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 June 30, 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. [ ] Yes [ X ] No Indicate the number of shares outstanding of each of the classes of common stock, as of the latest practical date. 2,607,549 shares of Common Stock, $1.00 par value per share, were outstanding as of June 30, 1998. MID PENN BANCORP, INC. CONSOLIDATED BALANCE SHEETS (Unaudited; Dollars in thousands) June 30, Dec. 31, 1998 1997 -------- -------- ASSETS: Cash and due from banks 4,635 4,409 Interest bearing balances 39,397 35,727 Available-for-sale securities 43,801 39,501 Federal funds sold 0 400 Loans 149,267 145,629 Less: Unearned discount 1,921 1,943 Allowance for loan losses 2,244 2,176 ------- ------- Net loans 145,102 141,510 ------- ------- Bank premises and equip't, net 3,445 3,186 Other real estate 428 1,355 Accrued interest receivable 1,690 1,594 Other assets 990 1,093 ------- ------- Total Assets 239,488 228,775 ======= ======= LIABILITIES & STOCKHOLDERS EQUITY: Deposits: Demand 19,123 19,612 NOW 23,874 23,086 Money Market 15,462 11,675 Savings 18,569 17,454 Time 112,597 120,412 ------- ------- Total deposits 189,625 192,239 ------- ------- Short-term borrowings 4,029 2,234 Accrued interest payable 1,645 1,178 Other liabilities 880 553 Long-term debt 15,620 5,688 ------- ------- Total Liabilities 211,799 201,892 ------- ------- STOCKHOLDERS' EQUITY: Common stock, par value $1 per share; authorized 10,000,000 shares; issued 2,626,608 shares at June 30, 1998 and December 31, 1997 2,627 2,627 Surplus 13,872 13,872 Undivided profits 11,435 10,605 Unrealized holding gain on securities, net of estimated tax effect 288 318 Less: Treasury Stock at cost (19,059 and 19,241 shares) 533 539 ------- ------- Total Stockholders Equity 27,689 26,883 ------- ------ Total Liabilities & Equity 239,488 228,775 ======= ======= MID PENN BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited; dollars in thousands) Three Months Six Months Ended June 30, Ended June 30, 1998 1997 1998 1997 INTEREST INCOME: ----- ----- ----- ----- Interest & fees on loans 3,355 3,419 6,629 6,694 Int.-bearing balances 626 453 1,217 897 Treas. & Agency securities 407 261 773 486 Municipal securities 226 186 446 371 Other securities 12 19 23 32 Fed funds sold and repos 9 9 9 9 ----- ----- ----- ----- Total Int. Income 4,635 4,347 9,097 8,489 ----- ----- ----- ----- INTEREST EXPENSE: Deposits 1,952 1,798 3,898 3,577 Short-term borrowings 26 41 112 110 Long-term borrowings 213 79 329 129 ----- ----- ----- ----- Total Int. Expense 2,191 1,918 4,339 3,816 ----- ----- ----- ----- Net Int. Income 2,444 2,429 4,758 4,673 PROVISION FOR LOAN LOSSES 25 25 50 50 ----- ----- ----- ----- Net Int. Inc. after Prov. 2,419 2,404 4,708 4,623 ----- ----- ----- ----- NON-INTEREST INCOME: Trust Dept 47 34 55 38 Service Chgs. on Deposits 107 73 202 143 Investment sec. gains, net 2 0 2 -1 Gain on sale of loans 23 64 23 64 Other 100 80 399 175 ----- ----- ----- ----- Total Non-Interest Income 279 251 681 419 ----- ----- ----- ----- NON-INTEREST EXPENSE: Salaries and benefits 753 666 1,457 1,305 Occupancy, net 76 75 151 149 Equipment 112 92 215 179 PA Bank Shares tax 60 60 134 121 Other 459 390 904 689 ----- ----- ----- ----- Tot. Non-int. Exp. 1,460 1,283 2,861 2,443 ----- ----- ----- ----- Income before income taxes 1,238 1,372 2,528 2,599 INCOME TAX EXPENSE 341 410 708 764 ----- ----- ----- ----- NET INCOME 897 962 1,820 1,835 ===== ===== ===== ===== Other Comprehensive Income, net of tax: Unrealized holding losses on securities arising during the period 9 174 -28 -44 Less: reclassification adjustments for gains included in net income 2 0 2 -1 ---- ---- ---- ---- Other comprehensive income 7 174 -30 -43 ---- ---- ---- ---- Comprehensive Income 904 1,136 1,790 1,792 ===== ===== ===== ===== NET INCOME PER SHARE 0.34 0.37 .70 .70 ===== ===== ===== ===== Weighted Average No. of Shares Outstanding 2,605,552 2,605,843 2,607,552 2,607,552 MID PENN BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited; Dollars in thousands) For the six months ended: June 30, June 30, 1998 1997 -------- -------- Operating Activities: Net Income 1,820 1,835 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 50 50 Depreciation 177 166 Change in interest receivable -96 -69 Change in other assets 103 -179 Change in interest payable 467 420 Change in other liabilities 327 209 Other, net 0 0 ------- ------- Net cash provided by operating activities: 2,848 2,432 ------- ------- Investing Activities: Net decrease in int-bearing balances -3,670 -2,271 Proceeds from sale of securities 0 3,267 Proceeds from the maturity of secs. 4,953 2,926 Purchase of investment securities -9,327 -10,003 Proceeds from the sale of loans 1,574 2,338 Net decrease in loans -5,402 -1,984 Net purchases of fixed assets -436 -55 Proceeds from sale of other real estate 1,163 153 Capitalized additions - ORE 0 0 ------- ------- Net cash provided by investing activities -11,145 -5,629 ------- ------- Financing Activities: Net increase in demand and savings 5,201 551 Net increase in time deposits -7,815 -1,458 Net increase in sh-term borrowings 1,795 5,523 Net increase in long-term borrowings 9,932 44 Cash dividend declared -990 -955 ------- ------- Net cash provided by financing activities 8,123 3,705 ------- ------- Net increase in cash & equivalents -174 508 Cash & cash equivalents, beg of period 4,809 4,442 ------- ------- Cash & cash equivalents, end of period 4,635 4,950 ======= ======= Supplemental Noncash Disclosures: Loan charge-offs 27 138 Transfers to other real estate 0 326 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 six months ended June 30, 1998 compared to year end 1997 and the Results of Operations for the second quarter and first half of 1998 compared to the same periods in 1997. CONSOLIDATED FINANCIAL CONDITION Total assets as of June 30, 1998, amounted to $239,488,000, an increase of $9,886,000 or 4.9% over 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 first half 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 half 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 $3 million during the six-month period. Foreclosed assets held for sale decreased to $428,000 during the first half 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 $137,000. As of June 30, 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 $2,614,000 during the first half 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 $5,201,000 during the first half largely due to a new money market deposit account offered by the Bank. Short-term borrowings, consisting of overnight borrowings, increased by $1.8 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 half of 1998 was $1,820,000, compared to $1,835,000 earned in the same period of 1997. Net income per share for both the six months ended June 30, 1998 and the same period of 1997 was $.70. Net income on an annualized basis at June 30, 1998, as a percent of total average assets, also known as return on assets (ROA) was 1.5% as compared to 1.8% 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 half of 1998 as compared to 14.9% for the same period in 1997. Second quarter net income was $897,000, or $.34 per share, in 1998 as compared to $962,000, or $.37 per share, during the same period of 1997. Net interest income for the six month period ended June 30, 1998, was $4,758,000 an increase of $85,000 over the same period of 1997. The net interest margin on average earning assets was 4.5% at June 30, 1998, compared to 4.9% at June 30, 1997 as margins continued to be challenged by strong rate competition for loans. A significant contribution to the increase in net interest income was an 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 $50,000 during the first half 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 during the present period of economic strength. 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 $681,000 for the first half of 1998 as compared to $419,000 earned during the same period 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 half of 1998. The pretax gain on these sales amounted to $207,000. Another significant contribution to non-interest income is NSF fee income. NSF fee income contributed in excess of $143,000 during the first half 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 half of 1998 increased significantly over the same period of 1997 due to several factors. The Corporation spent $35,000 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 $71,000 in legal and administrative costs associated with the Bancorp's upcoming merger with Miners Bank of Lykens, a one office bank with approximately $28 million in assets at December 31, 1997. Also the Bank incurred $31,000 additionally in the first half of 1998 on losses 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 $25,000 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 of 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 six months of 1998. Another major source of funds came from borrowings from the FHLB. Net short-term borrowings increased by $1,795,000, and long-term borrowings by $9,932,000. A new money market deposit account helped generate a net increase in demand and savings deposits of $5,201,000. Proceeds from the sale of student loans and other real estate provided additional funds of $1,574,000 and $1,163,000, respectively. The major uses of funds during the period included a net decrease in time deposits -- largely high-cost short-term jumbo certificates of deposit. Commercial loan demand, particularly in the area of commercial real estate, led to the net use of funds for loans of $5,402,000. Other major uses included a net increase of $3,670,000 in interest bearing balances and a net increase of $4,374,000 in investments, purchased to realize a spread over the cost of corresponding funding. CREDIT RISK AND ALLOWANCE FOR LOAN LOSSES Total non-performing assets were $2,095,000 representing 0.87% of total assets at June 30, 1998, compared to $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 June 30, 1998. The Allowance for Loan Losses at June 30, 1998, was $2,224,000 or 1.51% of loans, net of unearned interest, as compared to $2,176,000 also 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. MERGER WITH MINERS BANK OF LYKENS Mid Penn Bancorp will be merging with Miners Bank of Lykens, in a pooling of interests transaction, after close of business on July 10, 1998. Mid Penn Bancorp will be the surviving entity. Miners Bank will be contributing approximately $27,900,000 in total assets, $24,900,000 in deposits and $2,848,000 in capital to the corporation. Miners Bank of Lykens earned $37,000 in net income for the year 1998 through the date of the merger. MID PENN BANCORP, INC. June 30, Dec. 31, 1998 1997 -------- -------- Non-Performing Assets: Non-accrual loans 489 312 Past due 90 days or more 273 207 Restructured loans 905 212 ------- ------- Total non-performing loans 1,667 731 Other real estate 428 1,355 ------- ------- Total 2,095 2,086 ======= ======= Percentage of total loans outstanding 1.40 1.43 Percentage of total assets 0.87 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 8 12 Consumer 19 194 ------- ------- Total loans charged off 27 242 ------- ------- Recoveries of loans previously charged off: Commercial real estate, construction and land development 7 4 Commercial, industrial and agricultural 25 107 Real estate - residential mortgage 0 3 Consumer 13 31 ------- ------- Total recoveries 45 145 ------- ------- Net charge-offs (recoveries) 18 -97 ------- ------- Current period provision for loan losses 50 100 ------- ------- Balance end of period 2,244 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 - - At the Annual Meeting of Shareholders held on April 28, 1998, a vote was held for the election of Class C directors: Earl R. Etzweiler and William G. Nelson to serve for a three-year term, and to ratify the selection of Parente, Randolph, Orlando, Carey and Associates as external auditors for the corporation for the year ending December 31, 1998. Earl R. Etzweiler received 2,253,534 votes for and 6,251 votes withheld. William G. Nelson received 2,259,785 votes for and zero votes withheld. The selection of external auditors received 2,253,459 votes for, 4158 votes against, and 2167 votes abstaining. 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 - None 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: July 27, 1998 Date: July 27, 1998