10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

x    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

OR

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 1-13677

MID PENN BANCORP, INC.

(Exact Name of Registrant as Specified in its Charter)

Pennsylvania	25-1666413
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)
349 Union Street	17061

Millersburg, Pennsylvania (Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code 717.692.2133

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $1.00	Amercian Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitiv proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes No

The aggregate market value of the Registrant’s voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of June 28, 2002, the last business day of the Registrant’s most recently completed second fiscal quarter was approximately $37,539,000.

As of February 21, 2003, the Registrant had 3,033,379 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Excerpts from the Registrant’s Annual Report to Shareholders are incorporated herein by reference in response to Part II, hereof. The Registrant’s definitive proxy statement to be used in connection with the 2003 Annual Meeting of Shareholders is incorporated herein by reference in partial response to Part III, hereof.

MID PENN BANCORP, INC.

FORM 10-K

INDEX

		Page
PART I
Item 1—	Business	1
Item 2—	Properties	11
Item 3—	Legal Proceedings	12
Item 4—	Submission of Matters to a Vote of Security Holders	12
PART II
Item 5—	Market for Registrant’s Common Equity and Related Shareholder Matters	13
Item 6—	Selected Financial Data	13
Item 7—	Management’s Discussion and Analysis of Financial Condition and Results of Operation	13
Item 7A—	Quantitative and Qualitative Disclosure About Market Risk	13
Item 8—	Financial Statements and Supplementary Data	13
Item 9—	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	13
PART III
Item 10—	Directors and Executive Officers of the Registrant
Item 11—	Executive Compensation	14
Item 12—	Item 12—Security Ownership of Certain Beneficial Owners and Management	14
Item 13—	Certain Relationships and Related Transactions
Item 14—	Controls and Procedures	14
PART IV
Item 15—	Exhibits, Financial Statements, Schedules and Reports on Form 8-K	15
Signatures		17
EXHIBIT INDEX		21

PART I

Forward Looking Statements

Mid Penn Bancorp, Inc. (“MPB”) may include forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters in this and other filings with the SEC. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, MPB notes that a variety of factors could cause MPB’s actual results and experience to differ materially from the anticipated results or other expectations expressed in MPB’s forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of MPB’s business include the following: general economic conditions, interest rates, financial and capital markets, including their impact on capital expenditures; business conditions in the banking industry; the regulatory environment; rapidly changing technology and evolving banking industry standards; competitive factors, including increased competition with community, regional and national financial institutions; new service and product offerings by competitors and price pressures; and similar items.

ITEM 1.    BUSINESS.

Mid Penn Bancorp, Inc.

Mid Penn Bancorp, Inc. is a one bank holding company, incorporated in the Commonwealth of Pennsylvania in August 1991. On December 31, 1991, MPB acquired, as part of the holding company formation, all of the outstanding common stock of Mid Penn Bank, and the bank became a wholly-owned subsidiary of MPB. MPB’s other wholly-owned subsidiaries are Mid Penn Insurance Services, LLC which provides a range of personal and investment insurance products and Mid Penn Investment Corporation which is engaged in investing activities. MPB’s primary business is the operation of Mid Penn Bank which is managed as a single business segment.

MPB’s consolidated financial condition and results of operations consist almost entirely of that of Mid Penn Bank. At December 31, 2002, MPB had total consolidated assets of $363,284,000, total deposits of $274,703,000 and total shareholders’ equity of $35,204,000.

As of December 31, 2002, the holding company did not own or lease any property and had no employees.

Mid Penn Bank

Millersburg Bank, the predecessor to Mid Penn Bank, was organized in 1868, and became a state chartered bank in 1931, obtaining trust powers in 1935, at which time its name was changed to Millersburg Trust Company. In 1962, the Lykens Valley Bank merged with and into Millersburg Trust Company. In 1971, Farmer’s State Bank of Dalmatia merged with Millersburg Trust Company and the resulting entity adopted the name “Mid Penn Bank.” In 1985, the bank acquired Tower City National Bank. Effective July 10, 1998, MPB acquired Miners Bank of Lykens, which was merged into the bank. The bank is supervised by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation. MPB’s and the bank’s legal headquarters are located at 349 Union Street, Millersburg, Pennsylvania 17061.

The bank presently has 12 offices. The bank, headquartered in Millersburg, Dauphin County, Pennsylvania, has offices in Dauphin, Northumberland, Schuylkill, and Cumberland Counties, Pennsylvania with total assets of approximately $363 million as of December 31, 2002.

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MPB’s primary business consists of attracting deposits from its network of community banking offices operated by the bank. The bank engages in 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, personal loans, mortgage and home equity loans, secured and unsecured commercial and consumer loans, lines of credit, construction financing, farm loans, community development and local government loans and various types of time and demand deposits. Deposits of the bank are insured by the Bank Insurance Fund of the FDIC to the maximum extent provided by law. In addition, the bank provides a full range of trust services through its Trust Department. Mid Penn Bank also offers other services such as Internet banking, telephone banking, cash management services, automated teller services and safe deposit boxes.

At December 31, 2002, Mid Penn Bank had 106 full-time and 26 part-time employees. No employees are represented by a collective bargaining agent, and the bank believes it enjoys good relations with its personnel.

Lending Activities

Mid Penn Bank offers a variety of loan products to its customers, including loans secured by real estate, commercial and consumer loans. The bank’s lending objectives are as follows:

• to establish a diversified commercial loan portfolio;

• to provide a satisfactory return to the company’s shareholders by properly pricing loans to include the cost of funds, administrative costs, bad debts, local economic conditions, competition, customer relationships, the term of the loan, credit risk, collateral quality and a reasonable profit margin.

Credit risk is managed through portfolio diversification, underwriting policies and procedures and loan monitoring practices. The bank generally secures its loans with real estate with such collateral values dependent and subject to change based on real estate market conditions within its market area. As of December 31, 2002, Mid Penn Bank’s highest concentrations of credit were in mobile home park land and commercial real estate office financings and most of the bank’s business activity with customers was located in Central Pennsylvania, specifically in Dauphin, lower Northumberland, Western Schuylkill, and Cumberland Counties.

Investment Activities

MPB’s investment portfolio is used to improve earnings through investments of funds in higher-yielding assets, while maintaining asset quality, which provide the necessary balance sheet liquidity for MPB. MPB does not have any significant concentrations of investment securities.

MPB’s entire portfolio of investment securities is considered available for sale. As such, the investments are recorded on the balance sheet at market value. MPB’s investments include US Treasury, agency and municipal securities that 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, MPB’s existing securities are valued differently in comparison. This difference in value, or unrealized gain, amounted to $1,357,000, net of tax, as of December 31, 2002. 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.

For additional information with respect to MPB’s business activities, see Part II, Item 7 of this report.

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Sources of Funds

Mid Penn Bank primarily uses deposits and borrowings to finance lending and investment activities. Borrowing sources include advances from the Federal Home Loan Bank of Pittsburgh, repurchase agreements with investment banks and overnight borrowings from Mid Penn Bank’s customers and correspondent bank. All borrowings, except for the line of credit with Mid Penn Bank’s correspondent bank, require collateral in the form of loans or securities. Borrowings are, therefore, limited by collateral levels and the available lines of credit extended by the bank’s creditors. As a result, deposits remain key to the future funding and growth of the business. Deposit growth within the banking industry has been generally slow due to strong competition from a variety of financial services companies. This competition may require financial institutions to adjust their product offerings and pricing to adequately grow deposits.

Competition

Mid Penn Bank actively competes with other financial services companies for deposit and loan business. Competitors include other commercial banks, savings banks, savings and loan associations, insurance companies, securities brokerage firms, credit unions, finance companies, mutual funds, and money market funds. Financial institutions compete primarily on the quality of services rendered, interest rates on loans and deposits, service charges, the convenience of banking facilities, location and hours of operation and, in the case of loans to larger commercial borrowers, relative lending limits.

Many competitors are significantly larger than Mid Penn Bank and have significantly greater financial resources, personnel and locations from which to conduct business. In addition, the bank is subject to banking regulations while certain competitors may not be. There are relatively few barriers for companies wanting to enter into the financial services industry. For more information, see the “Supervision and Regulation” section below.

The growth of mutual funds over the past decade has made it increasingly difficult for financial institutions to attract deposits. The continued flow of cash into mutual funds, much of which is made through tax deferred investment vehicles such as 401(k) plans, and a generally strong economy, have, until recently, fueled high returns for these investments, in particular, certain equity funds. These returns perpetuated the flow of additional investment dollars into mutual funds and other products not traditionally offered by banks. In addition, insurance companies recently have become more significant competitors for deposits through their thrift subsidiaries.

Supervision and Regulation

General

Bank holding companies and banks are extensively regulated under both Federal and state laws. The regulation and supervision of MPB and Mid Penn Bank are designed primarily for the protection of depositors, the FDIC and the monetary system, and not MPB or its shareholders. Enforcement actions may include the imposition of a conservator or receiver, cease-and-desist orders and written agreements, the termination of insurance on deposits, the imposition of civil money penalties and removal and prohibition orders. If any enforcement action is taken by a banking regulator, the value of an equity investment in MPB could be substantially reduced or eliminated.

Holding Company Regulation

As a registered bank holding company under the Bank Holding Company Act of 1956 and a Pennsylvania business corporation, we are regulated by the Federal Reserve Board and the provisions of Section 115 of the Pennsylvania Banking Code of 1965.

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The Bank Holding Company Act requires MPB to file an annual report with the Federal Reserve Board regarding the holding company and its subsidiary bank. The Federal Reserve Board also makes examinations of the holding company. Mid Penn Bank is not a member of the Federal Reserve System; however, the Federal Reserve Board possesses cease-and-desist powers over bank holding companies and their subsidiaries where their actions would constitute an unsafe or unsound practice or violation of law.

The Bank Holding Company Act restricts a bank holding company’s ability to acquire control of additional banks. In addition, the Act restricts the activities in which bank holding companies may engage directly or through non-bank subsidiaries.

The Gramm-Leach-Bliley Financial Services Modernization Act of l999 (the “Gramm-Leach-Bliley Act”) amended the Bank Holding Company Act of 1956 to create a new category of holding company—the “financial holding company.” To be designated as a financial holding company, a bank holding company must file an application with the Federal Reserve Board. The holding company must be well capitalized and well managed, as determined by Federal Reserve Board regulations. When a bank holding company becomes a financial holding company, the holding company or its affiliates may engage in any financial activities that are “financial in nature or incidental to such activities.” Furthermore, the Federal Reserve may approve a proposed activity if it is “complementary” to financial activities and does not threaten the safety and soundness of banking. The Act provides an initial list of activities that constitute activities that are financial in nature, including:

• lending and deposit activities,

• insurance activities, including underwriting, agency and brokerage,

• providing financial investment advisory services,

• underwriting in, and acting as a broker or dealer in, securities,

• merchant banking,

• insurance company portfolio investment,

• support services,

• making equity and debt investments in corporations or projects designed primarily to promote community welfare, and providing advisory services to these programs,

• subject to certain limitations, providing others financially oriented data processing or bookkeeping services,

• issuing and selling money orders, travelers’ checks and United States savings bonds,

• providing consumer financial counseling that involves counseling, educational courses and distribution of instructional materials to individuals on consumer-oriented financial management matters, including debt consolidation, mortgage applications, bankruptcy, budget management, real estate tax shelters, tax planning, retirement and estate planning, insurance and general investment management, so long as this activity does not include the sale of specific products or investments; and

• providing tax planning and preparation advice.

In addition to permitting financial services providers to enter into new lines of business, the law allows firms the freedom to streamline existing operations and to potentially reduce costs. The Act may increase both opportunity as well as competition. Many community banks are less able to devote the capital and management resources needed to facilitate broad expansion of financial services including insurance and brokerage services.

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Bank Regulation

Mid Penn Bank is subject to supervision, regulation and examination by the Pennsylvania Department of Banking and the FDIC. In addition, the bank is subject to a variety of local, state and federal laws that affect its operations.

Banking regulations include, but are not limited to, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and the safety and soundness of banking practices.

Capital Requirements

Under risk-based capital requirements for bank holding companies, MPB is required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance-sheet activities, such as standby letters of credit) of eight percent. At least half of the total capital is to be composed of common equity, retained earnings and qualifying perpetual preferred stock, less goodwill (“tier 1 capital” and together with tier 2 capital “total capital”). The remainder may consist of subordinated debt, non-qualifying preferred stock and a limited amount of the loan loss allowance (“tier 2 capital”).

In addition, the Federal Reserve Board has established minimum leverage ratio requirements for bank holding companies. These requirements provide for a minimum leverage ratio of tier 1 capital to adjusted average quarterly assets (“leverage ratio”) equal to three percent for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies will generally be required to maintain a leverage ratio of from at least four to five percent. The requirements also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the requirements indicate that the Federal Reserve Board will continue to consider a “tangible tier 1 leverage ratio” (deducting all intangibles) in evaluating proposals for expansion or new activity. The Federal Reserve Board has not advised MPB of any specific minimum tier 1 leverage ratio applicable to it.

Mid Penn Bank is subject to similar capital requirements adopted by the FDIC. The FDIC has not advised the bank of any specific minimum leverage ratios applicable to it.

The capital ratios of MPB and Mid Penn Bank are described in Note 15 to MPB’s Consolidated Financial Statements.

Banking regulators continue to indicate their desire to further develop capital requirements applicable to banking organizations. Changes to capital requirements could materially affect the profitability of MPB or the market value of MPB stock.

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Prompt Corrective Action

In addition to the required minimum capital levels described above, federal law establishes a system of “prompt corrective actions” which Federal banking agencies are required to take, and certain actions which they have discretion to take, based upon the capital category into which a federally regulated depository institution falls. Regulations set forth detailed procedures and criteria for implementing prompt corrective action in the case of any institution which is not adequately capitalized. Under the rules, an institution will be deemed to be “adequately capitalized” or better if it exceeds the minimum Federal regulatory capital requirements. However, it will be deemed “undercapitalized” if it fails to meet the minimum capital requirements, “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6.0 percent, a Tier 1 risk-based capital ratio that is less than 3.0 percent, or a leverage ratio that is less than 3.0 percent, and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to or less than 2.0 percent.

The prompt corrective action rules require an undercapitalized institution to file a written capital restoration plan, along with a performance guaranty by its holding company or a third party. In addition, an undercapitalized institution becomes subject to certain automatic restrictions including a prohibition on payment of dividends, a limitation on asset growth and expansion, in certain cases, a limitation on the payment of bonuses or raises to senior executive officers, and a prohibition on the payment of certain “management fees” to any “controlling person”. Institutions that are classified as undercapitalized are also subject to certain additional supervisory actions, including increased reporting burdens and regulatory monitoring, a limitation on the institution’s ability to make acquisitions, open new branch offices, or engage in new lines of business, obligations to raise additional capital, restrictions on transactions with affiliates, and restrictions on interest rates paid by the institution on deposits. In certain cases, bank regulatory agencies may require replacement of senior executive officers or directors, or sale of the institution to a willing purchaser. If an institution is deemed to be “critically undercapitalized” and continues in that category for four quarters, the statute requires, with certain narrowly limited exceptions, that the institution be placed in receivership.

Deposit Insurance

Deposits of the Bank are insured by the FDIC through the Bank Insurance Fund (“BIF”). The insurance assessments paid by an institution are to be based on the probability that the fund will incur a loss with respect to the institution. The FDIC has adopted deposit insurance regulations under which insured institutions are assigned to one of the following three capital groups based on their capital levels: “well-capitalized,” “adequately capitalized” and “undercapitalized.” Banks in each of these three groups are further classified into three subgroups based upon the level of supervisory concern with respect to each bank. The resulting matrix creates nine assessment risk classifications to which are assigned deposit insurance premiums ranging from 0.00% for the best capitalized, healthiest institutions, to 0.27% for undercapitalized institutions with substantial supervisory concerns.

The FDIC sets deposit insurance assessment rates on a semiannual basis and will increase deposit insurance assessments whenever the ratio of reserves to insured deposits in a fund is less than 1.25. While under the current assessment matrix, Mid Penn Bank does not pay any assessments for deposit insurance, because of past bank failures there is a possibility that the FDIC will adjust the assessment matrix in the future and that as a result Mid Penn Bank may have to start paying insurance assessments.

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Mid Penn Bank is also subject to quarterly assessments relating to interest payments on Financing Corporation (FICO) bonds issued in connection with the resolution of the thrift industry crisis. The FICO assessment rate is adjusted quarterly to reflect changes in the assessment bases of the BIF. The FICO assessments on BIF-insured deposits are set at an annual rate of .0168% of assessable deposits.

Environmental Laws

Management does not anticipate that compliance with environmental laws and regulations will have any material effect on MPB’s capital, expenditures, earnings, or competitive position. However, environmentally related hazards have become a source of high risk and potentially unlimited liability for financial institutions.

In 1995, the Pennsylvania General Assembly enacted the Economic Development Agency, Fiduciary and Lender Environmental Liability Protection Act which, among other things, provides protection to lenders from environmental liability and remediation costs under the environmental laws for releases and contamination caused by others. A lender who engages in activities involved in the routine practices of commercial lending, including, but not limited to, the providing of financial services, holding of security interests, workout practices, foreclosure or the recovery of funds from the sale of property shall not be liable under the environmental acts or common law equivalents to the Pennsylvania Department of Environmental Resources or to any other person by virtue of the fact that the lender engages in such commercial lending practice. A lender, however, will be liable if it, its employees or agents, directly cause an immediate release or directly exacerbate a release of regulated substance on or from the property, or known and willfully compelled the borrower to commit an action which caused such release or violate an environmental act. The Economic Development Agency, Fiduciary and Lender Environmental Liability Protection Act, however, does not limit federal liability which still exists under certain circumstances.

Federal Reserve Board Requirements

Regulation D of the Federal Reserve Board requires all depository institutions to maintain reserves on transaction accounts. These reserves may be in the form of cash or non-interest-bearing deposits with the Federal Reserve Bank of Philadelphia. Under Regulation D, Mid Penn Bank’s reserve requirement was $500,000 and $2,554,000 at December 31, 2002 and 2001, respectively.

Recent Developments

USA Patriot Act of 2001.    In October 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks in New York, Pennsylvania and Washington D.C. which occurred on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcement’s and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

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IMLAFATA.    As part of the USA Patriot Act, Congress adopted the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (IMLAFATA). IMLAFATA amended the Bank Secrecy Act and adopted certain additional measures that increase the obligation of financial institutions, including MPB, to identify their customers, watch for and report upon suspicious transactions, respond to requests for information by federal banking regulatory authorities and law enforcement agencies, and share information with other financial institutions. The Secretary of the Treasury has adopted several regulations to implement these provisions. MPB is also barred from dealing with foreign “shell” banks. In addition, IMLAFATA expands the circumstances under which funds in a bank account may be forfeited. IMLAFATA also amended the Bank Holding Company Act and the Bank Merger Act to require the federal banking regulatory authorities to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing an application to expand operations. MPB has in place a Bank Secrecy Act compliance program.

Sarbanes-Oxley Act of 2002.    On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The stated goals of the Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.

The Act is the most far-reaching U.S. securities legislation enacted in decades. The Act generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934. Due to the SEC’s extensive role in implementing rules relating to many of the Act’s new requirements, the final scope of these requirements remains to be determined.

The Act includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the SEC. The Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.

The Act addresses, among other matters:

• audit committees for all reporting companies;

• certification of financial statements by the chief executive officer and the chief financial officer;

• the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement;

• a prohibition on insider trading during pension plan black out periods;

• disclosure of off-balance sheet transactions;

• a prohibition on personal loans to directors and officers; expedited filing requirements for Forms 4’s;

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• disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code;

• “real time” filing of periodic reports;

• the formation of a public accounting oversight board;

• auditor independence; and

• various increased criminal penalties for violations of securities laws.

The Act contains provisions that were effective upon enactment on July 30, 2002 and provisions that will be phased in for up to one year after enactment. The SEC was delegated the task of enacting rules to implement various provisions with respect to, among other matters, disclosure in periodic filings pursuant to the Exchange Act.

Regulation W.    Transactions between a bank and its “affiliates” are quantitatively and qualitatively restricted under the Federal Reserve Act. The Federal Deposit Insurance Act applies Sections 23A and 23B to insured nonmember banks in the same manner and to the same extent as if they were members of the Federal Reserve System. The Federal Reserve Board has also recently issued Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with respect to affiliate transactions. Regulation W incorporates the exemption from the affiliate transaction rules but expands the exemption to cover the purchase of any type of loan or extension of credit from an affiliate. Affiliates of a bank include, among other entities, the bank’s holding company and companies that are under common control with the bank. MPB is considered to be an affiliate of Mid Penn Bank. In general, subject to certain specified exemptions, a bank or its subsidiaries are limited in their ability to engage in “covered transactions” with affiliates:

• to an amount equal to 10% of the bank’s capital and surplus, in the case of covered transactions with any one affiliate; and

• to an amount equal to 20% of the bank’s capital and surplus, in the case of covered transactions with all affiliates.

In addition, a bank and its subsidiaries may engage in covered transactions and other specified transactions only on terms and under circumstances that are substantially the same, or at least as favorable to the bank or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A “covered transaction” includes:

• a loan or extension of credit to an affiliate;

• a purchase of, or an investment in, securities issued by an affiliate;

• a purchase of assets from an affiliate, with some exceptions;

• the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; and

• the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.

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In addition, under Regulation W:

• a bank and its subsidiaries may not purchase a low-quality asset from an affiliate;

• covered transactions and other specified transactions between a bank or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices; and

• with some exceptions, each loan or extension of credit by a bank to an affiliate must be secured by collateral with a market value ranging from 100% to 130%, depending on the type of collateral, of the amount of the loan or extension of credit.

Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the Federal Reserve Board decides to treat these subsidiaries as affiliates.

Concurrently with the adoption of Regulation W, the Federal Reserve Board has proposed a regulation which would further limit the amount of loans that could be purchased by a bank from an affiliate to not more than 100% of the bank’s capital and surplus.

Effects of Government Policy and Potential Changes in Regulation

Changes in regulations applicable to MPB or Mid Penn Bank, or shifts in monetary or other government policies, could have a material affect on their business. MPB’s and the bank’s business is also affected by the state of the financial services industry in general. As a result of legal and industry changes, management believes that the industry will continue to experience an increased rate of change as the financial services industry strives for greater product offerings, market share and economies of scale.

From time to time, legislation is enacted that has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, and before various bank regulatory agencies. MPB can not predict the likelihood of any major changes or the impact such changes might have on MPB and/or the bank. Various congressional bills and other proposals have proposed a sweeping overhaul of the banking system, including provisions for: limitations on deposit insurance coverage; changing the timing and method financial institutions use to pay for deposit insurance; expanding the power of banks by removing the restrictions on bank underwriting activities; and tightening the regulation of bank derivatives activities; and allowing commercial enterprises to own banks.

MPB’s earnings are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The monetary policies of the Federal Reserve have had, and will likely continue to have, an impact on the operating results of commercial banks because of the Federal Reserve’s power to implement national monetary policy, to, among other things, curb inflation or combat recession. The Federal Reserve has a major impact on the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of, among other things, the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.

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From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restrictions on, the business of the bank. It cannot be predicted whether any such legislation will be adopted or, if adopted, how such legislation would affect the business of the bank. As a consequence of the extensive regulation of commercial banking activities in the United States, the bank’s business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business.

Available Information

Mid Penn Bancorp Inc.’s common stock is registered under Section 12(b) of the Securities Exchange Act of 1934 and is traded on the American Stock Exchange under the trading symbol MBP. Mid Penn Bancorp, Inc. is subject to the informational requirements of the Exchange Act, and, accordingly, files reports, proxy statements and other information with the Securities and Exchange Commission. The reports, proxy statements and other information filed with the SEC are available for inspection and copying at the SEC’s Public Reference Room at Judiciary Plaza, 450 Fifth Street, N.W, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Mid Penn Bancorp, Inc. is an electronic filer with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC’s Internet site address is: http://www.sec.gov. Our Internet site address is: http//www.midpennbank.com.

You may also inspect materials and other information concerning Mid Penn Bancorp, Inc. at the offices of the American Stock Exchange, Inc. at 86 Trinity Place, New York, New York 10006 because our common stock is listed on the American Stock Exchange under the trading symbol MBP. The American Stock Exchange’s Internet site address is: http://www.amex.com.

ITEM 2.    PROPERTIES.

The bank owns its main office, branch offices and certain parking facilities related to its banking offices, all of which are free and clear of any lien. The bank’s main office and all branch offices are located in Pennsylvania. The table below sets forth the location of each of the bank’s properties.

Office and Address	Description of Property
Main Office	Main Bank Office
349 Union Street
Millersburg, PA 17061
Tremont Branch Office	Branch Bank
7-9 East Main Street
Tremont, PA 17981
Elizabethville Branch Office	Branch Bank
2 East Main Street
Elizabethville, PA 17023
Elizabethville Branch Office	Drive-In
11 East Main Street
Elizabethville, PA 17023

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Dalmatia Branch Office	Branch Bank
School House Road
Dalmatia, PA 17017
Halifax Branch Office	Branch Bank
Halifax Shopping Center
3763 Peters Mountain Road
Halifax, PA 17032
Carlisle Pike Branch Office	Branch Bank
4622 Carlisle Pike
Mechanicsburg, PA 17055
Harrisburg Branch Office	Branch Bank
4098 Derry Street
Harrisburg, PA 17111
Harrisburg Branch Office	Branch Bank
2615 North Front Street
Harrisburg, PA 17110
Tower City Branch Office	Branch Bank
545 East Grand Avenue
Tower City, PA 17980
Dauphin Branch Office	Branch Bank
1001 Peters Mountain Road
Dauphin, PA 17018
Miners-Lykens Branch Office	Branch Bank
550 Main Street
Lykens, PA 17048

All of these properties are in good condition and are deemed by management to be adequate for the bank’s purposes.

ITEM 3.    LEGAL PROCEEDINGS.

Management is not aware of any litigation that would have a material adverse effect on the consolidated financial position of MPB. There are no proceedings pending other than ordinary routine litigation incident to the business of MPB and of the bank. In addition, management does not know of any material proceedings contemplated by governmental authorities against MPB or the bank.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

12

PART II

ITEM 5.    MARKET FOR MPB’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The information required by this Item, regarding market value, dividend payments, and number of shareholders is set forth on page 2 of MPB’s Annual Report to Shareholders, which page is included at Exhibit 13 hereto, and incorporated herein by reference.

As of February 21, 2003, there were approximately 971 shareholders of record of MPB’s common stock.

ITEM 6.    SELECTED FINANCIAL DATA.

The information required by this Item is set forth on page 39 of MPB’s Annual Report to Shareholders, which page is included at Exhibit 13 hereto, and incorporated herein by reference.

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF         OPERATIONS.

The information required by this Item is set forth on pages 24 through 38 of MPB’s Annual Report to Shareholders, which pages are included at Exhibit 13 hereto, and incorporated herein by reference.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

The information required by this Item is set forth on pages 34 through 37 of MPB’s Annual Report to Shareholders, which pages are included at Exhibit 13, hereto and incorporated herein by reference.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The information required by this Item is set forth on pages 5 through 23 of MPB’s Annual Report to Shareholders, which pages are included at Exhibit 13 hereto, and incorporated herein by reference.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL         DISCLOSURE.

None.

13

PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF MPB.

The information required by this Item, relating to directors, executive officers, and control persons is set forth on pages 9-10 and 16-17 of MPB’s definitive proxy statement to be used in connection with the 2003 Annual Meeting of Shareholders, which pages are incorporated herein by reference.

ITEM 11.    EXECUTIVE COMPENSATION.

The information required by this Item, relating to executive compensation, is set forth on pages 13-15 of MPB’s definitive proxy statement to be used in connection with the 2003 Annual Meeting of Shareholders, which pages are incorporated herein by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this Item, relating to beneficial ownership of MPB’s common stock, is set forth on pages 16-17 of MPB’s definitive proxy statement to be used in connection with the 2003 Annual Meeting of Shareholders, which pages are incorporated herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this Item, relating to transactions with management and others, certain business relationships and indebtedness of management, is set forth on page 15 of MPB’s definitive proxy statement to be used in connection with the 2003 Annual Meeting of Shareholders, which page is incorporated herein by reference.

ITEM 14.    Controls and Procedures.

Within 90 days prior to the date of this Form 10-K, MPB carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, MPB’s disclosure controls and procedures are effective in timely alerting them to material information relating to MPB (including its consolidated subsidiaries) required to be included in our periodic SEC filings. There have been no significant changes in MPB’s internal controls or, to its knowledge, in other factors that could significantly affect internal controls subsequent to the date MPB carried out its evaluation.

14

PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.

(a)  1.  Financial Statements

The following financial statements are included by reference in Part II, Item 8 hereof:

Report of Independent Certified Public Accountants.

Consolidated Balance Sheet.

Consolidated Statement of Income.

Consolidated Statement of Changes in Stockholders’ Equity.

Consolidated Statement of Cash Flows.

Notes to Consolidated Financial Statements.

    2.    Financial Statement Schedules.

Financial Statement Schedules are omitted because the required information is either not applicable, not required or is shown in the respective financial statements or in the notes thereto.

    3.    The following Exhibits are filed herewith or incorporated by reference as a part of this Annual Report.

3(i)	The Registrant’s Articles of Incorporation. (Incorporated by reference to Registrant’s Annual Report on Form 10-K filed with the SEC on March 29, 2002.)
(3)(ii)	The Registrant’s By-laws. (Incorporated by reference to Registrant’s Annual Report on Form 10-K filed with the SEC on March 29, 2002.)
10.1	Mid Penn Bank’s Profit Sharing Retirement Plan. (Incorporated by reference to Registrant’s Annual Report on Form 10-K filed with the SEC on March 29, 2002.)
10.2	Mid Penn Bank’s Employee Stock Ownership Plan. (Incorporated by reference to Registrant’s Annual Report on Form 10-K filed with the SEC on March 29, 2002.)
10.3	The Registrant’s Dividend Reinvestment Plan, as amended and restated. (Incorporated by reference to Registrant’s Registration Statement on Form S-3, filed with the SEC on November 3, 1997.)
10.4	Salary Continuation Agreement between Mid Penn Bank and Alan W. Dakey.
11	Statement re: Computation of Per Share Earnings. (Included herein at Exhibit 13, at page 6 of Registrant’s Annual Report to Shareholders.)
12	Statements re: Computation of Ratios. (Included herein at Exhibit 13, at page 39 of Registrant’s Annual Report to Shareholders.)
13	Excerpts from Registrant’s Annual Report to Shareholders.

15

21	Subsidiaries of Registrant.
23	Consent of Parente Randolph, PC, independent auditors.
99.1	Chief Executive Officer’s §906 Certification.
99.2	Chief Financial Officer’s §906 Certification.

(b)    Reports on Form 8-K.

    No Current Reports on Form 8-K were filed by Registrant during the fourth quarter of the fiscal year ended

December 31, 2002.

(c)    The exhibits required herein are included at item 15(a), above.

(d)    Not Applicable.

.

16

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Mid Penn Bancorp, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MID PENN BANCORP, INC. (Registrant)
By	/s/    Alan W. Dakey
	Alan W. Dakey President and Chief Executive Officer

Dated:    March 27, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Mid Penn Bancorp, Inc. and in the capacities and on the dates indicated.

	Date
By  /s/    Eugene F. Shaffer	March 27, 2003
Eugene F. Shaffer Chairman of the Board of Directors
By  /s/    Alan W. Dakey	March 27, 2003
Alan W. Dakey, President, Chief Executive Officer and Director (Principal Executive Officer)
By  /s/    Kevin W. Laudenslager	March 27, 2003
Kevin W. Laudenslager Treasurer (Principal Financial and Principal Accounting Officer)
By  /s/    Jere M. Coxon	March 27, 2003
Jere M. Coxon, Director
By  /s/    Earl R. Etzweiler	March 27, 2003
Earl R. Etzweiler, Director
By  /s/    Gregory M. Kerwin	March 27, 2003
Gregory M. Kerwin, Director
By  /s/    Charles F. Lebo	March 27, 2003
Charles F. Lebo, Director

17

	Date
By  /s/    William G. Nelson	March 27, 2003
William G. Nelson, Director
By  /s/    Donald E. Sauve	March 27, 2003
Donald E. Sauve, Director
By  /s/    Edwin D. Schlegel	March 27, 2003
Edwin D. Schlegel, Director
By  /s/    Guy J. Snyder, Jr.	March 27, 2003
Guy J. Snyder, Jr., Director
By  /s/    Warren A. Miller	March 27, 2003
Warren A. Miller, Director

18

CERTIFICATION

I, Alan W. Dakey, President and Chief Executive Officer, certify, that:

1.    I have reviewed this annual report on Form 10-K of Mid Penn Bancorp, Inc.;

2.    Based on my knowledge, the annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.    Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.    The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

(c)  presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.  The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)  all significant deficiencies in the design or operation of the internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.    The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:	March 27, 2003	By:	/s/ Alan W. Dakey
			Alan W. Dakey President and Chief Executive Officer

CERTIFICATION

I, Kevin W. Laudenslager, Chief Financial Officer, certify, that:

1.    I have reviewed this annual report on Form 10-K of Mid Penn Bancorp, Inc.;

2.    Based on my knowledge, the annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.    Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.    The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

(c)  presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.    The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)  all significant deficiencies in the design or operation of the internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.    The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:	March 27, 2003	By:	/s/ Kevin W. Laudenslager
			Kevin W. Laudenslager, Chief Financial Officer

EXHIBIT INDEX

Exhibit No.			Page Number in Manually Signed Original
3	(i)	The Registrant’s Articles of Incorporation. (Incorporated by reference to Registrant’s Annual Report on Form 10-K filed with the SEC on March 29, 2002.)	*
3	(ii)	The Registrant’s By-laws. (Incorporated by reference to Registrant’s Annual Report on Form 10-K filed with the SEC on March 29, 2002.)	*
10.1		Mid Penn Bank’s Profit Sharing Retirement Plan. (Incorporated by reference to Registrant’s Annual Report on Form 10-K filed with the SEC on March 29, 2002.)	*
10.2		Mid Penn Bank’s Employee Stock Ownership Plan. (Incorporated by reference to Registrant’s Annual Report on Form 10-K filed with the SEC on March 29, 2002.)	*
10.3		The Registrant’ Dividend Reinvestment Plan. (Incorporated by reference to Registrant’s Annual Report on Form 10-K filed with the SEC on November 3, 1997.)	*
10.4		Salary Continuation Agreement between Mid Penn Bank and Alan W. Dakey.	22
11		Statement re: Computation of Per Share Earnings. (Included herein at Exhibit 13, at page 6 of Registrant’s Annual Report to Shareholders.)	*
12		Statement re: Computation of Ratios. (Included herein at Exhibit 13, at page 39 of Registrant’s Annual Report to Shareholders.)	*
13		Excerpts from Registrant’s Annual Report to Shareholders.	36
21		Subsidiaries of Registrant.	74
23		Consent of Parente Randolph, PC, independent auditors.	75
99.1		Chief Executive Officer’s §906 Certification.	76
99.2		Chief Financial Officer’s §906 Certification.	77

* Incorprated by reference.

EX-10.4

EXHIBIT 10.4

MID PENN BANK

SALARY CONTINUATION AGREEMENT

THIS AGREEMENT is made effective this 1st day of January 1999, by and Mid Penn Bank, a Pennsylvania corporation located in Millersburg, Pennsylvania (the “Company”) and Alan W. Dakey (the “Executive”).

INTRODUCTION

To encourage the Executive to remain an employee of the Company, the Company is willing to provide salary continuation benefits to the Executive. The Company will pay the benefits from its general assets.

AGREEMENT

The Executive and the Company agree as follows:

Article 1

Definitions

1.1  Definitions.    Whenever used in this Agreement, the following words and phrases shall have the meanings specified:

1.1.1 “Change of Control” shall mean any of the following:

(A)    any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), other than the Corporation, a subsidiary of the Corporation, an employee benefit plan (or related trust) of the Corporation or a direct or indirect subsidiary of the Corporation, or affiliates of the Corporation (as defined in Rule 12b-2 under the Exchange Act), becomes the beneficial owner (as determined pursuant to Rule l3d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing more than 20% of the combined voting power of the Corporation’s then outstanding securities or announces a tender offer

or exchange offer for securities of the Corporation representing more than 20% of the combined voting power of the Corporation’s then outstanding securities; or

(B)  the liquidation or dissolution of the Corporation or the Company or the occurrence of, or execution of an agreement providing for, a sale of all or substantially all of the assets of the Corporation or the Company to an entity which is not a direct or indirect subsidiary of the Corporation; or

(C) the occurrence of, or execution of an agreement providing for, a reorganization, merger, consolidation or other similar transaction or connected series of transactions of the Corporation as a result of which either (a) the Corporation does not survive or (b) pursuant to which shares of the Corporation, common stock (“Common Stock”) would be converted into cash, securities or other property, unless, in case of either (a) or (b), the holders of Corporation Common Stock immediately prior to such transaction will, following the consummation of the transaction, beneficially own, directly or indirectly, more than: 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the corporation surviving, continuing or resulting from such transaction; or

(D)  the occurrence of, or execution of an agreement providing for, a reorganization, merger, consolidation., or similar transaction of the Corporation, or before any connected series of such transactions, if, upon consummation of such transaction or transactions, the persons who are members of the Board of Directors of the Corporation immediately before such transaction or transactions cease or, in the case of the execution of an agreement for such transaction or transactions, it is contemplated in such agreement that upon consummation such persons would cease, to constitute a majority of the Board of Directors of the Corporation or, in a case where the Corporation

does not survive in such transaction, of the corporation surviving, continuing or resulting from such transaction or transactions; or

(E)  any other event which is at any time designated as a “Change of Control” for purposes of this Agreement by a resolution adopted by the Board of Directors of the Corporation with the affirmative vote of a majority of the non-employee directors in office at the time the resolution is adopted; in the event any such resolution is adopted, the Change of Control event specified thereby shall be deemed incorporated herein by reference and thereafter may not be amended, modified or revoked without the written agreement of Executive.

Notwithstanding anything else to the contrary set forth in this Agreement, if (i) an agreement is executed by the Corporation or the Company providing for any of the transactions or events constituting a Change of Control as defined herein, and the agreement subsequently expires or is terminated without the transaction or event being consummated, and (ii) Executive’s employment did not terminate during the period after the agreement and prior to such expiration or termination, for purposes of this Agreement it shall be as though such agreement was never executed and no Change of Control event shall be deemed to have occurred as a result of the execution of such agreement.

1.1.2  ”Code” means the Internal Revenue Code of 1986, as amended.

1.1.3  “Corporation” means Mid Penn Bancorp, Inc.

1.1.4  “Disability” means the Executive suffering a sickness, accident or injury which, in the judgment of a physician satisfactory to the Company, prevents the Executive from performing substantially all of the Executive’s normal duties for the Company. As a condition to any benefits, the Company may require the Executive to submit to such physical or mental evaluations and tests as the Company’s Board of Directors deems appropriate.

1.1.5  “Early Termination” means: the Termination of Employment before Normal Retirement Age for reasons other than death, Disability, Termination for Cause or following a Change of Control.

1.1.6  “Early Termination Date” means the month, day and year in which Early Termination occurs.

1.1.7  “Normal Retirement Age” means the Executive’s 65^th birthday.

1.1.8  “Normal Retirement Date” means the later of the Normal Retirement Age or Termination of Employment.

1.1.9  “Plan Year” means each twelve-month period commencing with the effective date of this Agreement.

1.1.10  “Termination for Cause” See Section 5.2.

1.1.11  “Termination ofEmployment” means that the Executive ceases to be employed by the Company for any reason whatsoever other than by reason of a leave of absence which is approved by the Company. For purposes of this Agreement, if there is a dispute over the employment status of the Executive or the date of the Executive’s Termination of Employment, the Company shall have the sole and absolute right to decide the dispute.

Article 2

Lifetime Benefits

2.1  Normal Retirement Benefits.    Upon Termination of Employment on or after the Normal Retirement Age for reasons other than death, the Company shall pay to the Executive the benefit described in this Section 2.1. in lieu of any other benefit under this Agreement.

2.1.1  Amount of Benefit.    The annual Normal Retirement Benefit under this Section 2.1 is $84,000 (eighty-four thousand dollars). The Company may increase the annual benefit under this Section 2.1 at the sole and absolute discretion of the Company’s Board of Directors. Any increase in the annua1 benefit shall require the recalculation of all the

amounts on Schedule A attached hereto. The annual benefit amounts on Schedule A are calculated by amortizing the annual normal retirement benefit using the interest method of accounting, a 7.50% discount rate, monthly compounding and monthly payments.

2.1.2  Payment of Benefit.    The Company shall pay the annual benefit to the Executive in 12 equal monthly installments payable on the first day of each month commencing with the month following the Executive’s Normal Retirement Date and continuing for 179 additional months.

2.1.3  Benefit Increases.    Commencing on the first anniversary of the first benefit payment, and continuing on each subsequent anniversary, the Company’s Board of Directors, in its sole discretion, may increase the benefit.

2.2  Early Termination Benefit.    Upon Early Termination, the Company shall pay to the Executive the benefit described in this Section 2.2 in lieu of any other benefit under this Agreement.

2.2.1  Amount of Benefit.    The annual benefit under this Section 2.2 is the Early Termination Annual Benefit set forth in Schedule A for the Plan Year ending immediately prior to the Early Termination Date.

2.2.2  Payment of Benefit.    The Company shall pay the annual benefit to the Executive in 12 equal monthly installments payable on the first day of each month commencing with the month following the Executive’s Normal Retirement Age and continuing for 179 additional months.

2.2.3  Benefit Increases’.    Benefit payments may be increased as provided in Section 2.1.3.

2.3  Disability Benefit.    If the Executive terminates employment due to Disability prior to Normal Retirement Age, the Company shall pay to the Executive the benefit described in this Section 2.3 in lieu of any other benefit under this Agreement.

2.3.1  Amount of Benefit.    The annual benefit under this Section 2.3 is the Disability Benefit amount set forth in schedule A for the Plan Year ending immediately prior to the date in which Termination of Employment occurs.

2.3.2  Payment of Benefit.    The Company shall pay the benefit to the Executive in 12 equal monthly installments commencing within 90 days after the date of the Executive’s Termination of Employment and continuing for 179 additional months.

2.3.3  Benefit Increases.    Benefit payments may be increased as provided in Section 2.1.3.

2.4  Change of Control Benefit.    If the Executive is in the active service of the Company at the time of a Change of Control, the Company shall pay to the Executive the benefit described in this Section 2.4 in lieu of any other benefit under this Agreement.

2.4.1  Amount of Benefit.    The annual benefit under this Section 2.4 is the Normal Retirement Benefit described in Section. 2.1.1.

2.4.2  Payment of Benefit.    The Company shall pay the annual benefit amount to the Executive in 12 equal monthly installments payable on the first day of each month commencing with the month following Normal Retirement Age and continuing for 179 additional months.

2.4.3  Benefit Increases.    Benefit payments may be increased as provided in Section 2.1.3

Article 3

Death Benefits

3.1  Death During Active Service.    If the Executive dies while in the active service of the Company, the Company shall pay to the Executive’s beneficiary the benefit described in this Section 3.1. This benefit shall be paid in lieu of the Lifetime Benefits of Article 2.

3.1.1  Amount of Benefit.    The annual benefit under this Section 3.1 is the Normal Retirement Benefit described in. Section 2.1.1.

3.1.2  Payment of Benefit.    The Company shall pay the annual benefit to the beneficiary in 12 equal monthly installments payable on the first day of each month commencing with the month following the Executive’s death and continuing for 179 additional months.

3.2  Death During Benefit Period.    If lie Executive dies after the benefit payments have commenced under this Agreement but before receiving all such payments, the Company shall pay the remaining benefits to the Executive’s beneficiary at the same time and in the same amounts they would have been paid to the Executive had the Executive survived.

3.3  Death Following Termination of Employment But Before Benefits Commence.    If the Executive is entitled to benefits under this Agreement, but dies prior to receiving said benefits, the Company shall pay to the Executive’s beneficiary the same benefits, in the same manner, they would have been paid to the Executive had the Executive survived; however, said benefit payments will commence upon the Executive’s death.

Article 4

Beneficiaries

4.1  Beneficiary Designations.    The Executive shall designate a beneficiary by filing a written designation with the Company. The Executive may revoke or modify the designation at any time by filing a new designation. However, designations will only be effective if signed by

the Executive and accepted by the Company during the Executive’s lifetime. The Executive’s beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive, or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executive’s estate.

4.2  Facility of Payment.    If a benefit is payable to a minor, to a person declared incapacitated, or to a person incapable of handling the disposition of his or her property, the Company may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incapacitated person or incapable person. The Company may require proof of incapacity, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Company from all liability with respect to such benefit.

Article 5

General Limitations

Notwithstanding any provision of this Agreement to the contrary, the Company shall not pay any benefit under this Agreement:

5.1  Excess Parachute Payment.    To the extent the benefit would be an excess parachute payment under Section 280G of the Code.

5.2  Termination for Cause.    If the Company terminates the Executive’s employment for:

5.2.1  Gross negligence or gross neglect of duties;

5.2.2  Commission of a felony or of a gross misdemeanor involving moral turpitude; or

5.2.3  Fraud, disloyalty, dishonesty or willful violation of any Law or significant Company policy committed in connection with the Executive’s employment and resulting in an adverse effect on the Company.

5.3  Competition After Termination of Employment. If the Executive, without the prior written consent of the Company, engages in, becomes interested in, directly or indirectly, as a sole proprietor, as a partner in a partnership, or as a substantial shareholder in a corporation, or becomes associated with, in the capacity of employee, director, officer, principal, agent, trustee or in any other capacity whatsoever, any enterprise conducted in the trading area (a 50 mile radius) of the business of the Company, which enterprise is, or may deemed to be, competitive with any business carried on by the Company as of the date of termination of the Executive’s employment or his retirement. This section shall not apply following a Change of Control.

5.4  Suicide or Misstatement. If the Executive commits suicide within two years after the date of this Agreement, or if the Executive has made any material misstatement of fact on any application for life insurance purchased by the Company.

Article 6

Claims and Review Procedures

6.1  Claims Procedure. The Company shall notify any person or entity that makes a claim against the Agreement (the “Claimant”) in writing, within ninety (90) days of Claimant’s written application for benefits, of his or her eligibility or noneligibility for benefits under the Agreement. If the Company determines that the Claimant is not eligible for benefits or full benefits, the notice shall set forth (1) the specific reasons for such denial, (2) a specific reference to the provisions of the Agreement on which the denial is based, (3) a description of any additional information or material necessary for the Claimant to perfect his or her claim, and a description of why it is needed, and (4) an explanation of the Agreement’s claims review procedure and other appropriate information as to the steps to be taken if the Claimant wishes to

have the claim reviewed. If the Company determines that there are special circumstances requiring additional time to make a decision, the Company shall notify the Claimant of the special circumstances and the date by which a decision is expected to be made, and may extend the rime for up to an additional ninety-day period.

6.2  Review Procedure. If the Claimant is determined by the Company not to be eligible for benefits, or if the Claimant believes that he or she is entitled to greater or different benefits, the Claimant shall have the opportunity to have such claim reviewed by the Company by filing a petition for review with the Company within sixty (60) days after receipt of the notice issued by the Company. Said petition shall state the specific reasons which the Claimant believes entitle him or her to benefits or to greater or different benefits. Within sixty (60) days after receipt by the Company of the petition, the Company shall afford the Claimant (and counsel, if any) an opportunity to present his or her position to the Company orally or in writing, and the Claimant (or counsel) shall have the right to review the pertinent documents. The Company shall notify the Claimant of its decision in writing within the sixty-day period, stating specifically the basis of its decision, written in a manner calculated to be understood by the Claimant and the specific provisions of the Agreement on which the decision is based. If, because of the need for a hearing, the sixty-day period is not sufficient, the decision may be deferred for up to another sixty-day period at the election of the Company, but notice of this deferral shall be given to the Claimant.

Article 7

Amendments and Termination

This Agreement may be amended or terminated only by a written agreement signed by the Company and the Executive.

Article 8

Miscellaneous

8.1  Binding Effect.    This Agreement shall bind the Executive and the Company, and their beneficiaries, survivors, executors, successors, administrators and transferees.

8.2  No Guarantee of Employment.    This Agreement is not an employment policy or contract, It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company’s right to discharge the Executive. It also does not require the Executive to remain an employee nor interfere with the Executive’s right to terminate employment at any time.

8.3  Non-Transferability.    Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.

8.4  Tax Withholding.    The Company shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.

8.5  Applicable Law.    The Agreement and all rights hereunder shall be governed by the laws of the Commonwealth of Pennsylvania, except to the extent preempted by the laws of the United States of America.

8.6  Unfunded Arrangement.    The Executive and beneficiary are general unsecured creditors of the Company for the payment of benefits under this Agreement. The benefits represent the mere promise by the Company to pay such benefits. The rights to benefits arc not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive’s life is a general asset of the Company to which f lie Executive and beneficiary have no preferred or secured claim.

8.7  Recovery of Estate Taxes.    If the Executive’s gross estate for federal estate tax purposes includes any amount determined by reference to and on account of this Agreement, and if the beneficiary is other than the Executive’s estate, then the Executive’s estate shall be entitled to recover from the beneficiary receiving such benefit under the terms of the Agreement, an amount by which the total estate tax due by the Executive’s estate, exceeds the total estate tax which would have been payable if the value of such benefit had not been included in the Executive’s gross estate. If there is more than one person receiving such benefit, the right of recovery shall be against each such person. In the event the beneficiary has a liability hereunder, the beneficiary may petition the Company for a lump sum payment in an amount not to exceed the beneficiary’s liability hereunder.

8.8  Entire Agreement.    This Agreement constitutes the entire agreement between the Company and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein.

8.9  Administration.    The Company shall have powers which are necessary to administer this Agreement, including but not limited to:

8.9.1  Interpreting the provisions of the Agreement;

8.9.2  Establishing and revising the method of accounting for the Agreement;

8.9.3  Maintaining a record of benefit payments; and

8.9.4  Establishing rules and prescribing any forms necessary or desirable to administer the Agreement.

IN WITNESS WHEREOF, the Executive and a duly authorized Company officer have signed this Agreement.

EXECUTIVE:	COMPANY: MID PENN BANK
	By _____________________________________
Alan W. Dakey	Title ____________________________________

By execution hereof, Mid Penn Bancorp, Inc. consents to and agrees to be bound by the terms and condition of this Agreement.

ATTEST:	CORPORATION: MID PENN BANCORP, INC.
	By _____________________________________
	Title ____________________________________

EX-13

EXHIBIT 13

EXCERPTS FROM REGISTRANT’S

ANNUAL REPORT TO SHAREHOLDERS

Mid Penn Bancorp, Inc.
Financial Highlights

AS OF AND FOR YEARS ENDED DECEMBER 31, 2002 AND 2001

(Dollars in thousands, except per share data.)	2002		2001		Percent Change
Total Assets	$	363,284		330,635		+9.9
Total Deposits	274,703		254,105		+8.1
Net Loans	218,302		199,980		+9.2
Total Investments and Interest Bearing Balances	124,346		108,390		+14.7
Stockholders’ Equity	35,204		31,716		+11.0
Net Income	4,495		4,230		+6.3
Earnings Per Share	1.48		1.39		+6.5
Cash Dividend Per Share Based on Weighted Average Number of Shares Outstanding	.80		.80		0
Book Value Per Share		11.59		10.44		+11.0

Mid Penn Bancorp, Inc.
Stockholders’ Information

	2002				2001
	High		Low		High		Low		Quarter
Market Value Per Share	$	19.00		18.01		16.55		14.88		1st
	18.55		17.75		19.04		16.50		2nd
	19.00		17.75		19.25		17.75		3rd
		23.70		18.50		18.65		18.05		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: Wells Fargo Shareholder Services, P.O. Box 64854, St. Paul, MN 55164-0854. Phone: 1-800-468-9716.

Number of Stockholders: At December 31, 2002, there were 968 stockholders.

Dividends: A dividend of $.20 per share was paid during each quarter of 2002 and 2001. 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 22, 2003, at 349 Union Street, Millersburg, Pennsylvania.

2

Independent Auditors’ 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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

PARENTE RANDOLPH, PC

Williamsport, Pennsylvania
January 16, 2003

4

Mid Penn Bancorp, Inc.
Consolidated Balance Sheet

DECEMBER 31, 2002 AND 2001

(Dollars in thousands, except share data)	2002			2001
ASSETS
Cash and due from banks	$	8,095		9,028
Interest-bearing balances with other financial institutions	65,487			53,042
Available-for-sale investment securities	58,859			55,348
Loans	223,203			205,101
Less:
Unearned income	(1,850		)	(2,265	)
Allowance for loan losses	(3,051		)	(2,856	)
Net loans	218,302			199,980
Bank premises and equipment, net	3,317			3,395
Foreclosed assets held for sale	781			1,693
Accrued interest receivable	2,007			2,091
Deferred income taxes	456			1,037
Cash surrender value of life insurance	4,743			4,504
Other assets	1,237			517
Total Assets	$	363,284		330,635
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand	$	28,011		29,226
Interest-bearing demand	33,645			30,795
Money market	40,515			27,734
Savings	26,705			26,398
Time	145,827			139,952
Total Deposits	274,703			254,105
Short-term borrowings	18,156			9,610
Accrued interest payable	1,187			1,292
Other liabilities	1,651			1,344
Long-term debt	32,383			32,568
Total Liabilities	328,080			298,919
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	10,944			8,880
Accumulated other comprehensive income (loss)	1,357			(56	)
Treasury stock at cost (18,622 and 19,065 shares in 2002 and 2001, respectively)	(522		)	(533	)
Stockholders’ Equity, Net	35,204			31,716
Total Liabilities and Stockholders’ Equity	$	363,284		330,635

The accompanying notes are an integral part of these consolidated financial statements.

5

Mid Penn Bancorp, Inc.
Consolidated Statement of Income

FOR YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

(Dollars in thousands, except share data)	2002		2001		2000
INTEREST INCOME
Interest and fees on loans	$	15,863	16,340		15,769
Interest on interest-bearing balances	2,703		3,092		2,306
Interest and dividends on investment securities:
U.S. Treasury and government agencies	659		1,349		2,284
State and political subdivision obligations, tax-exempt	2,001		1,806		1,475
Other securities	79		193		219
Interest on federal funds sold and securities purchased under agreement to resell	47		84		0
Total Interest Income	21,352		22,864		22,053
INTEREST EXPENSE
Interest on deposits	7,807		9,192		8,958
Interest on short-term borrowings	50		441		879
Interest on long-term debt	2,069		2,102		1,618
Total Interest Expense	9,926		11,735		11,455
Net Interest Income	11,426		11,129		10,598
PROVISION FOR LOAN LOSSES	425		500		325
Net Interest Income After Provision for Loan Losses	11,001		10,629		10,273
NONINTEREST INCOME
Trust department income	188		158		203
Service charges on deposits	1,053		921		590
Investment securities gains (losses), net	60		(14	)	(4	)
Gain on sale of loans	51		16		31
Income on cash surrender value of life insurance	239		216		198
Other income	431		548		538
Total Noninterest Income	2,022		1,845		1,556
NONINTEREST EXPENSE
Salaries and employee benefits	3,978		4,012		3,790
Occupancy expense, net	384		392		364
Equipment expense	514		461		481
Pennsylvania bank shares tax expense	259		262		271
FDIC insurance premium	46		44		45
Marketing and advertising	115		127		144
Loss on mortgage loan sales	79		125		19
Other real estate expense	294		43		11
Other expenses	1,589		1,560		1,531
Total Noninterest Expense	7,258		7,026		6,656
INCOME BEFORE PROVISION FOR INCOME TAXES	5,765		5,448		5,173
Provision for income taxes	1,270		1,218		1,225
Net Income	$	4,495	4,230		3,948
Earnings Per Share	$	1.48	1.39		1.30
Weighted Average Number of Shares Outstanding	3,036,508		3,038,859		3,036,007

The accompanying notes are an integral part of these consolidated financial statements.

6

Mid Penn Bancorp, Inc.
Consolidated Statement of Changes in Stockholders’ Equity

FOR YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

(Dollars in thousands, except share data)	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
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 gain (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
Comprehensive income:
Net income	0		0		4,230			0			0			4,230
Change in net unrealized gain (loss) on securities available for sale, net of reclassification adjustment and tax effects	0		0		0			288			0			288
Total comprehensive income														4,518
Cash dividends ($ .80 per share, historical)	0		0		(2,428		)	0			0			(2,428		)
Sale of treasury stock (8 shares)	0		0		0			0			0			0
Balance, December 31, 2001	3,057		20,368		8,880			(56		)	(533		)	31,716
Comprehensive income:
Net income	0		0		4,495			0			0			4,495
Change in net unrealized gain (loss) on securities available for sale, net of reclassification adjustment and tax effects	0		0		0			1,413			0			1,413
Total comprehensive income														5,908
Cash dividends ($ .80 per share, historical)	0		0		(2,431		)	0			0			(2,431		)
Sale of treasury stock (443 shares)	0		0		0			0			11			11
Balance, December 31, 2002	$	3,057		20,368		10,944			1,357			(522	)		35,204

The accompanying notes are an integral part of these consolidated financial statements.

7

Mid Penn Bancorp, Inc.
Consolidated Statement of Cash Flows

FOR YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

(Dollars in thousands)	2002			2001			2000
Operating Activities:
Net income	$	4,495			4,230			3,948
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	425			500			325
Depreciation	340			336			369
Increase in cash surrender value of life insurance	(239		)	(216		)	(198		)
Investment securities (gains) losses, net	(60		)	14			4
Loss (gain) on sale of foreclosed assets	54			(16		)	(40		)
Gain on sale of loans	(51		)	(16		)	(31		)
Deferred income taxes	(147		)	(116		)	(176		)
Change in accrued interest receivable	84			411			(382		)
Change in other assets	(712		)	(86		)	(77		)
Change in accrued interest payable	(105		)	(254		)	344
Change in other liabilities	307			319			126
Net Cash Provided By Operating Activities	4,391			5,106			4,212
Investing Activities:
Net increase in interest-bearing balances	(12,445		)	(10,666		)	(7,806		)
Proceeds from the maturity of investment securities	8,163			23,455			4,042
Proceeds from the sale of investment securities	3,176			11,284			3,515
Purchases of investment securities	(12,657		)	(15,780		)	(15,047		)
Proceeds from sale of loans	983			1,128			3,622
Net increase in loans	(19,969		)	(21,884		)	(15,558		)
Net purchases of bank premises and equipment	(262		)	(150		)	(643		)
Proceeds from the sale of foreclosed assets	1,311			81			68
Capitalized additions - foreclosed assets	(163		)	0			0
Net Cash Used In Investing Activities	(31,863		)	(12,532		)	(27,807		)
Financing Activities:
Net increase in deposits	20,598			22,697			13,568
Net increase (decrease) in short-term borrowings	8,546			(13,128		)	(1,898		)
Cash dividends paid	(2,431		)	(2,428		)	(2,427		)
Long-term debt repayment	(185		)	(1,673		)	(2,159		)
Sale of treasury stock	11			0			23
Long-term borrowings	0			5,000			15,000
Net Cash Provided By Financing Activities	26,539			10,468			22,107
Net (decrease) increase in cash and due from banks	(933		)	3,042			(1,488		)
Cash and due from banks at January 1	9,028			5,986			7,474
Cash and due from banks at December 31	$	8,095		9,028			5,986
Supplemental Disclosures of Cash Flow Information:
Interest paid	$	10,031		11,989			11,111
Income taxes paid	$	1,427		1,250			1,355
Supplemental Noncash Disclosures:
Loan charge-offs	$	302		489			74
Transfers to foreclosed assets held for sale	$	290			1,688			35

The accompanying notes are an integral part of these consolidated financial statements.

8

Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements for 2002 Report

(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”), Mid Penn Investment Corporation and Mid Penn Insurance Services, LLC, (collectively, “MPB”). All significant intercompany balances and transactions have been eliminated in consolidation.

(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.

Mid Penn Insurance Services, LLC provides a range of personal and investment insurance products.

(3)Summary of Significant Accounting Policies

The accounting and reporting policies of MPB conform with accounting principles generally accepted in the United States of America and to general practice within the financial industry. The following is a description of the more significant accounting policies.

(a)Use of Estimates

The preparation of financial statements 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:

Available-for-Sale Securities - includes debt and equity 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 component of other accumulated income (loss) within 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 received. The placement of a loan on the nonaccrual basis for revenue recognition does not necessarily imply a

9

Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont’d)

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 Bank’s methodology for determining the allowance for loan losses establishes both a specific and a general component. The specific portion of the allowance represents the results of analysis of individual “watch list” loans (commercial, residential and consumer loans) as well as pools of consumer loans within the portfolio. The individual commercial loans are risk rated with specific attention to estimated loss exposure. Historical loan loss rates are applied to “problem” consumer credits, adjusted to reflect current conditions.

Specific regular reviews of credits exceeding $500,000 are performed to monitor the major portfolio risk. The Bank analyzes all commercial loans in excess of $10,000 that are rated as watch list credits. Potential credit problems are monitored to determine whether specific loans are impaired, with impairment normally measured by reference to borrowers’ collateral values and cash flows.

The general portion of the allowance for loan losses represents the results of measuring potential losses inherent in the portfolio that are not identified in the specific allowance analysis. This general portion is analyzed by assessing changes in the Bank’s underwriting criteria, growth and/or changes in the mix of loans originated, industry concentrations and evaluations, lending management changes, comparisons of certain factors to peer group banks and changes in economic conditions.

Management believes the allowance for loan losses is adequate. Identification of specific losses is an ongoing process using available information. Specifically, quarterly management meetings to review “problem” loans are utilized to determine a plan for collection and, if necessary, a recommendation to the Board for loss. Future additions to the loan loss reserve via loan loss provisions will be made based on identified changes in the above factors coupled with loss experience.

Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. These agencies may require the Bank to recognize changes to the allowance based on their judgment about information available to them at the time of their examinations. In addition, the Bank’s auditors also review the Bank’s methodology utilized in determining the adequacy of the loan loss reserve.

(e)Bank Premises and Equipment

Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line 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 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 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 $115,000 in 2002, $127,000 in 2001 and $144,000 in 2000.

10

Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont’d)

(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 under certain circumstances, postretirement health care and group life insurance coverage. 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 postemployment 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 of board membership.

(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 consolidated 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 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 potentially dilutive securities outstanding.

(l)Statement of Cash Flows

For purposes 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 income (loss) and related tax effects are as follows:

(Dollars in thousands)	Years Ended December 31,
	2002			2001		2000
Unrealized holding gains on available-for-sale securities	$	2,193		422		2,296
Less reclassification adjustment for (gains) losses realized in income	(60		)	14		4
Net unrealized gains	2,133			436		2,300
Income tax expense	(720		)	(148	)	(783	)
Net	$	1,413		288		1,517

(5)Restrictions on Cash and Due from Bank Accounts

The Bank is required to maintain reserve balances with the Federal Reserve Bank of Philadelphia. The amount of those required reserve balances were $500,000 at December 31, 2002 and $2,554,000 at December 31, 2001.

(6)Investment Securities

At December 31, 2002 and 2001, amortized cost, fair value, and unrealized gains and losses on investment securities are as follows:

(Dollars in Thousands) December 31, 2002	Amortized Cost		Unrealized Gains	Unrealized Losses	Fair Value
Available-for-sale securities:
U.S. Treasury and U.S. government agencies	$	9,538	291	0	9,829
Mortgage-backed U.S. government agencies	5,512		134	9	5,637
State and political subdivision obligations	39,388		1,647	14	41,021
Restricted equity securities	2,372		0	0	2,372
	$	56,810	2,072	23	58,859

11

Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont’d)

(Dollars in Thousands) December 31, 2001	Amortized Cost		Unrealized Gains	Unrealized Losses	Fair Value
Available-for-sale securities:
U.S. Treasury and U.S. government agencies	$	9,028	102	96	9,034
Mortgage-backed U.S.government agencies	4,674		59	0	4,733
State and political subdivision obligations	39,760		439	588	39,611
Restricted equity securities	1,970		0	0	1,970
	$	55,432	600	684	55,348

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.

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 having a fair value of $26,909,000 at December 31, 2002 and $31,381,000 at December 31, 2001, were pledged to secure public deposits and other borrowings.

Net gains (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 $60,000 in 2002, ($14,000) in 2001 and ($4,000) in 2000. The proceeds from sales of investment securities were $3,176,000 in 2002, $11,284,000 in 2001 and $3,515,000 in 2000.

The following is a schedule of the maturity distribution of investment securities at amortized cost and fair value at December 31, 2002 and 2001:

(Dollars in thousands)	December 31, 2002			December 31, 2001
	Amortized Cost		Fair Value	Amortized Cost	Fair Value
Due in 1 year or less	$	3,264	3,280	407	415
Due after 1 year but within 5 years	9,802		10,269	8,201	8,384
Due after 5 years but within 10 years	9,978		10,453	9,727	9,833
Due after 10 years	25,882		26,848	30,453	30,013
	48,926		50,850	48,788	48,645
Mortgage-backed securities	5,512		5,637	4,674	4,733
Restricted equity securities	2,372		2,372	1,970	1,970
	$	56,810	58,859	55,432	55,348

(7)Loans

A summary of loans at December 31, 2002 and 2001 is as follows:

(Dollars in thousands)	2002		2001
Commercial real estate, construction and land development	$	146,325	130,913
Commercial, industrial and agricultural	22,398		23,107
Real estate - residential	41,502		38,349
Consumer	12,978		12,732
	$	223,203	205,101

Net unamortized loan fees of $443,000 in 2002 and $398,000 in 2001 were deducted from loans.

12

Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont’d)

Loans to Bank executive officers, directors, and corporations in which such executive officers and directors have beneficial interests as stockholders, executive officers, or directors aggregated approximately $1,935,000 at December 31, 2002 and $1,580,000 at December 31, 2001. New loans extended were $177,000 in 2002 and $497,000 in 2001. Net draws on these loans exceeded repayments by $178,000 in 2002 and $335,000 in 2001. 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.

(8)Allowance for Loan Losses

Changes in the allowance for loan losses for the years 2002, 2001, and 2000 are summarized as follows:

(Dollars in thousands)	2002			2001			2000
Balance, January 1	$	2,856		2,815			2,505
Provision for loan losses	425			500			325
Loans charged off	(302		)	(489		)	(74		)
Recoveries on loans charged off	72			30			59
Balance, December 31	$	3,051			2,856			2,815

The recorded investment in loans that are considered impaired amounted to $1,077,000 and $1,686,000 (all in nonaccrual) on December 31, 2002 and December 31, 2001, 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 $425,000 at December 31, 2002 and $125,000 at December 31, 2001. Impaired loans of approximately $743,000 at December 31, 2001 have no related allowance. The average balances of these loans amounted to approximately $1,361,000, $1,293,000 and $752,000 for the years 2002, 2001 and 2000, 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 2002, 2001 and 2000.

(Dollars in thousands)	2002		2001		2000
Cash receipts applied to reduce principal balance	$	122	238		520
Cash receipts recognized as interest income	1		31		36
Total cash receipts	$	123		269		556

Loans which were past due 90 days or more for which interest continued to be accrued amounted to approximately $350,000 at December 31, 2002 and $828,000 at December 31, 2001. The Bank has no commitments to loan additional funds to borrowers with impaired or nonaccrual loans.

(9)Bank Premises and Equipment

At December 31, 2002 and 2001, bank premises and equipment are as follows:

(Dollars in thousands)	2002		2001
Land	$	838	822
Buildings	3,976		3,938
Furniture and fixtures	3,716		3,517
	8,530		8,277
Less accumulated depreciation	5,213		4,882
	$	3,317		3,395

Depreciation expense was $340,000 in 2002, $336,000 in 2001 and $369,000 in 2000.

(10)Deposits

At December 31, 2002 and 2001, time deposits in denominations of $100,000 or more amounted to $24,831,000 and $24,341,000 respectively. Interest expense on such certificates of deposit amounted to approximately $1,112,000, $1,454,000 and $1,211,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Time deposits at December 31, 2002, mature as follows: (in thousands) 2003, $62,026; 2004, $32,484; 2005, $25,288; 2006, $6,106; 2007, $3,537; thereafter, $16,386. Deposits and other funds from related parties held by MPB at December 31, 2002 and 2001 amounted to approximately $5,807,000 and $4,307,000, respectively.

13

Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont’d)

(11)Short-term Borrowings

Short-term borrowings as of December 31, 2002 and 2001 consisted of:

(Dollars in thousands)	2002		2001
Federal funds purchased	$	14,200	5,800
Repurchase agreements	2,550		2,666
Treasury, tax and loan note	1,058		196
Due to broker	348		948
	$	18,156		9,610

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 due to broker balance represents previous day balances transferred from deposit accounts under a sweep account agreement. The Bank also has unused lines of credit with several banks amounting to $1 million dollars at December 31, 2002.

(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, 2002, the Bank had long-term debt in the amount of $32,383,000 outstanding to the FHLB consisting of a $5,000,000 3 year fixed rate advance at 5.20% which will mature on March 12, 2004; a $5,000,000 bullet loan at 6.55% which will mature on November 24, 2003; a $283,000 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 $100,000 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, 2002 are $5,199,000 (2003), $5,088,000 (2004), $2,000 (2005), $5,002,000 (2006), $17,092,000 thereafter.

Most of the Bank’s investments and mortgage loans are pledged to secure FHLB borrowings.

(13)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 was $353,000 for 2002, $362,000 for 2001 and $361,000 for 2000.

(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 may pay, at its discretion, premiums for 65 Special coverage or a similar supplemental coverage. After the five year period has expired, all Bank-paid benefits cease; however, the retiree may continue coverage through the Bank at his/her own expense.

(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 three times the participant’s annual salary at retirement or $50,000, whichever is less. After age 65, the life insurance coverage amount will decrease by 10% per year, subject to a minimum amount of $2,000.

14

Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont’d)

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, 2002 and 2001 and a statement of the funded status at December 31, 2002 and 2001:

(Dollars in thousands)	2002			2001
Change in benefit obligations:
Benefit obligations, January 1	$	377			354
Service cost	24			20
Interest cost	28			24
Actuarial loss (gain)	45			(3		)
Benefit payments	(24		)	(18		)
Benefit obligations, December 31	$	450		377
Change in fair value of plan assets:
Fair value of plan assets, January 1	$	0		0
Employer contributions	24			18
Benefit payments	(24		)	(18		)
Fair value of plan assets, December 31	$	0			0

	December 31,
	2002			2001
Funded status:
Excess of the benefit obligation over the value of plan assets	$	(450	)		(377	)
Unrecognized transition obligation	147			162
Unrecognized gain	(101		)	(150		)
Net amount recognized	$	(404	)		(365	)

Amount recognized in the consolidated balance sheet at December 31, 2002 and 2001 is as follows:

(Dollars in thousands)	2002			2001
Accrued benefit liability	$	(404	)		(365	)

The components of net periodic postretirement benefit cost for 2002, 2001 and 2000 are as follows:

(Dollars in thousands)	2002			2001			2000
Service cost	$	24			20			18
Interest cost	28			24			22
Amortization of transition obligation	15			15			15
Amortization of net gain	(4		)	(7		)	(8		)
Net periodic postretirement benefit cost	$	63			52			47

Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement 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	$	7		6
Effect on postretirement benefit obligation	$	50		42

Assumptions used in the measurement of MPB’s benefit obligations at December 31, 2002 and 2001 are as follows:

Weighted-average assumptions:
Discount rate	6.75	%
Rate of compensation increase	5.00	%

15

Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont’d)

For measurement purposes, no change in the per capita cost of covered health care benefits was assumed for 2003. The rate was assumed to be 6 percent for 2003 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 directors.

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, 2002 and 2001 and a statement of the funded status at December 31, 2002 and 2001:

(Dollars in thousands)	December 31,
	2002			2001
Change in benefit obligations:
Benefit obligations, January 1	$	502			455
Service cost	23			21
Interest cost	35			32
Actuarial (gain) loss	(1		)	3
Change in assumptions	13			0
Benefit payments	(9		)	(9		)
Benefit obligations, December 31	$	563		502
Change in fair value of plan assets:
Fair value of plan assets, January 1	$	0		0
Employer contributions	9			9
Benefit payments	(9		)	(9		)
Fair value of plan assets, December 31	$	0		0
Funded status:
Excess of the benefit obligation over the value of plan assets	$	(563	)	(502		)
Unrecognized prior-service cost	79			104
Unrecognized loss (gain)	1			(11		)
Net amount recognized	$	(483	)		(409	)

Amounts recognized in the consolidated balance sheet at December 31, 2002 and 2001 are as follows:

(Dollars in thousands)	2002			2001
Accrued benefit liability	$	(489	)		(426	)
Intangible asset	6			17
Net amount recognized	$	(483	)		(409	)

The components of net periodic pension cost for 2002, 2001 and 2000 are as follows:

(Dollars in thousands)	2002		2001		2000
Service cost	$	23	21			20
Interest cost	35		32		28
Amortization of prior-service cost	26		26		26
Net periodic pension cost	$	84		79		74

Assumptions used in the measurement of MPB’s benefit obligations at December 31, 2002 and 2001 are as follows:

Weighted-average assumptions:
Discount rate	6.75	%
Change in consumer price index	4.00	%

16

Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont’d)

The Bank is the owner and beneficiary of insurance policies on the lives of the executive officers and directors which informally fund certain benefit obligations. The aggregate cash surrender value of these policies was approximately $1,670,000 and $1,585,000 at December 31, 2002 and 2001, respectively.

(e)Deferred Compensation Plans

The Bank has 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, 2002 and 2001, the Bank has accrued a liability of approximately $56,000 and $33,000, respectively, for this plan.

The Bank also has a directors’ deferred compensation plan which allows directors to defer receipt of monthly fees for a specified period in order to provide future retirement income. At December 31, 2002 and 2001, the Bank has accrued a liability of approximately $117,000 and $92,000, 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 $1,362,000 and $1,296,000 at December 31, 2002 and 2001, respectively.

(f)Salary Continuation Agreement

The Bank maintains a Salary Continuation Agreement (Agreement) for an executive officer. The 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 in control of the Bank, the executive officer or his beneficiary is entitled to the full fixed annual benefit. At December 31, 2002 and 2001, the Bank has accrued a liability of approximately $100,000 and $72,000, respectively, for the Agreement. The expense related to the Agreement was $28,000 for 2002, $26,000 for 2001 and $24,000 for 2000.

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 $802,000 and $760,000 at December 31, 2002 and 2001, respectively.

(g)Employee Stock Ownership Plan

The Bank has an Employee Stock Ownership Plan (ESOP) covering substantially all employees. Contributions to the ESOP are made at the discretion of the Board of Directors. Total expense related to the Bank’s contribution to the ESOP for 2002, 2001 and 2000 was $118,000, $121,000 and $118,000, respectively. The ESOP held 21,496 and 15,889 shares of MPB stock as of December 31, 2002 and December 31, 2001, respectively, all of which were allocated to plan participants. Shares held by the ESOP are considered outstanding for purposes of calculating earnings per share. Dividends paid on shares held by the ESOP are charged to retained earnings.

(h)Other

At December 31, 2002 and 2001, the Bank had a Split Dollar Life Insurance arrangement with two executives for which the aggregate cash surrender value is approximately $909,000 and $863,000, respectively.

(14)Federal Income Taxes

The following temporary differences gave rise to the deferred tax asset at December 31, 2002 and 2001:

(Dollars in thousands)	2002		2001
Deferred tax assets:
Allowance for loan losses	$	883	817
Benefit plans	390		328
Nonaccrual interest	75		42
Other items	63		61
Unrealized losses on securities	—		29
Total	$	1,411	1,277

17

Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont’d)

(Dollars in thousands)	2002			2001
Deferred tax liabilities:
Depreciation	$	(93	)	(90	)
Loan fees	(132		)	(128	)
Bond accretion	(31		)	(22	)
Unrealized gain on securities	(699		)	—
Total	$	(955	)	(240	)
Deferred tax asset, net	$	456		1,037

The provision for income taxes consists of the following:

(Dollars in thousands)	2002			2001		2000
Current provision	$	1,417		1,334		1,401
Deferred provision	(147		)	(116	)	(176	)
Provision for income taxes	$	1,270		1,218		1,225

A reconciliation of income tax at the statutory rate to MPB’s effective rate is as follows:

(Dollars in thousands)	2002			2001		2000
Provision at the expected statutory rate	$	1,960		1,852		1,759
Effect of tax-exempt income	(824		)	(753	)	(633	)
Nondeductible interest	73			83		69
Other items	61			36		30
Provision for income taxes	$	1,270		1,218		1,225

(15)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.

(Dollars in thousands) As of December 31, 2002:	Capital Adequacy							To Be Well Capitalized Under Prompt Corrective Action Provisions:
	Actual				Required
	Amount		Ratio		Amount	Ratio		Amount	Ratio
Tier I Capital (to Average Assets)	$	25,235	7.4	%	13,712	4.0	%	17,140	5.0	%
Tier I Capital (to Risk Weighted Assets)	25,235		10.4	%	9,754	4.0	%	14,630	6.0	%
Total Capital (to Risk Weighted Assets)	28,283		11.6	%	19,507	8.0	%	24,384	10.0	%
As of December 31, 2001:
Tier I Capital (to Average Assets)	$	23,246	7.4	%	12,650	4.0	%	15,812	5.0	%
Tier I Capital (to Risk Weighted Assets)	23,246		10.4	%	8,971	4.0	%	13,457	6.0	%
Total Capital (to Risk Weighted Assets)	26,050		11.6	%	17,942	8.0	%	22,428	10.0	%

As of December 31, 2002, the Bank’s capital ratios are well in excess of the minimum and well-capitalized guide lines and MPB’s capital ratios are in excess of the Bank’s capital ratios.

18

Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont’d)

(16)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 financial 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 financial 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 direct, funded loans.

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.

Financial 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 financial standby letters of credit is generally one year or less.

As of December 31, 2002, commitments to extend credit amounted to $42,261,000 and financial standby letters of credit amounted to $4,579,000.

Significant concentration of credit risk may occur when obligations of the same parties engaged in similar activities occur and accumulate in significant amounts.

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., are 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, 2002, commercial real estate financing was the only similar activity that met the requirements to be classified as a 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.

The Bank’s highest concentrations of credit are in the areas of commercial real estate office financings and mobile home park land. Outstanding credit to these sectors amounted to $23,985,000 or 11.0% and $17,368,000 or 7.9% of net loans outstanding as of December 31, 2002.

(17)Commitments and Contingencies

Capital Purchases

The Bank has committed to the purchase of equipment in the amount of approximately $755,000. Deposits of approximately $443,000, which are included in other assets in the consolidated balance sheet, have been made at December 31, 2002. The balance of approximately $312,000 is expected to be funded through operating cash flows.

Litigation

MPB is subject to lawsuits and claims arising out of its business. 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

Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont’d)

(18)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

December 31, 2002 and 2001 (Dollars in thousands)	2002			2001
ASSETS
Cash	$	277		253
Investment in Subsidiaries	34,927			31,463
Total Assets	$	35,204		31,716
LIABILITIES AND STOCKHOLDERS’ EQUITY
Stockholders’ Equity	35,726			32,249
Less Treasury Stock	(522		)	(533	)
Total Liabilities and Equity	$	35,204		31,716

CONDENSED STATEMENT OF INCOME

For Years Ended December 31, 2002, 2001 and 2000 (Dollars in thousands)	2002			2001		2000
Dividends from Subsidiaries	$	2,496		1,544		2,795
Other Income from Subsidiaries	27			25		30
Undistributed Earnings of Subsidiaries	2,051			2,733		1,212
Other Expenses	(79		)	(72	)	(89	)
Net Income	$	4,495		4,230		3,948

CONDENSED STATEMENT OF CASH FLOWS

For Years Ended December 31, 2002, 2001 and 2002 (Dollars in thousands)	2002			2001		2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	4,495		4,230		3,948
Undistributed Earnings of Subsidiaries	(2,051		)	(2,733	)	(1,212	)
Net Cash Provided By Operating Activities	2,444			1,497		2,736
CASH FLOWS USED BY INVESTING ACTIVITIES
Funds used to capitalize Mid Penn Insurance	0			(15	)	0
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends Paid	(2,431		)	(2,428	)	(2,427	)
Sale of Treasury Stock	11			0		23
Net Cash Used By Financing Activities	(2,420		)	(2,428	)	(2,404	)
Net Increase (Decrease) in Cash	24			(946	)	332
Cash at Beginning of Period	253			1,199		867
Cash at End of Period	$	277		253		1,199

(19)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 consolidated 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.

20

Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont’d)

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 is 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 6, 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 borrowings:

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.

The following table summarizes the book value and fair value of financial instruments at December 31, 2002 and 2001.

	December 31, 2002				December 31, 2001
(Dollars in thousands)	Book Value		Fair Value		Book Value		Fair Value
Financial assets:
Cash and due from banks	$	8,095		8,095		9,028		9,028
Interest-bearing balances	65,487		65,487		53,042		53,042
Investment securities	58,859		58,859		55,348		55,348
Net loans		218,302		234,783		199,980		211,170

21

Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont’d)

	December 31, 2002				December 31, 2001
(Dollars in thousands)	Book Value		Fair Value		Book Value		Fair Value
Financial liabilities:
Deposits	$	274,703		280,514		254,105		258,305
Short-term borrowings	18,156		18,156		9,610		9,610
Long-term debt	32,383		35,724		32,568		34,673
Off-balance sheet financial instruments:
Commitments to extend credit	$	42,261	42,261		37,674		37,674
Financial standby letters of credit	4,579			4,579		4,009		4,009

(20)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.

Under MPB’s amended and restated dividend reinvestment plan, (DRIP), two hundred thousand shares of MPB’s authorized but unissued common stock are reserved for issuance. The DRIP also allows for voluntary cash payments within specified limits, for the purchase of additional shares.

(21)Summary of Quarterly Consolidated Financial Data (Unaudited):

The following table presents summarized quarterly financial data for 2002, 2001 and 2000.

	2002 Quarter Ended
(Dollars in Thousands, Except Per Share Data)	Mar. 31		June. 30		Sept. 30		Dec. 31
Interest Income	$	5,420		5,274		5,379		5,279
Interest Expense	2,511		2,483		2,550		2,382
Net Interest Income	2,909		2,791		2,829		2,897
Provision for Loan Losses	100		100		100		125
Net Interest Income After Provision for Loan Losses	2,809		2,691		2,729		2,772
Other Income	462		454		498		497
Securities Gains	5		0		55		0
Gain on Sale of Loans	0		0		0		51
Other Expenses	1,843		1,910		1,807		1,698
Income Before Income Tax Provision	1,433		1,235		1,475		1,622
Income Tax Provision	327		259		330		354
Net Income	1,106		976		1,145		1,268
Earnings Per Share	$	.36		.32		.38		.42

	2001 Quarter Ended
	Mar. 31			June. 30			Sept. 30		Dec. 31
Interest Income	$	5,783			5,840			5,671		5,570
Interest Expense	3,147			3,021			2,885		2,682
Net Interest Income	2,636			2,819			2,786		2,888
Provision for Loan Losses	75			75			100		250
Net Interest Income After Provision for Loan Losses	2,561			2,744			2,686		2,638
Other Income	449			444			475		491
Securities Gains (Losses)	(11		)	(7		)	4		0
Other Expenses	1,737			1,852			1,798		1,639
Income Before Income Tax Provision	1,262			1,329			1,367		1,490
Income Tax Provision	291			312			303		312
Net Income	971			1,017			1,064		1,178
Earnings Per Share	$	0.32			0.33			0.35		0.39

22

Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont’d)

(Dollars in Thousands, Except Per Share Data)	2000 Quarter Ended
	Mar. 31	June 30		Sept. 30	Dec. 31
Interest Income	$ 5,230	5,407		5,564	5,852
Interest Expense	2,652	2,743		2,930	3,130
Net Interest Income	2,578	2,664		2,634	2,722
Provision for Loan Losses	75	100		75	75
Net Interest Income After Provision for Loan Losses	2,503	2,564		2,559	2,647
Other Income	414	401		374	371
Securities Losses	0	(4	)	0	0
Other Expenses	1,653	1,684		1,706	1,613
Income Before Income Tax Provision	1,264	1,277		1,227	1,405
Income Tax Provision	316	308		280	321
Net Income	948	969		947	1,084
Earnings Per Share	$0.31	0.32		0.31	0.36

(22)Recent Accounting Pronouncements:

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” It is effective for financial statements issued for fiscal years beginning after June 15, 2002. Earlier application is encouraged. The adoption of this SFAS on January 1, 2003 is not expected to have an impact on MPB’s earnings, financial condition or equity.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The provisions of this SFAS are effective for financial statements issued for fiscal years beginning after December 15, 2001, interim periods within those fiscal years, with earlier application encouraged. The provisions of this SFAS generally are to be applied prospectively. The adoption of this SFAS on January 1, 2002 did not have an impact on MPB’s earnings, financial condition or equity.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” The provisions of this SFAS related to the rescission of SFAS No. 4 are to be applied in fiscal years beginning after May 15, 2002. Early application of the provisions of this SFAS related to SFAS No. 13 shall be effective for transactions occurring after May 15, 2002. All other provisions of the SFAS shall be effective for financial statements issued on or after May 15, 2002. Early application of the SFAS is encouraged. The adoption of the effective portions of the SFAS did not have an impact on MPB’s earnings, financial condition or equity. The adoption of the remaining portions of this SFAS is not expected to have an impact on MPB’s earnings, financial condition or equity.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The provisions of this SFAS are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. MPB does not expect the adoption of this Statement to have an impact on its earnings, financial condition or equity.

On October 1, 2002, the FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions,” effective for all business combinations initiated after October 1, 2002. This Statement addresses the financial accounting and reporting for the acquisition of all or part of a financial institution, except for a transaction between two or more mutual enterprises. Under this SFAS, acquisition of all or part of a financial institution that meets the definition of a business combination shall be accounted for by the purchase method in accordance with SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” This SFAS also provides guidance on the accounting for the impairment or disposal of acquired long-term customer-relationship intangible assets (such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets), including those acquired in transactions between two or more mutual enterprises. The adoption of this SFAS did not have an impact on MPB’s earnings, financial condition or equity.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others.” This Interpretation clarifies the requirements for a guarantor’s accounting for and disclosures of certain guarantees issued and outstanding. This Interpretation requires a guarantor to recognize a liability for the fair value of the obligation it assumes under that guarantee. The initial recognition and initial measurement provisions of the Interpretation are applied on a prospective basis to guarantees issued or modified after December 31, 2002. The Interpretation’s disclosure requirements were implemented during the year ended December 31, 2002. The adoption of the recognition and measurement provisions of this Interpretation are not expected to have a significant impact on MPB’s earnings, financial condition or equity.

23

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 consolidated financial statements also appearing in this report.

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 $4,495,000 for the year 2002, compared to $4,230,000 in 2001, which was an increase of $265,000 or 6.3%. This represents net income in 2002 of $1.48 per share compared to $1.39 per share in 2001 and $1.30 per share in 2000.

Total assets of MPB continued to grow in 2002, reaching the level of $363,284,000, an increase of $32,649,000 or 9.9% over $330,635,000 at year end 2001. The majority of growth came from increases in commercial real estate loans, and an increase in our portfolio of investment certificates of deposit. These increases were funded primarily through retained earnings of the Bank as well as short-term borrowings.

MPB continued to achieve an excellent return on average shareholders’ equity, (ROE), a widely recognized performance indicator in the financial industry. The ROE was 13.60% in 2002, 13.68% in 2001 and 14.64% in 2000. Return on average assets (ROA), another performance indicator, was 1.32% in 2002, 1.31% in 2001 and 1.34% in 2000.

Tier one capital (to risk weighted assets) of $25,235,000 or 10.4% and total capital (to risk weighted assets) of $28,283,000 or 11.6% at December 31, 2002, are well above the December 31, 2002 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 2002 net interest income increased $297,000 or 2.7% as compared to an increase of $531,000 or 5.0% in 2001. The average balances, effective interest differential and interest yields for the years ended December 31, 2002, 2001 and 2000 and the components of net interest rate growth, are presented in Table 1. A comparative presentation of the changes in net interest income for 2002 compared to 2001, and 2001 compared to 2000, 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.

24

Mid Penn Bancorp, Inc.
Management’s Discussion and Analysis (cont’d)

The yield on earning assets decreased to 7.00% in 2002 from 7.93% in 2001. The yield on earning assets for 2000 was 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 and changes in the “prime rate.” The average “prime rate” for 2002 was 4.67% as compared to 6.91% for 2001 and 9.23% for 2000.

Interest expense decreased by $1,809,000 or 15.4% in 2002 as compared to an increase of $280,000 or 2.44% in 2001. In order to maintain the spread between interest earning assets and interest bearing liabilities, management was forced to aggressively decrease the expense on deposits.

Primarily resulting from the fluctuations in interest rates, the net interest margin, on a tax equivalent basis, in 2002 was 3.91% compared to 4.04% in 2001 and 4.25% in 2000. 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, 2002

(Dollars in thousands)	Average Balance		Interest Income/Expense	Average Rates Earned/Paid
ASSETS:
Interest Bearing Balances	$	57,454	2,703	4.70	%
Investment Securities:
Taxable	14,460		738	5.10	%
Tax-Exempt	39,937		3,032	7.59	%
Total Investment Securities	54,397
Federal Funds Sold	2,786		47	1.69	%
Loans, Net	207,028		15,983	7.72	%
Total Earning Assets	321,665		22,503	7.00	%
Cash and Due from Banks	6,350
Other Assets	13,745
Total Assets	$	341,760
LIABILITIES & STOCKHOLDERS’ EQUITY:
Interest Bearing Deposits:
NOW	$	32,480	168	0.52	%
Money Market	36,390		801	2.20	%
Savings	26,662		355	1.33	%
Time	144,353		6,483	4.49	%
Short-term Borrowings	4,821		50	1.04	%
Long-term Debt	32,469		2,069	6.37	%
Total Interest Bearing Liabilities	277,175		9,926	3.58	%
Demand Deposits	28,069
Other Liabilities	3,475
Stockholders’ Equity	33,041
Total Liabilities and Stockholders’ Equity	$	341,760
Net Interest Income	$		12,577
Net Yield on Interest Earning Assets:
Total Yield on Earning Assets				7.00	%
Rate on Supporting Liabilities				3.09	%
Net Interest Margin				3.91	%

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, 2001

(Dollars in thousands)	Average Balance		Interest Income/Expense	Average Rates Earned/Paid
ASSETS:
Interest Bearing Balances	$	49,013	3,092	6.31	%
Investment Securities:
Taxable	23,706		1,542	6.50	%
Tax-Exempt	35,929		2,736	7.62	%
Total Investment Securities	59,635
Federal Funds Sold	2,435		84	3.45	%
Loans, Net	190,558		16,460	8.64	%
Total Earning Assets	301,641		23,914	7.93	%
Cash and Due from Banks	6,044
Other Assets	12,263
Total Assets	$	319,948
LIABILITIES & STOCKHOLDERS’ EQUITY:
Interest Bearing Deposits:
NOW	$	29,427	246	0.84	%
Money Market	23,342		739	3.17	%
Savings	25,661		456	1.78	%
Time	139,928		7,751	5.54	%
Short-term Borrowings	9,822		441	4.49	%
Long-term Debt	32,704		2,102	6.43	%
Total Interest Bearing Liabilities	260,884		11,735	4.50	%
Demand Deposits	25,709
Other Liabilities	2,431
Stockholders’ Equity	30,924
Total Liabilities and Stockholders’ Equity	$	319,948
Net Interest Income	$		12,179
Net Yield on Interest Earning Assets:
Total Yield on Earning Assets				7.93	%
Rate on Supporting Liabilities				3.89	%
Net Interest Margin				4.04	%

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, 2000

(Dollars in thousands)	Average Balance		Interest Income/Expense	Average Rates 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	%

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 $550,000, $387,000 and $203,000 are included with interest income in Table 1 for the years 2002, 2001 and 2000, 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)	2002 Compared to 2001 Increase (Decrease) Due to Change In:									2001 Compared to 2000 Increase (Decrease) Due to Change In:
Taxable Equivalent Basis	Volume			Rate			Net			Volume			Rate			Net
INTEREST INCOME:
Interest Bearing Balances	$	533		(922		)	(389		)	813			(27		)	786
Investment Securities:
Taxable	(601		)	(203		)	(804		)	(990		)	29			(961		)
Tax-Exempt	305			(9		)	296			510			(9		)	501
Total Investment Securities	(296		)	(212		)	(508		)	(480		)	20			(460		)
Federal Funds Sold	12			(49		)	(37		)	146			(62		)	84
Loans, Net	1,423			(1,900		)	(477		)	1,369			(1,219		)	150
Total Interest Income	1,672			(3,083		)	(1,411		)	1,848			(1,288		)	560
INTEREST EXPENSE:
Interest Bearing Deposits:
NOW	256			(334		)	(78)			12			(157		)	(145		)
Money Market	414			(352		)	62			169			(89		)	80
Savings	18			(119		)	(101		)	(2		)	(112		)	(114		)
Time	245			(1,513		)	(1,268		)	540			(127		)	413
Total Interest Bearing Deposits	933			(2,318		)	(1,385		)	719			(485		)	234
Short-term Borrowings	(225		)	(166		)	(391		)	(278		)	(160		)	(438		)
Long-term Debt	(15		)	(18		)	(33		)	553			(69		)	484
Total Interest Expense	693			(2,502		)	(1,809		)	994			(714		)	280
NET INTEREST INCOME	$	979			(581	)		398			854			(574	)		280

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 $425,000 allocation in 2002 as well as a provision of $500,000 in 2001 and $325,000 in 2000. The allowance for loan losses as a percentage of average total loans was 1.45% at December 31, 2002, compared to 1.48% at December 31, 2001 and 1.58% at December 31, 2000, which continues to be higher than that of peer financial institutions due to MPB’s 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,
	2002			2001		2000		1999		1998
Balance, beginning of year	$	2,856			2,815		2,505		2,313		2,281
Loans charged-off:
Commercial real estate, construction and land development	41			249		1		0		40
Commercial, industrial and agricultural	113			118		12		146		200
Real estate-residential	0			0		0		0		40
Consumer	148			122		61		78		37
Total loans charged off	302			489		74		224		317
Recoveries on loans previously charged-off:
Commercial real estate, construction and land development	17			0		28		55		10
Commercial, industrial and agricultural	0			1		5		1		56
Real estate-residential	0			0		0		0		0
Consumer	55			29		26		35		29
Total recoveries	72			30		59		91		95
Net charge-offs	230			459		15		133		222
Provision for loan losses	425			500		325		325		254
Balance, end of year	$	3,051			2,856		2,815		2,505		2,313
Ratio of net charge-offs during the year to average loans outstanding during the year, net of unearned discount	.11		%	.24		.01		.08		.14
Allowance for loan losses as a percentage of average total loans	1.45		%	1.48		1.58		1.58		1.47

Noninterest Income

During 2002, MPB earned $2,022,000 in noninterest income, compared to $1,845,000 earned in 2001, and $1,556,000 earned in 2000.

Service charges on deposit accounts amounted to $1,053,000 for 2002, an increase of $132,000 or 14.33% over $921,000 for 2001, which showed an increase of $331,000 over 2000. The majority of this increase resulted from the increasing revenues from NSF charges. In 2001, MPB initiated a program which allows approved customers to overdraw their checking accounts and have the checks paid, up to an approved limit not to exceed $300. This program, coupled with a more restrictive policy on fee waivers, and an increase in demand accounts, has contributed to this substantial increase in fee income with a very controllable level of associated loss.

MPB owns cash surrender value life insurance policies that provide funding for director retirement and salary continuation plans. The income on these policies amounted to $239,000 during the year 2002.

Trust department income for 2002 was $188,000, a $30,000 or 19.0% increase from the $158,000 in 2001, which was $45,000 or 22.2% decrease from the $203,000 earned in 2000. The Trust Department adopted a new fee schedule during 2000, which has resulted in increased trust fees earned. Trust Department income fluctuates from year to year, due to the number of estates being settled during the year.

MPB also earned $64,000 in 2002 and $75,000 in 2001 in fees from Invest, the third-party provider of investments whose services the Bank has contracted. Other income amounted to $431,000 in 2002, $612,000 in 2001 and $496,000 in 2000, net of gains on other real estate.

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, 2002, 2001 and 2000 is reflected in Table 4. Noninterest expense increased to $7,258,000 in 2002 from $7,026,000 in 2001 and $6,656,000 in 2000. The major component of noninterest expense is salaries and employee benefits. The number of full-time equivalent employees increased from 109 to 110 during 2002. Increases in the 2002 workforce also included the addition of two experienced commercial loan officers. A major increase in noninterest expense was the increase in expenses associated with maintaining other real estate and moving these parcels toward sale. Most of the 2002 increase dealt with one commercial parcel, over $1 million in value, that was completed for sale and sold during the year.

TABLE 4: NONINTEREST EXPENSE

(Dollars in thousands)	Years ended December 31,
	2002		2001		2000
Salaries and employee benefits	$	3,978	$	4,012	$	3,790
Occupancy, net	384		392		364
Equipment	514		461		481
Postage and supplies	278		280		291
FDIC insurance premium	46		44		45
Marketing and advertising	115		127		144
Other real estate, net	294		43		11
Pennsylvania bank shares tax	259		262		271
Professional services	160		213		104
Telephone	78		78		72
Loss on mortgage sales	79		125		19
Other	1,073		989		1,064
Total Noninterest Expense	$	7,258		7,026		6,656

Investments

MPB’s investment portfolio is utilized to improve earnings through investments of funds in higher-yielding assets, while maintaining asset quality, 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 at fair 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 gain, amounted to $1,357,000, net of tax, as of the end of the year.

At December 31, 2002, SFAS No. 115 resulted in an increase of shareholders’ equity of $1,357,000 (unrealized gain on securities of $2,049,000 less estimated income tax expense of $692,000). As of December 31, 2001, SFAS No. 115 resulted in a decrease in shareholders’ equity of $56,000 (unrealized loss on securities of $84,000, less estimated income tax benefit of $28,000), compared to a decrease in stockholders’ equity of $344,000 (unrealized loss on securities of $522,000, less estimated income tax benefit of $178,000) as of December 31, 2000.

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 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,
	2002		2001	2000
U. S. Treasury and U.S. government agencies	$	9,538	9,028	34,750
Mortgage backed U.S. government agencies	5,512		4,674	2,402
State and political subdivision obligations	39,388		39,760	33,972
Restricted equity securities	2,372		1,970	3,281
Total	$	56,810	55,432	74,405

Loans

At December 31, 2002, net loans totaled $218,302,000, an $18,584,000 or 9.2% increase from December 31, 2001. During 2002, MPB experienced a net increase in commercial real estate and commercial/industrial loans of approximately $14,703,000, 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, 2002, loans, net of unearned income, represented 64.4% of earning assets as compared to 64.6% on December 31, 2001 and 62.7% on December 31, 2000.

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, industrial 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,
	2002			2001		2000		1999		1998
Commercial real estate, construction and land development	$	146,325		130,913		110,947		105,328		88,263
Commercial, industrial and agricultural	22,398			23,107		26,274		20,118		20,401
Real estate-residential	41,502			38,349		35,610		32,586		30,325
Consumer	12,978			12,732		14,110		16,780		16,034
Lease financing	0			0		0		0		1
Total Loans	223,203			205,101		186,941		174,812		155,024
Unearned income	(1,850		)	(2,265	)	(2,730	)	(2,518	)	(2,031	)
Loans net of unearned discount	221,353			202,836		184,211		172,294		152,993
Allowance for loan losses	(3,051		)	(2,856	)	(2,815	)	(2,505	)	(2,313	)
Net Loans	$	218,302		199,980		181,396		169,789		150,680

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 “specific” reserves. The amounts not specifically provided for individual classes of loans are considered “general.” This 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, 2002, was $3,051,000 or 1.38% of total loans less unearned discount as compared to $2,856,000 or 1.41% at December 31, 2001, and $2,815,000 or 1.53% at December 31, 2000.

TABLE 7: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

(Dollars in thousands)	December 31,
	2002				2001			2000			1999			1998
	Amount		Percent of Loans		Amount	Percent of Loans		Amount	Percent of Loans		Amount	Percent of Loans		Amount	Percent of Loans
Commercial real estate, construction and land development	$	1,898	65.6	%	1,584	63.8	%	1,318	59.3	%	927	60.3	%	861	56.8	%
Commercial, industrial and agricultural	922		10.0	%	987	11.3	%	1,008	14.1	%	782	11.5	%	693	13.5	%
Real estate-residential	56		18.6	%	73	18.7	%	209	19.0	%	198	18.6	%	219	19.4	%
Consumer	147		5.8	%	166	6.2	%	93	7.6	%	114	9.6	%	127	10.3	%
General	28		—		46	—		187	—		484	—		413	—
Total loans	$	3,051	100	%	2,856	100	%	2,815	100	%	2,505	100	%	2,313	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 $350,000, $87,000 and $222,000 in 2002, 2001, and 2000, 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, 2002, totaled $2,753,000 or 0.76% of total assets compared to $4,744,000 or 1.44% of total assets in 2001, and $2,312,000 or 0.73% of total assets in 2000. The foreclosed assets held for sale at December 31, 2002, consist of two pieces of commercial real estate and residential building lots that MPB has available for sale.

32

Mid Penn Bancorp, Inc.
Management’s Discussion and Analysis (cont’d)

TABLE 8: NONPERFORMING ASSETS

(Dollars in thousands)	December 31,
	2002			2001		2000		1999		1998
Nonaccrual loans	$	1,164		1,686		1,116		890		376
Past due 90 days or more	808			828		504		386		844
Restructured loans	0			537		622		878		1,497
Total nonperforming loans	1,972			3,051		2,242		2,154		2,717
Foreclosed assets held for sale	781			1,693		70		63		347
Total nonperforming assets	$	2,753		4,744		2,312		2,217		3,064
Percent of loans outstanding	1.23		%	2.31	%	1.24	%	1.27	%	2.00	%
Percent of total assets	0.76		%	1.44	%	0.73	%	0.77	%	1.10	%

 

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, 2002, increased by $20,598,000 or 8.1% over December 31, 2001, which also increased by $22,697,000 or 9.8% from December 31, 2000. Average balances and average interest rates applicable to the major classifications of deposits for the years ended December 31, 2002, 2001, and 2000 are presented in Table 9.

Average short-term borrowings for 2002 were $4,821,000 as compared to $9,822,000 in 2001. 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,
	2002				2001			2000
	Average Balance		Average Rate		Average Balance	Average Rate		Average Balance	Average Rate
Noninterest-bearing demand deposits	$	28,069	0.00	%	25,709	0.00	%	23,511	0.00	%
Interest-bearing demand deposits	32,480		0.52	%	29,427	0.84	%	28,518	1.37	%
Money market	36,390		2.20	%	23,342	3.17	%	18,568	3.55	%
Savings	26,662		1.33	%	25,661	1.78	%	25,744	2.21	%
Time	144,353		4.49	%	139,928	5.54	%	130,342	5.63	%
Total	$	267,954	2.91	%	244,067	3.77	%	226,683	3.95	%

 

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 stockholders and the buildup makes it difficult for a company to offer a competitive return on the stockholders’ capital going forward. For these reasons capital adequacy has been, and will continue to be, of paramount importance.

In 2002, capital was increased by $3,488,000 or 11.0%. In 2001, capital was increased by $2,090,000 or 7.05%. In 2000, capital was increased by $3,061,000 or 11.52%. Capital growth is achieved by retaining more in earnings than we pay out to our stockholders.

MPB’s normal dividend payout allows for quarterly cash returns to its stockholders and provides earnings retention at a level sufficient to finance future growth. The dividend payout ratio, which represents the percentage of annual net income returned to the stockholders in the form of cash dividends, was 54% for 2002 compared to 58% for 2001 and 62% for 2000.

33

Mid Penn Bancorp, Inc.
Management’s Discussion and Analysis (cont’d)

At December 31, 2002, 18,622 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 2002 was $1,270,000 compared to $1,218,000 and $1,225,000 in 2001 and 2000, respectively. The effective tax rate was 22% for 2002 and 2001, and 24% for 2000.

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.

The major sources of cash in 2002 came from operations and the influx of deposit dollars during the year. Demand and savings balances posted a net increase of $14,723,000 and time deposits increased by a net amount of $5,875,000 as bank customers returned to the safety of bank deposits during this time of uncertainty in the equity markets.

The Bank used this cash to fund loans which increased by a net $18,322,000 during the year, as well as investing in short term interest-bearing (certificate of deposit) balances in other banks. These jumbo certificates offer a competitive rate of return with no credit risk and little interest-rate risk due to their short terms.

The major sources of cash in 2001 came from operations and the net decrease of $18,537,000 in investment securities. Net deposits increased by $22,697,000 contributing another major 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 2001 sources of cash were used primarily to fund loan growth and to pay down short-term borrowings. Net loan funding used $18,584,000 of cash. While loan growth was very sluggish during the first half of 2001, MPB experienced substantial loan growth with the portfolio growing more than 10% by the end of 2001. The majority of the loan growth was in loans to fund commercial real estate in the Greater Harrisburg area.

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.

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 earning assets by

34

Mid Penn Bancorp, Inc.
Management’s Discussion and Analysis (cont’d)

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, 2002
	One Year and Less		After One Year thru Five Years		After Five Years thru Ten Years		After Ten Years		Total
U.S. Treasury and U.S. government agencies	$	2,994	6,544		0		0			9,538
State and political subdivision obligations	270		3,258		9,978		25,882		39,388
Mortgage-backed U.S. government agencies	61		1,808		2,105		1,538		5,512
Equity securities	0		0		0		2,372		2,372
Total	$	3,325		11,610		12,083		29,792		56,810

	One Year and Less		After One Year thru Five Years	After Five Years thru Ten Years	After Ten Years	Total
Weighted Average Yields
U.S. Treasury and U.S. government agencies	1.91	%	3.92	0	0	3.29
State and political subdivision obligations	7.39		7.38	7.18	7.07	7.13
Mortgage-backed U.S. government agencies	6.10		6.09	5.92	3.93	5.42
Equity securities	0		0	0	3.23	3.23
Total	2.43	%	5.23	6.96	6.60	6.16

TABLE 11: LOAN MATURITY AND INTEREST SENSITIVITY

(Dollars in thousands)	December 31, 2002
	One Year and Less		After One Year thru Five Years	After Five Years	Total
Commercial, real estate, construction and land development	$	48,755	90,305	7,265		146,325
Commercial, industrial and agricultural	12,960		8,281	1,157	22,398
Real estate-residential mortgages	13,165		19,112	9,225	41,502
Consumer	3,169		7,462	497	11,128
Total Loans	$	78,049	125,160	18,144	221,353
Rate Sensitivity
Predetermined rate	$	9,104	36,589	17,660	63,353
Floating or adjustable rate	68,945		88,571	484	158,000
Total	$	78,049	125,160	18,144		221,353

35

Mid Penn Bancorp, Inc.
Management’s Discussion and Analysis (cont’d)

TABLE 12: INTEREST RATE SENSITIVITY GAP

(Dollars in thousands) (As of December 31, 2002)	Expected Maturity Year Ended December 31,
	2003			2004			2005			2006			2007			Thereafter			Total		Fair Value
Assets:
Interest bearing balances	$	55,189			8,615			1,287			297			99			0			65,487		65,487
Average interest rate	3.66			4.19			7.21			6.68			5.05			—			3.82
Debt securities	3,325			1,007			5,368			3,976			1,261			39,500			54,437		56,486
Average interest rate	2.43			6.95			4.57			5.26			5.57			6.91			6.27
Adjustable rate loans	68,945			33,371			22,966			14,242			17,992			484			158,000		158,000
Average interest rate	5.47			7.82			7.40			7.84			6.94			7.76			6.64
Fixed rate loans	9,104			7,710			9,988			8,949			9,942			17,660			63,353		79,834
Average interest rate	7.72			8.37			8.32			6.38			7.11			7.72			7.64
Total	$	136,563		50,703			39,609			27,464			29,294			57,644			341,277		359,807
Interest liabilities:
Variable rate savings and transaction accounts	$	55,602		0			0			0			0			73,274			128,876		128,876
Average interest rate	1.44			—			—			—			—			.39			.84
Certificates of deposit and IRAs	62,026			32,484			25,288			6,106			16,386			2,853			145,143		151,638
Average interest rate	3.81			4.08			4.51			4.78			4.53			4.73			4.13
Short term borrowings	18,156			0			0			0			0			0			18,156		18,156
Average interest rate	1.40			—			—			—			—			—			1.40
Long term fixed rate borrowings	5,197			5,086			0			5,000			0			17,100			32,383		34,673
Average interest rate	6.61			5.24			—			6.21			—			6.55			6.30
Total	$	140,981		37,570			25,288			11,106			16,386			93,227				324,558		333,343
Rate sensitive gap:
Periodic gap	$	(4,418	)	13,133			14,321			16,358			12,908			(35,583		)
Cumulative gap	$	(4,418	)	8,715			23,036			39,394			52,302			16,719
Cumulative gap as a percentage of total assets		-1.2	%		+2.4	%		+6.3	%		+10.8	%		+14.4	%		+4.6	%

(Dollars in thousands) (As of December 31, 2001)	Expected Maturity Year Ended December 31,
	2002		2003		2004		2005		2006		Thereafter		Total		Fair Value
Assets:
Interest bearing balances	$	35,642		13,935		1,980		1,188		297		0		53,042		53,042
Average interest rate	5.45		5.93		6.63		7.47		6.68		—		5.67
Debt securities	521		3,204		1,055		2,984		3,114		42,585		53,463		53,377
Average interest rate	7.63		5.75		6.93		5.74		6.69		6.91		6.77
Adjustable rate loans	52,655		11,238		40,103		13,448		22,692		1,015		141,151		141,151
Average interest rate	6.27		9.09		7.87		7.75		8.04		8.08		7.39
Fixed rate loans	8,952		7,825		9,213		9,375		7,695		18,625		61,685		72,875
Average interest rate	8.09		8.99		8.76		8.98		8.53		8.29		8.49
Total	$	97,770		36,202		52,351		26,995		33,798		62,225		309,341		320,445

36

Mid Penn Bancorp, Inc.
Management’s Discussion and Analysis (cont’d)

TABLE 12: INTEREST RATE SENSITIVITY GAP (cont’d)

(Dollars in thousands) (As of December 31, 2001)	Expected Maturity Year Ended December 31,
	2002			2003		2004		2005		2006		Thereafter		Total	Fair Value
Interest liabilities:
Variable rate savings and transaction accounts	$	42,012		0		0		0		0		72,141		114,153	114,153
Average interest rate	1.88											0.61		1.08
Certificates of deposit and IRAs	79,798			26,037		10,852		7,689		5,258		2,977		132,611	136,811
Average interest rate	4.60			5.98		4.75		5.70		4.86		5.35		4.97
Short term borrowings	8,662			0		0		0		0		0		8,662	8,662
Average interest rate	1.50			—		—		—		—		—		1.50
Long term fixed rate borrowings	184			5,197		5,087		0		5,000		17,100		32,568	34,673
Average interest rate	7.30			6.61		5.24		—		6.21		6.55		6.31
Total	$	130,656		31,234		15,939		7,689		10,258		92,218		287,994	294,299
Rate sensitive gap:
Periodic gap	$	(32,886	)	4,968		36,412		19,306		23,540		(29,993	)
Cumulative gap	$	(32,886	)	(27,918	)	8,494		27,800		51,340		21,347
Cumulative gap as a percentage of total assets	-9.9		%	-8.4	%	+2.6	%	+8.4	%	+15.5	%	+6.5	%

Duing 2002, Management analyzed interest rate risk using the Profit Star 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, 2002, 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,
	2002		2001	2000
Three months or less	$	5,757	3,925	5,431
Over three months to twelve months	6,179		12,773	8,534
Over twelve months	12,895		7,643	9,377
Total	$	24,831	24,341	23,342

 

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.

37

Mid Penn Bancorp, Inc.
Management’s Discussion and Analysis (cont’d)

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, 2002, commitments to extend credit amounted to $42,261,000 as compared to $37,674,000 as of December 31, 2001.

MPB also issues financial standby letters of credit to its customers. The risk associated with financial standby letters of credit is essentially the same as the credit risk involved in loan extensions to customers. Financial standby letters of credit increased to $4,579,000 at December 31, 2002, from $4,009,000 at December 31, 2001.

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 for the years ended December 31, 2002, 2001 and 2000 was $1,413,000, $288,000 and $1,517,000, respectively.

Critical Accounting Policies

The Bank’s methodology for determining the allowance for loan losses establishes both a specific and a general component. The specific portion of the allowance represents the results of analysis of individual “watch list” loans (commercial, residential and consumer loans) as well as pools of consumer loans within the portfolio. The individual commercial loans are risk rated with specific attention to estimated loss exposure. Historical loan loss rates are applied to “problem” consumer credits, adjusted to reflect current conditions.

Specific regular reviews of credits exceeding $500,000 are performed to monitor the major portfolio risk. The Bank analyzes all commercial loans in excess of $10,000 that are rated as “watch list” credits. Potential credit problems are monitored to determine whether specific loans are impaired, with impairment normally measured by reference to borrowers’ collateral values and cash flows.

The general portion of the allowance for loan losses represents the results of measuring potential losses inherent in the portfolio that are not identified in the specific allowance analysis. This general portion is analyzed by assessing changes in the Bank’s underwriting criteria, growth and/or changes in the mix of loans originated, industry concentrations and evaluations, lending management changes, comparisons of certain factors to peer group banks, and changes in economic conditions.

38

Mid Penn Bancorp, Inc.
Summary of Selected Financial Data

(Dollars in thousands, except per share data)	2002		2001	2000	1999	1998
INCOME:
Total Interest Income	$	21,352	22,864	22,053	20,112	20,436
Total Interest Expense	9,926		11,735	11,455	9,674	9,593
Net Interest Income	11,426		11,129	10,598	10,438	10,843
Provision for Possible Loan Losses	425		500	325	325	254
Non-Interest Income	2,022		1,845	1,556	1,689	1,398
Non-Interest Expense	7,258		7,026	6,656	6,665	6,606
Income Before Income Taxes	5,765		5,448	5,203	5,137	5,381
Provision for Income Taxes	1,270		1,218	1,255	1,253	1,516
Net Income	4,495		4,230	3,948	3,884	3,865
COMMON STOCK DATA PER SHARE:
Earnings Per Share	$	1.48	1.39	1.30	1.28	1.27
Cash Dividends Declared	.80		.80	.80	2.18	.69
Stockholders’ Equity	11.59		10.44	9.76	8.74	10.90
AVERAGE SHARES OUTSTANDING	3,036,508		3,038,859	3,036,007	3,037,976	2,892,416
AT YEAR-END:
Investments	$	58,859	55,348	73,885	64,099	67,933
Loans, Net of Unearned Discount	221,353		202,836	184,211	172,294	152,993
Allowance for Loan Losses	3,051		2,856	2,815	2,505	2,313
Total Assets	363,284		330,635	315,584	287,542	277,827
Total Deposits	274,703		254,105	231,408	217,840	216,802
Short-term Borrowings	18,156		9,610	22,738	24,636	12,159
Long-term Debt	32,383		32,568	29,241	16,400	15,550
Stockholders’ Equity	$	35,204	31,716	29,626	26,565	31,536
RATIOS:
Return on Average Assets	1.32		1.31	1.34	1.40	1.45
Return on Average Stockholders’ Equity	13.60		13.68	14.64	14.68	12.81
Cash Dividend Payout Ratio	54.05		57.55	61.54	170.91	53.73
Allowance for Loan Losses to Loans	1.38		1.41	1.53	1.45	1.51
Average Stockholders’ Equity to Average Assets	9.67		9.67	9.15	9.50	11.36

39

EX-21

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

Name	State of Incorporation
Mid Penn Bank	Pennsylvania
Mid Penn Investment Corp.	Delaware
Mid Penn Insurance Services, LLC	Pennsylvania

EX-23

EXHIBIT 23

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the incorporation by reference in Mid Penn Bancorp, Inc.’s Annual Report on Form 10-K of our report dated January 16, 2003, relating to the consolidated financial statements as of and for the year ended December 31, 2002 of Mid Penn Bancorp, Inc. and subsidiaries, which report appears in Mid Penn Bancorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2002 and filed with the Securities and Exchange Commission.

PARENTE RANDOLPH, PC

Williamsport, Pennsylvania

March 26, 2003

EX-99.1

EXHIBIT 99.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADDED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Mid Penn Bancorp, Inc. (the “Company”) for the period ended December 31, 2002, as filed with the Securities and Exchange Commission (the “Report”), I, Alan W. Dakey, President and Chief Executive Officer, of the Company, certify, pursuant to 18 U.S.C. §1350, as added by § 906 of the Sarbanes-Oxley Act of 2002, that:

1.    The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.    To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

Date: March 27, 2003	By:	/s/ Alan W. Dakey
		Alan W. Dakey, President and Chief Executive Officer

EX-99.2

EXHIBIT 99.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADDED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Mid Penn Bancorp, Inc. (the “Company”) for the period ended December 31, 2002, as filed with the Securities and Exchange Commission (the “Report”), I, Kevin W. Laudenslager, Chief Financial Officer, of the Company, certify, pursuant to 18 U.S.C. §1350, as added by § 906 of the Sarbanes-Oxley Act of 2002, that:

1.    The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.    To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

Date: March 27, 2003	By:	/s/ Kevin W. Laudenslager
		Kevin W. Laudenslager, Chief Financial Officer