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, 1999 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. 2,893,203 shares of Common Stock, $1.00 par value per share, were outstanding as of June 30, 1999. MID PENN BANCORP, INC. CONSOLIDATED BALANCE SHEETS (Unaudited; Dollars in thousands) June 30, Dec. 31, 1999 1998 -------- -------- ASSETS: Cash and due from banks 5,768 5,651 Interest bearing balances 40,913 42,883 Available-for-sale securities 66,239 67,933 Federal funds sold 0 0 Loans 155,083 152,993 Less: Allowance for loan losses 2,439 2,313 ------- ------- Net loans 152,644 150,680 ------- ------- Bank premises and equip't, net 3,362 3,498 Other real estate 53 347 Accrued interest receivable 2,180 1,907 Cash surrender value of life insurance 3,993 3,900 Other assets 1,775 1,028 ------- ------- Total Assets 276,927 277,827 ======= ======= LIABILITIES & STOCKHOLDERS EQUITY: Deposits: Demand 21,815 20,971 NOW 26,994 28,234 Money Market 20,684 17,158 Savings 26,802 25,305 Time 124,935 125,134 ------- ------- Total deposits 221,230 216,802 ------- ------- Short-term borrowings 11,082 12,159 Accrued interest payable 1,711 1,240 Other liabilities 1,031 540 Long-term debt 15,477 15,550 ------- ------- Total Liabilities 250,531 246,291 ------- ------- STOCKHOLDERS' EQUITY: Common stock, par value $1 per share; authorized 10,000,000 shares; issued 2,912,267 shares at June 30, 1999 and December 31, 1998 2,912 2,912 Surplus 17,181 17,181 Undivided profits 8,097 11,640 Unrealized holding gain on securities, net of estimated tax effect -1,261 344 Less: Treasury Stock at cost (19,059 and 19,241 shares) 533 541 ------- ------- Total Stockholders Equity 26,396 31,536 ------- ------ Total Liabilities & Equity 276,927 277,827 ======= ======= MID PENN BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited; dollars in thousands) Three Months Six Months Ended June 30, Ended June 30, 1999 1998 1999 1998 INTEREST INCOME: ----- ----- ----- ----- Interest & fees on loans 3,341 3,591 6,688 7,099 Int.-bearing balances 622 662 1,255 1,277 Treas. & Agency securities 618 602 1,243 1,171 Municipal securities 330 236 654 465 Other securities 35 14 64 26 Fed funds sold and repos 0 17 0 25 ----- ----- ----- ----- Total Int. Income 4,946 5,122 9,904 10,063 ----- ----- ----- ----- INTEREST EXPENSE: Deposits 2,083 2,185 4,194 4,361 Short-term borrowings 63 26 143 112 Long-term borrowings 223 213 435 329 ----- ----- ----- ----- Total Int. Expense 2,369 2,424 4,772 4,802 ----- ----- ----- ----- Net Int. Income 2,577 2,698 5,132 5,261 PROVISION FOR LOAN LOSSES 75 25 150 54 ----- ----- ----- ----- Net Int. Inc. after Prov. 2,502 2,673 4,982 5,207 ----- ----- ----- ----- NON-INTEREST INCOME: Trust Dept 55 47 73 55 Service Chgs. on Deposits 119 111 244 211 Investment sec. gains, net 0 3 50 8 Gain on sale of loans 0 23 0 23 Other 397 106 658 414 ----- ----- ----- ----- Total Non-Interest Income 571 290 1,025 711 ----- ----- ----- ----- NON-INTEREST EXPENSE: Salaries and benefits 960 883 1,939 1,720 Occupancy, net 78 81 167 163 Equipment 115 133 230 256 PA Bank Shares tax 69 65 138 144 Other 553 517 956 1,042 ----- ----- ----- ----- Tot. Non-int. Exp. 1,775 1,679 3,430 3,325 ----- ----- ----- ----- Income before income taxes 1,298 1,284 2,577 2,593 INCOME TAX EXPENSE 326 344 653 712 ----- ----- ----- ----- NET INCOME 972 940 1,924 1,881 ===== ===== ===== ===== Other Comprehensive Income, net of tax: Unrealized holding losses on securities arising during the period -1,122 7 -1,605 -30 Less: reclassification adjustments for gains included in net income 0 3 50 8 ---- ---- ---- ---- Other comprehensive income -1,122 4 -1,655 -38 ---- ---- ---- ---- Comprehensive Income -150 944 269 1,843 ===== ===== ===== ===== NET INCOME PER SHARE 0.34 0.33 .66 .65 ===== ===== ===== ===== Weighted Average No. of Shares Outstanding 2,894,672 2,893,963 2,891,492 2,891,798 MID PENN BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited; Dollars in thousands) For the six months ended: June 30, June 30, 1999 1998 -------- -------- Operating Activities: Net Income 1,924 1,881 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 150 54 Depreciation 201 196 Change in interest receivable -273 -69 Change in other assets -130 118 Change in interest payable 471 463 Change in other liabilities 491 271 Other, net 0 0 ------- ------- Net cash provided by operating activities: 2,834 2,914 ------- ------- Investing Activities: Net decrease in int-bearing balances 1,970 -6,274 Proceeds from sale of securities 3,811 0 Proceeds from the maturity of secs. 4,773 7,933 Purchase of investment securities -9,160 -9,327 Proceeds from the sale of loans 0 1,574 Net decrease in loans -2,324 -5,847 Net purchases of fixed assets -65 -459 Proceeds from sale of other real estate 504 1,163 Capitalized additions - ORE 0 0 ------- ------- Net cash provided by investing activities -491 -11,237 ------- ------- Financing Activities: Net increase in demand and savings 4,627 4,285 Net increase in time deposits -199 -6,935 Net increase in sh-term borrowings -1,077 1,795 Net increase in long-term borrowings -73 9,932 Cash dividend declared -5,504 -990 ------- ------- Net cash provided by financing activities -2,226 8,087 ------- ------- Net increase in cash & equivalents 117 -236 Cash & cash equivalents, beg of period 5,651 6,998 ------- ------- Cash & cash equivalents, end of period 5,768 6,762 ======= ======= Supplemental Noncash Disclosures: Loan charge-offs 99 51 Transfers to other real estate 0 0 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements 1. The consolidated interim financial statements included here have been prepared by the Company, without audit, according to the rules and regulations of the Securities and Exchange Commission with respect to Form 10-Q. The financial information included here reflects all adjustments (consisting only of normal recurring adjustments) which are, in our opinion, necessary for a fair statement of results for the periods covered. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted according to these rules and regulations. We believe, however, that the disclosures made here are adequate so that the information is not misleading. You should read these interim financial statements along with the financial statements including the notes 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 our opinion, all necessary adjustments have been included so that the interim financial statements are not misleading. 3. The results of operations for the interim periods presented are not necessarily an indicator 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, 1999, compared to year- end 1998 and the Results of Operations for the second quarter and first half of 1999 compared to the same periods in 1998. CONSOLIDATED FINANCIAL CONDITION Total assets as of June 30, 1999, amounted to $276,927,000, compared to $277,827,000 the total assets as of December 31, 1998. Our entire portfolio of investment securities is considered available for sale as of June 30, 1999. As such, the investments are recorded on our Balance Sheet at market value. Our investments: US Treasury, Agency and Municipal securities are given a market price relative to investments of the same type with similar maturity dates. Since the interest rate environment of these securities has increased by as much as 1.80 percentage points in the past nine months, our existing securities are valued lower in comparison. This difference in value, or unrealized loss, amounted to $1,261,000, net of tax, as of the end of the quarter. However, the investments are all high quality United States and municipal securities that if held to maturity are expected to yield no loss to the bank. Loans remained fairly flat during the first half due to some large payoffs in the commercial loan portfolio along with a continued competitive pricing environment Foreclosed assets held for sale (real estate owned by the Corporation resulting from loan transactions) decreased to $294,000 during the first half of 1999 due to the sale of a commercial property and several lots of undeveloped land. These sales of other real estate resulted in an after-tax gain of approximately $215,000. As of June 30, 1999, the balance of foreclosed assets held for sale consisted exclusively of undeveloped land. Total deposits increased by $4,428,000 during the first six months of 1999. This increase was seen mainly in our money market deposit and savings accounts. 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. During the first quarter of 1999 our Board of Directors declared a special cash dividend of $1.50 per share. This special dividend is not expected to affect future regular dividends. The special dividend was declared to reduce the capital levels of Mid Penn Bancorp, Inc., increase return on equity (ROE), and enhance shareholder value. We have enjoyed a very solid capital position due to strong financial performance. After payment of this special dividend, Mid Penn will maintain capital levels well above regulatory requirements. In the banking industry, there has been a general shift from return on assets (ROA) to ROE as a measure of financial performance. By lowering capital through this special dividend, we will be improving ROE, thus improving this ratio important to bank stock analysis. We have also modified our employee performance incentives to encourage activities that will emphasize earnings per share and return on equity instead of our traditional return on assets approach. We believe over time this change in emphasis will improve performance measures that investors utilize. RESULTS OF OPERATION Net income for the first half of 1999 was $1,924,000, compared with $1,881,000 earned in the same period of 1998. Net income per share for the first half of 1999 and 1998 was $.66 and $.65, respectively. . Net income as a percentage of stockholders' equity, also known as return on equity,(ROE), was 14.5% on an annualized basis for the first half of 1999 as compared to 12.0% for the same period in 1998. Second quarter net income was $972,000 or $.34 per share, in 1999 as compared to $940,000, or $.33 per share, during the same period of 1998. Net interest income of $5,132,000 for the period ended June 30, 1999, decreased 2.5% from the $5,261,000 earned in the same period of 1998. Margins continued to be challenged by strong rate competition for loans. The Bank made a provision for loan losses of $150,000 and $54,000 during the first half of 1999 and 1998, respectively. 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 $571,000 for the second quarter of 1999 over $290,000 earned during the same period of 1998. Gains resulting from the sale of other real estate amounted to $325,000 during the first half of 1999 in comparison to the $207,000 earned during the same period of 1998. A significant contribution to non-interest income is insufficient fund (NSF) fee income. NSF fee income contributed in excess of $180,000 during the first half of 1999 Non-interest expense has remained fairly constant at $3,430,000 for the first six months of 1999 compared to $3,325,000 for the same period of 1998. We do anticipate higher non-interest expense in the upcoming quarters as we update our technology so as to be able to provide internet banking services to our customers by yearend or the beginning of next year. We have also hired a business development officer for our trust department in order to increase our market penetration and fee income potential in the areas of asset management and trust services. 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 half of 1999. The major source of funds came from the increase in demand and savings deposits, mainly the $3,526,000 increase in money market deposit accounts. Other major sources of funds included the $1,970,000 net decrease in investment certificates of deposit, and the proceeds of the sale of other real estate of $504,000. The major use of funds during the period was a net increase in loans of $2,324,000. The other major use of funds was for the payment of the first two quarter regular dividends and the February special dividend of $1.50 per share, having a combined total of $5,504,000. CREDIT RISK AND ALLOWANCE FOR LOAN LOSSES Total non-performing assets increased to $3,373,000 representing 1.22% of total assets at June 30, 1999, from $3,064,000 or 1.10% of total assets at December 31, 1998. Included in the past-due category is a commercial loan of which we are a participant with another bank with our outstanding principal balance exceeding $500,000 as of June 30, 1999. This loan was paid to us in full subsequent to the end of the quarter. Most non-performing assets are supported by collateral value that appears to be adequate at June 30, 1999. The Allowance for Loan Losses at June 30, 1999, was $2,439,000 or 1.57% of loans, net of unearned interest, as compared to $2,313,000 or 1.51% of loans, net of unearned interest, at December 31, 1998. 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, we consider the Allowance for Loan Losses to be adequate to absorb any reasonable, foreseeable loan losses. YEAR 2000 COMPLIANCE: MANAGEMENT INFORMATION SYSTEMS We have 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. Testing demonstrated that the new hardware and software are Year 2000 compliant. In addition, the Corporation has hired a third-party Year 2000 consultant. With the aid of the consultant, we have developed a Year 2000 testing master plan, organization chart and detailed work plan. The testing plan includes several phases of testing in accordance with regulatory guidelines. We successfully completed the testing of all systems critical the operation of the bank on February 3, 1999. MID PENN BANCORP, INC. June 30, Dec. 31, 1999 1998 -------- -------- Non-Performing Assets: Non-accrual loans 911 376 Past due 90 days or more 1,522 844 Restructured loans 887 1,497 ------- ------- Total non-performing loans 3,320 2,717 Other real estate 53 347 ------- ------- Total 3,373 3,064 ======= ======= Percentage of total loans outstanding 2.17 2.00 Percentage of total assets 1.22 1.10 Analysis of the Allowance for Loan Losses: Balance beginning of period 2,313 2,281 Loans charged off: Commercial real estate, construction and land development 0 40 Commercial, industrial and agricultural 70 200 Real estate - residential mortgage 0 40 Consumer 29 37 ------- ------- Total loans charged off 99 317 ------- ------- Recoveries of loans previously charged off: Commercial real estate, construction and land development 55 10 Commercial, industrial and agricultural 1 56 Real estate - residential mortgage 0 0 Consumer 19 29 ------- ------- Total recoveries 75 95 ------- ------- Net charge-offs (recoveries) -24 -222 ------- ------- Current period provision for loan losses 150 254 ------- ------- Balance end of period 2,439 2,313 ======= ====== 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 29, 1999, a vote was held for the election of Class A directors: Gregory M. Kerwin, Warren A. Miller, Edwin D. Schlegel, and Eugene F. Shaffer 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, 1999. Gregory M. Kerwin received 2,426,595 votes for and 12,407 votes withheld. Warren A. Miller received 2,423,059 votes for and 15,943 votes withheld. Edwin D. Schlegel received 2,430,515 votes for and 8,487 votes withheld. Eugene F. Shaffer received 2,425,365 votes for and 13,637 votes withheld. The selection of external auditors received 2,429,650 votes for, 2,711 votes against, and 6,641 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 28, 1999 Date: July 28, 1999