Mid Penn Bancorp, Inc.
A Traditional, Yet Progressive Bank
AS OF AND FOR YEARS ENDED DECEMBER 31, 2000 AND 1999
(Dollars in thousands, except per share data.) Percent
2000 1999 Change
---- ---- ------
Total Assets....................................... $ 315,584 287,542 +9.75%
Total Deposits..................................... 231,408 217,840 +6.23%
Net Loans.......................................... 181,396 169,789 +6.84%
Total Investments and Interest Bearing Balances.... 116,261 98,669 +17.83%
Stockholders' Equity............................... 29,626 26,565 +11.52%
Net Income......................................... 3,948 3,884 +1.65%
Earnings Per Share................................. 1.30 1.28 +1.56%
Cash Dividend Per Share based on Weighted Average
Number of Shares Outstanding.................... .80 2.18 -63.30%
Book Value Per Share............................... 9.76 8.74 +11.67%
Mid Penn Bancorp, Inc.
Stockholders' Information
2000 1999
---- ----
High Low High Low Quarter
---- --- ---- --- -------
Market Value Per Share............ $ 22.00 13.25 26.50 24.50 1st
19.25 15.38 25.75 24.38 2nd
18.50 15.25 26.38 23.38 3rd
15.88 14.75 27.25 22.50 4th
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, 2000, there were 973 stockholders.
- ----------------------
Dividends: A dividend of $ .20 per share was paid during each quarter of 2000. A
- ---------
dividend of $ .19 as well as a special dividend of $1.50 per share was paid
during the first quarter of 1999; a dividend of $.20 per share was paid during
each subsequent quarter of the year. 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 24, 2001, at 349 Union Street,
Millersburg, Pennsylvania.
3
Independent Auditor's Report
The Board of Directors and Stockholders
Mid Penn Bancorp, Inc.
Millersburg, Pennsylvania
We have audited the accompanying consolidated balance sheet of Mid Penn Bancorp,
Inc. and subsidiaries (collectively, "Corporation") as of December 31, 2000 and
1999, 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, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America.
PARENTE RANDOLPH, PC
Williamsport, Pennsylvania
January 19, 2001
5
Mid Penn Bancorp, Inc.
Consolidated Balance Sheet
DECEMBER 31, 2000 AND 1999
(Dollars in thousands, except share data) 2000 1999
---- ----
ASSETS
Cash and due from banks............................................. $ 5,986 7,474
Interest bearing balances........................................... 42,376 34,570
Available-for-sale investment securities............................ 73,885 64,099
Loans............................................................... 186,941 174,812
Less:
Unearned income.............................................. (2,730) (2,518)
Allowance for loan losses.................................... (2,815) (2,505)
------- -------
Net loans.................................................. 181,396 169,789
------- -------
Bank premises and equipment, net ................................... 3,581 3,307
Foreclosed assets held for sale..................................... 70 63
Accrued interest receivable......................................... 2,502 2,120
Deferred income taxes............................................... 1,069 1,676
Cash surrender value of life insurance.............................. 4,288 4,089
Other assets........................................................ 431 355
------- -------
Total Assets $ 315,584 287,542
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand...................................... $ 23,274 22,331
Interest-bearing demand......................................... 28,293 26,962
Money market.................................................... 17,494 22,899
Savings......................................................... 25,912 25,815
Time............................................................ 136,435 119,833
------- -------
Total Deposits 231,408 217,840
------- -------
Short-term borrowings............................................... 22,738 24,636
Accrued interest payable............................................ 1,546 1,202
Other liabilities................................................... 1,025 899
Long-term debt...................................................... 29,241 16,400
------- -------
Total Liabilities 285,958 260,977
------- -------
Stockholders' Equity:
Common stock, par value $1 per share; authorized
10,000,000 shares; 3,056,501 shares
issued....................................................... 3,057 3,057
Additional paid-in capital...................................... 20,368 20,368
Retained earnings............................................... 7,078 5,557
Accumulated other comprehensive loss............................ (344) (1,861)
Treasury stock at cost (19,057 and 19,996 shares in 2000
and 1999, respectively)...................................... (533) (556)
------- -------
Stockholders' Equity, Net 29,626 26,565
------- -------
Total Liabilities and Stockholders' Equity $ 315,584 287,542
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
6
Mid Penn Bancorp, Inc.
Consolidated Statement of Income
FOR YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(Dollars in thousands, except share data)
2000 1999 1998
---- ---- ----
INTEREST INCOME
Interest and fees on loans...................................... $ 15,769 13,829 14,330
Interest on interest-bearing balances........................... 2,306 2,409 2,574
Interest and dividends on investment securities:
U.S. Treasury and government agencies....................... 2,284 2,426 2,385
State and political subdivision obligations, tax-exempt..... 1,475 1,311 1,032
Other securities............................................ 219 136 70
Interest on federal funds sold and securities purchased
under agreement to resell..................................... 0 1 45
----------- --------- ---------
Total Interest Income 22,053 20,112 20,436
----------- --------- ---------
INTEREST EXPENSE
Interest on deposits............................................ 8,958 8,302 8,627
Interest on short-term borrowings............................... 879 516 203
Interest on long-term debt...................................... 1,618 856 763
----------- --------- ---------
Total Interest Expense 11,455 9,674 9,593
----------- --------- ---------
Net Interest Income 10,598 10,438 10,843
PROVISION FOR LOAN LOSSES............................................ 325 325 254
----------- --------- ---------
Net Interest Income After Provision for Loan Losses 10,273 10,113 10,589
----------- --------- ---------
NONINTEREST INCOME
Trust department income......................................... 203 127 104
Service charges on deposits..................................... 590 554 450
Investment securities (losses) gains, net....................... (4) 50 13
Gain on sale of loans........................................... 31 0 65
Income on cash surrender value of life insurance................ 198 189 0
Other income.................................................... 538 769 766
----------- --------- ---------
Total Noninterest Income 1,556 1,689 1,398
----------- --------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits.................................. 3,790 3,741 3,383
Occupancy expense, net.......................................... 364 318 323
Equipment expense............................................... 481 510 565
Pennsylvania bank shares tax expense ........................... 271 279 274
FDIC insurance premium.......................................... 45 26 26
Marketing and advertising....................................... 144 121 160
Loss on mortgage loan sales..................................... 19 47 64
Other expenses.................................................. 1,542 1,623 1,811
----------- --------- ---------
Total Noninterest Expense 6,656 6,665 6,606
----------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 5,173 5,137 5,381
Provision for income taxes...................................... 1,225 1,253 1,516
----------- --------- ---------
Net Income $ 3,948 3,884 3,865
=========== ========= =========
Earnings Per Share (1) $ 1.30 1.28 1.27
=========== ========= =========
Weighted Average Number of Shares Outstanding 3,036,007 3,037,976 3,037,037
(1) Earnings per share for 1998 has been restated to reflect a 5% stock dividend
effective November 22, 1999.
The accompanying notes are an integral part of these consolidated financial
statements.
7
Mid Penn Bancorp, Inc.
Consolidated Statement of Changes in Stockholders' Equity
FOR YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(Dollars in thousands, except share data)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings (Loss) Income Stock Total
----- ------- -------- ------ ------ ----- -----
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
------
Comprehensive income:
Net income............................................ 0 0 3,884 0 0 3,884
Change in net unrealized loss on securities available
for sale, net of reclassification adjustment
and tax effects..................................... 0 0 0 (2,205) 0 (2,205)
------
Total comprehensive income 1,679
------
Cash dividends ($2.29 per share, historical)............ 0 0 (6,635) 0 0 (6,635)
5% stock dividend (additional 144,234 shares)........... 145 3,187 (3,332) 0 0 0
Purchase of treasury stock (659 shares)................. 0 0 0 0 (15) (15)
----- ------ ------ ------ ------ ------
Balance, December 31, 1999................................. 3,057 20,368 5,557 (1,861) (556) 26,565
------
Comprehensive income:
Net income............................................ 0 0 3,948 0 0 3,948
Change in net unrealized loss on securities available
for sale, net of reclassification adjustment
and tax effects..................................... 0 0 0 1,517 0 1,517
------
Total comprehensive income 5,465
------
Cash dividends ($ .80 per share, historical)............ 0 0 (2,427) 0 0 (2,427)
Sale of treasury stock (939 shares)..................... 0 0 0 0 23 23
----- ------ ------ ------ ------ ------
Balance, December 31, 2000................................. $ 3,057 20,368 7,078 (344) (533) 29,626
===== ====== ====== ====== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
8
Mid Penn Bancorp, Inc.
Consolidated Statement of Cash Flows
FOR YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(Dollars in thousands)
2000 1999 1998
---- ---- ----
Operating Activities:
Net income............................................... $ 3,948 3,884 3,865
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses............................ 325 325 254
Depreciation......................................... 369 404 426
Increase in cash surrender value of life insurance... (198) (189) 0
Investment securities losses (gains), net............ 4 (50) (13)
Gain on sale of foreclosed assets.................... (40) (229) (273)
Gain on sale of loans................................ (31) 0 (65)
Deferred income taxes................................ (177) (105) (61)
Change in accrued interest receivable................ (382) (213) (21)
Change in other assets............................... (76) 238 157
Change in accrued interest payable................... 344 (38) (35)
Change in other liabilities.......................... 126 359 (114)
Other................................................ 0 0 0
------- ------- -------
Net Cash Provided By Operating Activities 4,212 4,386 4,120
------- ------- -------
Investing Activities:
Net (increase) decrease in interest-bearing balances..... (7,806) 8,313 (6,879)
Decrease in federal funds sold........................... 0 0 1,000
Proceeds from the maturity of investment securities...... 4,042 9,663 19,707
Proceeds from the sale of investment securities.......... 3,515 3,811 5,290
Purchases of investment securities....................... (15,047) (12,931) (39,279)
Proceeds from sale of loans.............................. 3,622 0 6,174
Net increase in loans.................................... (15,558) (19,434) (4,917)
Net purchases of bank premises and equipment............. (643) (213) (471)
Proceeds from the sale of foreclosed assets.............. 68 523 1,450
Capitalized additions - foreclosed assets................ 0 (10) 0
Purchase of cash surrender value of life insurance....... 0 0 (3,900)
------- ------- -------
Net Cash Used In Investing Activities (27,807) (10,278) (21,825)
------- ------- -------
Financing Activities:
Net (decrease) increase in demand and savings deposits... (3,034) 6,339 7,074
Net increase (decrease) in time deposits................. 16,602 (5,301) (7,418)
Net (decrease) increase in short-term borrowings......... (1,898) 12,477 9,925
Long-term borrowings..................................... 15,000 12,000 10,000
Long-term debt repayment................................. (2,159) (11,150) (138)
Cash dividends paid...................................... (2,427) (6,635) (2,083)
Sale (purchase) of treasury stock........................ 23 (15) (2)
------- ------- -------
Net Cash Provided By Financing Activities 22,107 7,715 17,358
------- ------- -------
Net (decrease) increase in cash and due from
banks.................................................. (1,488) 1,823 (347)
Cash and due from banks at January 1.......................... 7,474 5,651 5,998
------- ------- -------
Cash and due from banks at December 31........................ $ 5,986 7,474 5,651
======= ======= =======
Supplemental Disclosures of Cash Flow Information:
Cash payments of interest expense........................ $ 11,111 9,636 9,628
Cash payments of income taxes............................ $ 1,355 1,149 1,723
Supplemental Noncash Disclosures:
Loan charge-offs......................................... $ 74 224 317
Transfers to foreclosed assets held for sale............. $ 35 0 169
The accompanying notes are an integral part of these consolidated financial
statements.
9
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements for 2000 Reports
(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, "MPB"). All
significant intercompany balances and transactions have been eliminated.
On July 13, 1998, Miners Bank of Lykens was merged with and into Mid
Penn Bank, and 148,250 shares of MPB'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. The separate company financial
statements of Miners Bank of Lykens were immaterial in relation to MPB.
(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, 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 eleven 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 MPB 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 reported 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
could 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 bank's allowances for loan losses and
foreclosed assets. Such agencies may require the bank to recognize
changes 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 allowance for loan losses
may change materially in the near term.
(b) Investment Securities
---------------------
Investments are accounted for as follows:
Held-to-Maturity Securities - includes debt securities that
---------------------------
MPB 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 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.
Interest income is subsequently recognized only to the extent cash
payments are
10
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements for 2000 Reports
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) Marketing and Advertising Costs
-------------------------------
Marketing and advertising costs are expensed as incurred and were
$144,000, $121,000 and $160,000 in 2000, 1999 and 1998, respectively.
(i) 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.
(j) 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.
(k) Earnings Per Share
------------------
Earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding
11
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements for 2000 Reports
during each of the years presented giving retroactive effect to stock
dividends and stock splits. MPB's basic and diluted earnings per
share are the same since there are no dilutive shares of potential
common stock outstanding.
(l) Statement of Cash Flows
-----------------------
For purposes of the statement of cash flows, MPB considers cash
and due from banks to be cash equivalents.
(m) Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to
the current year's classifications.
(4) Comprehensive Income
-------------------------
The components of other comprehensive (loss) income and related tax
effects are as follows:
(Dollars in thousands) Years Ended December 31,
2000 1999 1998
---- ---- ----
Unrealized holding gains (losses) on available-for-sale securities......... $ 2,296 (3,291) 52
Less reclassification adjustment for losses (gains) realized in income..... 4 (50) (13)
-------- ------- ----
Net unrealized gains (losses).............................................. 2,300 (3,341) 39
Tax effect................................................................. (783) 1,136 (13)
-------- ------- ----
Net-of-tax amount.......................................................... $ 1,517 (2,205) 26
======== ======= ====
(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, 2000 and 1999 was approximately
$1,878,000 and $1,871,000, respectively.
(6) Investment Securities
---------------------
At December 31, 2000 and 1999, amortized cost, fair value, and gross
unrealized gains and losses on investment securities are as follows:
(Dollars in thousands) Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2000 Cost Gains Losses Value
---- ----- ------ -----
Available for sale securities:
U.S. Treasury and U.S.
government agencies...................... $ 34,750 77 476 34,351
Mortgage-backed U.S.
government agencies....................... 2,402 1 2 2,401
State and political
subdivision obligations................... 33,972 418 538 33,852
Restricted equity securities................ 3,281 0 0 3,281
-------------- ------ ------- ---------
$ 74,405 496 1,016 73,885
============== ====== ======= =========
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1999 Cost Gains Losses Value
---- ----- ------ -----
Available for sale securities:
U.S. Treasury and U.S.
government agencies...................... $ 33,778 57 1,851 31,984
Mortgage-backed U.S.
government agencies....................... 1,799 0 35 1,764
State and political
subdivision obligations................... 28,061 144 1,135 27,070
Restricted equity securities......................... 3,281 0 0 3,281
-------------- ------ ------- ---------
$ 66,919 201 3,021 64,099
============== ====== ======= =========
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.
12
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements for 2000 Reports
Restricted equity securities consist of stock in the Federal Home Loan
Bank of Pittsburgh 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 $49,108,000 at December 31, 2000, were pledged to secure public and
trust deposits and other borrowings.
Proceeds from the sale of investment securities in 2000 amounted to
$3,515,000 and gross losses from such sales of investment securities, as
determined on the basis of specific identification of the adjusted cost of
each security sold, amounted to $4,000. Gross gains of $50,000 and $13,000
were realized on the sale of investment securities amounting to $3,811,000
and $5,290,000 in 1999 and 1998, respectively.
The following is a schedule of the maturity distribution of investment
securities at amortized cost and fair value as of December 31, 2000 and
1999:
December 31, 2000 December 31, 1999
(Dollars in thousands) Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Due in 1 year or less............................................ $ 2,389 2,390 1,680 1,681
Due after 1 year but within 5 years.............................. 13,061 13,084 8,674 8,563
Due after 5 years but within 10 years............................ 20,737 20,678 23,243 22,542
Due after 10 years............................................... 32,535 32,051 28,242 26,268
---------- ------ ------ ------
68,722 68,203 61,839 59,054
Mortgage-backed securities....................................... 2,402 2,401 1,799 1,764
Restricted equity securities..................................... 3,281 3,281 3,281 3,281
---------- ------ ------ ------
$ 74,405 73,885 66,919 64,099
========== ====== ====== ======
(7) Loans
-----
A summary of loans at December 31, 2000 and 1999 is as follows:
(Dollars in thousands)
2000 1999
---- ----
Commercial real estate, construction and land development........ $ 110,947 105,328
Commercial, industrial and agricultural.......................... 26,274 20,118
Real estate - residential........................................ 35,610 32,586
Consumer......................................................... 14,110 16,780
---------- ---------
$ 186,941 174,812
========== =========
Net unamortized loan fees of $417,000 were deducted from loans in both
years.
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
$1,418,000 and $1,353,000 at December 31, 2000 and 1999, respectively. New
loans extended were $66,000 and $277,000 during 2000 and 1999,
respectively. Net repayments in 2000 amounted to $1,000. Draws exceeded
repayments on these loans by $153,000 during 1999. 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.
13
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial
(8) Allowance for Loan Losses
-------------------------
Changes in the allowance for loan losses for the years 2000, 1999, and
1998 are summarized as follows:
(Dollars in thousands)
2000 1999 1998
---- ---- ----
Balance, January 1............................................... $ 2,505 2,313 2,281
Provision charged to operations.................................. 325 325 254
Loans charged off................................................ (74) (224) (317)
Recoveries on loans charged off.................................. 59 91 95
-------- ------ ------
Balance, December 31............................................. $ 2,815 2,505 2,313
======== ====== ======
The recorded investment in loans that are considered impaired amounted
to $448,000 and $890,000 (all in nonaccrual) on December 31, 2000 and
December 31, 1999, 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 as impaired amounted to approximately $169,000 at
December 31, 2000 and $235,000 at December 31, 1999. The average balances
of these loans amounted to approximately $752,000, $873,000 and $861,000
for the years 2000, 1999 and 1998, 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 2000,
1999 and 1998.
(Dollars in thousands)
2000 1999 1998
---- ---- ----
Cash receipts applied to reduce principal balance................ $ 520 63 0
Cash receipts recognized as interest income...................... 36 28 27
----- ---- ----
Total cash receipts.............................................. $ 556 91 27
===== ==== ====
In addition, at December 31, 2000 and 1999, the Bank had other
nonaccrual loans of approximately $668,000 and $15,000, for which
impairment had not been recognized. Loans which were past due 90 days or
more for which interest continued to be accrued as of December 31, 2000
and 1999, amounted to approximately $504,000 and $386,000, respectively.
The Bank has no commitments to loan additional funds to borrowers with
impaired or nonaccrual loans.
(9) Bank Premises and Equipment
---------------------------
At December 31, 2000 and 1999, bank premises and equipment are as
follows:
(Dollars in thousands) 2000 1999
---- ----
Land ........................................................... $ 818 626
Buildings....................................................... 3,926 3,645
Furniture and fixtures.......................................... 3,383 3,213
-------- -------
8,127 7,484
Less accumulated depreciation................................... 4,546 4,177
-------- -------
$ 3,581 3,307
======== =======
(10) Deposits
--------
At December 31, 2000 and 1999, time deposits in denominations of
$100,000 or more amounted to $23,342,000 and $16,216,000, respectively.
Interest expense on such certificates of deposit amounted to approximately
$1,211,000, $1,103,000 and $1,102,000 for the years ended December 31,
2000, 1999 and 1998, respectively. Time deposits at December 31, 2000,
mature as follows: (in thousands) 2001, $68,417; 2002, $34,178; 2003,
$21,009; 2004, $4,192; 2005, $5,289; thereafter, $3,350. Deposits and
other funds from related parties held by the Corporation at December 31,
2000 amounted to $2,070,000.
14
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
(11) Short-term Borrowings
---------------------
Short-term borrowings as of December 31, 2000 and 1999 consisted of:
(Dollars in thousands) 2000 1999
---- ----
Discount window borrowings......................... $ 1,500 0
Federal funds purchased............................ 19,300 22,300
Repurchase agreements.............................. 1,459 1,313
Treasury, tax and loan note........................ 479 1,023
-------- --------
$22,738 24,636
======== ========
Discount window borrowings and federal funds purchased represent
overnight funds. Securities sold under repurchase agreements generally
mature between one day and one year. Treasury, tax and loan notes are
open-ended interest bearing notes 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 $20 million dollars at December 31, 2000.
(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, 2000, the Bank had long-term debt in the amount of
$29,241,000 outstanding to the FHLB consisting of a $1,500,000 5 year
fixed advance at 6.67% due September 4, 2001; a $5,000,000 bullet loan at
6.61% which will mature on November 24, 2003; a $639,000 10 year
amortizing advance at 7.30% which will mature April 5, 2004; a $5,000,000
7 year fixed rate advance at 6.21% convertible at FHLB's option to a LIBOR
adjustable rate after 3 years which will mature November 30, 2006; a
$5,000,000 10 year fixed rate advance at 6.42% convertible at FHLB's
option to a LIBOR adjustable rate after 5 years which matures December 3,
2009; a $1,000,000 10 year fixed rate advance with an interest rate of
7.06% maturing on December 9, 2009; a $1,000,000 10 year fixed rate
advance with an interest rate of 7.24% which matures December 17, 2009; a
$5,000,000 10 year fixed rate advance at 6.28% convertible at FHLB's
option to a LIBOR adjustable rate after 2 years which is due January 14,
2010; a $5,000,000 10 year fixed rate advance at 6.71% convertible at
FHLB's option to a LIBOR adjustable rate after 3 years which is due
February 22, 2010; and a $102,000 amortizing loan at a rate of 6.71% which
matures February 22, 2027. The aggregate amounts of maturities of long-
term debt subsequent to December 31, 2000 are $1,672,000 (2001), $185,000
(2002), $5,199,000 (2003), $88,000 (2004), $2,000 (2005), $22,095,000
thereafter.
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 2000, 1999 and 1998 was approximately
$34,000, $42,000 and $49,000, respectively.
(14) Benefit Plans
-------------
(a) Profit-Sharing
--------------
The Bank has a funded contributory profit-sharing plan covering
substantially all employees. The Bank's contribution to the plan for
2000, 1999 and 1998 was $361,000, $310,000 and $281,000,
respectively.
(b) 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/her retirement date, the Bank will
pay, at its discretion, premiums for 65 Special coverage or a similar
supplemental coverage. After the five year period has expired, all
employer-paid benefits will cease; however, the employee may continue
coverage through the employer at his/her own expense.
15
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
(c) Life Insurance
--------------
For full-time employees who retire after at least 20 years of
service, the Bank will provide term life insurance. The amount of
coverage 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' health and life insurance benefit obligations and fair
value of plan assets for the years ended December 31, 2000 and 1999
and a statement of the funded status at December 31, 2000 and 1999:
(Dollars in thousands) 2000 1999
---- ----
Change in post-retirement benefit obligations:
Benefit obligations, January 1......................................... $ 329 404
Service cost......................................................... 18 20
Interest cost........................................................ 22 23
Actuarial loss (gain)................................................ 0 (104)
Benefit payments..................................................... (15) (14)
-------- --------
Benefit obligations, December 31....................................... $ 354 329
======== ========
Change in fair value of plan assets:
Fair value of plan assets, January 1................................... $ 0 0
Employer contributions............................................... 15 14
Benefit payments..................................................... (15) (14)
-------- --------
Fair value of plan assets, December 31................................. $ 0 0
======== ========
December 31,
2000 1999
---- ----
Funded status:
Excess of the benefit obligation over the value of plan assests...... $ (354) (329)
Unrecognized transition obligation................................... 177 192
Unrecognized gain.................................................... (154) (162)
-------- --------
Net amount recognized................................................ $ (331) (299)
======== ========
Amount recognized in the balance sheet at December 31, 2000 and 1999 is
as follows:
(Dollars in thousands) 2000 1999
---- ----
Accrued benefit liability............................................ $ (331) (299)
======== ========
The components of net periodic post-retirement benefit cost for 2000,
1999 and 1998 are as follows:
(Dollars in thousands)
2000 1999 1998
---- ---- ----
Service cost......................................................... $ 18 20 24
Interest cost........................................................ 22 23 20
Amortization of transition obligation................................ 15 15 15
Amortization of net gain............................................. (8) (4) (5)
-------- -------- -------
Net periodic post-retirement benefit cost............................ $ 47 54 54
======== ======== =======
Assumed health care cost trend rates have a significant effect on the
amounts reported for the post retirement medical benefits plan. A
one-percentage-point change in assumed health care cost trend rates would
have the following effect:
(Dollars in thousands) One-Percentage Point
Increase Decrease
-------- --------
Effect on total of service and interest cost components....... $ 6 5
Effect on post retirement benefit obligation.................. $ 39 32
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
Assumptions used in the measurement of MPB's benefit obligations at
December 31, 2000 and 1999 are as follows:
Weighted-average assumptions:
Discount rate............................................... 7.0%
Rate of compensation increase............................... 5.0%
For measurement purposes, a one percent annual decrease in the per
capita cost of covered health care benefits was assumed for 2001. The rate
was assumed to be 6 percent for 2001 and remain at that level thereafter.
(d) 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 $274,000 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, 2000 and 1999 and a statement of the funded
status at December 31, 2000 and 1999:
(Dollars in thousands)
2000 1999
---- ----
Change in benefit obligations:
Benefit obligations, January 1.................................... $ 414 405
Service cost.................................................... 20 20
Interest cost................................................... 28 26
Actuarial loss (gain)........................................... 1 (29)
Benefit payments................................................ (8) (8)
----------- --------
Benefit obligations, December 31.................................. $ 455 414
=========== ========
Change in fair value of plan assets:
Fair value of plan assets, January 1.............................. $ 0 0
Employer contributions.......................................... 8 8
Benefit payments................................................ (8) (8)
----------- --------
Fair value of plan assets, December 31 $ 0 0
=========== ========
December 31,
2000 1999
---- ----
Funded status:
Excess of the benefit obligation over the value of plan assets.... $ (455) (414)
Unrecognized prior-service cost................................... 130 156
Unrecognized gain................................................. (14) (14)
----------- --------
Net amount recognized............................................. $ (339) (272)
========== =======
Amounts recognized in the balance sheet at December 31, 2000 and 1999
are as follows:
(Dollars in thousands) 2000 1999
---- ----
Accrued benefit liability......................................... $ (376) (334)
Intangible asset.................................................. 37 62
---------- -------
Net amount recognized............................................. $ (339) (272)
========== =======
The components of net periodic pension cost for 2000, 1999 and 1998 are
as follows:
(Dollars in thousands) 2000 1999 1998
---- ---- ----
Service cost...................................................... $ 20 20 17
Interest cost..................................................... 28 26 24
Amortization of prior-service cost................................ 26 26 26
---------- ------ ------
Net periodic pension cost......................................... $ 74 72 67
========== ====== ======
17
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements
Assumptions used in the measurement of MPB's benefit obligations at
December 31, 2000 and 1999 are as follows:
Weighted-average assumptions:
Discount rate................................................. 7.0%
The Bank is the owner and beneficiary of insurance policies on the lives
of the executive officers and directors which informally fund the benefit
obligations. The aggregate cash surrender value of these policies was
approximately $1,512,000 and $1,444,000 at December 31, 2000 and 1999,
respectively.
(e) Deferred Compensation Plans
---------------------------
During 1999, the Bank adopted an executive deferred compensation plan
which allows an executive officer to defer bonus compensation for a
specified period in order to provide future retirement income. At
December 31, 2000 and 1999, the Bank has accrued a liability of
approximately $20,000 and $10,000, respectively, for this plan.
During 1999, the Bank adopted a director's deferred compensation plan
which allows directors to defer receipt of monthly director's fees for a
specified period in order to provide future retirement income. At
December 31, 2000 and 1999, the Bank has accrued a liability of
approximately $64,000 and $36,000, respectively, for this plan.
The Bank is the owner and beneficiary of insurance policies on the
lives of the participating executive officer and directors which
informally fund the benefit obligations. The aggregate cash surrender
value of these policies was approximately $1,232,000 and $1,174,000 at
December 31, 2000 and 1999, respectively.
(f) Salary Continuation Plan
------------------------
During 1999, the Board of Directors adopted a Salary Continuation
Agreement for an executive officer. The Salary Continuation Agreement
provides the executive officer with a fixed annual benefit. The benefit
is payable beginning at age 65 for a period of 15 years. If the
executive officer terminates employment before the normal retirement
date for reasons other than death, the annual benefit payable will be
based on the vesting schedule as defined in the Agreement. Upon death or
a change of control of the Bank, the executive officer or his
beneficiary is entitled to the full fixed annual benefit. At December
31, 2000 and 1999, the Bank has accrued a liability of approximately
$46,000 and $22,000, respectively, for this plan.
The Bank is the owner and beneficiary of an insurance policy on the
life of the participating executive officer which informally funds the
benefit obligation. The aggregate cash surrender value of this policy
was approximately $723,000 and $688,000 at December 31, 2000 and 1999,
respectively.
(g) Employee Stock Ownership Plan
-----------------------------
The Bank has an Employee Stock Ownership Plan (ESOP) covering
substantially all employees. Contributions to the plan are made at the
discretion of the Board of Directors. Total expense related to the
Bank's contribution to the plan for 2000, 1999 and 1998 was $118,000,
$103,000 and $87,000, respectively. The ESOP held 8,932 and 3,732 shares
of MPB stock as of December 31, 2000 and December 31, 1999,
respectively, all of which were allocated to plan participants. Shares
held by the ESOP are considered outstanding for purposes of calculating
earnings per share.
(h) Other
-----
At December 31, 2000 and 1999, the Bank had a Split Dollar Life
Insurance Plan for two executives for which the aggregate cash surrender
value is approximately $822,000 and $783,000, respectively.
18
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
(15) Federal Income Taxes
--------------------
The following temporary differences gave rise to the deferred tax asset
at December 31, 2000 and 1999:
(Dollars in thousands) 2000 1999
---- ----
Deferred tax assets:
Allowance for loan losses................................... $ 803 697
Benefit plans............................................... 308 218
Nonaccrual interest......................................... 16 26
Deferred income............................................. 7 8
Unrealized losses on securities............................. 177 959
------------ -----------
Total $ 1,311 1,908
------------ -----------
Deferred tax liabilities:
Depreciation................................................ $ (92) (103)
Loan fees................................................... (120) (98)
Bond accretion.............................................. (30) (32)
------------ -----------
Total $ 242 (233)
------------ -----------
Deferred tax asset, net....................................... $ 1,069 1,676
============ ===========
The provision for income taxes consists of the following:
(Dollars in thousands) 2000 1999 1998
---- ---- ----
Current provision............................................. $ 1,401 1,358 1,577
Deferred provision............................................ (176) (105) (61)
------------ ----------- ----------
Provision for income taxes.................................... $ 1,225 1,253 1,516
============ =========== ==========
A reconciliation of income tax at the statutory rate to MPB's effective rate is as follows:
(Dollars in thousands) 2000 1999 1998
---- ---- ----
Provision at the expected statutory rate...................... $ 1,759 1,747 1,829
Effect of tax-exempt income................................... (633) (536) (380)
Nondeductible interest........................................ 69 50 43
Other items................................................... 30 (8) 24
------------ ----------- ----------
Provision for income taxes.................................... $ 1,225 1,253 1,516
============ =========== ==========
(16) Regulatory Matters
------------------
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 Tier 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.
19
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
(Dollars in thousands) To Be Well Capitalized
As of December 31, 2000: Capital Adequacy Under Prompt Corrective
----------------
Actual Required Action Provisions:
-----------------
Amount (Ratio) Amount (Ratio) Amount (Ratio)
------------- -------------- ---------------
Tier I Capital (to Average Assets)............ $ 20,523 (7.0%) 11,790 (4.0%) 14,737 (5.0%)
Tier I Capital (to Risk Weighted Assets)...... 20,523 (9.9%) 8,296 (4.0%) 12,444 (6.0%)
Total Capital (to Risk Weighted Assets)....... 23,118 (11.2%) 16,592 (8.0%) 20,740 (10.0%)
As of December 31, 1999:
Tier I Capital (to Average Assets)............ $ 19,307 (7.1%) 10,812 (4.0%) 13,515 (5.0%)
Tier I Capital (to Risk Weighted Assets)...... 19,307 (9.9%) 7,768 (4.0%) 11,653 (6.0%)
Total Capital (to Risk Weighted Assets)....... 21,736 (11.2%) 15,537 (8.0%) 19,421 (10.0%)
As of December 31, 2000, the Bank's capital ratios are well in excess
of the minimum and well-capitalized guidelines and MPB'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 sheet.
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.
As of December 31, 2000, commitments to extend credit amounted to
$30,325,000 and standby letters of credit amounted to $2,921,000.
Significant concentration of credit risk may occur when the obligations
of the same or affiliated parties engaged in similar activities or having
similar economic characteristics causing those parties to be similarly
affected by changes in economic or other conditions occur.
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, and any assets
collateralized by the same were excluded.
As of December 31, 2000, commercial real estate financing was the only
similar activity 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.
20
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
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 $15,229,000 or 8.4% and $20,975,000 or 11.6% of net
loans outstanding as of December 31, 2000.
(18) Commitments and Contingencies
-----------------------------
In the ordinary course of business, MPB 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 MPB.
(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:
CONDENSED BALANCE SHEET
As of December 31, 2000, 1999 and 1998
(Dollars in thousands)
2000 1999 1998
---- ---- ----
ASSETS
Cash.......................................................... $ 1,199 867 485
Investment in Subsidiaries.................................... 28,427 25,698 31,051
------------ -------- -------
Total Assets $ 29,626 26,565 31,536
============ ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' Equity......................................... 30,159 27,121 32,077
Less Treasury Stock........................................... (533) (556) (541)
------------ -------- -------
Total Liabilities and Equity $ 29,626 26,565 31,536
============ ======== ========
CONDENSED STATEMENT OF INCOME
For the Years Ended December 31, 2000, 1999 and 1998
(Dollars in thousands) 2000 1999 1998
---- ---- ----
Dividends from Subsidiaries................................... $ 2,795 7,080 2,304
Other Income from Subsidiaries................................ 30 24 27
Undistributed Earnings of Subsidiaries........................ 1,212 (3,148) 1,615
Other Expenses................................................ (89) (72) (81)
----------- ------ ------
Net Income $ 3,948 3,884 3,865
=========== ====== ======
CONDENSED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2000, 1999 and 1998
(Dollars in thousands)
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................... $ 3,948 3,884 3,865
Undistributed Earnings of Subsidiaries....................... (1,212) 3,148 (1,615)
----------- -------- --------
Net Cash Provided By Operating Activities 2,736 7,032 2,250
----------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends Paid................................................ (2,427) (6,635) (2,083)
Sale (purchase) of Treasury Stock............................. 23 (15) (2)
----------- -------- --------
Net Cash Used By Financing Activities (2,404) (6,650) (2,085)
----------- -------- --------
Net Increase in Cash.......................................... 332 382 165
Cash at Beginning of Period................................... 867 485 320
----------- -------- --------
Cash at End of Period......................................... $ 1,199 867 485
=========== ======== ========
21
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
(20) Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
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 MPB.
The following methodologies and assumptions were used to estimate the fair
value of MPB'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.
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.
22
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
The following table summarizes the book or notional value and fair
value of financial instruments at December 31, 2000 and 1999.
December 31, 2000 December 31, 1999
(Dollars in thousands) Book or Book or
Notional Fair Notional Fair
Value Value Value Value
----- ----- ----- -----
Financial assets:
Cash and due from banks....................................... $ 5,986 5,986 7,474 7,474
Interest bearing balances..................................... 42,376 42,376 34,570 34,570
Investment securities......................................... 73,885 73,885 64,099 64,099
Net loans..................................................... 181,396 187,750 169,789 172,678
Financial liabilities:
Deposits...................................................... $ 231,408 232,803 217,840 217,107
Short-term borrowings......................................... 22,738 22,738 24,636 24,636
Long-term debt................................................ 29,241 30,944 16,400 16,842
Off-balance sheet financial instruments:
Commitments to extend credit $ 30,325 30,325 29,648 29,648
Standby letters of credit..................................... 2,921 2,921 2,336 2,336
(21) Common Stock
------------
MPB 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.
In November, 1997, MPB amended and restated its dividend reinvestment
plan, (DRIP). Two hundred thousand shares of MPB'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) Recent Accounting Pronouncements
--------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The statement establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met. The Corporation is required to adopt SFAS No. 133 on January 1,
2001 and it cannot be applied retroactively to financial statements of
prior periods. Management does not expect the initial adoption of SFAS No.
133 to have a material effect on the Corporation's operations or financial
position.
In September 2000, the SFAS issued FASB No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." This statement supercedes and replaces the guidance in
Statement 125. It revises the standards for accounting for securitizations
and other transfers of financial assets and collateral and requires
certain disclosures, although it carries over most of Statement 125's
provisions without reconsideration. The Statement is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001 and for recognition and
reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending
December 15, 2000. This Statement is to be applied prospectively with
certain exceptions. Other than those exceptions, earlier or retroactive
application of its accounting provisions is not permitted. The Corporation
has not yet determined the impact, if any, of this statement on the
Corporation's financial condition, equity, results of operations or
disclosure.
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. (MPB). MPB
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 MPB's liquidity, capital
resources or operations. This discussion should be read along with the
financial statements also appearing in this report. Per share data has
been restated to reflect the effect of stock dividends and splits. The
prior financial data has been restated to reflect the 1998 merger of
Miners Bank of Lykens as if the two banks had always been one.
Financial Summary
-----------------
The consolidated earnings of MPB are derived primarily from the
operations of its wholly-owned subsidiary, Mid Penn Bank.
MPB earned net income of $3,948,000 for the year 2000, compared to
$3,884,000 in 1999, which was an increase of $64,000 or 1.7%. This
represents net income in 2000 of $1.30 per share compared to $1.28 per
share in 1999 and $1.27 per share in 1998.
Total assets of MPB continued to grow in 2000, reaching the level of
$315,584,000, an increase of $28,042,000 or 9.75% over $287,542,000 at
year end 1999. Approximately ten million of the asset growth during 2000
resulted in the purchase of interest bearing balances and municipal
securities, which were funded by borrowings resulting in incremental
income to MPB going forward.
MPB continued to achieve an excellent return on average shareholders'
equity, (ROE), a widely recognized performance indicator in the financial
industry. The ROE was 14.64% in 2000, 14.68% in 1999 and 12.81% in 1998.
Return on average assets (ROA), another performance indicator, was 1.34%
in 2000, 1.40% in 1999 and 1.45% in 1998.
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 regular dividends in the future. The special dividend
was declared to reduce the capital levels of Mid Penn Bancorp, Inc.,
increase ROE, and enhance shareholder value. We have enjoyed a very solid
capital position due to strong financial performance. In the banking
industry, there has been a general shift from ROA to ROE as a measure of
financial performance since ROE is a truer measure of a company's earnings
on its shareholders' ownership. By lowering capital through this special
dividend, we would be improving ROE, thus improving this ratio important
to bank stock analysis.
Even after the payment of this special dividend, Mid Penn Bank has
maintained capital levels well above regulatory requirements. Tier one
capital (to risk weighted assets) of $20,523,000 or 9.9% and total capital
(to risk weighted assets) of $23,118,000 or 11.2% at December 31, 2000,
are well above the December 31, 2000 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.
Net Interest Income
-------------------
Net interest income, MPB'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 2000 net interest income increased $160,000 or 1.53% as compared
to a decrease of $405,000 or 3.74% in 1999. The 1999 decrease was caused
primarily by the lower yield on loans during the year due to the decrease
in average prime rate and pressure in the competitive environment to
reprice existing loans. The average balances, effective interest
differential and interest yields for the years ended December 31, 2000,
1999 and 1998, the components of net interest rate growth, are presented
in Table 1. A comparative presentation of the changes in net interest
income for 2000 compared to 1999, and 1999 compared to 1998, 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.
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
The yield on earning assets increased to 8.33% in 2000 from 7.91% in
1999. The yield on earning assets for 1998 was also 8.33%. The change in
the yield on earning assets was due primarily to the repricing of
commercial loans in a very competitive rate environment, the $3,900,000
purchase of life insurance, which yields income but not interest income,
and changes in the "prime rate." The average "prime rate" for 2000 was
9.20% as compared to 7.98% for 1999 and 8.38% for 1998.
Interest expense increased by $1,781,000 or 18.41% in 2000 as compared
to $81,000 or .84% in 1999. The increase in interest expense is 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 particularly in light of the short-term interest rate
increases during 2000.
Primarily resulting from the fluctuations in interest rates, the net
interest margin, on a tax equivalent basis, in 2000 was 4.25% compared to
4.24% in 1999 and 4.52% in 1998. 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, 2000
(Dollars in thousands) Average Interest Average Rates
Balance Income/Expense Earned/Paid
------- -------------- -----------
ASSETS:
Interest Bearing Balances............. $ 36,234 2,306 6.36
Investment Securities:
Taxable............................. 39,224 2,503 6.38
Tax-Exempt ......................... 29,251 2,235 7.64
------------
Total Investment Securities 68,475
------------
Federal Funds Sold.................... 7 0 6.00
Loans, Net............................ 175,802 16,310 9.28
------------ -----------
Total Earning Assets.................. 280,518 23,354 8.33
-----------
Cash and Due from Banks............... 5,212
Other Assets.......................... 9,015
------------
Total Assets $ 294,745
============
LIABILITIES & STOCKHOLDERS' EQUITY:
Interest Bearing Deposits:
NOW ................................ $ 28,518 391 1.37
Money Market........................ 18,568 659 3.55
Savings............................. 25,744 570 2.21
Time................................ 130,342 7,338 5.63
Short-term Borrowings................. 14,362 879 6.12
Long-term Debt........................ 24,378 1,618 6.64
------------ -----------
Total Interest Bearing Liabilities.... 241,912 11,455 4.74
-----------
Demand Deposits....................... 23,511
Other Liabilities..................... 2,358
Stockholders' Equity.................. 26,964
------------
Total Liabilities and
Stockholders' Equity $ 294,745
============
Net Interest Income...................... $ 11,899
===========
Net Yield on Interest Earning Assets:
Total Yield on Earning Assets......... 8.33%
Rate on Supporting Liabilities........ 4.08%
Net Interest Margin................... 4.25%
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, 1999
(Dollars in thousands)
Average Interest Average Rates
Balance Income/Expense Earned/Paid
------- -------------- -----------
ASSETS:
Interest Bearing Balances............. $ 39,671 2,409 6.07%
Investment Securities:
Taxable............................. 40,672 2,562 6.30%
Tax-Exempt ......................... 26,609 1,988 7.47%
--------
Total Investment Securities........... 67,281
--------
Federal Funds Sold.................... 12 1 5.00%
Loans, Net............................ 156,518 13,884 8.87%
-------- -------
Total Earning Assets.................. 263,482 20,844 7.91%
-------
Cash and Due from Banks............... 5,174
Other Assets.......................... 9,646
--------
Total Assets $ 278,302
========
LIABILITIES & STOCKHOLDERS' EQUITY:
Interest Bearing Deposits:
NOW ................................ $ 27,669 380 1.37%
Money Market........................ 20,734 705 3.40%
Savings............................. 26,259 586 2.23%
Time................................ 125,782 6,631 5.27%
Short-term Borrowings................. 10,683 517 4.84%
Long-term Debt........................ 14,453 855 5.92%
-------- -------
Total Interest Bearing Liabilities.... 225,580 9,674 4.29%
-------
Demand Deposits....................... 23,338
Other Liabilities..................... 2,934
Stockholders' Equity.................. 26,450
--------
Total Liabilities and
Stockholders' Equity $ 278,302
========
Net Interest Income...................... $ 11,170
=======
Net Yield on Interest Earning Assets:
Total Yield on Earning Assets......... 7.91%
Rate on Supporting Liabilities........ 3.67%
Net Interest Margin................... 4.24%
26
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, 1998
(Dollars in thousands)
Average Interest Average Rates
Balance Income/Expense Earned/Paid
------- -------------- -----------
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%
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 $203,000, $258,000 and $275,000 are included with interest
income in Table 1 for the years 2000, 1999 and 1998, respectively.
27
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 2: VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Dollars in thousands)
2000 Compared to 1999 1999 Compared to 1998
Increase (Decrease) Due to Change In: Increase (Decrease) Due to Change In:
Taxable Equivalent Basis Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
INTEREST INCOME:
Interest Bearing Balances........ $ (209) 106 (103) (25) (140) (165)
Investment Securities:
Taxable.......................... (91) 32 (59) 184 (77) 107
Tax-Exempt....................... 197 50 247 531 (107) 424
--------- --------- --------- --------- --------- ---------
Total Investment Securities 106 82 188 715 (184) 531
Federal Funds Sold............... (1) 0 (1) (44) 0 (44)
Loans, Net....................... 1,710 716 2,426 297 (770) (473)
--------- --------- --------- --------- --------- ---------
Total Interest Income $ 1,606 904 2,510 943 (1,094) (151)
--------- --------- --------- --------- --------- ---------
INTEREST EXPENSE:
Interest Bearing Deposits:
NOW ........................... $ 11 0 11 0 (120) (120)
Money Market................... (74) 28 (46) 177 79 256
Savings........................ (11) (5) (16) 28 (64) (36)
Time........................... 240 467 707 (19) (406) (425)
--------- --------- --------- --------- --------- ---------
Total Interest Bearing Deposits 166 490 656 186 (511) (325)
Short-term Borrowings............ 178 184 362 367 (53) 314
Long-term Debt................... 588 175 763 49 43 92
--------- --------- --------- --------- --------- ---------
Total Interest Expense $ 932 849 1,781 602 (521) 81
--------- --------- --------- --------- --------- ---------
NET INTEREST INCOME: $ 674 55 729 341 (573) (232)
========= ========= ========= ========= ========= =========
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 $325,000 allocation in 2000 as
well as a provision of $325,000 during 1999. 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
1.58% at December 31, 2000, compared to 1.58% and 1.47% for the years
ended December 31, 1999 and 1998, which continues to be higher than that
of peer financial institutions due to higher level of loans to finance
commercial real estate. A summary of charge-offs and recoveries of loans
is presented in Table 3.
28
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 3: ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
Years ended December 31,
2000 1999 1998 1997 1996*
---- ---- ---- ---- -----
Balance beginning of period................. $ 2,505 2,313 2,281 2,278 2,457
----- ----- ----- ----- -----
Loans charged-off:
Commercial real estate, construction
and land development................... 1 0 40 4 25
Commercial, industrial and agricultural.. 12 146 200 32 213
Real estate-residential.................. 0 0 40 20 4
Consumer................................. 61 78 37 197 234
----- ----- ----- ----- -----
Total loans charged off 74 224 317 253 476
----- ----- ----- ----- -----
Recoveries on loans previously
charged-off:
Commercial real estate, construction
and land development................... 28 55 10 4 39
Commercial, industrial and agricultural.. 5 1 56 107 105
Real estate-residential.................. 0 0 0 3 38
Consumer................................. 26 35 29 33 63
----- ----- ----- ----- -----
Total recoveries 59 91 95 147 245
----- ----- ----- ----- -----
Net charge-offs............................. 15 133 222 106 231
----- ----- ----- ----- -----
Current period provision for
loan losses.............................. 325 325 254 109 52
----- ----- ----- ----- -----
Balance end of period....................... $ 2,815 2,505 2,313 2,281 2,278
===== ===== ===== ===== =====
Ratio of net charge-offs during the period
to average loans outstanding during the
period, net of unearned discount......... .01% .08 0.14 0.07 0.16
===== ===== ===== ===== =====
*Mid Penn Bank only, Miners Bank of Lykens
information not readily available
Allowance for loan losses as a percentage
of average total loans................... 1.58% 1.58 1.47 1.46 -
Noninterest Income
------------------
During 2000, MPB earned $1,556,000 in noninterest income, compared to
$1,689,000 earned in 1999, and $1,398,000 earned in 1998. Noninterest
income in 1999 included nonrecurring gains of $336,000 from the sale of
other real estate.
Trust department income for 2000 was $203,000, a $76,000 or 59.84%
increase over $127,000 in 1999, which was $23,000 or 22.12% more than the
$104,000 earned in 1998. The Trust Department adopted a new fee schedule
during 2000, which will result in increased trust fees earned. Trust
Department income fluctuates from year to year, also due to the number of
estates being settled during the year.
Service charges on deposit accounts amounted to $590,000 for 2000, an
increase of $36,000 over $554,000 for 1999, which showed a 23.11% increase
over 1998. The majority of this increase resulted from the increasing
revenues from NSF charges.
On December 31, 1998, MPB purchased cash surrender value life insurance
policies that provide funding for director retirement and salary
continuation plans. The income on these policies amounted to $198,000
during the year 2000.
MPB also earned $70,000 in fees from Invest, the third-party provider
of investments whose services the Bank has contracted. Other operating
income amounted to $496,000 (net of gains on other real estate) in 2000,
$481,000 and $443,000 in 1999 and 1998, respectively.
29
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, 2000, 1999 and 1998 is reflected in Table 4.
Noninterest expense decreased to $6,656,000 in 2000 from $6,665,000 in
1999 and $6,606,000 in 1998. The major component of noninterest expense is
salaries and employee benefits. Noninterest expense in 2000 changed less
than 1% compared to that of 1999.
Noninterest expense of $6,665,000 in 1999 increased less than 1% over
that of 1998. This expense in 1999 includes approximately $126,000 of
supplemental employee bonuses for the year 1998.
TABLE 4: NONINTEREST EXPENSE
(Dollars in thousands)
Years ended December 31,
2000 1999 1998
---- ---- ----
Salaries and employee benefits......................... $ 3,790 3,741 3,383
Occupancy, net......................................... 364 318 323
Equipment.............................................. 481 510 565
Postage and supplies................................... 291 275 356
FDICassessments........................................ 45 26 26
Marketing and advertising.............................. 144 121 160
Other real estate, net................................. 0 0 0
Pennsylvania bank shares tax........................... 271 279 274
Professional services.................................. 104 124 126
Telephone.............................................. 72 74 70
Loss on mortgage sales................................. 19 47 64
Other.................................................. 1,075 1,150 1,259
----- ----- -----
Total Noninterest Expense $ 6,656 6,665 6,606
===== ===== =====
Investments
-----------
MPB investment portfolio is utilized to improve earnings through
investments of funds in high-yielding assets which provide the necessary
balance sheet liquidity for MPB.
MPB's entire portfolio of investment securities is considered available
for sale. 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. As the interest rate environment of
these securities changes, our existing securities are valued differently
in comparison. This difference in value, or unrealized loss, amounted to
$344,000, net of tax, as of the end of the year. 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.
At December 31, 2000, SFAS No. 115 resulted in a decrease of
shareholders' equity of $344,000 (unrealized loss on securities of
$522,000 less estimated income tax effect of $178,000). As of December 31,
1999, SFAS No. 115 resulted in an decrease in shareholders' equity of
$1,861,000 (unrealized loss on securities of $2,820,000, less estimated
income tax effect of $959,000), compared to in an increase in
stockholders' equity of $344,000 (unrealized gain on securities of
$521,000, less estimated income tax effect of $177,000) as of December 31,
1998.
MPB 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.
30
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 5: AMORTIZED COST OF INVESTMENT SECURITIES
(Dollars in thousands) December 31,
2000 1999 1998
---- ---- ----
U. S. Treasury and U.S. government agencies............... $ 34,750 33,778 36,922
Mortgage backed U.S. government agencies.................. 2,402 1,799 2,285
State and political subdivision obligations............... 33,972 28,061 26,020
Restricted equity securities.............................. 3,281 3,281 2,185
------ ------ ------
Total $ 74,405 66,919 67,412
====== ====== ======
Loans
-----
At December 31, 2000, net loans totaled $181,396,000, a $11,607,000 or
6.84% increase from December 31, 1999. During 2000, MPB experienced an
increase in commercial real estate and commercial/industrial loans of
approximately $5,619,000, the majority of which was generated in the
greater Harrisburg region.
The current environment in lending is extremely competitive with
financial institutions aggressively pursuing potential borrowers. At
December 31, 2000, loans, net of unearned income, represented 62.7% of
earning assets as compared to 63.2% on December 31, 1999 and 57.6% on
December 31, 1998.
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, 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
(Dollars in thousands) December 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Commercial real estate, construction
and land development..................... $ 110,947 105,328 88,263 81,191 75,200
Commercial, industrial and agricultural..... 26,274 20,118 20,401 20,107 19,925
Real estate-residential mortgage............ 35,610 32,586 30,325 34,195 34,391
Consumer.................................... 14,110 16,780 16,034 21,018 27,420
Lease financing............................. 0 0 1 8 13
------- ------- ------- ------- -------
Total Loans 186,941 174,812 155,024 156,519 156,949
Unearned income............................. (2,730) (2,518) (2,031) (1,943) (1,879)
------- ------- ------- ------- -------
Loans net of unearned discount.............. 184,211 172,294 152,993 154,576 155,070
Allowance for loan losses................... (2,815) (2,505) (2,313) (2,281) (2,278)
------- ------- ------- ------- -------
Net Loans $ 181,396 169,789 150,680 152,295 152,792
======= ======= ======= ======= =======
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. MPB has a loan review department that is charged with
establishing a "watch list" of potential unsound 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 "watch list." Each credit on the "watch list" 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 economic conditions, trends and other factors.
31
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
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, 2000, was
$2,815,000 or 1.53% of total loans less unearned discount as compared to
$2,505,000 or 1.45% at December 31, 1999, and $2,313,000 or 1.51% at
December 31, 1998.
TABLE 7: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands) December 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
Amount of Loans Amount of Loans Amount of Loans Amount of Loans Amount of Loans
------------------------------------------------------------------------------------------
Commercial real estate,
construction and land
development................ $ 1,318 59.3% 927 60.3% 861 56.8% 596 50.6% 666 47.9%
Commercial, industrial and
agricultural............... 1,008 14.1% 782 11.5% 693 13.5% 369 14.0% 381 12.7%
Real estate-residential
mortgage................... 209 19.0% 198 18.6% 219 19.4% 207 21.9% 184 21.9%
Consumer...................... 93 7.6% 114 9.6% 127 10.3% 146 13.5% 309 17.5%
Unallocated................... 187 - 484 - 413 - 963 - 738 -
----- ---- ----- ---- ----- ----- ----- ----- ----- -----
Total loans $ 2,815 100% 2,505 100% 2,313 100.0% 2,281 100.0% 2,278 100.0%
===== ==== ===== ==== ===== ===== ===== ===== ===== =====
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). Nonaccrual loans are loans on which we no longer
recognize daily interest income. 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 lower 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 $222,000, $266,000 and $66,000 in 2000, 1999, and 1998,
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, 2000, totaled $2,312,000 or 0.73% of total assets compared to
$2,217,000 or 0.77% of total assets in 1999, and $3,064,000 or 1.10% of
total assets in 1998. The foreclosed assets held for sale at December 31,
2000, consist of one piece of commercial real estate and residential
building lots that MPB has available for sale.
Nonperforming assets are taken into consideration by Management when
assessing the adequacy of the Allowance for Loan Losses.
32
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 8: NONPERFORMING ASSETS
(Dollars in thousands) December 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Nonaccrual loans............................ $ 1,116 890 376 333 1,183
Past due 90 days or more.................... 504 386 844 212 544
Restructured loans.......................... 622 878 1,497 212 145
----- ----- ----- ----- -----
Total nonperforming loans 2,242 2,154 2,717 757 1,872
Foreclosed assets held for sale............. 70 63 347 1,355 548
----- ----- ----- ----- -----
Total nonperforming assets $ 2,312 2,217 3,064 2,112 2,420
===== ===== ===== ===== =====
Percent of total loans outstanding.......... 1.26% 1.29% 2.00% 1.38% 1.54%
Percent of total assets..................... .73% 0.77% 1.10% 0.82% 1.02%
There are no loans classified for regulatory purposes that have not
been included in Table 8. 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
----------------------------------
MPB's primary source of funds is its deposits. Deposits at December 31,
2000, increased by $13,568,000 or 6.23% from December 31, 1999, which also
increased slightly by $1,038,000 or 0.48% from December 31, 1998. The
majority of deposit growth in 2000 came during a three-year, 7% APY
certificate of deposit promotion offered in the Spring of the year.
Average balances and average interest rates applicable to the major
classifications of deposits for the years ended December 31, 2000, 1999,
and 1998 are presented in Table 9.
Average short-term borrowings for 2000 were $14,362,000 as compared to
$10,683,000 in 1999. These borrowings included customer repurchase
agreements, treasury tax and loan option borrowings and federal funds
purchased.
TABLE 9: DEPOSITS BY MAJOR CLASSIFICATION
(Dollars in thousands) Years ended December 31,
2000 1999 1998
---- ---- ----
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
Noninterest bearing demand deposits.... $ 23,511 0.00% 23,338 0.00% 21,024 0.00%
Interest bearing demand deposits....... 28,518 1.37% 27,669 1.37% 27,649 1.81%
Money market........................... 18,568 3.55% 20,734 3.40% 14,882 3.02%
Savings................................ 25,744 2.21% 26,259 2.23% 25,112 2.48%
Time .................................. 130,342 5.63% 125,782 5.27% 126,123 5.59%
------- ---- ------- ---- ------- ----
Total $ 226,683 3.95% 223,782 3.71% 214,790 4.02%
======= ==== ======= ==== ======= ====
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. Too much capital, however, indicates that
not enough of the company's earnings have been paid to shareholders and
the buildup makes it difficult for a company to offer a competitive return
on the shareholders' capital going forward. For these reasons capital
adequacy has been, and will continue to be, of paramount importance.
In 2000, capital was increased by $3,061,000 or 11.52%. In 1999,
capital was decreased by $4,971,000 or 15.8% compared to 1998. Capital
growth is achieved by retaining more in earnings than we pay out to our
shareholders.
MPB'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 62% for 2000 compared to
171% for 1999 and 54% for 1998.
33
Mid Penn Bancorp. Inc.
Management's Discussion and Analysis (cont'd)
The reason for the special dividend payout in 1999, as outlined in the
first section of this discussion, was to increase ROE and enhance
shareholder value.
MPB has been approved by the Internal Revenue Service to offer an
employee stock ownership plan.
At December 31, 2000, 19,057 shares of MPB's common stock have been
purchased back by MPB, 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 2000 was $1,255,000 compared to
$1,253,000 and $1,516,000 in 1999 and 1998, respectively. The effective
tax rate was 24% for 2000, 24% for 1999 and 28% for 1998.
Liquidity
---------
MPB's asset-liability management policy addresses the management of
MPB's liquidity position and its ability to raise sufficient funds to meet
deposit withdrawals, fund loan growth and meet other operational needs.
MPB 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 MPB through loans from the Federal
Home Loan Bank and established federal funds (overnight) lines of credit.
MPB's major source of funds is its core deposit base as well as its
capital resources.
During 2000, the major sources of cash came from operations and a net
increase in deposits of $13,568,000. The majority of this deposit increase
came in the form of three-year certificates of deposit issued at a yield
of 7%. In order to meet our funding needs over and above the funds
generated by growth in deposits, MPB turned to the FHLB for borrowings.
MBP borrowed $5,000,000 in a 10-year/2-year putable advance, $5,000,000 in
a 10-year/3-year putable advance and $5,000,000 in a three year bullet
borrowing.
The major uses of funds during the year included the net increase in
loans of $15,558,000, and the increase in both investments and
interest-bearing balances. Short-term borrowings were used during December
to purchase interest-bearing balances, which increased by $7,806,000 from
year end 1999, to December 31, 2000, and to purchase other investment
securities in advance of declining interest rates.
The major sources of cash in 1999 came from operations, increased
short-term borrowings of $12,477,000, and the net decrease of $8,313,000
in interest-bearing balances. Net deposits increased by $1,038,000
contributing another source of cash. The major area of deposit increase
was in a high-balance money market account known as the Prime Investment
account, while certificate of deposit balances decreased during the year
in the face of a very competitive price environment.
The sources of cash were used primarily to fund loan growth. Net loan
funding in 1999 used $19,434,000 of cash. While loan growth was very
sluggish during the first half of the year, MPB experienced substantial
loan growth with the portfolio growing more than 12% by year end. The
majority of the loan growth was in loans to fund commercial real estate in
the Greater Harrisburg area. Other uses of cash for the year included the
$6,635,000 paid to shareholders in dividends, and the increase in cash
balances of $1,823,000 related to our preparedness for increased cash
needs in light of Y2K concerns.
Market Risk - Asset-Liability Management and Interest Rate Sensitivity
----------------------------------------------------------------------
Interest rate sensitivity is a function of the repricing
characteristics of MPB'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.
MPB 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.
34
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
MPB 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 MPB's
management. MPB 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 MPB's loan portfolio is shown in Table 11. Table 12
provides expected maturity information about MPB'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. MPB 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
(Dollars in thousands) December 31, 2000
After One After Five
One Year Year thru Years thru After Ten
and Less Five Years Ten Years Years Total
--------- ---------- ---------- ----------- -------
U.S. Treasury and U.S.government agencies...... $ 2,001 10,238 10,999 11,512 34,750
State and political subdivision obligations.... 388 2,823 9,739 21,022 33,972
Mortgage-backed U.S. government agencies....... 0 749 994 659 2,402
Equity securities.............................. 0 0 0 3,281 3,281
-------- ---------- --------- -------- -------
Total $ 2,389 13,810 21,732 36,474 74,405
======== ========== ========= ======== =======
December 31, 2000
After One After Five
One Year Year thru Years thru After Ten
and Less Five Years Ten Years Years Total
--------- ---------- --------- ---------- -----
Weighted Average Yields
-----------------------
U.S. Treasury and U.S. government agencies..... 5.79 6.36 6.51 6.53 6.43
State and political subdivision obligations.... 9.08 7.48 7.24 7.03 7.15
Mortgage-backed U.S. government agencies....... 0 6.28 6.20 6.60 6.34
Equity securities.............................. 0 0 0 6.49 6.49
----- ----- ----- ------ -----
Total 6.32 6.58 6.82 6.81 6.76
===== ===== ===== ====== =====
TABLE 11: LOAN MATURITY AND INTEREST SENSITIVITY
(Dollars in thousands) December 31, 2000
After One
One Year Year thru After Five
and Less Five Years Years Total
-------- ---------- ---------- -------
Commercial, real estate, construction
and land development................... $ 28,381 64,377 18,189 110,947
Commercial, industrial and agricultural... 12,981 11,772 1,521 26,274
Real estate- residential mortgages........ 8,320 12,554 14,736 35,610
Consumer.................................. 2,626 7,931 823 11,380
--------- ------- ------ --------
Total Loans $ 52,308 96,634 35,269 184,211
========= ======= ====== ========
35
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 11: LOAN MATURITY AND INTEREST SENSITIVITY (cont'd)
After One
One Year Year thru After Five
and Less Five Years Years Total
-------- ---------- ----- -----
Rate Sensitivity
----------------
Predetermined rate........................ $ 6,912 28,557 33,039 68,508
Floating or adjustable rate............... 45,396 68,077 2,230 115,703
--------- -------- -------- --------
Total $ 52,308 96,634 35,269 184,211
========= ======== ======== ========
TABLE 12: INTEREST RATE SENSITIVITY GAP
(Dollars in thousands) Expected Maturity
Year Ended December 31,
(As of December 31, 2000)
2001 2002 2003 2004 2005 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Assets:
Interest bearing balances.......... $ 22,479 12,470 5,745 495 1,188 0 42,377 42,377
Average interest rate............ 6.45 7.07 7.32 7.30 7.47 - 6.79
Debt securities.................... $ 2,389 1,810 3,599 2,603 5,798 54,935 71,134 70,604
Average interest rate............ 6.32 6.50 6.59 6.67 6.56 6.83 6.77
Adjustable rate loans.............. $ 46,093 16,805 17,988 17,928 16,343 546 115,703 115,703
Average interest rate............ 9.18 8.49 8.70 7.99 8.08 8.01 8.65
Fixed rate loans................... $ 9,286 7,799 9,974 8,179 10,077 23,193 68,508 72,047
Average interest rate............ 8.90 9.32 9.08 8.72 9.06 8.39 8.61
Federal funds sold................. $ 0 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- ------- -------
Total $ 80,247 38,884 37,306 29,205 33,406 78,674 297,722 300,731
------- ------- ------- ------- ------- ------- ------- -------
Interest liabilities:
Variable rate savings and
transaction accounts............. $ 33,276 0 0 0 0 65,127 98,403 98,403
Average interest rate............ 2.97 - - - - 1.10 1.73
Certificates of deposit and IRAs... $ 66,186 34,178 21,009 4,192 5,289 3,350 134,204 134,400
Average interest rate.............. 5.69 6.06 6.36 5.36 6.07 5.58 5.89
Short term borrowings.............. $ 22,738 0 0 0 0 0 22,738 22,738
Average interest rate............ 6.40 - - - - - 6.40
Long term fixed rate borrowings.... $ 1,671 184 5,197 87 0 22,102 29,241 30,944
Average interest rate 6.67 7.30 6.61 7.30 - 6.47 6.52
------- ------- ------- ------- ------- ------- ------- -------
Total $123,871 34,362 26,206 4,279 5,289 90,579 284,586 286,485
------- ------- ------- ------- ------- ------- ------- -------
Rate sensitive gap:
Periodic gap....................... $(43,624) 4,522 11,100 24,926 28,117 (11,905)
Cumulative gap..................... $(43,624) (39,102) (28,002) (3,076) 25,041 13,136
Cumulative gap as a percentage
of total assets.................... -13.8% -12.4% -8.9% -1.0% +7.9% +4.2%
36
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
(Dollars in thousands) Expected Maturity
Year Ended December 31,
(As of December 31, 1999)
2000 2001 2002 2003 2004 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Assets:
Interest bearing balances.......... $ 19,315 13,271 1,587 298 99 0 34,570 34,570
Average interest rate............ 6.19 5.84 5.74 6.25 7.00 - 6.04
Debt securities.................... $ 1,681 2,645 1,589 995 3,233 50,675 60,818 60,818
Average interest rate............ 7.00 6.46 7.43 5.87 6.83 6.71 6.72
Adjustable rate loans.............. $ 34,019 17,839 18,870 13,506 19,175 3,750 107,159 107,159
Average interest rate............ 8.75 8.69 8.52 8.48 8.00 8.35 8.51
Fixed rate loans................... $ 6,495 8,317 8,943 8,813 7,576 24,991 65,135 68,024
Average interest rate............ 8.55 8.94 9.15 8.67 8.38 8.31 8.52
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 61,510 42,072 30,989 23,612 30,083 79,416 267,682 270,571
-------- -------- -------- -------- -------- -------- -------- --------
Interest liabilities:
Variable rate savings and
transaction accounts............. $ 38,464 0 0 0 0 61,914 100,378 100,378
Average interest rate............ 2.87 - - - - 1.13 1.79
Certificates of deposit and IRAs... $ 54,239 29,882 12,691 7,804 5,519 7,327 117,462 116,729
Average interest rate.............. 5.07 5.63 5.54 5.63 5.35 5.94 5.36
Short term borrowings.............. $ 24,636 0 0 0 0 0 24,636 24,636
Average interest rate............ 5.79 - - - - - 5.79
Long term fixed rate borrowings.... $ 200 1,700 7,200 200 5,017 2,083 16,400 16,842
Average interest rate 7.29 6.74 6.20 7.29 6.42 7.13 6.47
-------- -------- -------- -------- -------- -------- -------- --------
Total $117,539 31,582 19,891 8,004 10,536 71,324 258,876 258,585
-------- -------- -------- -------- -------- -------- -------- --------
Rate sensitive gap:
Periodic gap....................... $(56,029) 10,490 11,098 15,608 19,547 8,115
Cumulative gap..................... $(56,029) (45,539) (34,441) (18,823) 714 8,806
Cumulative gap as a percentage
of total assets.................... -19.5% -15.8% -12.0% -6.5% -0.2% +3.1%
In the last quarter of 2000, 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. 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, 2000, 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,
2000 1999 1998
---- ---- ----
Three months or less................................... $ 5,431 3,525 4,933
Over three months to twelve months..................... 8,534 4,960 5,921
Over twelve months..................................... 9,377 7,731 5,882
--------- -------- --------
Total $ 23,342 16,216 16,736
========= ======== ========
37
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
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 MPB'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 MPB 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
-----------------------
MPB makes contractual commitments to extend credit and extends lines of
credit which are subject to MPB's credit approval and monitoring
procedures.
As of December 31, 2000, commitments to extend credit amounted to
$30,325,000 as compared to $29,648,000 as of December 31, 1999.
MPB 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 $2,921,000 at December 31, 2000, from $2,336,000 at
December 31, 1999.
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 MPB, 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 to 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, 2000, 1999 and 1998 was 1,517,000, ($2,205,000) and $26,000,
respectively.
38
Mid Penn Bancorp, Inc.
Summary of Selected Financial Data
(Dollars in thousands, except per share data)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
INCOME:
Total Interest Income.................... $ 22,053 20,112 20,436 19,312 18,171
Total Interest Expense................... 11,455 9,674 9,593 8,853 8,428
Net Interest Income...................... 10,598 10,438 10,843 10,459 9,743
Provision for Possible Loan Losses....... 325 325 254 109 52
Non-Interest Income...................... 1,556 1,689 1,398 1,772 841
Non-Interest Expense..................... 6,656 6,665 6,606 6,232 5,658
Income Before Income Taxes............... 5,203 5,137 5,381 5,890 4,874
Income Tax Expense....................... 1,255 1,253 1,516 1,721 1,397
Extraordinary Income, Net of Tax......... 0 0 0 0 0
Net Income............................... 3,948 3,884 3,865 4,169 3,477
COMMON STOCK DATA PER SHARE:*
Earnings Per Share....................... 1.30 1.28 1.27 1.37 1.14
Cash Dividends Declared.................. .80 2.18 .69 .66 .42
Stockholders' Equity..................... $ 9.76 8.74 10.90 10.27 9.48
AVERAGE SHARES OUTSTANDING.................. 3,036,007 3,037,976 2,892,416 2,895,417 2,895,430
AT YEAR-END:
Investments.............................. $ 73,885 64,099 67,933 53,599 42,740
Loans, Net of Unearned Discount.......... 184,211 172,294 152,993 154,576 155,070
Allowance for Loan Losses................ 2,815 2,505 2,313 2,281 2,278
Total Assets............................. 315,584 287,542 277,827 256,728 238,103
Total Deposits........................... 231,408 217,840 216,802 217,146 199,673
Short-term Borrowings.................... 22,738 24,636 12,159 2,234 4,512
Long-term Debt........................... 29,241 16,400 15,550 5,688 4,710
Stockholders' Equity..................... $ 29,626 26,565 31,536 29,730 27,438
RATIOS:
Return on Average Assets................. 1.34 1.40 1.45 1.71 1.52
Return on Average Stockholders' Equity... 14.64 14.68 12.81 14.76 13.37
Cash Dividend Payout Ratio............... 61.54 170.91 53.73 47.92 36.67
Allowance for Loan Losses to Loans....... 1.53 1.45 1.51 1.48 1.47
Average Stockholders' Equity to
Average Assets........................... 9.15 9.50 11.36 11.56 11.34
* Per share figures are based on weighted
average shares outstanding for the respec-
tive years as restated after giving effect
to stock dividends and splits.
39