UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 Commission file number 0-20141 Mid Penn Bancorp, Inc. (Exact name of registrant as specified in its charter) Pennsylvania 25-1666413 (State or other jurisdiction of (IRS Employer ID No) Incorporation or Organization) 349 Union Street, Millersburg, PA 17061 (Address of principal executive offices) (Zip Code) (717) 692-2133 (Registrant's telephone number, including area code) 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. [ X ] Yes [ ] No Indicate the number of shares outstanding of each of the classes of common stock, as of the latest practical date. 2,607,289 shares of Common Stock, $1.00 par value per share, were outstanding as of March 31, 1998. MID PENN BANCORP, INC. CONSOLIDATED BALANCE SHEETS (Unaudited; Dollars in thousands) March 31, Dec. 31, 1998 1997 -------- -------- ASSETS: Cash and due from banks 3,946 4,409 Interest bearing balances 40,786 35,727 Available-for-sale securities 42,331 39,501 Federal funds sold 0 400 Loans 147,706 145,629 Less: Unearned discount 1,916 1,943 Allowance for loan losses 2,220 2,176 ------- ------- Net loans 143,570 141,510 ------- ------- Bank premises and equip't, net 3,504 3,186 Other real estate 462 1,355 Accrued interest receivable 1,648 1,594 Other assets 951 1,093 ------- ------- Total Assets 237,198 228,775 ======= ======= LIABILITIES & STOCKHOLDERS EQUITY: Deposits: Demand 18,341 19,612 NOW 23,646 23,086 Money Market 13,817 11,675 Savings 17,905 17,454 Time 117,296 120,412 ------- ------- Total deposits 191,005 192,239 ------- ------- Short-term borrowings 5,686 2,234 Accrued interest payable 1,455 1,178 Other liabilities 1,126 553 Long-term debt 10,654 5,688 ------- ------- Total Liabilities 209,926 201,892 ------- ------- STOCKHOLDERS' EQUITY: Common stock, par value $1 per share; authorized 10,000,000 shares; issued 2,626,608 shares at March 31, 1998 and December 31, 1997 2,627 2,627 Surplus 13,872 13,872 Undivided profits 11,033 10,605 Unrealized holding gain on securities, net of estimated tax effect 281 318 Less: Treasury Stock at cost (19,319 and 19,241 shs., resp.) 541 539 ------- ------- Total Stockholders Equity 27,272 26,883 ------- ------ Total Liabilities & Equity 237,198 228,775 ======= ======= MID PENN BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited; dollars in thousands) Three Months Ended March 31, 1998 1997 INTEREST INCOME: ----- ----- Interest & fees on loans 3,274 3,275 Int.-bearing balances 591 444 Treas. & Agency securities 366 225 Municipal securities 220 185 Other securities 11 13 Fed funds sold and repos 0 0 ----- ----- Total Int. Income 4,462 4,142 ----- ----- INTEREST EXPENSE: Deposits 1,946 1,779 Short-term borrowings 86 39 Long-term borrowings 116 80 ----- ----- Total Int. Expense 2,148 1,898 ----- ----- Net Int. Income 2,314 2,244 PROVISION FOR LOAN LOSSES 25 25 ----- ----- Net Int. Inc. after Prov. 2,289 2,219 ----- ----- NON-INTEREST INCOME: Trust Dept 8 4 Service Chgs. on Deposits 95 70 Investment sec. gains, net 0 -1 Other 299 95 ----- ----- Total Non-Interest Income 402 168 ----- ----- NON-INTEREST EXPENSE: Salaries and benefits 704 639 Occupancy, net 75 74 Equipment 103 87 PA Bank Shares tax 74 61 Other 445 299 ----- ----- Tot. Non-int. Exp. 1,401 1,160 ----- ----- Income before income taxes 1,290 1,227 INCOME TAX EXPENSE 367 354 ----- ----- NET INCOME 923 873 ===== ===== Other Comprehensive Income, net of tax: Unrealized holding losses on securities arising during the period -37 -217 Less: reclassification adjustments for gains included in net income 0 0 ----- ----- Other comprehensive income -37 -217 ----- ----- Comprehensive Income 886 656 ===== ===== NET INCOME PER SHARE 0.35 0.33 ===== ===== Weighted Average No. of Shares Outstanding 2,606,138 2,608,143 MID PENN BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited; Dollars in thousands) For the three months ended: March 31, March 31, 1998 1997 -------- -------- Operating Activities: Net Income 923 873 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 25 25 Depreciation 83 83 Loss (gain) on sale of investment securities 0 -1 Loss (gain) on sale/disposal of bank premises and equipment 0 0 Loss (gain) on the sale of foreclosed assets -209 0 Change in interest receivable -54 -67 Change in other assets 142 -443 Change in interest payable 277 326 Change in other liabilities 573 561 Other, net 0 0 ------- ------- Net cash provided by operating activities: 1,760 1,357 ------- ------- Investing Activities: Net decrease in int-bearing balances -5,059 1,161 Proceeds from sale of securities 2,460 2,166 Proceeds from the maturity of secs. 0 3,267 Purchase of investment securities -5,355 -4,757 Net decrease in loans -2,085 -305 Net purchases of fixed assets -401 -16 Proceeds from sale of other real estate 1,128 36 Capitalized additions - ORE 0 0 ------- ------- Net cash provided by investing activities -9,312 1,552 ------- ------- Financing Activities: Net increase in demand and savings 1,882 -325 Net increase in time deposits -3,116 -184 Net increase in sh-term borrowings 3,452 -3,772 Net increase in long-term borrowings 4,966 2,076 Cash dividend declared -495 -472 ------- ------- Net cash provided by financing activities .6,689 -2,677 ------- ------- Net increase in cash & equivalents -863 232 Cash & cash equivalents, beg of period 4,809 4,442 ------- ------- Cash & cash equivalents, end of period 3,946 4,674 ======= ======= Supplemental Noncash Disclosures: Loan charge-offs 5 46 Transfers to other real estate 0 0 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements 1. The consolidated interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission with respect to Form 10-Q. The financial information included herein reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made herein are adequate to make the information not misleading. It is suggested that these interim financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's most recent Form 10-K. 2. Interim statements are subject to possible adjustments in connection with the annual audit of the Company's accounts for the full fiscal year. In the Company's opinion, all adjustments necessary in order to make the interim financial statements not misleading have been included. 3. The results of operations for the interim periods presented are not necessarily indicative of the results expected for the full year. 4. Management considers the Allowance for Loan Losses to be adequate at this time. Mid Penn Bancorp, Inc. Millersburg, Pennsylvania Management's Discussion of Consolidated Financial Condition for the three months ended March 31, 1998, compared to year- end 1997 and the Results of Operations for the first quarter of 1998 compared to the same period in 1997. CONSOLIDATED FINANCIAL CONDITION Total assets as of March 31, 1998, amounted to $237,198,000, an increase of $8,423,000 or 3.7% from the total assets as of December 31, 1997. During the first quarter of 1998, insured jumbo certificates of deposit of other institutions, interest bearing balances, were yielding a higher return than other comparable investments. Management took this opportunity to increase the Bank's investment in interest bearing balances by approximately $5 million. These balances were funded with a 10 year/1 year convertible FHLB borrowing securing a positive spread. Available for sale securities were also increased during the quarter in response to favorable return opportunities on certain agency and municipal bonds. Loan demand, particularly in the area of commercial real estate, showed some renewed strength during the first three months of 1998. Even though the Bank experienced some large payoffs in the commercial loan portfolio along with a continued competitive pricing environment, net loans increased by more than $2 million during the quarter with additional funding activity to carry over into the second quarter. Foreclosed assets held for sale decreased to $462,000 during the first quarter of 1998 due to the sale of one residential property, one commercial property, and several lots of undeveloped land. These sales of other real estate resulted in an after-tax gain of approximately $127,000. As of March 31, 1998, the balance of foreclosed assets held for sale consisted of undeveloped land including farmland, one single-family residence and one commercial property. Total deposits decreased by $1,234,000 during the first three months of 1998. This decrease was largely due to the run-off of some short-term jumbo certificates of deposit issued to municipalities. Lower costing demand and savings deposits actually increased by $1,882,000 during the quarter. Short-term borrowings, consisting of overnight borrowings, increased by $3.5 million from year end. All components of long-term debt are advances from the FHLB. Long-term debt advances were initiated in order to secure an adequate spread on certain pools of loans and investments of the Bank. RESULTS OF OPERATION Net income for the first quarter of 1998 was $923,000, compared with $873,000 earned in the same quarter of 1997. Net income per share for the first quarter ended March 31, 1998, increased to $.35 from $.33 earned in the same period of 1997. Net income on an annualized basis at March 31, 1998, as a percent of total average assets, also known as return on assets (ROA) was 1.6% as compared to 1.7% for the same period in 1997. Net income as a percentage of stockholders' equity, also known as return on equity, (ROE), was 13.6% on an annualized basis for the first quarter of 1998 as compared to 14.1% for the same period in 1997. A principal reason for the increase in net income was an increase in net interest income. Net interest income was $2,314,000 for the quarter ended March 31, 1998, an increase of $70,000 over the same period of 1997. The net interest margin on average earning assets was 4.4% at March 31, 1998, compared to 4.7% at March 31, 1997 as margins continued to be challenged by strong rate competition for loans. A significant contribution to the increase in net interest income was the increase in volume in earning assets as the corporation poises to use increased leverage, in light of a very strong equity position, to increase earnings The Bank made a provision for loan losses of $25,000 during the first quarters of 1998 and 1997. 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 this allocation now during stronger economic times. On a quarterly basis, senior management reviews potentially unsound loans taking into consideration judgments regarding risk or error, economic conditions, trends and other factors. Non-interest income increased to $402,000 for the first quarter of 1998 over $168,000 earned during the same quarter of 1997. The major increase in non-interest income came from the gain on several parcels of other real estate which were sold during the first quarter of 1998. The pretax gain on these sales amounted to $192,000. Another significant contribution to non-interest income is insufficient fund (NSF) fee income. NSF fee income contributed in excess of $54,000 during the first quarter of 1998. The Corporation has also implemented service charges for non-customer usage of Mid Penn Bank owned cash machines. Expected income from ATM service charging should yield in excess of $60,000 by year end. Non-interest expense during the first quarter of 1998 increased significantly over the same period of 1997 due to several factors. The Corporation spent 24,000 additional dollars in 1998 on advertising. The additional advertising was used to promote the Bank's free business checking account and the Bank's IRA program in light of the new IRA options including Roth and educational IRAs. The additional advertising was also spurred by the bank merger activity in our market area which created opportunities for attracting new customers who were unhappy with their former banks' mergers. The Corporation also incurred $18,000 in legal and administrative costs associated with the Bancorp's proposed merger with Miners Bank of Lykens, a one office bank with approximately $28 million in assets at December 31, 1997. Also the Bank incurred $17,000 additionally in the first quarter of 1998 on losses, including both realized and unrealized, on the residential mortgages sold to FNMA. These losses are offset by both up-front origination fees and ongoing servicing fees associated with these loans. Additionally, the Corporation incurred $20,000 in costs associated with the property held for sale as other real estate, and in excess of $15,000 in finder's fees for the hire additional Bank management talent. LIQUIDITY The Bank's objective is to maintain adequate liquidity while minimizing interest rate risk. Adequate liquidity provides resources for credit needs of borrowers, for depositor withdrawals, and for funding Corporate operations. Sources of liquidity include maturing investment securities, overnight borrowings of federal funds (and Flex Line), payments received on loans, and increases in deposit liabilities. Funds generated from operations contributed a major source of funds for the first quarter of 1998. The major source of funds came from borrowings from the FHLB. Net short-term borrowings increased by $3,452,000, and long-term borrowings by $4,966,000. Proceeds of the sale of other real estate provided an additional $1,128,000. The major use of funds during the period was a net increase of $5,059,000 in interest bearing balances and a net increase of $2,895,000 in investments purchased to realize a spread over the cost of corresponding funding. Another major use of funds is the $2,085,000 increase net loans. CREDIT RISK AND ALLOWANCE FOR LOAN LOSSES Total non-performing assets decreased to $1,791,000 representing 0.76% of total assets at March 31, 1998, from $2,086,000 or 0.91% of total assets at December 31, 1997. Most non-performing assets are supported by collateral value that appears to be adequate at March 31, 1998. The Allowance for Loan Losses at March 31, 1998, was $2,220,000 or 1.52% of loans, net of unearned interest, as compared to $2,176,000 or 1.51% of loans, net of unearned interest, at December 31, 1997. Based upon the ongoing analysis of the Bank's loan portfolio by the loan review department, the latest quarterly analysis of potentially unsound loans and non-performing assets, Management considers the Allowance for Loan Losses to be adequate to absorb any reasonable, foreseeable loan losses. MID PENN BANCORP, INC. March 31, Dec. 31, 1998 1997 -------- -------- Non-Performing Assets: Non-accrual loans 358 312 Past due 90 days or more 385 207 Restructured loans 586 212 ------- ------- Total non-performing loans 1,329 731 Other real estate 462 1,355 ------- ------- Total 1,791 2,086 ======= ======= Percentage of total loans outstanding 1.23 1.43 Percentage of total assets 0.76 0.91 Analysis of the Allowance for Loan Losses: Balance beginning of period 2,176 2,173 Loans charged off: Commercial real estate, construction and land development 0 4 Commercial, industrial and agricultural 0 32 Real estate - residential mortgage 0 12 Consumer 5 194 ------- ------- Total loans charged off 5 242 ------- ------- Recoveries of loans previously charged off: Commercial real estate, construction and land development 6 4 Commercial, industrial and agricultural 9 107 Real estate - residential mortgage 0 3 Consumer 9 31 ------- ------- Total recoveries 24 145 ------- ------- Net (charge-offs) recoveries 19 (97) ------- ------- Current period provision for loan losses 25 100 ------- ------- Balance end of period 2,220 2,176 ======= ====== Mid Penn Bancorp, Inc. PART II - OTHER INFORMATION: Item 1. Legal Proceedings - Nothing to report Item 2. Changes in Securities - Nothing to report Item 3. Defaults Upon Senior Securities - Nothing to report Item 4. Submission of Matters to a Vote of Security Holders - -Nothing to report Item 5. Other Information - Nothing to report Item 6. Exhibits and Reports on Form 8-K a. Exhibits - (27) Financial Data Schedule b. Reports on Form 8-K - The Corporation filed a Current Report on Form 8-K dated January, 9, 1998, with respect to the proposed acquisition of Miners Bank of Lykens, which Report was filed with the Commission on January 16, 1998. Pursuant to the requirements 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 /s/ Eugene F. Shaffer /s/ Kevin W. Laudenslager By:Eugene F. Shaffer By:Kevin W. Laudenslager Chairman, Pres. & CEO Treasurer Date: April 12, 1998 Date: April 12, 1998