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 September 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. [ X ] Yes [ ] No Indicate the number of shares outstanding of each of the classes of common stock, as of the latest practical date. 2,755,479 shares of Common Stock, $1.00 par value per share, were outstanding as of September 30, 1998. MID PENN BANCORP, INC. CONSOLIDATED BALANCE SHEETS (Unaudited; Dollars in thousands) Sept. 30, Dec. 31, 1998 1997 -------- -------- ASSETS: Cash and due from banks 4,063 5,998 Interest bearing balances 40,389 36,004 Available-for-sale securities 60,572 39,595 Held-to-maturity securities (FMV: 14,204) 0 14,004 Federal funds sold 1,600 1,000 Loans 157,031 156,519 Less: Unearned discount 2,062 1,943 Allowance for loan losses 2,359 2,281 ------- ------- Net loans 152,610 152,295 ------- ------- Bank premises and equip't, net 3,601 3,453 Other real estate 392 1,355 Accrued interest receivable 1,834 1,886 Other assets 868 1,138 ------- ------- Total Assets 265,929 256,728 ======= ======= LIABILITIES & STOCKHOLDERS EQUITY: Deposits: Demand 22,073 25,057 NOW 26,131 26,663 Money Market 15,514 11,675 Savings 24,663 21,199 Time 126,502 132,552 ------- ------- Total deposits 214,883 217,146 ------- ------- Short-term borrowings 707 2,234 Accrued interest payable 2,059 1,275 Other liabilities 1,216 654 Long-term debt 15,585 5,688 ------- ------- Total Liabilities 234,450 226,997 ------- ------- STOCKHOLDERS' EQUITY: Common stock, par value $1 per share; authorized 10,000,000 shares; issued 2,774,858 shares at Sept. 30, 1998 and December 31, 1997 2,775 2,775 Surplus 14,072 14,072 Undivided profits 14,516 13,105 Unrealized holding gain on securities, net of estimated tax effect 658 318 Less: Treasury Stock at cost (19,379 and 19,056 shares) 542 539 ------- ------- Total Stockholders Equity 31,479 29,731 ------- ------ Total Liabilities & Equity 265,929 256,728 ======= ======= MID PENN BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited; dollars in thousands) Three Months Nine Months Ended Sept 30, Ended Sept 30, 1998 1997 1998 1997 INTEREST INCOME: ----- ----- ----- ----- Interest & fees on loans 3,698 3,507 10,797 10,692 Int.-bearing balances 639 527 1,916 1,430 Treas. & Agency securities 599 546 1,770 1,464 Municipal securities 250 207 715 601 Other securities 18 17 44 58 Fed funds sold and repos 15 16 40 55 ----- ----- ----- ----- Total Int. Income 5,219 4,820 15,282 14,300 ----- ----- ----- ----- INTEREST EXPENSE: Deposits 2,164 2,086 6,525 6,110 Short-term borrowings 27 96 139 206 Long-term borrowings 217 78 546 207 ----- ----- ----- ----- Total Int. Expense 2,408 2,260 7,210 6,523 ----- ----- ----- ----- Net Int. Income 2,811 2,560 8,072 7,777 PROVISION FOR LOAN LOSSES 50 25 104 80 ----- ----- ----- ----- Net Int. Inc. after Prov. 2,761 2,535 7,968 7,697 ----- ----- ----- ----- NON-INTEREST INCOME: Trust Dept 8 12 63 50 Service Chgs. on Deposits 125 81 336 236 Investment sec. gains, net 3 0 11 -2 Gain on sale of loans 42 862 65 926 Other 226 81 640 268 ----- ----- ----- ----- Total Non-Interest Income 404 1,036 1,115 1,478 ----- ----- ----- ----- NON-INTEREST EXPENSE: Salaries and benefits 798 823 2,518 2,387 Occupancy, net 84 82 247 245 Equipment 119 122 375 351 PA Bank Shares tax 69 65 213 196 Other 510 419 1,552 1,228 ----- ----- ----- ----- Tot. Non-int. Exp. 1,580 1,511 4,905 4,407 ----- ----- ----- ----- Income before income taxes 1,585 2,060 4,178 4,768 INCOME TAX EXPENSE 523 636 1,213 1,419 ----- ----- ----- ----- NET INCOME 1,062 1,424 2,965 3,349 ===== ===== ===== ===== Other Comprehensive Income, net of tax: Unrealized holding losses on securities arising during the period 373 122 351 77 Less: reclassification adjustments for gains included in net income 3 0 11 -2 ---- ---- ---- ---- Other comprehensive income 370 122 340 79 ---- ---- ---- ---- Comprehensive Income 1,432 1,546 3,305 3,428 ===== ===== ===== ===== NET INCOME PER SHARE 0.39 0.52 1.07 1.22 ===== ===== ===== ===== Weighted Average No. of Shares Outstanding 2,755,285 2,754,495 2,755,802 2,755,802 MID PENN BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited; Dollars in thousands) For the nine months ended: Sept 30, Sept 30, 1998 1997 -------- -------- Operating Activities: Net Income 2,965 3,349 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 104 75 Depreciation 304 251 Change in interest receivable 52 -255 Change in other assets 270 -137 Change in interest payable 784 767 Change in other liabilities 562 670 Other, net 0 -137 ------- ------- Net cash provided by operating activities: 5,041 4,583 ------- ------- Investing Activities: Net decrease in int-bearing balances -4,385 -5,837 Proceeds from sale of securities 2,150 3,370 Proceeds from the maturity of secs. 19,096 4,433 Purchase of investment securities -27,986 -16,123 Proceeds from the sale of loans 6,132 7,454 Net decrease in loans -6,852 -5,383 Purchase of loans 0 0 Net purchases of fixed assets -452 -71 Proceeds from sale of other real estate 1,368 157 Capitalized additions - ORE 0 0 ------- ------- Net cash provided by investing activities -10,929 -12,000 ------- ------- Financing Activities: Net increase in demand and savings 3,787 -822 Net increase in time deposits -6,050 6,536 Net increase in sh-term borrowings -1,527 2,839 Net increase in long-term borrowings 9,897 11 Cash dividend declared -1,554 -1,449 ------- ------- Net cash provided by financing activities 4,553 7,115 ------- ------- Net increase in cash & equivalents -1,335 -302 Cash & cash equivalents, beg of period 6,998 4,442 ------- ------- Cash & cash equivalents, end of period 5,663 4,140 ======= ======= Supplemental Noncash Disclosures: Loan charge-offs 107 193 Transfers to other real estate 169 433 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 nine months ended September 30, 1998 compared to year end 1997 and the Results of Operations for the third quarter and first nine months of 1998 compared to the same periods in 1997. CONSOLIDATED FINANCIAL CONDITION Total assets as of September 30, 1998, amounted to $265,929,000, an increase of $9,201,000 or 3.6% over the total assets as of December 31, 1997. Mid Penn Bancorp merged with Miners Bank of Lykens, after close of business on July 10, 1998, in a pooling of interests transaction meaning that all financial information will be restated as though the two institutions had always been together. Mid Penn Bancorp is the surviving entity. Miners Bank contributed 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. 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 three quarters 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 quarters of 1998. Even though the Bank experienced some large payoffs in the commercial loan portfolio along with a continued competitive pricing environment, net loans showed a modest increase of $315,000 during the nine-month period. However, this increase is net of the sales of a portion of the Bank's student loan portfolio, which generated proceeds of $6,132,000. Foreclosed assets held for sale decreased to $392,000 during the first nine months of 1998 due to the sale of two residential properties, one commercial property, and several lots of undeveloped land. These sales of other real estate resulted in a net after-tax gain of approximately $138,000. As of September 30, 1998, the balance of foreclosed assets held for sale consisted of undeveloped land including farmland, one single family residence and two commercial properties. Total deposits decreased by $2,263,000 during the first nine months of 1998. This decrease was largely due to the run- off of some short-term jumbo certificates of deposit issued to municipalities prior to year-end 1997. Lower costing demand and savings deposits actually increased by $3,787,000 during the same period largely due to a new money market deposit account offered by the Bank. Short-term borrowings, consisting mainly of overnight borrowings, decreased by $1.5 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 three quarters of 1998 was $2,965,000, compared to $3,349,000 earned in the same period of 1997. Excluding the net gain on the sale of the Bank's credit card portfolio in 1997, earnings for the first nine months of 1998 exceeded the first nine months of 1997 by $187,000 or 6.7%. Net income per share for the nine months ended September 30, 1998 was $1.07, and for the same period of 1997 was $1.22. Net income on an annualized basis at September 30, 1998, as a percent of total average assets, also known as return on assets (ROA) was 1.5% as compared to 2.3% for the same period in 1997. Net income as a percentage of stockholders' equity, also known as return on equity, (ROE), was 13.3% on an annualized basis for the first nine months of 1998 as compared to 15.0% for the same period in 1997. Third quarter net income was $1,062,000, or $.39 per share, in 1998 as compared to $1,424,000, or $.52 per share, during the same period of 1997. Net earnings during the third quarter of 1997 without the sale of the credit card portfolio were $853,000. Excluding this net gain on sale, earnings for the third quarter of 1998 exceeded those of the same quarter of 1997 by $209,000 or 24.9%. Net interest income for the nine month period ended September 30, 1998, was $8,072,000 an increase of $295,000 over the same period of 1997. The net interest margin on average earning assets was 4.5% at September 30, 1998, compared to 4.8% at September 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 $104,000 during the first nine months of 1998 compared to $75,000 made during the same period of 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 amounted to $1,115,000 during the first nine months of 1998 as compared to $1,478,000 earned during the same period of 1997 which included a pre-tax gain of $862,000 on the sale of the Bank's credit card loan portfolio. A major component of 1998 non-interest income came from the gain on several parcels of other real estate which were sold during the first nine months of 1998. The pretax gain on these sales amounted to $291,000. Another significant contribution to non-interest income is NSF fee income. NSF fee income contributed in excess of $236,000 during the first three quarters 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 nine months 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 $86,000 in legal and administrative costs associated with the Bancorp's merger with Miners Bank of Lykens, a one office bank with approximately $28 million in assets at December 31, 1997. Also the Bank incurred $34,000 additionally in the first nine months 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 $82,000 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 nine months of 1998. Another major source of funds came from borrowings from the FHLB. Net long-term borrowings increased by $9,897,000. A new money market deposit account helped generate a net increase in demand and savings deposits of $3,787,000. Proceeds from the sale of student loans and other real estate provided additional funds of $6,132,000 and $1,368,000, respectively. Management decided on the sale of a portion of the student loan portfolio in order to reinvest these funds at a better return elsewhere in the loan portfolio. 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 $6,852,000. Other major uses included a net increase of $4,385,000 in interest bearing balances and a net increase of $6,736,000 in investments, purchased to realize a spread over the cost of corresponding funding. Jumbo certificates of deposit of other banks have been particularly attractive investments in the current falling-interest-rate environment due to a greater time lag in rate movements on these instruments compared to the majority of other investment alternatives. CREDIT RISK AND ALLOWANCE FOR LOAN LOSSES Total non-performing assets were $2,203,000 representing 0.83% of total assets at September 30, 1998, compared to $2,091,000 or 0.81% of total assets at December 31, 1997. Most non-performing assets are supported by collateral value that appears to be adequate at September 30, 1998. The Allowance for Loan Losses at September 30, 1998, was $2,359,000 or 1.52% of loans, net of unearned interest, as compared to $2,281,000 or 1.48% 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. 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 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-part Year-2000 consultant, Steve Carroll, 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 scheduled for completion by December 10, 1998. 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 and testing plans are available by contacting Mid Penn Bancorp. MID PENN BANCORP, INC. Sept. 30, Dec. 31, 1998 1997 -------- -------- Non-Performing Assets: Non-accrual loans 119 312 Past due 90 days or more 287 212 Restructured loans 1,405 212 ------- ------- Total non-performing loans 1,811 736 Other real estate 392 1,355 ------- ------- Total 2,203 2,091 ======= ======= Percentage of total loans outstanding 1.40 1.34 Percentage of total assets 0.83 0.81 Analysis of the Allowance for Loan Losses: Balance beginning of period 2,281 2,278 Loans charged off: Commercial real estate, construction and land development 0 4 Commercial, industrial and agricultural 40 32 Real estate - residential mortgage 40 20 Consumer 27 197 ------- ------- Total loans charged off 107 253 ------- ------- Recoveries of loans previously charged off: Commercial real estate, construction and land development 7 4 Commercial, industrial and agricultural 50 107 Real estate - residential mortgage 0 3 Consumer 24 33 ------- ------- Total recoveries 81 147 ------- ------- Net charge-offs (recoveries) 26 -106 ------- ------- Current period provision for loan losses 104 109 ------- ------- Balance end of period 2,359 2,281 ======= ====== 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 July 10, 1998, with respect to items 2 and 7, the acquisition of Miners Bank of Lykens, which Report was filed with the Commission on July 13, 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: November 12, 1998 Date: November 12, 1998