in connection with the 1998 Annual Meeting of Shareholders, which
page is incorporated herein by reference.
14
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.
- ------- ------------------------------------------------------------------
(a) 1. Financial Statements.
The following financial statements are included by reference in
Part II, Item 8 hereof:
Report of Independent Certified Public Accountants.
Consolidated Balance Sheets.
Consolidated Statements of Income.
Consolidated Statements of Changes in Stockholders' Equity.
Consolidated Statement of Cash Flows.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules.
Financial Statement Schedules are omitted because the required
information is either not applicable, not required or is shown in
the respective financial statements or in the notes thereto.
3. The following Exhibits are filed herewith or incorporated by
reference as a part of this Annual Report.
3(i) Registrant's Articles of Incorporation. (Incorporated by
Reference to Exhibit 3(i) to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996, and filed
with the Commission on March 31, 1997.)
3(ii) Registrant's By-laws. (Incorporated by Reference to
Exhibit 3(ii) to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996, and filed with the
Commission on March 31, 1997.)
10.1 Retirement Bonus Plan for the Board of Directors of Mid
Penn Bank. (Incorporated by Reference to Exhibit 10 to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, and filed with the Commission on March
31, 1997.)
10.2 Agreement and Plan of Reorganization, dated as of January
9, 1998, among Mid Penn Bancorp, Inc., Mid Penn Bank and
Miners Bank of Lykens, (Lykens, PA.). (Incorporated by
Reference to Exhibit 10.2
15
<PAGE>
to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997, and filed with the Commission on
March 27, 1998.)
11 Statement re: Computation of Earnings per share. (Included
herein at Exhibit 13, at page 7 of Registrant's Annual
Report to Shareholders.)
12 Statements re: Computation of Ratios. (Included herein at
Exhibit 13, at page 39 of Registrant's Annual Report to
Shareholders.)
13 Excerpts from Registrant's Annual Report to Shareholders.
21 Subsidiaries of the Registrant.
23 Consent of Parente, Randolph, Orlando Carey & Associates,
independent auditors.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No Current Report on Form 8-K was filed by the Registrant during the
fourth quarter of the fiscal year ended December 31, 1998.
(c) The exhibits required herein are included at Item 14(a), above.
(d) Not Applicable.
16
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MID PENN BANCORP, INC.
-----------------------------------------
(Registrant)
By /s/ Eugene F. Shaffer
------------------------------
Eugene F. Shaffer
President and Chief Executive Officer
Date March 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
DATE
----
By /s/ Eugene F. Shaffer March 24, 1999
-------------------------------- --------------------
Eugene F. Shaffer
Chairman of the Board of Directors,
President, Chief Executive Officer
and Director (principal executive officer)
By /s/ Kevin W. Laudenslager March 24, 1999
-------------------------------- --------------------
Kevin W. Laudenslager
Treasurer (principal financial and
accounting officer)
By /s/ Jere M. Coxon March 24, 1999
-------------------------------- --------------------
Jere M. Coxon, Director
By /s/ Alan W. Dakey March 24, 1999
-------------------------------- --------------------
Alan W. Dakey, Director
<PAGE>
By /s/ Earl R. Etzweiler March 24, 1999
-------------------------------- --------------------
Earl R. Etzweiler, Director
By /s/ Gregory M. Kerwin March 24, 1999
-------------------------------- --------------------
Gregory M. Kerwin, Director
By /s/ Charles F. Lebo March 24, 1999
-------------------------------- --------------------
Charles F. Lebo, Director
By /s/ Warren A. Miller March 24, 1999
-------------------------------- --------------------
Warren A. Miller, Director
By /s/ William G. Nelson March 24, 1999
-------------------------------- --------------------
William G. Nelson, Director
By /s/ Edwin D. Schlegel March 24, 1999
-------------------------------- --------------------
Edwin D. Schlegel, Director
By ________________________________
Guy J. Snyder, Jr., Director
By /s/ Donald E. Sauve March 24, 1999
-------------------------------- --------------------
Donald E. Sauve, Director
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page Number
in Manually Signed
Exhibit No. Original
- ----------- --------
<S> <C>
3(i) Registrant's Articles of Incorporation. (Incorporated by
Reference to Exhibit 3(i) to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996,
and filed with the Commission on March 31, 1997.)
3(ii) Registrant's By-laws. (Incorporated by Reference to
Exhibit 3(ii) to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996, and filed with the
Commission on March 31, 1997.)
10.1 Retirement Bonus Plan for the Board of Directors of Mid Penn
Bank. (Incorporated by Reference to Exhibit 10 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996, and filed
with the Commission on March 31, 1997.)
10.2 Agreement and Plan of Reorganization, dated as of January 9, 1998,
among Mid Penn Bancorp, Inc., Mid Penn Bank and Miners Bank of
Lykens, (Lykens, PA.). (Incorporated by Reference to Exhibit 10.2 to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997, and filed with the Commission on March 27, 1997.)
11 Statement re: Computation of Earnings per share. (Included herein at
Exhibit 13, at page 7 of Registrant's Annual Report to Shareholders.)
12 Statements re: Computation of Ratios. (Included herein at Exhibit 13,
at page 39 of Registrant's Annual Report to Shareholders.)
13 Excerpts from Registrant's Annual Report to Shareholders.
21 Subsidiaries of the Registrant.
23 Consent of Parente, Randolph, Orlando Carey & Associates,
independent auditors.
27 Financial Data Schedule.
</TABLE>
<PAGE>
Mid Penn Bancorp, Inc.
Financial Highlights
AS OF AND FOR YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data.) Percent
1998 1997 Change
---- ---- -------
<S> <C> <C> <C>
Total Assets .................................. $277,827 256,728 +8.2%
Total Deposits ................................ 216,802 217,146 -0.2%
Net Loans ..................................... 150,680 152,295 -1.1%
Total Investments and Interest Bearing
Balances..................................... 110,816 89,603 +23.7%
Stockholders' Equity .......................... 31,536 29,730 +6.1%
Net Income .................................... 3,865 4,169 -7.3%
Earnings Per Share ............................ 1.34 1.44 -6.9%
Cash Dividend Per Share on Weighted Average
Number of Shares Outstanding ................ .72 .69 +4.3%
Book Value Per Share .......................... $ 10.90 10.27 +6.1%
</TABLE>
Mid Penn Bancorp, Inc.
Stockholders' Information
<TABLE>
<CAPTION>
1998 1997
---- ----
High Low High Low Quarter
---- --- ---- --- -------
<S> <C> <C> <C> <C> <C>
Market Value Per Share ....................... $ 32.00 28.00 16.19 15.95 1st
30.13 28.13 16.31 15.36 2nd
30.50 25.25 18.00 17.38 3rd
27.00 22.75 32.50 21.25 4th
</TABLE>
Market Value Information: The market share information was provided by the
- ------------------------
American Stock Exchange, New York, NY. Mid Penn Bancorp, Inc. common stock
trades on the American Stock Exchange under the symbol: MBP.
Transfer Agent: Norwest Shareholder Services, P.O. Box 64854, St. Paul, MN
- --------------
55164-0854. Phone: 1-800-468-9716.
Number of Stockholders: At December 31, 1998, there were 943 stockholders.
- ----------------------
Dividends: A dividend of $.19 per share was paid during each quarter of 1998 and
- ---------
1997. Cash dividends of $ .50 were declared in March and September in 1996. Mid
Penn Bancorp, Inc. plans to continue a quarterly dividend payable in February,
May, August and November.
Dividend Reinvestment and Stock Purchases: Stockholders of Mid Penn Bancorp,
- -----------------------------------------
Inc. may acquire additional shares of common stock by reinvesting their cash
dividends under the Dividend Reinvestment Plan without paying a brokerage fee.
Voluntary cash contributions may also be made under the Plan. For additional
information about the Plan, contact the Transfer Agent.
Form 10-K: A Copy of Mid Penn Bancorp, Inc.'s Annual Report on Form 10-K, as
- ---------
filed with the Securities and Exchange Commission, will be provided to
stockholders without charge upon written request to: Secretary, Mid Penn
Bancorp, Inc., 349 Union Street, Millersburg, PA 17061.
Annual Meeting: The Annual Meeting of the Stockholders of Mid Penn Bancorp, Inc.
- --------------
will be held at 10:00 a.m. on Tuesday, April 27, 1999, at 349 Union Street,
Millersburg, Pennsylvania.
3
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Mid Penn Bancorp, Inc.
Millersburg, Pennsylvania
We have audited the accompanying consolidated balance sheets of Mid Penn
Bancorp, Inc. and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mid Penn Bancorp,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES
Williamsport, Pennsylvania
January 20, 1999
5
<PAGE>
Mid Penn Bancorp, Inc.
Consolidated Balance Sheets
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
(Dollars in thousands, except share data) 1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks ................................................. $ 5,651 5,998
Interest bearing balances ............................................... 42,883 36,004
Investment securities:
Available-for-sale securities ................................... 67,933 39,595
Held-to-maturity ................................................ 0 14,004
Federal funds sold ...................................................... 0 1,000
Loans ................................................................... 155,024 156,519
Less:
Unearned income ......................................... (2,031) (1,943)
Allowance for loan losses ............................... (2,313) (2,281)
-------- --------
Net loans ............................................... 150,680 152,295
-------- --------
Bank premises and equipment, net ........................................ 3,498 3,453
Foreclosed assets held for sale ......................................... 347 1,355
Accrued interest receivable ............................................. 1,907 1,886
Deferred income taxes ................................................... 436 389
Cash surrender value of life insurance .................................. 3,900 0
Other assets ............................................................ 592 749
-------- --------
Total Assets ............................................ $ 277,827 256,728
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand ...................................... $ 20,971 21,478
Interest-bearing demand ......................................... 28,234 26,665
Money market .................................................... 17,158 11,675
Savings ......................................................... 25,305 24,776
Time ............................................................ 125,134 132,552
-------- --------
Total Deposits .......................................... 216,802 217,146
Short-term borrowings ................................................... 12,159 2,234
Accrued interest payable ................................................ 1,240 1,275
Other liabilities ....................................................... 540 655
Long-term debt .......................................................... 15,550 5,688
-------- --------
Total Liabilities ....................................... 246,291 226,998
-------- --------
Stockholders' Equity:
Common stock, par value $1 per share; authorized
10,000,000 shares; 2,912,267 and 2,774,858 shares
issued in 1998 and 1997 respectively .................... 2,912 2,775
Additional paid-in capital ...................................... 17,181 14,072
Retained earnings ............................................... 11,640 13,104
Accumulated other comprehensive income .......................... 344 318
Treasury stock at cost (19,337 and 19,241 shares, in 1998
and 1997, respectively) ................................. (541) (539)
-------- --------
Stockholders' Equity, Net ............................... 31,536 29,730
-------- --------
Total Liabilities and Stockholders' Equity .............. $ 277,827 256,728
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
Mid Penn Bancorp, Inc.
Consolidated Statement of Income
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except share data) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans .......................................... $ 14,330 14,297 13,525
Interest on interest-bearing balances ............................... 2,574 2,014 2,011
Interest and dividends on investment securities:
U.S. Treasury and government agencies ....................... 2,385 2,062 1,718
State and political subdivision obligations, taxable ........ 0 1 12
State and political subdivision obligations, tax-exempt ..... 1,032 813 748
Other securities ............................................ 70 59 57
Interest on federal funds sold and securities purchased
under agreement to resell ................................... 45 66 100
---------- --------- ---------
Total Interest Income 20,436 19,312 18,171
---------- --------- ---------
INTEREST EXPENSE
Interest on deposits ................................................ 8,627 8,296 8,061
Interest on short-term borrowings ................................... 203 186 182
Interest on long-term debt .......................................... 763 371 185
---------- --------- ---------
Total Interest Expense 9,593 8,853 8,428
---------- --------- ---------
Net Interest Income 10,843 10,459 9,743
PROVISION FOR LOAN LOSSES ................................................... 254 109 52
---------- --------- ---------
Net Interest Income After Provision for Loan Losses . 10,589 10,350 9,691
---------- --------- ---------
NONINTEREST INCOME
Trust department income ............................................. 104 90 83
Service charges on deposits ......................................... 450 328 274
Investment securities gains (losses), net ........................... 13 (2) 12
Gain on sale of loans ............................................... 65 924 0
Other income ........................................................ 766 432 472
---------- --------- ---------
Total Noninterest Income 1,398 1,772 841
---------- --------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits ...................................... 3,383 3,474 2,953
Occupancy expense, net .............................................. 323 319 323
Equipment expense ................................................... 565 477 483
Pennsylvania bank shares tax expense ................................ 274 261 248
FDIC insurance premium .............................................. 26 25 4
Marketing and advertising ........................................... 160 151 152
Loss on mortgage sales .............................................. 64 18 26
Other expenses ...................................................... 1,811 1,507 1,469
---------- --------- ---------
Total Noninterest Expense 6,606 6,232 5,658
---------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES .................................... 5,381 5,890 4,874
Provision for income taxes .......................................... 1,516 1,721 1,397
---------- --------- ---------
Net Income $ 3,865 4,169 3,477
========== ========= =========
Earnings Per Share (1) $ 1.34 1.44 1.20
========== ========= =========
Weighted Average Number of Shares Outstanding 2,892,416 2,895,417 2,895,430
</TABLE>
(1) Earnings per share for all periods presented have been restated to reflect a
5% stock dividend effective November 23, 1998, a stock split effected in the
form of a 100% stock dividend effective August 25, 1997, a 5% stock dividend
effective May 26, 1997 and a 5% stock dividend effective October 7, 1996.
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
Mid Penn Bancorp, Inc.
Consolidated Statement of Changes in Stockholders' Equity
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income Stock Total
----- ------- -------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 .................................... $ 1,352 10,089 14,153 348 (533) 25,409
------
Comprehensive income:
Net income ................................................... 0 0 3,477 0 0 3,477
Change in net unrealized loss on securities
available for sale, net of reclassification adjustment
and tax effects ...................................... 0 0 0 (180) 0 (180)
------
Total comprehensive income 3,297
------
Cash dividends ($.96 per share, historical) .................. 0 0 (1,268) 0 0 (1,268)
5% stock dividend (additional 58,868 shares) ................. 59 1,928 (1,987) 0 0 0
------- ------ ------- ----- ----- ------
Balance, December 31, 1996 .................................... 1,411 12,017 14,375 168 (533) 27,438
------
Comprehensive income:
Net income ................................................... 0 0 4,169 0 0 4,169
Change in net unrealized gain on securities
available for sale, net of reclassification adjustment
and tax effects ...................................... 0 0 0 150 0 150
------
Total comprehensive income 4,319
------
Cash dividends ($.76 per share, historical) .................. 0 0 (1,992) 0 0 (1,992)
5% stock dividend (additional 61,803 shares) ................. 62 2,055 (2,117) 0 0 0
Stock split effected in the form of a 100%
stock dividend (additional 1,303,776 shares) ......... 1,304 0 (1,304) 0 0 0
Common stock retired ......................................... (2) 0 (27) 0 0 (29)
Purchase of treasury stock (185 shares) ...................... 0 0 0 0 (6) (6)
------- ------ ------- ----- ----- ------
Balance, December 31, 1997 .................................... 2,775 14,072 13,104 318 (539) 29,730
------
Comprehensive income:
Net income ................................................... 0 0 3,865 0 0 3,865
Change in net unrealized gain on securities
available for sale, net of reclassification adjustment
and tax effects ...................................... 0 0 0 26 0 26
------
Total comprehensive income 3,891
------
Cash dividends ($.76 per share, historical) .................. 0 0 (2,083) 0 0 (2,083)
5% stock dividend (additional 137,409 shares) ................ 137 3,109 (3,246) 0 0 0
Purchase of treasury stock (96 shares) ....................... 0 0 0 0 (2) (2)
------- ------ ------- ----- ----- ------
Balance, December 31, 1998 .................................... $ 2,912 17,181 11,640 344 (541) 31,536
======= ====== ======= ===== ===== ======
</TABLE>
8
<PAGE>
Mid Penn Bancorp, Inc.
Consolidated Statement of Cash Flows
FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating Activities:
Net income ...................................................... $ 3,865 4,169 3,477
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ....................... 254 109 52
Depreciation .................................... 426 372 413
Investment securities (gains) losses, net ....... (13) 2 (12)
Gain on sale/disposal of bank premises and
equipment .............................. 0 0 (3)
Gain on sale of foreclosed assets ............... (273) (41) (189)
Gain on sale of loans ........................... (65) (924) 0
Deferred income taxes ........................... (61) 78 40
Change in interest receivable ................... (21) (259) 65
Change in other assets .......................... 157 (286) 242
Change in interest payable ...................... (35) 158 (42)
Change in other liabilities ..................... (114) (36) (450)
Other ........................................... 0 10 0
-------- -------- -------
Net Cash Provided By Operating Activities 4,120 3,352 3,593
-------- -------- -------
Investing Activities:
Net (increase) decrease in interest-bearing balances ............ (6,879) (7,307) 2,600
Decrease (increase) in federal funds sold ....................... 1,000 (300) 390
Proceeds from the maturity of investment securities ............. 19,707 12,402 10,967
Proceeds from the sale of investment securities ................. 5,290 4,370 3,786
Proceeds from the sale of bank premises and equipment ........... 0 0 12
Purchases of investment securities .............................. (39,279) (27,398) (20,161)
Proceeds from sale of loans ..................................... 6,174 8,378 0
Net increase in loans ........................................... (4,917) (8,143) (13,373)
Net purchases of bank premises and equipment .................... (471) (181) (377)
Proceeds from the sale of foreclosed assets ..................... 1,450 324 555
Capitalized additions - foreclosed assets ....................... 0 (4) (13)
Purchase of life insurance ...................................... (3,900) 0 0
-------- -------- -------
Net Cash Used In Investing Activities ... (21,825) (17,859) (15,614)
-------- -------- -------
Financing Activities:
Net increase (decrease) in demand and savings deposits .......... 7,074 3,452 4,082
Net (decrease) increase in time deposits ........................ (7,418) 14,023 9,119
Net increase (decrease) in short-term borrowings ................ 9,925 (2,278) 198
Long-term borrowings ............................................ 10,000 3,106 1,500
Long-term debt repayment ........................................ (138) (2,128) (119)
Cash dividends .................................................. (2,083) (1,992) (1,268)
Purchase of treasury stock ...................................... (2) (6) 0
Common stock retired ............................................ 0 (29) 0
-------- -------- -------
Net Cash Provided By Financing Activities 17,358 14,148 13,512
-------- -------- -------
Net (decrease) increase in cash and cash equivalents ................... (347) (359) 1,491
Cash and cash equivalents at January 1 .................................. 5,998 6,357 4,866
-------- -------- -------
Cash and cash equivalents at December 31 ................................ $ 5,651 5,998 6,357
======== ======== =======
Supplemental Disclosures of Cash Flow Information:
Cash payments of interest expense ............................... $ 9,628 8,705 8,470
Cash payments of income taxes ................................... $ 1,723 1,736 1,219
Supplemental Noncash Disclosures:
Loan charge-offs ................................................ $ 317 253 476
Transfers to foreclosed assets held for sale .................... $ 169 1,086 394
</TABLE>
9
<PAGE>
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements for 1998 Report
(1) Basis of Presentation
---------------------
The accompanying consolidated financial statements include the
accounts of Mid Penn Bancorp, Inc. and its wholly-owned subsidiaries Mid
Penn Bank ("Bank") and Mid Penn Investment Corporation (collectively the
"Corporation"). All significant intercompany balances and transactions have
been eliminated.
On July 13, 1998, Miners Bank of Lykens was merged with and into the
Corporation, and 148,250 shares of the Corporation's common stock were
issued in exchange for all the outstanding stock of Miners Bank of Lykens.
The merger was accounted for as a pooling of interests, and, accordingly,
the accompanying financial statements have been restated to include the
accounts and operations of Miners Bank of Lykens for all periods prior to
the merger. The separate company financial statements of Miners Bank of
Lykens were immaterial in relation to the Corporation.
(2) Nature of Business
------------------
The Bank engages in a full-service commercial banking and trust
business, making available to the community a wide range of financial
services, including, but not limited to, installment loans, VISA credit
cards, mortgage and home equity loans, secured and unsecured commercial and
consumer loans, lines of credit, construction financing, farm loans,
community development loans, loans to non-profit entities and local
government loans and various types of time and demand deposits, including
but not limited to, checking accounts, savings accounts, clubs, money
market deposit accounts, certificates of deposit and IRAs. In addition, the
Bank provides a full range of trust services through its Trust Department.
Deposits are insured by the Federal Deposit Insurance Corporation (FDIC) to
the extent provided by law.
The financial services are provided to individuals, partnerships,
non-profit organizations and corporations through its ten offices located
in the northern portion of Dauphin County, Swatara Township in the lower
portion of Dauphin County, the southern portion of Northumberland County,
the western portion of Schuylkill County and Hampden Township in Cumberland
County.
Mid Penn Investment Corporation is engaged in investing activities.
(3) Summary of Significant Accounting Policies
------------------------------------------
The accounting and reporting policies of the Corporation conform to
generally accepted accounting principles and to general practice within the
banking industry. The following is a description of the more significant
accounting policies.
(a) Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reporting amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results may
differ from those estimates.
Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for
loan losses and the valuation of real estate acquired through, or in
lieu of, foreclosure in settlement of debt.
While management uses available information to recognize losses
on loans and foreclosed assets, future additions to the allowances may
be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's allowances
for loan losses and foreclosed assets. Such agencies may require the
Corporation to recognize additions to the allowances based on their
judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible that
the allowances for loan losses and foreclosed assets may change
materially in the near term.
(b) Investment Securities
---------------------
Investments are accounted for as follows:
Held-to-Maturity Securities - includes debt securities that
---------------------------
the Corporation has the positive intent and ability to hold
to maturity. These securities are reported at amortized
cost.
Available-for-Sale Securities - includes debt and equity
-----------------------------
securities not classified as held-to-maturity securities.
Such securities are reported at fair value, with unrealized
holding gains and losses excluded from earnings and
reported, net of deferred income taxes, as a separate
component of stockholders' equity.
(c) Loans
-----
Interest on loans is recognized on a method which approximates a
level yield basis over the life of the loans. The accrual of interest
on loans, including impaired loans, is discontinued when principal or
interest has consistently been in default
10
<PAGE>
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
for a period of 90 days or more, or because of a deterioration in the
financial condition of the borrower, payment in full of principal or
interest is not expected except when loans are well-secured and in the
process of collection. Interest income is subsequently recognized only to
the extent cash payments are received. The placement of a loan on the
nonaccrual basis for revenue recognition does not necessarily imply a
potential charge-off of loan principal. Loan origination fees and certain
direct origination costs are capitalized and recognized as an adjustment of
the yield of the related loan.
(d) Allowance for Loan Losses
-------------------------
The allowance for loan losses is maintained at a level believed
adequate by management to absorb potential losses that may become
uncollectible. Management's judgment is based upon evaluation of individual
loans, risk characteristics of categories of loans, credit loss experience,
economic conditions, appraisals and other relevant factors which in
management's judgment deserve recognition. The allowance for loan losses is
established by a charge to operations. Loan losses and recoveries on
previously charged-off loans are charged or credited directly to the
allowance.
(e) Bank Premises and Equipment
---------------------------
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is provided on the straightline basis.
Maintenance and repairs are charged to expense when incurred. Gains and
losses on dispositions are reflected in current operations.
(f) Foreclosed Assets Held for Sale
-------------------------------
Foreclosed assets held for sale consist of real estate acquired
through, or in lieu of, foreclosure in settlement of debt and are recorded
at fair market value at the date of transfer. Any valuation adjustments
required at the date of transfer are charged to the allowance for loan
losses. Subsequent to acquisition, foreclosed assets are carried at the
lower of cost or fair market value less costs of disposal, based upon
periodic evaluations that consider changes in market conditions and
development and disposition costs. Operating results from assets acquired
in satisfaction of debt, including rental income less operating costs and
gains or losses on the sale of or the periodic evaluation of foreclosed
assets, are recorded in noninterest expense.
(g) Income Taxes
------------
Certain items of income and expense are recognized in different
accounting periods for financial reporting purposes than for income tax
purposes. Deferred income tax assets and liabilities are provided in
recognition of these timing differences at currently enacted income tax
rates. As changes in tax laws or rates are enacted, deferred income tax
assets and liabilities are adjusted through the provision for income taxes.
(h) Benefit Plans
-------------
A funded contributory profit-sharing plan is maintained for
substantially all employees. The cost of the Bank's profit-sharing plan is
charged to current operating expenses and is funded annually. In addition
to providing a profit-sharing plan, the Bank provides health care coverage
for employees who retire with twenty years or more of full-time service
with the Bank, for a period up to five years from the date of retirement
under the group plan of the other employees, provided the Bank is providing
such health care coverage for other employees. The Bank also provides
continued coverage on group life insurance for those employees who retire
with twenty years or more of full-time service with the Bank. Substantially
all of the Bank's employees may become eligible for those benefits if they
continue working for the Bank until retirement age. The Bank currently does
not offer post-employment benefits.
The Bank also has a defined benefit retirement bonus plan for
qualified members of the Board of Directors who either voluntarily retire
from service or attain mandatory retirement age (age 70). The benefit is
based on years of service and is funded based on the expected future years
of service of active participants.
(i) Trust Assets and Income
-----------------------
Assets held by the Bank in a fiduciary or agency capacity for
customers of the Trust Department are not included in the financial
statements since such items are not assets of the Bank. Trust income is
recognized on the cash basis which is not materially different than if it
were reported on the accrual basis.
(j) Earnings Per Share
------------------
Earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during each of the years
presented giving retroactive effect to stock dividends and stock splits.
The Corporation's basic and diluted earnings per share are the same since
there are no dilutive shares of potential common stock outstanding.
11
<PAGE>
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
(k) Statement of Cash Flows
-----------------------
For purposes of the statement of cash flows, the Corporation considers
cash and due from banks to be cash equivalents.
(l) Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the
current year's classifications.
(4) Comprehensive Income
--------------------
The Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income" as of January 1, 1998.
Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in
assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS No. 130 had no
effect on the Corporation's net income or shareholders' equity. The
components of other comprehensive income and related tax effects are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Years Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Unrealized holding gains (losses) on available-for-sale securities ................. $ 52 225 (260)
Less reclassification adjustment for (gains) losses realized in income ............. (13) 2 (12)
---- --- ----
Net unrealized gains (losses) ...................................................... 39 227 (272)
Tax effect ......................................................................... (13) (77) 92
---- --- ----
Net-of-tax amount .................................................................. $ 26 150 (180)
==== === ====
</TABLE>
(5) Restrictions on Cash and Due from Bank Accounts
-----------------------------------------------
The Bank is required to maintain reserve balances. The amount of those
required reserve balances at December 31, 1998 and 1997 was approximately
$1,403,000 and $1,371,500, respectively.
(6) Investment Securities
---------------------
At December 31, 1998 and 1997, amortized cost, fair value, and gross
unrealized gains and losses on investment securities are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available for sale securities:
U.S. Treasury and U.S. government agencies .... $36,922 318 126 37,114
Mortgage-backed U.S. government agencies ....... 2,285 32 0 2,317
State and political subdivision obligations .... 26,020 450 153 26,317
Restricted equity securities ................... 2,185 0 0 2,185
------- ---- --- ------
$67,412 800 279 67,933
======= ==== === ======
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available for sale securities:
U.S. Treasury and U.S.
government agencies .................. $19,294 125 21 19,398
Mortgage-backed U.S.
government agencies ................... 3,556 13 13 3,556
State and political
subdivision obligations ............... 15,527 378 1 15,904
Restricted equity securities ................... 737 0 0 737
------- --- ---- ------
$39,114 516 35 39,595
======= === ==== ======
</TABLE>
12
<PAGE>
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Held-to-maturity securities:
U.S. Treasury and U.S. government
agencies ................. $12,942 173 2 13,113
Mortgage-backed U.S.
government agencies ...... 313 12 0 325
State and political
subdivision obligations .. 749 16 0 765
------- ---- --- ------
$14,004 201 2 14,203
======= ==== === ======
</TABLE>
Estimated fair values of debt securities are based on quoted market prices,
where applicable. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments, adjusted for
differences between the quoted instruments and the instruments being valued.
Restricted equity securities consist of stock in the Federal Home Loan Bank
of Pittsburgh, Federal Reserve Bank and Atlantic Central Bankers Bank and do not
have a readily determinable fair value for purposes of SFAS No. 115, because
their ownership is restricted and they lack a market. Therefore, these
securities are classified as restricted investment securities, carried at cost,
and evaluated for impairment.
Investment securities and interest bearing balances having a fair value of
$24,651,000 at December 31, 1998, were pledged to secure public and trust
deposits and other borrowings.
Proceeds from the sale of investment securities in 1998 amounted to
$5,290,000. Gross gains from such sales of investment securities, as determined
on the basis of specific identification of the adjusted cost of each security
sold, amounted to $13,000. A gross loss of $2,000 and a gross gain of $12,000
were realized on the sale of investment securities amounting to $4,370,000 and
$3,786,000 in 1997 and 1996, respectively.
The following is a schedule of the maturity distribution of investment
securities at amortized cost and fair value as of December 31, 1998:
<TABLE>
<CAPTION>
December 31, 1998
(Dollars in thousands) Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due in 1 year or less ...................................... $ 4,234 4,265
Due after 1 year but within 5 years ........................ 9,578 9,709
Due after 5 years but within 10 years ...................... 26,245 26,630
Due after 10 years ......................................... 22,912 22,827
------- ------
62,969 63,431
Mortgage-Backed Securities ................................. 2,285 2,317
Restricted Equity Securities ............................... 2,185 2,185
------- ------
$67,439 67,933
======= ======
</TABLE>
The Corporation has no derivative financial instruments requiring
disclosure under SFAS No. 119.
(7) Loans
-----
A summary of loans at December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
---- ----
<S> <C> <C>
Commercial real estate, construction and land development .. $ 88,263 81,191
Commercial, industrial and agricultural .................... 20,401 20,107
Real estate - residential .................................. 30,325 34,195
Consumer ................................................... 16,034 21,018
Lease financing ............................................ 1 8
-------- -------
$155,024 156,519
======== =======
</TABLE>
13
<PAGE>
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
Included within the loan portfolio are impaired loans on which the Bank has
ceased the accrual of interest. These loans amounted to $376,000 as of December
31, 1998 and $334,000 as of December 31, 1997. Income recognized on nonaccrual
loans in 1998 and 1997 was $50,000 and $19,000, respectively. Interest income
which would have been recognized in 1998 and 1997 in accordance with the
contractual terms would have been $57,000 and $22,000, respectively. In
addition, loans which were past due 90 days or more for which interest continued
to be accrued as of December 31, 1998 and 1997, amounted to approximately
$844,000 and $211,000, respectively.
Loans to Bank executive officers, directors, and corporations in which such
executive officers and directors are beneficially interested as stockholders,
executive officers, or directors aggregated approximately $923,000 and
$1,653,000 at December 31, 1998 and 1997, respectively. New loans extended were
$1,006,000 and $468,000 and repayments on these loans were $1,736,000 and
$563,000 during 1998 and 1997, respectively. These loans were made on
substantially the same basis, including interest rates and collateral as those
prevailing for comparable transactions with other borrowers at the same time.
Net unamortized loan fees deducted from loans were $410,000 and $382,000 at
December 31, 1998 and 1997, respectively.
(8) Allowance for Loan Losses
-------------------------
Changes in the allowance for loan losses for the years 1998, 1997, and 1996
are summarized as follows:
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Balance, January 1 ............... $ 2,281 2,278 2,457
Provision charged to operations .. 254 109 52
Loans charged off ................ (317) (253) (476)
Recoveries on loans charged off .. 95 147 245
------- ----- -----
Balance, December 31 ............. $ 2,313 2,281 2,278
======= ===== =====
The recorded investment in loans that are considered impaired amounted to
$744,000 and $120,000 (all in nonaccrual) on December 31, 1998 and December 31,
1997, respectively. By definition, impairment of a loan is considered when,
based on current information and events, it is probable that all amounts due
will not be collected according to the contractual terms of the loan agreement.
The allowance for loan losses related to loans classified impaired amounted to
approximately $230,000 at December 31, 1998. The average balances of these loans
amounted to approximately $861,000 and $204,000 for the years 1998 and 1997,
respectively. The Bank recognizes interest income on impaired loans on a cash
basis. The following is a summary of cash receipts on these loans and how they
were applied in 1998 and 1997.
(Dollars in thousands) 1998 1997
---- ----
Cash receipts applied to reduce principal balance .. $ 0 8
Cash receipts recognized as interest income ........ 27 9
---- ---
Total cash receipts ................................ $ 27 17
==== ===
In addition, at December 31, 1998 and 1997, the Bank had other nonaccrual
loans of approximately $256,000 and $214,000, for which impairment had not been
recognized.
The Bank has no commitments to loan additional funds to borrowers with
impaired or nonaccrual loans.
(9) Bank Premises and Equipment
---------------------------
At December 31, 1998 and 1997, bank premises and equipment are as follows:
(Dollars in thousands) 1998 1997
---- ----
Land ............................................... $ 626 626
Buildings .......................................... 3,632 3,620
Furniture and Fixtures ............................. 3,012 2,553
------ -----
7,270 6,799
Less accumulated depreciation ...................... 3,772 3,346
------ -----
$3,498 3,453
====== =====
14
<PAGE>
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
Depreciation expense amounted to $426,000, $372,000 and $413,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
(10) Deposits
--------
At December 31, 1998 and 1997, time deposits in denominations of
$100,000 or more amounted to $16,736,000 and $26,718,000, respectively.
Interest expense on such certificates of deposit amounted to approximately
$1,102,000, $954,000 and $791,000 for the years ended December 31, 1998,
1997 and 1996, respectively. Time deposits at December 31, 1998, mature as
follows: (in thousands) 1999, $78,227; 2000, $15,923; 2001, $10,957; 2002,
$4,886; 2003, $6,986; thereafter, $8,079.
(11) Short-term Borrowings
---------------------
Short-term borrowings and the related interest expense as of December
31, 1998 and 1997 consisted of:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
---- ----
Interest Interest
Balance Expense Balance Expense
------- ------- ------- -------
<S> <C> <C> <C> <C>
Federal funds purchased ... $11,700 167 1,200 163
Repurchase agreements ..... 426 12 0 0
Treasury, tax and loan note 33 24 1,034 23
------- ---- ----- ----
$12,159 203 2,234 186
======= ==== ===== ====
</TABLE>
Federal funds purchased represent overnight funds. Securities sold
under repurchase agreements generally mature between one day and one year.
The Treasury, tax and loan note is open-ended interest bearing note payable
to the U.S. Treasury upon call. All tax deposits accepted by the Bank are
placed in the Treasury note option account. The Bank also has unused lines
of credit with several banks amounting to $26.1 million dollars at December
31, 1998.
(12) Long-term Debt
--------------
The Bank is a member of the Federal Home Loan Bank of Pittsburgh
(FHLB) and through its membership, the Bank can access a number of credit
products which are utilized to provide various forms of liquidity. As of
December 31, 1998, the Bank had long-term debt in the amount of $15,550,000
outstanding to the FHLB consisting of a $5,000,000 10 year/1 year putable
advance at 4.95% due February 25, 2008, a $5,000,000 10 year/1 year putable
advance at 4.96% due April 7, 2008, a $1,500,000 term loan at 6.67% due
September 4, 2001, a $945,000 loan at 7.30% due April 5, 2004 amortized in
equal monthly payment, a $2,000,000 bullet loan at 6.08% which will mature
on March 19, 2002, a $1,000,000 bullet loan at 6.03% maturing October 4,
1999, and a $105,000 amortizing note at 6.71% maturing on February 22,
2027. The aggregate amounts of maturities of long-term debt subsequent to
December 31, 1998 are $1,149,000 (1999), $160,000 (2000), $1,672,000
(2001), $2,185,000 (2002), $199,000 (2003), and $10,185,000 thereafter. As
of December 31, 1997, the Bank had long-term debt in the amount of
$5,688,000.
Most of the Bank's investments and mortgage loans are pledged to
secure FHLB borrowings.
(13) Lease Commitments
-----------------
The Bank leases certain premises under long-term lease agreements
which are classified as operating leases. Commitments under these
agreements are not material. Rental expense for 1998, 1997 and 1996 was
approximately $49,000, $35,000 and $35,000, respectively.
(14) Benefit Plans
-------------
The Bank has a funded contributory profit-sharing plan covering
substantially all employees. The total employee benefits expense related to
the Bank's contribution to the plan for 1998, 1997 and 1996 was $281,000,
$258,000 and $229,000, respectively. In addition, the Bank sponsors two
defined benefit postretirement plans that cover all full-time employees.
One plan provides health insurance benefits, and the other provides life
insurance benefits.
Health Insurance
----------------
For full-time employees who retire after at least 20 years of service,
the Bank will pay premiums for major medical insurance (as provided to
active employees) for a period ending on the earlier of the date the
participant obtains other employment where major medical coverage is
available or the date of the participant's death; however, payment of
medical premiums by the Bank will cease after five years. If the retiree
becomes eligible for Medicare within the five year period beginning on his
retirement date, the Bank will pay, at its discretion, premiums for 65
Special coverage or a similar supplemental coverage. After the five
15
<PAGE>
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
year period has expired, all employer-paid benefits will cease; the employee may
continue coverage through the employer at his/her own expense.
Life Insurance
- --------------
Full-time employees will be provided with term life insurance. The amounts
of coverage are determined as follows:
At retirement after 20 or more years of service, the insurance amount prior
to age 65 will be the lesser of three times the participant's annual salary at
retirement or $50,000. After age 65, the insurance amount will decrease by 10%
of the age 65 amount per year, subject to a minimum amount of $2,000.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of plan assets for the years ended December
31, 1998 and 1997 and a statement of the funded status at December 31, 1998 and
1997:
(Dollars in thousands) 1998 1997
---- ----
Change in benefit obligations:
Benefit obligations, January 1 ............ $ 311 304
Service cost ........................ 24 22
Interest cost ....................... 20 21
Actuarial loss (gain) ............... 60 (31)
Benefit payments .................... (12) (5)
----- ----
Benefit obligations, December 31 .......... $ 404 311
===== ====
Change in fair value of plan assets:
Fair value of plan assets, January 1 ...... $ 0 0
Employer contributions .............. 12 5
Benefit payments .................... (12) (5)
----- ----
Fair value of plan assets, December 31 ... $ 0 0
===== ====
1998 1997
---- ----
Funded status:
Funded status ....................... $(404) (311)
Unrecognized transition obligation .. 206 221
Unrecognized gain ................... (61) (127)
----- ----
Net amount recognized ............... $(259) (217)
===== ====
Amount recognized in the balance sheet at December 31, 1998 and 1997 is as
follows:
(Dollars in thousands) 1998 1997
---- ----
Accrued benefit liability............ $(259) (217)
===== ====
The components on net periodic pension cost for 1998, 1997 and
1996 are as follows:
(Dollars in thousands)
1998 1997 1996
---- ---- ----
Service cost ........................... $ 24 24 22
Interest cost .......................... 20 21 21
Amortization of transition obligation 15 15 13
Amortization of net gain ............... (5) (4) 0
---- --- ---
Net periodic pension cost ............. $ 54 56 56
==== === ===
Assumed health care cost trend rates have a significant effect on the amounts
reported for the postretirement medical benefits
16
<PAGE>
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
plan. A one-percentage-point change in assumed health care cost trend rates
would have the following effect:
<TABLE>
<CAPTION>
(Dollars in thousands) One-Percentage Point
Increase Decrease
-------- --------
<S> <C> <C>
Effect on total of service and interest cost components $ 7 5
Effect on postretirement benefit obligation ........... $ 44 36
</TABLE>
Assumptions used in the measurement of the Corporation's benefit
obligations at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Weighted-average assumptions:
Discount rate ......................................... $ 6.5% 6.5%
Rate of compensation increase ......................... $ 4.5% 4.5%
</TABLE>
For measurement purposes, a one percent annual decrease in the per capita
cost of covered health care benefits was assumed for 1999. The rate was assumed
to decrease to 6 percent for 2000 and remain at that level thereafter.
Retirement Plan
- ---------------
The Bank has an unfunded defined benefit retirement plan for directors with
benefits based on years of service. The adoption of this plan generated
unrecognized prior service cost of $273,675 which is being amortized based on
the expected future years of service of active participants.
The following tables provide a reconciliation of the changes in the plan's
benefit obligations and fair value of plan assets for the years ended December
31, 1998 and 1997 and a statement of the funded status at December 31, 1998 and
1997:
(Dollars in thousands)
1998 1997
---- ----
Change in benefit obligations:
Benefit obligations, January 1 ........... $ 378 317
Service cost ..................... 17 16
Interest cost .................... 24 22
Actuarial gain ................... (5) 0
Benefit payments ................. (8) (5)
------ -----
Benefit obligations, December 31 ......... $ 405 378
===== =====
Change in fair value of plan assets:
Fair value of plan assets, January 1 ..... $ 0 0
Employer contributions ........... 8 5
Benefit payments ................. (8) (5)
------ -----
Fair value of plan assets, December 31 ... $ 0 0
====== =====
1998 1997
---- ----
Funded status:
Funded status ............................ $(405) (378)
Unrecognized prior-service cost .......... 183 209
Unrecognized loss ........................ 14 19
------ -----
Net amount recognized .................... $(208) (150)
====== =====
Amounts recognized in the balance sheet at December 31, 1998 and
1997 are as follows:
(Dollars in thousands) 1998 1997
---- ----
Accrued benefit liability ................. $(319) (292)
Intangible asset .......................... 111 142
------ -----
Net amount recognized ..................... $(208) (150)
====== =====
17
<PAGE>
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
The components of net periodic pension cost for 1998, 1997 and 1996 are as
follows:
(Dollars in thousands)
1998 1997 1996
---- ---- ----
Service cost ..................... $17 15 18
Interest cost .................... 24 22 20
Amortization of prior-service cost 26 26 26
---- ---- ----
Net periodic pension cost ........ $67 63 64
==== ==== ====
Assumptions used in the measurement of the Corporation's benefit obligations at
December 31, 1998 and 1997 are as follows:
1998 1997
---- ----
Weighted-average assumptions:
Discount rate ................. 6.5% 6.5%
During 1998, the Corporation acquired $3.9 million of universal life
insurance. Policies were acquired on the lives of corporate officers and
directors and are designed primarily to recover the costs of the Corporation's
Director Retirement Plan. The policy death benefits also indemnify the
Corporation against the death benefit provision of the benefit plans. The
policies were paid with a single premium and have a combined death benefit of
$8.6 million. There are no loads or surrender charges associated with the
policies.
(15) Federal Income Taxes
--------------------
The following temporary differences gave rise to the deferred tax asset at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses ............. $ 635 626
Nonaccrual interest ................... 2 1
Benefit plans ......................... 158 124
Deferred income ....................... 17 19
Other ................................. 0 8
------- ------
Total 812 778
------- ------
Deferred tax liabilities:
Unrealized gains on securities ........ (177) (163)
Depreciation .......................... (101) (124)
Loan fees ............................. (81) (71)
Bond accretion ........................ (17) (31)
------- ------
Total (376) (389)
------- ------
Deferred tax asset, net ................ $ 436 389
======= ======
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current .............................. $ 1,577 1,643 1,360
Deferred ............................. (61) 78 37
------- ----- -----
Provision for income taxes ........... $ 1,516 1,721 1,397
======= ===== =====
</TABLE>
A reconciliation of income tax at the statutory rate to the Corporation's
effective rate is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Provision at the expected statutory rate $ 1,829 2,003 1,657
Effect of tax-exempt income ............ (380) (302) (283)
Nondeductible interest ................. 43 39 37
Other items ............................ 24 (19) (14)
------- ----- -----
Provision for income taxes ............. $ 1,516 1,721 1,397
======= ===== =====
</TABLE>
18
<PAGE>
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
(16) Regulatory Matters
------------------
The Pennsylvania Banking Code restricts the availability of Bank
retained earnings for dividend purposes. At December 31, 1998 and 1997,
$17,181,000 and $14,147,000, respectively, was not available for dividends
to the Corporation.
The Bank is subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. The
regulations require the Bank to meet specific capital adequacy guidelines
that involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital classification is also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth
in the table below) of Tier I capital (as defined in the regulations) to
total average assets (as defined), and minimum ratios of Tier I and total
capital (as defined) to risk-weighted assets (as defined). To be considered
adequately capitalized (as defined) under the regulatory framework for
prompt corrective action, the Bank must maintain minimum T I leverage, Tier
I risk-based and total risk-based ratios as set forth in the table. The
Bank's actual capital amounts and ratios are also presented in the table.
(Dollars in thousands)
<TABLE>
<CAPTION>
As of December 31, 1998: Capital Adequacy To Be Well Capitalized
---------------- Under Prompt Corrective
Actual Required Action Provisions:
------------------
Amount (Ratio) Amount (Ratio) Amount (Ratio)
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Tier I Capital (to Average Assets) $22,417 (8.4%) 10,659 (4.0%) 13,324 (5.0%)
Tier I Capital (to Risk Weighted Assets) 22,417 (12.8%) 6,981 (4.0%) 10,471 (6.0%)
Total Capital (to Risk Weighted Assets) 24,600 (14.1%) 13,962 (8.0%) 17,452 (10.0%)
As of December 31, 1997:
Tier I Capital (to Average Assets) ....... $23,888 (9.4%) 10,129 (4.0%) 12,661 (5.0%)
Tier I Capital (to Risk Weighted Assets).. 23,888 (14.7%) 6,488 (4.0%) 9,732 (6.0%)
Total Capital (to Risk Weighted Assets)... 25,912 (16.0%) 12,976 (8.0%) 16,220 (10.0%)
</TABLE>
As of December 31, 1998, the Bank's capital ratios are well in excess
of the minimum and well-capitalized guidelines and the Corporation's
capital ratios are in excess of the Bank's capital ratios.
(17) Concentration of Risk and Off-Balance Sheet Risk
------------------------------------------------
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets.
The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Bank
upon extension of credit, is based on management's credit evaluation of the
borrower. Collateral held varies but may include accounts receivable,
inventory, property, plant, and equipment, and income-producing commercial
properties. The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit written is
represented by the contractual amount of those instruments. The Bank uses
the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers. The term of
these standby letters of credit is generally one year or less.
19
<PAGE>
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
As of December 31, 1998, commitments to extend credit amounted to
$20,697,000 and standby letters of credit amounted to $2,480,000.
Significant concentration of credit risk may occur when the
obligations of the same or affiliated parties engage in similar activities
or have similar economic characteristics that would cause those parties to
be similarly affected by changes in economic or other conditions.
In analyzing the Bank's exposure to significant concentration of
credit risk, management set a parameter of 10% or more of the Bank's total
net loans outstanding as the threshold in determining whether the
obligations of the same or affiliated parties would be classified as
significant concentration of credit risk. Concentrations by industry,
product line, type of collateral, etc., were also considered. U.S. Treasury
securities, obligations of U.S. government agencies and corporations, an
any assets collateralized by the same were excluded.
As of December 31, 1998, there were no similar activities that met the
requirements to be classified as significant concentration of credit risk.
However, there is a geographical concentration in that most of the Bank's
business activity is with customers located in Central Pennsylvania,
specifically within the Bank's trading area made up of Dauphin County,
lower Northumberland County, western Schuylkill County and Hampden Township
in Cumberland County.
The Bank's highest concentrations of credit are in the areas of mobile
home park land and commercial real estate office financing. Outstanding
credit to these sectors amounted to $13,997,000 or 9.3% and $16,370,000 or
10.9% of total net loans outstanding as of December 31, 1998.
(18) Commitments and Contingencies
-----------------------------
In the ordinary course of business, the Bank has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In the opinion of
management, after consultation with legal counsel, the ultimate disposition
of these matters is not expected to have a material adverse effect on the
consolidated financial condition of the Bank.
(19) Parent Company Statements
-------------------------
The condensed balance sheet, statement of income and statement of cash
flows for Mid Penn Bancorp, Inc., parent only, are presented below:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
As of December 31, 1998, 1997 and 1996
(Dollars in thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
ASSETS
Cash ..................................................... $ 485 320 19
Investment in Subsidiaries ............................... 31,051 29,410 27,419
-------- ------ ------
Total Assets $ 31,536 29,730 27,438
======== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other Liabilities ........................................ $ 0 0 0
Stockholders' Equity ..................................... 32,077 30,269 27,971
Less Treasury Stock ...................................... (541) (539) (533)
-------- ------ ------
Total Liabilities and Equity $ 31,536 29,730 27,438
======== ====== ======
<CAPTION>
CONDENSED STATEMENT OF INCOME
For the Years Ended December 31, 1998, 1997 and 1996
(Dollars in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividends from Subsidiaries .............................. $ 2,304 2,385 1,287
Other Income from Subsidiaries ........................... 27 25 13
Undistributed Earnings of Subsidiaries ................... 1,615 1,841 2,215
Other Expenses ........................................... (81) (82) (38)
-------- ------ ------
Net Income $ 3,865 4,169 3,477
======== ====== ======
</TABLE>
20
<PAGE>
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
(Dollars in thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ...................................................... $ 3,865 4,169 3,477
Net Change in Other Liabilities ................................. 0 0 (563)
Undistributed Earnings of Subsidiaries .......................... (1,615) (1,841) (2,215)
------- ------ ------
Net Cash Provided By Operating Activities 2,250 2,328 699
------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends Paid .................................................. (2,083) (1,992) (1,268)
Common Stock Retired ............................................ 0 (29) 0
Purchase of Treasury Stock ...................................... (2) (6) 0
------- ------ ------
Net Cash Used By Financing Activities (2,085) (2,027) (1,268)
------- ------ ------
Net Increase (Decrease) in Cash and Cash Equivalents ............ 165 301 (569)
Cash and Cash Equivalents at Beginning of Period ................ 320 19 588
------- ------ ------
Cash and Cash Equivalents at End of Period ...................... $ 485 320 19
======= ====== ======
</TABLE>
(20) Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Insturments"
requires disclosures of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practical
to estimate that value. In cases where quoted market values are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets, and in many cases,
could not be realized in immediate settlement of the instrument.
Accordingly, the aggregate fair value amounts presented do not represent
the underlying value of the Corporation.
The following methodologies and assumptions were used to estimate the
fair value of the Corporation's financial instruments:
Cash and due from banks:
The carrying value of cash and due from banks was considered to be a
reasonable estimate of fair value.
Interest bearing balances with other financial institutions:
The estimate of fair value was determined by comparing the present
value of quoted interest rates on like deposits with the weighted average
yield and weighted average maturity of the balances.
Investment securities:
As indicated in Note 5, estimated fair values of investment
securities are based on quoted market prices, where applicable. If quoted
market prices are not available, fair values are based on quoted market
prices for comparable instruments, adjusted for differences between the
quoted instruments and the instruments being valued.
Loans:
The loan portfolio was segregated into pools of loans with similar
economic characteristics and was further segregated into fixed rate and
variable rate and each pool was treated as a single loan with the estimated
fair value based on the discounted value of expected future cash flows.
Fair value of loans with significant collectibility concerns (that is,
problem loans and potential problem loans) was determined on an individual
basis using an internal rating system and appraised values of each loan.
Assumptions regarding problem loans are judgmentally determined using
specific borrower information.
Deposits:
The fair value for demand deposits (e.g., interest and noninterest
checking, savings and money market deposit accounts) are by definition,
equal to the amount payable on demand at the reporting date (i.e. their
carrying amounts). Fair value for fixed-rate certificates of deposit was
estimated using a discounted cash flow calculation by combining all fixed-
rate certificates into a pool with a weighted average yield and a weighted
average maturity for the pool and comparing the pool with interest rates
currently being offered on a similar maturity.
21
<PAGE>
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
Short-term borrowed funds:
Because of time to maturity, the estimated fair value of short-term
borrowings approximates the book value.
Long-term debt:
The estimated fair values of long-term debt was determined using discounted
cash flow analysis, based on borrowing rates for similar types of borrowing
arrangements.
Accrued interest:
The carrying amounts of accrued interest approximates their fair values.
Off-balance-sheet financial instruments:
There are no unearned fees outstanding on off-balance-sheet financial
instruments and the fair values are determined to be equal to the carrying
values.
The following table summarizes the book or notional value and fair value of
financial instruments at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
(Dollars in thousands) Book or Book or
Notional Fair Notional Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks ................................ $ 5,651 5,651 5,998 5,998
Interest bearing balances and federal funds sold ....... 42,883 42,883 37,004 37,604
Investment securities .................................. 67,933 67,933 53,599 53,799
Net loans .............................................. 150,680 159,643 152,295 155,718
Financial liabilities:
Deposits ............................................... $216,802 219,301 217,146 218,039
Short-term borrowings .................................. 12,159 12,159 2,234 2,234
Long-term debt ......................................... 15,550 16,254 5,688 5,494
Off-balance sheet financial instruments:
Commitments to extend credit ........................... $ 20,697 20,697 21,427 21,427
Standby letters of credit .............................. 2,480 2,480 1,323 1,323
</TABLE>
(21) Common Stock:
-------------
The Corporation has reserved 50,000 of authorized, but unissued
shares of its common stock for issuance under a Stock Bonus Plan (the
"Plan"). Shares issued under the Plan are at the discretion of the board of
directors. Shares reserved will be reduced by any shares issued under the
Plan which come from treasury stock or are obtained in the open market. At
December 31, 1998, no shares have been awarded under the plan.
In November, 1997, the Corporation amended and restated its dividend
reinvestment plan, (DRIP). Two hundred thousand shares of the Corporation's
authorized but unissued common stock are reserved for issuance under the
DRIP. The DRIP also allows for voluntary cash payments within specified
limits, for the purchase of additional shares.
22
<PAGE>
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The purpose of this discussion is to further detail the financial condition
and results of operations of Mid Penn Bancorp, Inc. (the Corporation). The
Corporation is not aware of any known trends, events, uncertainties or of any
current recommendations by the regulatory authorities which, if they were to be
implemented, would have a material effect on the Corporation's liquidity,
capital resources or operations. This discussion should be read in conjunction
with the financial statements appearing elsewhere in this report. Per share data
has been restated to reflect the effect of stock dividends and splits. The prior
year financial data has been restated to reflect the merger of Miners Bank of
Lykens as if the two banks had always been one.
Financial Summary
-----------------
The consolidated earnings of the Corporation are derived primarily from the
operations of its wholly-owned subsidiary, Mid Penn Bank.
The Corporation achieved net income of $3,865,000 for the year 1998,
compared to $4,169,000 in 1997, which was an increase of $692,000 or 19.90% over
1996 net income of $3,477,000. This represents net income in 1998 of $1.34 per
share compared to $1.44 per share in 1997 and $1.20 per share in 1996.
Approximately $568,000 of the earnings of 1997 were the result of the net gain
on the sale of the Mid Penn Bank credit card portfolio. Excluding the net gain
on the sale of the credit card portfolio, earnings for the year 1998 exceed
those of the year 1997 by $264,000 or 7.3%.
Total assets of the Corporation continued to grow in 1998, reaching the
level of $277,827,000, an increase of $21,099,000 or 8.22% over $256,728,000 at
year end 1997. Ten million of the asset growth during 1998 resulted in the
purchase of interest bearing balances and municipal securities, which were
funded by borrowings resulting in incremental income to the Corporation that
will have a positive effect on the return on stockholders' equity, going
forward.
The Corporation continued to achieve an excellent return of average assets,
(ROA), a widely recognized performance indicator in the financial industry. The
ROA was 1.45% in 1998, 1.71% in 1997 and 1.52% in 1996. Return on average
stockholders' equity (ROE), another performance indicator, was 12.81% in 1998,
14.76% in 1997 and 13.37% in 1996.
Tier one capital (to risk weighted assets) of $22,417,000 or 12.80% and
total capital (to risk weighted assets) of $24,600,000 or 14.10% at December 31,
1998 are well above the December 31, 1998 requirement, which is 4% for tier one
capital and 8% for total capital. Tier one capital consists primarily of
stockholders' equity. Total capital includes qualifying subordinated debt, if
any, and the allowance for loan losses, within permitted limits. Risk-weighted
assets are determined by assigning various levels of risk to different
categories of assets and off-balance-sheet activities. On December 31, 1998, the
Corporation transferred an additional $3,000,000 in investment securities from
the Bank to a wholly-owned investment company, Mid Penn Investment Corporation
in Wilmington, Delaware, as the state of Delaware offers a beneficial state tax
environment for these assets.
During 1998, the Corporation acquired all the outstanding common stock of
Miners Bank of Lykens (MBL) in exchange for 148,250 shares of the Corporation's
common stock. MBL was a one office, full service bank with total assets of
approximately $27,915,000 at July 13, 1998, the date of the acquisition. MBL
earned net income of $163,000 in 1997 and $148,000 in 1996. This acquisition
allows Mid Penn Bank to bridge a gap between its Elizabethville and Tower City
offices. Management anticipates that Mid Penn Bank will be able to reduce the
operating expenses of the MBL location through the elimination of duplicate cost
areas.
Net Interest Income
-------------------
Net interest income, the Corporation's primary source of revenue,
represents the difference between interest income and interest expense. Net
interest income is affected by changes in interest rates and changes in average
balances (volume) in the various interest-sensitive assets and liabilities.
During 1998, net interest income increased $384,000 or 3.67% as compared to
$716,000 or 7.35% in 1997. The average balances, effective interest differential
and interest yields for the years ended December 31, 1998, 1997 and 1996, the
components of net interest rate growth, are presented in Table 1. A comparative
presentation of the changes in net interest income for 1998 compared to 1997,
and 1997 compared to 1996, is given in Table 2. This analysis indicates the
changes in interest income and interest expense caused by the volume and rate
components of interest earning assets and interest bearing liabilities.
23
<PAGE>
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
The yield on earning assets decreased to 8.33% in 1998 from 8.54% in 1997.
The yield on earning assets for 1996 was 8.55%. The change in the yield on
earning assets was due primarily to the repricing of commercial loans and
changes in the "prime rate." The average "prime rate" for 1998 was 8.38% as
compared to 8.44% for 1997 and 8.29% for 1996.
Interest expense increased by $740,000 or 8.36% in 1998 as compared to
$425,000 or 5.04% in 1997. The increases were due primarily to the increase in
the total of interest bearing liabilities including the greater reliance on
borrowings from the Federal Home Loan Bank of Pittsburgh.
Primarily resulting from the fluctuations in interest rates, the net
interest margin, on a tax equivalent basis, in 1998 was 4.52% compared to 4.72%
in 1997 and 4.67% in 1996. Management continues to closely monitor the net
interest margin.
TABLE 1: AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS
INCOME AND RATES ON A TAXABLE EQUIVALENT BASIS
FOR YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
(Dollars in thousands)
Average Interest Average Rates
Balance Income/Expense Earned/Paid
------- -------------- -----------
<S> <C> <C> <C>
ASSETS:
Interest Bearing Balances ......................... $ 40,056 2,574 6.43%
Investment Securities:
Taxable ................................... 37,832 2,455 6.49%
Tax-Exempt ................................ 19,868 1,564 7.87%
--------
Total Investment Securities ....... 57,700
--------
Federal Funds Sold ................................ 819 45 5.50%
Loans, Net ........................................ 153,344 14,357 9.36%
-------- ------
Total Earning Assets .............................. 251,919 20,995 8.33%
------
Cash and Due from Banks ........................... 5,806
Other Assets ...................................... 7,945
--------
Total Assets ...................... $265,670
========
LIABILITIES & STOCKHOLDERS'
EQUITY:
Interest Bearing Deposits:
NOW ....................................... $ 27,649 500 1.81%
Money Market .............................. 14,882 449 3.02%
Savings ................................... 25,112 622 2.48%
Time ...................................... 126,123 7,056 5.59%
Short-term Borrowings ............................. 3,801 203 5.34%
Long-term Debt .................................... 13,573 763 5.62%
-------- ------
Total Interest Bearing Liabilities ................ 211,140 9,593 4.54%
------
Demand Deposits ................................... 21,024
Other Liabilities ................................. 3,328
Stockholders' Equity .............................. 30,178
--------
Total Liabilities and
Stockholders' Equity .............. $265,670
========
Net Interest Income ....................................... $ 11,402
========
Net Yield on Interest Earning Assets:
Total Yield on Earning Assets ..................... 8.33%
Rate on Supporting Liabilities .................... 3.81%
Net Interest Margin ............................... 4.52%
</TABLE>
24
<PAGE>
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 1: AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS
(cont'd)
INCOME AND RATES ON A TAXABLE EQUIVALENT BASIS
FOR YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
(Dollars in thousands)
Average Interest Average Rates
Balance Income/Expense Earned/Paid
------- -------------- -----------
<S> <C> <C> <C>
ASSETS:
Interest Bearing Balances ................. $ 31,709 2,014 6.35%
Investment Securities:
Taxable ........................... 32,169 2,122 6.60%
Tax-Exempt ........................ 14,844 1,226 8.26%
--------
Total Investment Securities 47,013
--------
Federal Funds Sold ........................ 1,138 66 5.80%
Loans, Net ................................ 151,759 14,344 9.45%
-------- ------
Total Earning Assets ...................... 231,619 19,772 8.54%
------
Cash and Due from Banks ................... 4,957
Other Assets .............................. 7,488
--------
Total Assets .............. $244,064
========
LIABILITIES & STOCKHOLDERS' EQUITY:
Interest Bearing Deposits:
NOW ............................... $ 26,804 567 2.12%
Money Market ...................... 11,821 295 2.50%
Savings ........................... 25,360 641 2.53%
Time .............................. 121,117 6,793 5.61%
Short-term Borrowings ..................... 3,415 186 5.45%
Long-term Debt ............................ 5,719 371 6.49%
-------- ------
Total Interest Bearing Liabilities ........ 194,236 8,853 4.56%
------
Demand Deposits ........................... 18,547
Other Liabilities ......................... 2,985
Stockholders' Equity ...................... 28,296
--------
Total Liabilities and
Stockholders' Equity ...... $244,064
========
Net Interest Income ............................... $ 10,919
========
Net Yield on Interest Earning Assets:
Total Yield on Earning Assets ............. 8.54%
Rate on Supporting Liabilities ............ 3.82%
Net Interest Margin ....................... 4.72%
</TABLE>
25
<PAGE>
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 1: AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS
(cont'd)
INCOME AND RATES ON A TAXABLE EQUIVALENT BASIS
FOR YEAR ENDED DECEMBER 31, 1996
(In thousands)
<TABLE>
<CAPTION>
Average Interest Average Rates
Balance Income/Expense Earned/Paid
------- -------------- -----------
<S> <C> <C> <C>
ASSETS:
Interest Bearing Balances .................................. $ 31,227 2,011 6.44%
Investment Securities:
Taxable ............................................ 26,589 1,787 6.72%
Tax-Exempt ......................................... 13,226 1,129 8.54%
--------
Total Investment Securities 39,815
--------
Federal Funds Sold ......................................... 1,920 100 5.21%
Loans, Net ................................................. 144,491 13,560 9.38%
-------- ------
Total Earning Assets ....................................... 217,453 18,587 8.55%
------
Cash and Due from Banks .................................... 4,941
Other Assets ............................................... 7,405
--------
Total Assets $229,799
========
LIABILITIES & STOCKHOLDERS'
EQUITY:
Interest Bearing Deposits:
NOW ................................................ $ 27,733 717 2.59%
Money Market ....................................... 11,061 265 2.40%
Savings ............................................ 25,971 694 2.67%
Time ............................................... 113,855 6,385 5.61%
Short-term Borrowings ...................................... 3,380 182 5.38%
Long-term Debt ............................................. 2,860 185 6.47%
-------- ------
Total Interest Bearing Liabilities ......................... 184,860 8,428 4.56%
------
Demand Deposits ............................................ 16,306
Other Liabilities .......................................... 2,623
Stockholders' Equity ....................................... 26,010
--------
Total Liabilities and
Stockholders' Equity $229,799
========
Net Interest Income ................................................ $ 10,159
========
Net Yield on Interest Earning Assets:
Total Yield on Earning Assets .............................. 8.55%
Rate on Supporting Liabilities ............................. 3.88%
Net Interest Margin ........................................ 4.67%
</TABLE>
Interest and average rates are presented on a fully taxable equivalent
basis, using an effective tax rate of 34%. For purposes of calculating loan
yields, average loan balances include nonaccrual loans.
Loan fees of $275,000, $304,000 and $178,000 are included with interest
income in Table 1 for the years 1998, 1997 and 1996, respectively.
26
<PAGE>
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 2: VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Due to Change In: Increase (Decrease) Due to Change In:
Taxable Equivalent Basis Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest Bearing Balances ................. $ 530 30 560 31 (28) 3
Investment Securities:
Taxable ................................... 374 (41) 333 375 (40) 335
Tax-Exempt ................................ 415 (77) 338 138 (41) 97
------- ----- ----- ------ ------- -----
Total Investment Securities 789 (118) 671 513 (81) 432
Federal Funds Sold ........................ (18) (3) (21) (41) 7 (34)
Loans, Net ................................ 15 (2) 13 682 102 784
------- ----- ----- ------ ------- -----
Total Interest Income ..... $ 1,316 (93) 1,223 1,185 0 1,185
------- ----- ----- ------ ------- -----
INTEREST EXPENSE:
Interest Bearing Deposits:
NOW ............................... $ 18 (85) (67) (24) (126) (150)
Money Market ...................... 77 77 154 18 12 30
Savings ........................... (6) (13) (19) (16) (37) (53)
Time .............................. 281 (18) 263 407 1 408
------- ----- ----- ------ ------- -----
Total Interest Bearing Deposits ... 370 (39) 331 385 (150) 235
Short-term Borrowings ..................... 21 (4) 17 2 2 4
Long-term Debt ............................ 510 (118) 392 185 1 186
------- ----- ----- ------ ------- -----
Total Interest Expense .... $ 901 (161) 740 572 (147) 425
------- ----- ----- ------ ------- -----
NET INTEREST INCOME: ........................ $ 415 68 483 613 (147) 760
======= ===== ===== ====== ======= =====
</TABLE>
The effect of changing volume and rate has been allocated entirely to the
rate column. Tax-exempt income is shown on a tax equivalent basis assuming a
federal income tax rate of 34%.
Provision for Loan Losses
-------------------------
The provision for loan losses charged to operating expense represents the
amount deemed appropriate by management to maintain an adequate allowance for
possible loan losses. Due to the cyclical nature of the economy coupled with the
Bank's substantial involvement in commercial loans and the record number of
nationwide consumer bankruptcies, management thought it prudent to make a
$254,000 allocation in 1998 as well as a provision of $109,000 during 1997. The
1998 provision included a specific allocation of $150,000 related to one
impaired commercial loan. The allowance for loan losses as a percentage of
average total loans was 1.47% at December 31, 1998, compared to 1.46% and 1.53%
for the years ended December 31, 1997 and 1996, which continues to be higher
than that of peer financial institutions. A summary of charge-offs and
recoveries of loans is presented in Table 3.
27
<PAGE>
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 3: ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
(Dollars in thousands)
Years ended December 31,
1998 1997 1996 1995* 1994*
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Balance beginning of period ....................... $2,281 2,278 2,457 2,511 2,646
------ ----- ----- ----- -----
Loans charged-off:
Commercial real estate, construction
and land development .............. 40 4 25 86 0
Commercial, industrial and agricultural ... 200 32 213 55 14
Real estate-residential ................... 40 20 4 0 34
Consumer .................................. 37 197 234 225 159
------ ----- ----- ----- -----
Total loans charged off 317 253 476 366 207
------ ----- ----- ----- -----
Recoveries on loans previously
charged-off:
Commercial real estate, construction
and land development .............. 10 4 39 33 8
Commercial, industrial and agricultural ... 56 107 105 111 33
Real estate-residential ................... 0 3 38 4 1
Consumer .................................. 29 33 63 54 30
------ ----- ----- ----- -----
Total recoveries 95 147 245 202 72
------ ----- ----- ----- -----
Net charge-offs ................................... 222 106 231 164 135
------ ----- ----- ----- -----
Current period provision for
loan losses ............................... 254 109 52 0 0
------ ----- ----- ----- -----
Balance end of period ............................. $2,313 2,281 2,278 2,347 2,511
====== ===== ===== ===== =====
Ratio of net charge-offs during the period
to average loans outstanding during the
period, net of unearned discount .......... 0.14% 0.07 0.16 0.13 0.11
====== ===== ===== ===== =====
*Mid Penn Bank only, Miners Bank of Lykens
information not readily available
Allowance for loan losses as a percentage
of average total loans .................... 1.47% 1.46 1.53
</TABLE>
Noninterest Income
------------------
During 1998, the Corporation earned $1,398,000 in noninterest income,
compared to $1,772,000 earned in 1997, which was $931,000 or 110.70% over the
1996 total of $841,000. The major contributor to noninterest income in 1997 was
the one-time gain on the sale of the Bank's credit card portfolio that amounted
to $860,000. Noninterest income in 1998 included nonrecurring gains of $273,000
from the sale of other real estate.
Trust department income for 1998 was $104,000, a $14,000 or 15.56% increase
over $90,000 in 1997, which was $7,000 or 8.43% more than the $83,000 earned in
1996. Trust Department income fluctuates from year to year, primarily due to the
number of estates being settled during the year.
Service charges on deposit accounts amounted to $450,000 for 1998, an
increase of $122,000 over $328,000 for 1997, which showed a 19.71% increase over
1996. The majority of this increase resulted from the increasing revenues from
NSF charges.
The Corporation also earned $82,000 in fees from Invest, the third-party
provider of investments whose services the Bank has contracted. Other operating
income amounted to $443,000 (net of gains on other real estate) in 1998,
$432,000 and $472,000 in 1997 and 1996, respectively.
28
<PAGE>
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
Noninterest Expense
-------------------
A summary of the major components of noninterest expense for the years
ended December 31, 1998, 1997 and 1996 is reflected in Table 4. Noninterest
expense increased to $6,606,000 in 1998 from $6,232,000 in 1997 and $5,658,000
in 1996. The major component of noninterest expense is salaries and employee
benefits. This expense includes approximately $198,000 of supplemental employee
bonuses and incentives for the year 1997.
Noninterest expense of $6,606,000 in 1998 represents an increase of 6.00%
over that of the prior year. The majority of the increase deals with costs of
the merger with MBL including the related legal, advertising and conversion
expenses.
Other noninterest expense increased by $84,000 in 1997. Included in this
increase was $20,000 in costs and fees associated with the revision of the
Corporation's Dividend Reinvestment Plan to make the Plan more accessible to
shareholders. In addition, the Corporation incurred a $20,000 fee for listing on
the American Stock Exchange.
TABLE 4: NONINTEREST EXPENSE
<TABLE>
<CAPTION>
(Dollars in thousands)
Years ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Salaries and employee benefits .... $3,383 3,474 2,953
Occupancy, net .................... 323 319 323
Equipment ......................... 565 477 483
Postage and supplies .............. 356 306 300
FDIC assessments .................. 26 25 4
Marketing and advertising ......... 160 151 152
Other real estate, net ............ 0 0 0
Pennsylvania bank shares tax ...... 274 261 248
Professional services ............. 126 101 117
Telephone ......................... 70 61 57
Loss on mortgage sales ............ 64 18 26
Other ............................. 1,259 1,039 995
------ ----- -----
Total Noninterest Expense $6,606 6,232 5,658
====== ===== =====
</TABLE>
Investments
-----------
The Corporation investment portfolio is utilized to improve earnings
through investments of funds in high-yielding assets which provide the necessary
balance sheet liquidity for the Corporation.
At December 31, 1998, SFAS No. 115 resulted in an increase in shareholders'
equity of $344,000 (unrealized gain on securities of $521,000, less estimated
income tax effect of $177,000). SFAS No. 115 as of December 31, 1997 resulted in
an increase in stockholders' equity of $318,000 (unrealized gain on securities
of $481,000, less estimated income tax effect of $163,000) compared to an
increase in stockholders' equity of $168,000 (unrealized gain on securities of
$255,000, less estimated income tax effect of $87,000) as of December 31, 1996.
Proceeds from the sale of investment securities during 1998 were
$5,290,000. A net gain of $13,000 was realized on those sales. Proceeds from the
sale of investment securities during 1997 were $4,370,000. A net loss of $2,000
was realized on those sales. Proceeds from the maturities of investment
securities were $19,707,000 in 1998 compared with $12,402,000 in 1997 and
$10,967,000 in 1996.
The Corporation does not have any significant concentrations of investment
securities.
Table 5 provides a history of the amortized cost of investment securities
at December 31, for each of the past three years. The gross unrealized gains and
losses on investment securities are outlined in Note 6 to the Consolidated
Financial Statements.
29
<PAGE>
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 5: AMORTIZED COST OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U. S. Treasury and U.S. government agencies ...... $36,922 32,236 25,469
Mortgage backed U.S. government agencies ......... 2,285 3,869 1,556
State and political subdivision obligations ...... 26,020 16,276 14,117
Corporate bonds .................................. 0 0 0
Restricted equity securities ..................... 2,185 737 1,343
------- ------ ------
Total $67,412 53,118 42,485
======= ====== ======
</TABLE>
Loans
-----
At December 31, 1998, net loans totaled $150,680,000, a $1,615,000 or 1.1%
decrease from December 31, 1997. During 1998, the Corporation experienced an
increase in commercial real estate loans of approximately $8,767,000, the
majority of which was generated in the greater Harrisburg region.
In August of 1997, Mid Penn Bank sold its credit card portfolio of
$5,100,000, generating a gain net of tax of $568,000. The portfolio was sold in
light of the record number of consumer bankruptcies and the rising incidence of
credit card fraud that were detrimentally affecting the overall return of the
portfolio.
The current environment in lending is extremely competitive with financial
institutions aggressively pursuing potential borrowers. At December 31, 1998,
loans, net of unearned income, represented 57.6% of earning assets as compared
to 62.7% on December 31, 1997 and 70.1% on December 31, 1996.
The Bank's loan portfolio is diversified among individuals, farmers, and
small and medium-sized businesses generally located within the Bank's trading
area of Dauphin County, lower Northumberland County, western Schuylkill County
and eastern Cumberland County. Commercial real estate, construction and land
development loans are collateralized mainly by mortgages on the income-producing
real estate or land involved. Commercial, financial and agricultural loans are
made to business entities and may be secured by business assets, including
commercial real estate, or may be unsecured. Residential real estate loans are
secured by liens on the residential property. Consumer loans include
installment, credit card, lines of credit and home equity loans.
A distribution of the Bank's loan portfolio according to major loan
classification is shown in Table 6.
TABLE 6: LOAN PORTFOLIO
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
1998 1997 1996 1995* 1994*
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Commercial real estate, construction
and land development ............ $ 88,263 81,191 75,200 65,671 54,225
Commercial, industrial and agricultural .. 20,401 20,107 19,925 16,682 19,397
Real estate-residential mortgage ......... 30,325 34,195 34,391 27,821 25,142
Consumer ................................. 16,034 21,018 27,420 23,473 20,409
Lease financing .......................... 1 8 13 18 0
--------- ------- ------- ------- -------
Total Loans 155,024 156,519 156,949 133,665 119,173
Unearned income .......................... (2,031) (1,943) (1,879) (1,729) (1,488)
--------- ------- ------- ------- -------
Loans net of unearned discount ........... 152,993 154,576 155,070 131,936 117,685
Allowance for loan losses ................ (2,313) (2,281) (2,278) (2,347) (2,511)
--------- ------- ------- ------- -------
Net Loans $ 150,680 152,295 152,792 129,589 115,174
========= ======= ======= ======= =======
</TABLE>
* Mid Penn Bank only, Miners Bank of Lykens
information not readily available
Allowance for Loan Losses
-------------------------
The allowance for loan losses is maintained at a level believed adequate by
Management to absorb potential loan losses in the loan portfolio. The
Corporation has a loan review department that is charged with establishing a
"watchlist" of potential unsound
30
<PAGE>
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
loans, identifying unsound credit practices and suggesting corrective actions. A
quarterly review and reporting process is in place for monitoring those loans
that are on the "watchlist." Each credit on the "watchlist" is evaluated to
estimate potential losses. In addition, estimates for each category of credit
are provided based on Management's judgment which considers past experience,
current economic conditions and other factors. For installment and real estate
mortgages, specific allocations are based on past loss experience adjusted for
recent portfolio growth and economic trends. The total of reserves resulting
from this analysis are "allocated" reserves. The amounts not specifically
provided for individual classes of loans are considered "unallocated." This
unallocated amount is determined and based on judgments regarding risk of error,
economic conditions, trends and other factors.
The allocation of the allowance for loan losses among the major
classifications is shown in Table 7 as of December 31 of each of the past five
years. The allowance for loan losses at December 31, 1998, was $2,313,000 or
1.51% of total loans less unearned discount as compared to $2,281,000 or 1.48%
at December 31, 1997, and $2,278,000 or 1.47% at December 31, 1996.
TABLE 7: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
1998 1997 1996 1995* 1994*
---- ---- ---- ----- -----
Percent Percent Percent Percent Percent
Amount of Loans Amount of Loans Amount of Loans Amount of Loans Amount of Loans
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial real estate,
construction and land
development ............... $ 861 56.8% 596 50.6% 666 47.9% 574 49.1% 776 45.5%
Commercial, industrial and
agricultural .............. 693 13.5% 369 14.0% 381 12.7% 573 12.5% 301 16.3%
Real estate-residential
mortgage .................. 219 19.4% 207 21.9% 184 21.9% 120 20.8% 118 21.1%
Consumer .................... 127 10.3% 146 13.5% 309 17.5% 245 17.6% 248 17.1%
Unallocated ................. 413 - 963 - 738 - 835 - 1,068 -
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Total loans $2,313 100.0% 2,281 100.0% 2,278 100.0% 2,347 100.0% 2,511 100.0%
====== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
* Mid Penn Bank only, Miners
Bank of Lykens information
not readily available
Nonperforming Assets
--------------------
Nonperforming assets, other than consumer loans and 1-4 family residential
mortgages, include impaired and nonaccrual loans, loans past due 90 days or
more, restructured loans and other real estate (including residential property).
A loan is generally classified as nonaccrual when principal or interest has
consistently been in default for a period of 90 days or more, or because of a
deterioration in the financial condition of the borrower, payment in full of
principal or interest is not expected. Loans past due 90 days or more and still
accruing interest are loans that are generally well-secured and in the process
of collection or repayment. Restructured loans are those loans whose terms have
been modified to provide for a reduction of interest or principal payments
because of borrower financial difficulties. Foreclosed assets held for sale
include those assets that have been acquired through foreclosure for debts
previously contracted, in settlement of debt.
Consumer loans are generally recommended for charge-off when they become
150 days delinquent. All 1-4 family residential mortgages 90 days or more past
due are reviewed quarterly by Management, and collection decisions are made in
light of the analysis of each individual loan. The amount of consumer and
residential mortgage loans past due 90 days or more at year-end was $66,000,
$123,000 and $114,000 in 1998, 1997, and 1996, respectively.
A presentation of nonperforming assets as of December 31, for each of the
past five years is given in Table 8. Nonperforming assets at December 31, 1997,
totaled $3,064,000 or 1.10% of total assets compared to $2,112,000 or .82% of
total assets in 1997, and $2,420,000 or 1.02% of total assets in 1996. The
foreclosed assets held for sale at December 31, 1998, consist of two pieces of
commercial real estate, residential building lots and one commercial property
that the Corporation has available for sale.
Nonperforming assets are taken into consideration by Management when
assessing the adequacy of the Allowance for Loan Losses.
31
<PAGE>
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 8: NONPERFORMING ASSETS
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
1998 1997 1996 1995* 1994*
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Nonaccrual loans ......................... $ 376 333 1,183 1,753 2,181
Past due 90 days or more ................. 844 212 544 195 252
Restructured loans ....................... 1,497 212 145 0 0
------ ----- ----- ----- -----
Total nonperforming loans 2,717 757 1,872 1,948 2,433
Foreclosed assets held for sale .......... 347 1,355 548 507 120
------ ----- ----- ----- -----
Total nonperforming assets $3,064 2,112 2,420 2,455 2,553
====== ===== ===== ===== =====
Percent of total loans outstanding ....... 2.00% 1.38% 1.54% 1.84% 2.14%
Percent of total assets .................. 1.10% .82% 1.02% 1.26% 1.46%
*Mid Penn Bank only, Miners Bank of Lykens
information not readily available
</TABLE>
There are no loans classified for regulatory purposes that have not been
included in Table 8. As of December 31, 1998, one commercial relationship, a
potential future nonperforming asset of $615,000, in total, was considered
impaired, because management is aware of information which causes doubt as to
the ability of the borrower to comply with loan repayment terms, in addition to
those identified as non-accrual loans. There are no trends or uncertainties
which management expects will materially impact future operating results,
liquidity or capital resources or no other material credits about which
management is aware of any information which causes management to have serious
doubts as to the ability of such borrowers to comply with loan repayment terms.
Deposits and Other Funding Sources
----------------------------------
The Corporation's primary source of funds is its deposits. Deposits at
December 31, 1998, were $216,802,000, which decreased slightly by $344,000 or
0.16% from December 31, 1997, compared to an increase of $17,473,000 or 8.75% in
1997. A limited-time, special-rate certificate of deposit offer in the fall of
1997 aided the Bank in attaining these increases. Included in the 1997 deposit
growth are in excess of $10 million in jumbo certificates of deposit issued to
municipalities. Average balances and average interest rates applicable to the
major classifications of deposits for the years ended December 31, 1998, 1997,
and 1996 are presented in Table 9.
Average short-term borrowings for 1998 were $3,801,000 as compared to
$3,415,000 in 1997. These borrowings included customer repurchase agreements,
treasury tax and loan option borrowings and federal funds purchased.
TABLE 9: DEPOSITS BY MAJOR CLASSIFICATION
<TABLE>
<CAPTION>
(Dollars in thousands) Years ended December 31,
1998 1997 1996
---- ---- ----
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand deposits $ 21,024 0.00% 18,547 0.00% 16,306 0.00%
Interest bearing demand deposits .. 27,649 1.81% 26,804 2.12% 27,733 2.59%
Money market ...................... 14,882 3.02% 11,821 2.50% 11,061 2.40%
Savings ........................... 25,112 2.48% 25,360 2.52% 25,971 2.67%
Time .............................. 126,123 5.59% 121,117 5.61% 113,855 5.61%
-------- ------ ------- ------ ------- ------
Total $214,790 4.02% 203,649 4.07% 194,926 4.14%
======== ====== ======= ====== ======= ======
</TABLE>
Capital Resources
-----------------
Stockholders' equity, or capital, is evaluated in relation to total assets
and the risk associated with those assets. The greater the capital resources,
the more likely a corporation is to meet its cash obligations and absorb
unforeseen losses. For these reasons capital adequacy has been, and will
continue to be, of paramount importance.
32
<PAGE>
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
In 1998, capital grew $1,806,000 or 5.97% above 1997. Comparatively, 1997
capital grew $2,292,000 or 8.35% above 1996. Capital growth in both periods was
achieved through earnings retention.
The Corporation's normal dividend payout allows for quarterly cash returns
to its stockholders and provides earnings retention at a level sufficient to
finance future Corporation growth. The dividend payout ratio, which represents
the percentage of annual net income returned to the stockholders in the form of
cash dividends, was 54% for 1998 compared to 48% for 1997 and 36% for 1996.
Until 1997, the Corporation acquired shares of its stock in the open market
to meet the needs of its dividend reinvestment plan. The availability of shares
for purchase has decreased significantly in recent years, and, as a result, the
Corporation's dividend reinvestment plan was changed in 1997 to allow for the
use of authorized, but unissued shares of common stock under the plan.
The Corporation has been approved by the Internal Revenue Service to offer
an employee stock ownership plan.
At December 31, 1998, 19,337 shares of the Corporation's common stock are
held as treasury stock and are available for issuance under the dividend
reinvestment plan or the stock bonus plan. The treasury stock may also be used
for the employee stock ownership plan.
Federal Income Taxes
--------------------
Federal income tax expense for 1998 was $1,516,000 compared to $1,721,000
and $1,397,000 in 1997 and 1996, respectively. The effective tax rate was 28%
for 1998 and 29% for 1997 and 1996.
Liquidity
---------
The Corporation's asset-liability management policy addresses the
management of the Corporation's liquidity position and its ability to raise
sufficient funds to meet deposit withdrawals, fund loan growth and meet other
operational needs. The Corporation utilizes its investment portfolio as a source
of liquidity, along with deposit growth and increases in repurchase agreements
and other short-term borrowings. (See Deposits and Other Funding Sources which
appears earlier in this discussion.) Liquidity from investments is provided
primarily through investments and interest bearing balances with maturities of
one year or less. Funds are available to the Corporation through loans from the
Federal Home Loan Bank and established federal funds lines of credit. The
Corporation's major source of funds is its core deposit base as well as its
capital resources.
During 1998, the major sources of cash came from operations and the
maturity and sale of investment securities, which accelerated in the decreasing
rate environment to $24,997,000. The Corporation also borrowed $10,000,000 in 10
year/1 year putable advances from the Federal Home Loan Bank. These advances
with an average rate of 4.96% were used to fund the purchase of interest bearing
balances and investment securities of which the bank is able to generate a
spread and increase net earnings. By continuing to promote free checking
products, the Corporation was able to realize a net increase of $7,074,000 in
low-cost demand and savings deposits.
As loan demand remained very competitive, the Corporation realized a net
increase in loans of $4,917,000 during the year 1998. Additional cash was used
to purchase $39,279,000 in investment securities, largely high quality U.S.
Government Agency securities which offered a significant spread over U.S.
Treasury Securities. In the falling rate environment, interest bearing balances,
insured jumbo certificates of deposit of other banks, continued to offer
attractive interest rates relative to Treasury investment alternatives. In light
of this opportunity, the Corporation increased the portfolio of interest bearing
balances by $6,879,000 during the year. On December 31, 1998, the Corporation
also purchased $3,900,000 single premium life insurance policies, which will be
used to fund director retirement benefits, and in the meantime, will generate a
stream of tax-free income to the Corporation. Time deposits decreased during the
year as jumbo certificates of deposit issued in 1997 ran off.
In 1997, the major sources of cash were provided by operations, the sale
and maturity of investments of $16,772,000 and an increase in deposits of
$17,475,000. Included in the time deposit increase is approximately $10,000,000
in short-term certificates issued to local municipalities. A special rate
certificate of deposit promotion in the early fall of the year also aided in
attracting additional deposit funds. Another major one-time source of funds was
the $8,378,000 contributed by the sale of the Bank's entire credit card
portfolio and a portion of its student loans. These funds included a gross gain
on the sales of $924,000.
33
<PAGE>
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
The major use of funds during 1997 was the purchase of investment
securities. Purchases of investment securities included largely agency and
municipal securities of intermediate term. The large investment in securities
was made initially to invest the funds generated from the loan sales. Purchases
continued in the fourth quarter in an effort to lock in yields in anticipation
of falling interest rates. Interest-bearing balances, jumbo certificates of
deposit of other financial institutions, also offered favorable rates over
treasury securities during the last half of 1997. These balances which also
provide steady liquidity for the bank showed a net increase of $7,307,000 during
the year. Loan growth while sporadic in a very competitive rate environment
provided a net use of funds of $8,143,000. The majority of the loan growth
occurred in commercial real estate and development loans particularly in the
Harrisburg and Camp Hill markets.
Market Risk - Asset-Liability Management and Interest Rate Sensitivity
----------------------------------------------------------------------
Interest rate sensitivity is a function of the repricing characteristics of
the Corporation's portfolio of assets and liabilities. Each asset and liability
reprices either at maturity or during the life of the instrument. Interest rate
sensitivity is measured as the difference between the volume of assets and
liabilities that are subject to repricing in a future period of time. These
differences are known as interest sensitivity gaps.
The Corporation manages the interest rate sensitivity of its assets and
liabilities. The principal purpose of asset-liability management is to maximize
net interest income while avoiding significant fluctuations in the net interest
margin and maintaining adequate liquidity. Net interest income is increased by
increasing the net interest margin and by increasing earning assets.
The Corporation utilizes asset-liability management models to measure the
impact of interest rate movements on its interest rate sensitivity position. The
traditional maturity gap analysis is also reviewed regularly by the
Corporation's management. The Corporation does not attempt to achieve an exact
match between interest sensitive assets and liabilities because it believes that
a controlled amount of interest rate risk is desirable.
The maturity distribution and weighted average yields of investments is
presented in Table 10. The maturity distribution and repricing characteristics
of the Corporation's loan portfolio is shown in Table 11. Table 12 provides
expected maturity information about the Corporation's financial instruments that
are sensitive to changes in interest rates. Except for the effects of
prepayments on mortgage related assets, the table presents principal cash flows
and related average interest rates on interest bearing assets by contractual
maturity. Residential loans are assumed to have annual payment rates between 12%
and 18% of the portfolio. Loan and mortgage backed securities balances are not
adjusted for unearned discounts, premiums, and deferred loan fees. The
Corporation assumes that 75% of savings and NOW accounts are core deposits and
are, therefore, expected to roll-off after 5 years. Transaction accounts,
excluding money market accounts, are assumed to roll-off after five years. Money
market accounts are assumed to be variable accounts and are reported as maturing
within the first twelve months. No roll-off is applied to certificates of
deposit. Fixed maturity deposits reprice at maturity. The maturity distribution
of time deposits of $100,000 or more is shown in Table 13.
TABLE 10: INVESTMENT MATURITY AND YIELD
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, 1998
After One After Five
One Year Year thru Years thru After Ten
and Less Five Years Ten Years Years Total
-------- ---------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
U.S. Treasury and U.S.government agencies .......... $3,499 5,484 19,728 8,211 36,922
State and political subdivision obligations ........ 735 4,094 6,517 14,674 26,020
Mortgage-backed U.S. government agencies ........... 0 1,239 0 1,046 2,285
Equity securities .................................. 0 0 0 2,185 2,185
------ ------ ------ ------ ------
Total $4,234 10,817 26,245 26,116 67,412
====== ====== ====== ====== ======
</TABLE>
34
<PAGE>
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 10: INVESTMENT MATURITY AND YIELD (cont'd)
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, 1998
After One After Five
One Year Year thru Years thru After Ten
and Less Five Years Ten Years Years Total
-------- ---------- --------- ----- -----
Weighted Average Yields
- -----------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and U.S. government agencies .............. 6.37 6.31 6.54 6.43 6.47
State and political subdivision obligations ............. 7.20 7.83 7.48 7.15 7.35
Mortgage-backed U.S. government agencies ................ 0 6.47 0 6.72 6.59
Equity securities ....................................... 0 0 0 6.43 6.43
------ ------- ------- ------- -----
Total 6.51 6.90 6.77 6.85 6.85
====== ======= ======= ======= =====
</TABLE>
TABLE 11: LOAN MATURITY AND INTEREST SENSITIVITY
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, 1998
After One
One Year Year thru After Five
and Less Five Years Years Total
-------- ---------- ----- -----
<S> <C> <C> <C> <C>
Commercial, real estate, construction
and land development ........................... $28,872 46,606 12,785 88,263
Commercial, industrial and agricultural ................ 13,688 5,544 1,169 20,401
Real estate-residential mortgages ...................... 7,905 8,654 13,766 30,325
Consumer ............................................... 4,653 8,571 780 14,004
------- ------- ------ -------
Total Loans $55,118 69,375 28,500 152,993
======= ======= ====== =======
<CAPTION>
After One
One Year Year thru After Five
and Less Five Years Years Total
-------- ---------- ----- -----
<S> <C> <C> <C> <C>
Rate Sensitivity
- ----------------
Predetermined rate ..................................... $ 5,994 22,371 25,960 54,325
Floating or adjustable rate ............................ 49,124 47,004 2,540 98,668
------- ------ ------ -------
Total $55,118 69,375 28,500 152,993
======= ====== ====== =======
</TABLE>
TABLE 12: INTEREST RATE SENSITIVITY GAP
<TABLE>
<CAPTION>
(Dollars in thousands) Expected Maturity
Year Ended December 31,
(As of December 31, 1998)
1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest bearing balances ............ $18,533 15,236 8,519 297 298 0 42,883 42,883
Average interest rate ........ 6.24 6.32 5.86 5.90 6.25 - 6.19
Debt securities ...................... $ 4,265 3,159 2,289 2,638 1,624 51,773 65,748 65,748
Average interest rate ........ 6.64 7.38 7.29 7.28 6.05 6.89 6.91
Adjustable rate loans ................ $49,496 9,606 20,161 7,431 11,009 1,040 98,743 98,743
Average interest rate ........ 8.59 9.18 8.66 9.02 8.54 8.44 8.68
Fixed rate loans ..................... $ 8,422 6,094 9,585 8,094 6,714 15,341 54,250 63,213
Average interest rate ........ 8.65 9.32 9.05 9.16 8.72 8.68 8.83
Federal funds sold ................... $ 0 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- ------- -------
Total $80,716 34,095 40,554 18,460 19,645 68,154 261,624 270,587
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
35
<PAGE>
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 12: INTEREST RATE SENSITIVITY GAP (cont'd)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest liabilities:
Variable rate savings and
transaction accounts ......... $ 32,962 0 0 0 0 61,227 94,189 94,189
Average interest rate ....... 2.64 - - - - 1.22 1.72
Certificates of deposit and IRAs 73,961 16,636 11,005 5,425 7,507 8,079 122,613 125,112
Average interest rate ....... 5.27 5.79 5.74 5.95 5.64 6.02 5.48
Short term borrowings .......... $ 12,159 0 0 0 0 0 12,159 12,159
Average interest rate ....... 5.50 - - - - - 5.50
Long term fixed rate borrowings $ 1,149 160 1,672 2,185 10,384 0 15,550 16,254
Average interest rate ....... 6.19 7.28 6.74 6.18 4.97 - 5.44
-------- ------ ------ ----- ------ ------ ------- -------
Total $120,231 16,796 12,677 7,610 17,891 69,306 244,511 247,714
-------- ------ ------ ----- ------ ------ ------- -------
Rate sensitive gap:
Periodic gap ................... $(39,515) 17,299 27,877 10,850 1,754 (1,152)
Cumulative gap ................. $(39,515) (22,216) 5,661 16,511 18,265 17,113
Cumulative gap as a percentage
of total assets ................ -14.2% -8.0% 2.0% 5.9% 6.6% 6.2%
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands) Expected Maturity
Year Ended December 31,
(As of December 31, 1997)*
1998 1999 2000 2001 2002 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest bearing balances ....... $12,081 13,759 9,689 99 99 0 35,727 35,727
Average interest rate .......... 6.35 6.38 6.55 6.75 6.70 - 6.42
Debt securities ................. $ 9,639 7,380 6,186 895 1,006 13,752 38,858 38,858
Average interest rate .......... 6.47 6.51 7.00 8.36 8.26 7.64 7.08
Adjustable rate loans ........... $49,178 14,986 12,950 5,940 8,809 4,486 96,349 96,349
Average interest rate .......... 9.17 9.25 9.37 8.82 9.10 8.67 9.16
Fixed rate loans ................ $ 8,724 8,158 7,365 7,475 6,767 10,791 49,280 48,509
Average interest rate .......... 8.66 9.34 9.48 9.04 9.25 8.88 9.08
Federal funds sold .............. $ 400 0 0 0 0 0 400 400
6.31 - - - - - 6.31
------- ------ ------ ------ ------ ------ ------- -------
Total $80,022 44,283 36,190 14,409 16,681 20,029 220,614 219,843
------- ------ ------ ------ ------ ------ ------- -------
Interest liabilities:
Variable rate savings and
transaction accounts .......... $23,900 0 0 0 0 50,342 74,242 74,242
Average interest rate ........ 2.53 - - - - 1.39 1.76
Certificates of deposit and IRAs 57,865 28,162 10,515 7,517 4,587 9,351 117,997 118,853
Average interest rate ........ 5.40 5.89 6.10 5.91 6.08 6.02 5.69
Short term borrowings .......... $ 2,234 0 0 0 0 0 2,234 2,234
Average interest rate ........ 5.57 - - - - - 5.57
Long term fixed rate borrowings $ 138 1,149 1,60 1,672 2,185 384 5,688 5,494
Average interest rate ........ 7.28 6.19 7.28 6.74 6.18 7.28 6.48
------- ------ ------ ------ ------ ------ ------- -------
Total $84,137 29,311 10,675 9,189 6,772 60,077 200,161 200,823
------- ------ ------ ------ ------ ------ ------- -------
Rate sensitive gap:
Periodic gap ................... $(4,115) 14,973 25,515 5,220 9,909 (31,048)
Cumulative gap ................. $(4,115) 10,857 36,372 41,592 51,501 20,453
Cumulative gap as a percentage
of total assets ................ -1.80% 4.75% 15.90% 18.18% 22.51% 8.94%
* Mid Penn Bank only, Miners Bank of
Lykens information not readily available
</TABLE>
36
<PAGE>
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
On December 31, 1998, management analyzed interest rate risk using the
Vining Sparks Asset-Liability Management Model. Using the computerized model,
management reviews interest rate risk on a monthly basis. This analysis includes
an earnings scenario whereby interest rates are increased by 200 basis points
and another whereby they are decreased by 200 basis points. At December 31,
1998, these scenarios indicate that there would not be a significant variance in
net interest income at the one-year time frame due to interest rate changes;
however, actual results could vary significantly from the calculations prepared
by management. At December 31, 1998, all interest rate risk levels according to
our model were within the tolerance guidelines set by management. The model
noted above utilized by management to create the reports used for Table 12 makes
various assumptions and estimates. Actual results could differ significantly
from these estimates which would result in significant differences in cash
flows. In addition, the table does not take into consideration changes which
management would make to realign its portfolio in the event of a changing rate
environment.
TABLE 13: MATURITY OF TIME DEPOSITS $100,000 OR MORE
(Dollars in thousands) December 31,
1998 1997 1996
---- ---- ----
Three months or less ............. $ 4,933 15,186 4,409
Over three months to twelve months 5,921 4,046 5,778
Over twelve months ............... 5,882 7,486 5,419
------- ------ ------
Total $16,736 26,718 15,606
======= ====== ======
Effects of Inflation
--------------------
A bank's asset and liability structure is substantially different from that
of an industrial company in that virtually all assets and liabilities of a bank
are monetary in nature. Management believes the impact of inflation on its
financial results depends principally upon the Corporation's ability to react to
changes in interest rates and, by such reaction, reduce the inflationary impact
on performance. Interest rates do not necessarily move in the same direction or
at the same magnitude as the prices of other goods and services. As discussed
previously, Management seeks to manage the relationship between interest
sensitive assets and liabilities in order to protect against wide interest rate
fluctuations, including those resulting from inflation.
Information shown elsewhere in this Annual Report will assist in the
understanding of how the Corporation is positioned to react to changing interest
rates and inflationary trends. In particular, the summary of net liabilities,
the composition of loans, investments and deposits should be considered.
Off-Balance-Sheet Items
-----------------------
The Corporation makes contractual commitments to extend credit and extends
lines of credit which are subject to the Corporation's credit approval and
monitoring procedures.
As of December 31, 1998, commitments to extend credit amounted to
$20,697,000 as compared to $21,427,000 as of December 31, 1997.
The Corporation also issues standby letters of credit to its customers. The
risk associated with standby letters of credit is essentially the same as the
credit risk involved in loan extensions to customers. Standby letters of credit
increased to $2,480,000 at December 31, 1998, from $1,323,000 at December 31,
1997.
Year 2000 Compliance: Management Information Systems
----------------------------------------------------
The Board of Directors has established a Year 2000 compliance committee to
address the risks of the critical internal bank systems that are affected by
date sensitive applications, as well as external systems provided by third
parties. A comprehensive Year 2000 Business Action Plan was developed detailing
the sequence of events and actions to be taken as the Year 2000 approaches.
In November 1997, the Company purchased and installed an upgrade to its
current computer systems to improve efficiencies of operations and position
itself for future growth. The cost of the new system was approximately $284,000.
Anticipated additional costs prior to year 2000 are estimated to be $47,000.
Preconversion testing demonstrated that the new hardware and software are Year
2000 compliant. In addition, the Corporation has hired a third-party Year 2000
consultant, BNP, Inc. With the aid of BNP, the Corporation has developed a Year
2000 testing master plan, organization chart and detailed work plan. The testing
plan includes several phases of testing with all mission critical testing having
been completed February 3, 1999.
37
<PAGE>
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
The Corporation's software provider, ITI, has determined to be year 2000
ready. This readiness is being confirmed by internal testing at Mid Penn Bancorp
in accordance with the Year 2000 testing master plan. With both software and
hardware readiness, the Corporation anticipates minimal risk in mission critical
operations. External risks are also being assessed in conjunction with the
Corporation's Year 2000 Business Action Plan.
The Corporation is in the process of developing contingency planning with
the aid of BNP consulting. Further detail concerning our Year 2000 readiness,
and the master testing plan are available by contacting Mid Penn Bancorp.
Comprehensive Income
--------------------
Comprehensive Income is a measure of all changes in equity of a
corporation, excluding transactions with owners in their capacity as owners
(such as proceeds from issuances of stock and dividends). The difference between
Net Income and Comprehensive Income is termed "Other Comprehensive Income." For
the Corporation, Other Comprehensive Income consists of unrealized gains and
losses on available-for-sale securities, net of deferred income tax.
Comprehensive Income should not be construed be a measure of net income. The
effect of Other Comprehensive Income would only be reflected in the income
statement if the entire portfolio of available-for-sale securities were sold on
the statement date. The amount of unrealized gains or losses reflected in
Comprehensive Income may vary widely at statement dates depending on the markets
as a whole and how the portfolio of available-for-sale securities is affected by
interest rate movements. Other Comprehensive Income (Loss) for the periods ended
December 31, 1998, 1997 and 1996 were respectively, 26,000, $150,000 and
($180,000).
38
<PAGE>
Mid Penn Bancorp, Inc.
Summary of Selected Financial Data
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME:
Total Interest Income ....................... $ 20,436 19,312 18,171 16,789 15,343
Total Interest Expense ...................... 9,593 8,853 8,428 7,604 6,535
Net Interest Income ......................... 10,843 10,459 9,743 9,185 8,808
Provision for Possible Loan Losses .......... 254 109 52 6 26
Non-Interest Income ......................... 1,398 1,772 841 734 657
Non-Interest Expense ........................ 6,606 6,232 5,658 5,621 5,563
Income Before Income Taxes .................. 5,381 5,890 4,874 4,292 3,876
Income Tax Expense .......................... 1,516 1,721 1,397 1,171 1,008
Extraordinary Income, Net of Tax ............ 0 0 0 0 0
Net Income .................................. 3,865 4,169 3,477 3,121 2,868
COMMON STOCK DATA PER SHARE:*
Earnings Per Share .......................... 1.34 1.44 1.20 1.08 .99
Cash Dividends Declared ..................... .72 .69 .44 .61 .40
Stockholders' Equity ........................ $ 10.90 10.27 9.48 8.78 8.16
AVERAGE SHARES OUTSTANDING ..................... 2,892,416 2,895,417 2,895,430 2,895,430 2,895,430
AT YEAR-END:
Investments ................................. $ 67,933 53,599 42,740 37,592 39,409
Loans, Net of Unearned Discount ............. 152,993 154,576 155,070 142,322 128,127
Allowance for Loan Losses ................... 2,313 2,281 2,278 2,457 2,614
Total Assets ................................ 277,827 256,728 238,103 221,786 201,472
Total Deposits .............................. 216,802 217,146 199,673 186,472 170,950
Long-term Debt .............................. 15,550 5,688 4,710 3,329 3,439
Stockholders' Equity ........................ $ 31,536 29,730 27,438 25,409 23,621
RATIOS:
Return on Average Assets .................... 1.45 1.71 1.52 1.50 1.43
Return on Average Stockholders' Equity ...... 12.81 14.76 13.37 12.71 12.20
*Cash Dividend Payout Ratio ................. 53.73 47.92 36.67 56.48 40.40
Allowance for Loan Losses to Loans .......... 1.51 1.48 1.47 1.73 2.04
Average Stockholders' Equity to
Average Assets .............................. 11.36 11.56 11.34 11.81 11.76
</TABLE>
* Per share figures are based on weighted average shares outstanding for the
respective years as restated after giving effect to stock dividends and
splits.
39
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Name State of Incorporation
---- ----------------------
Mid Penn Bank Commonwealth of
Pennsylvania
Mid Penn Investment Corp. Delaware
<PAGE>
Exhibit 23
[LETTERHEAD OF PARENTE . RANDOLPH
ORLANDO & CAREY & ASSOCIATES]
CONSENT OF INDEPENDENT AUDITORS
===============================
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Mid Penn Bancorp, Inc. of our report dated January 20, 1999, included
in the 1998 Annual Report to Stockholders of Mid Penn Bancorp, Inc.
/s/ Parente, Randolph, Orlando, Carey & Associates
Wilkes-Barre, Pennsylvania
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,651
<INT-BEARING-DEPOSITS> 42,883
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 67,933
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 152,993
<ALLOWANCE> 2,313
<TOTAL-ASSETS> 227,827
<DEPOSITS> 216,802
<SHORT-TERM> 12,159
<LIABILITIES-OTHER> 1,780
<LONG-TERM> 15,550
0
0
<COMMON> 2,912
<OTHER-SE> 28,624
<TOTAL-LIABILITIES-AND-EQUITY> 277,827
<INTEREST-LOAN> 14,330
<INTEREST-INVEST> 6,061
<INTEREST-OTHER> 45
<INTEREST-TOTAL> 20,436
<INTEREST-DEPOSIT> 8,627
<INTEREST-EXPENSE> 9,593
<INTEREST-INCOME-NET> 10,843
<LOAN-LOSSES> 254
<SECURITIES-GAINS> 13
<EXPENSE-OTHER> 6,606
<INCOME-PRETAX> 5,381
<INCOME-PRE-EXTRAORDINARY> 3,865
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,865
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.34
<YIELD-ACTUAL> 8.33
<LOANS-NON> 376
<LOANS-PAST> 844
<LOANS-TROUBLED> 1,497
<LOANS-PROBLEM> 4,704
<ALLOWANCE-OPEN> 2,281
<CHARGE-OFFS> 317
<RECOVERIES> 95
<ALLOWANCE-CLOSE> 2,313
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
