-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RjZ0QW3gHOiomPAHvv9bHDJ2EV5MnBITRHdEZSk9VbuK3f1wOtRZoYFT5DrJPawG EXK3dy0Z+0gvLQuOUSFhLA== 0000950115-97-000477.txt : 19970401 0000950115-97-000477.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950115-97-000477 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MID PENN BANCORP INC CENTRAL INDEX KEY: 0000879635 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 251666413 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-20141 FILM NUMBER: 97570103 BUSINESS ADDRESS: STREET 1: 349 UNION ST CITY: MILLERSBURG STATE: PA ZIP: 17061 BUSINESS PHONE: 7176922133 MAIL ADDRESS: STREET 2: 349 UNION STREET CITY: MILLERSBURG STATE: PA ZIP: 17061 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 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 0-20141 ---------------------- MID PENN BANCORP, INC. ---------------------- (Exact Name of Registrant as Specified in its Charter) Pennsylvania 25-1666413 ------------ ---------- (State or Other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) 349 Union Street Millersburg, Pennsylvania 17601 ------------------------- ----- (Address of Principal Executive Offices) (Zip Code) (717) 692-2133 -------------- (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00 Par Value ----------------------------- (Title of Class) 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 ----- PAGE 1 OF 92 SEQUENTIALLY NUMBERED PAGES EXHIBIT INDEX IS LOCATED ON SEQUENTIAL PAGE 20 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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the shares of Common Stock of the Registrant held by nonaffiliates of the Registrant was $34,632,019 at March 6, 1997 (a date within 60 days of the date hereof). As of March 6, 1997, the Registrant had 1,241,973 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Excerpts from the Registrant's 1996 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 1997 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..................................... 10 Item 3 - Legal Proceedings.............................. 11 Item 4 - Submission of Matters to a Vote of Security Holders....................... 11 PART II Item 5 - Market for Registrant's Common Equity and Related Shareholder Matters.................... 11 Item 6 - Selected Financial Data........................ 11 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation...................................... 12 Item 8 - Financial Statements and Supplementary Data 12 Item 9 - Changes In and Disagreements With Accountants on Accounting and Financial Disclosure......... 12 PART III Item 10 - Directors and Executive Officers of the Registrant................................. 12 Item 11 - Executive Compensation......................... 12 Item 12 - Security Ownership of Certain Beneficial Owners and Management.......................... 13 Item 13 - Certain Relationships and Related Transactions........................... 13 PART IV Item 14 - Exhibits, Financial Statements, Schedules and Reports on Form 8-K........................ 13 Signatures............................................... 15 i PART I ITEM 1. BUSINESS. General. Mid Penn Bancorp, Inc. (the "Registrant"), was incorporated in the Commonwealth of Pennsylvania in August, 1991, for the sole purpose of forming a one-bank holding company. On December 31, 1991, the Registrant acquired, as part of the holding company formation, all of the outstanding common stock of Mid Penn Bank (the "Bank"), and the Bank became a wholly owned subsidiary of the Registrant. The Bank is the Registrant's only, direct or indirect, subsidiary. Millersburg Bank, the predecessor to the 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. The Bank is supervised by the Pennsylvania Department of Banking (the "Department") and the Federal Deposit Insurance Corporation (the "FDIC"). The Registrant's and the Bank's legal headquarters is located at 349 Union Street, Millersburg, Pennsylvania 17061. At December 31, 1996, the Registrant's consolidated assets, deposits and shareholders' equity were approximately $210,172, $174,671 and $24,650, respectively. The Registrant's primary business consists of attracting deposits from its network of community banking offices operated by the Bank. 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, personal loans, mortgage and home equity loans, secured and unsecured commercial 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 (the "BIF") of the FDIC to the maximum extent provided by law. The Registrant operates in a heavily regulated environment. Changes in laws and regulations affecting the Registrant and it's subsidiary, the Bank, may have an impact on operations. See "Supervision and Regulation--The Registrant" and "Supervision and Regulation--The Bank." Employees. At December 31, 1996, the Registrant had 68 full-time and 24 part-time employees. None of these employees is represented by a collective bargaining agent, and the Registrant believes it enjoys good relations with its personnel. The Registrant experiences substantial competition in attracting and retaining deposits and in lending funds. Primary factors in competing for deposits are the ability to offer attractive rates and the convenience of office locations. Direct competition for deposits comes primarily from other commercial banks and thrift institutions. Competition for deposits also comes from money 1 market mutual funds, corporate and government securities and credit unions. The primary factors in the competition for loans are interest rates, loan origination fees and the range of products and services offered. Competition for origination of real estate loans normally comes from other commercial banks, thrift institutions, mortgage bankers, mortgage brokers and insurance companies. For additional information with respect to the Registrant's business activities, see Part II, Item 7 hereof. Environmental Laws. Neither the Registrant nor the Bank anticipate that compliance with environmental laws and regulations will have any material effect on capital, expenditures, earnings, or on its competitive position. However, environmentally related hazards have become a source of high risk and potentially unlimited liability for financial institutions. Environmentally contaminated properties owned by an institution's borrowers may result in a drastic reduction in the value of the collateral securing the institution's loans to such borrowers, high environmental clean up costs to the borrower affecting its ability to repay the loans, the subordination of any lien in favor of the institution to a state or federal lien securing clean up costs, and liability to the institution for clean up costs if it forecloses on the contaminated property or becomes involved in the management of the borrower. To minimize this risk, the Bank may require an environmental examination of and report with respect to the property of any borrower or prospective borrower if circumstances affecting the property indicate a potential for contamination, taking into consideration a potential loss to the institution in relation to the borrower. Such examination must be performed by an engineering firm experienced in environmental risk studies and acceptable to the institution, and the cost of such examinations and reports are the responsibility of the borrower. These costs may be substantial and may deter prospective borrower from entering into a loan transaction with the Bank. The Registrant is not aware of any borrower who is currently subject to any environmental investigation or clean up proceeding that is likely to have a material adverse effect on the financial condition or results of operations of the Bank. 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 substances on or from the property, or knowingly 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. 2 As discussed above, there are several federal and state statutes that regulate the obligations and liabilities of financial institutions pertaining to environmental issues. In addition to the potential for attachment of liability resulting from its own actions, a bank may be held liable under certain circumstances for the actions of its borrowers, or third parties, when such actions result in environmental problems on properties that collateralize loans held by the Bank. Further, the liability has the potential to far exceed the original amount of the loan issued by the Bank. Currently, neither the Registrant nor the Bank is a party to any pending legal proceeding pursuant to any environmental statute, nor is the Registrant or the Bank aware of any circumstances that may give rise to liability under any such statute. Supervision and Regulation - The Registrant. The Registrant is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the "Holding Company Act"), and to supervision and regulation by the Board of Governors of the Federal Reserve System (the "Board"). The Holding Company Act requires the Registrant to secure the prior approval of the Board before it owns or controls, directly or indirectly, more than 5 percent of the voting shares or substantially all of the assets of any institution, including another bank. The Holding Company Act prohibits acquisition by the Registrant of more than 5 percent of the voting shares of, or interest in, all or substantially all of the assets of any bank located outside of Pennsylvania unless such acquisition is specifically authorized by the laws of the state in which such bank is located. A bank holding company, such as the Registrant, is prohibited from engaging in or acquiring direct or indirect control of more than 5 percent of the voting shares of any company engaged in non-banking activities unless the Board, by order or regulation, has found that such activities are so closely related to banking, managing or controlling banks as to be a proper incident thereto. In making this determination, the Board considers whether the performance of these activities by a bank holding company would offer benefits to the public that outweigh possible adverse effects. The Registrant does not at this time engage in any other permissible activities, nor does the Registrant, presently, have plans to engage in any other permissible activities. Federal law also prohibits acquisitions of control of a bank holding company without prior notice to certain federal bank regulators. Control is defined for this purpose as the power, directly or indirectly, to direct the management or policies of the bank or bank holding company or to vote 25 percent or more of any class of voting securities. The Bank, as a subsidiary bank of a bank holding company, is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the Registrant or to any of its subsidiaries, on investments in the stock or other securities of the Registrant and on taking of such stock or securities as collateral for loans to any borrower. The Board, the FDIC and other federal regulators have issued certain risk-based capital guidelines, which supplement existing capital requirements. The guidelines require all United States banks and bank holding companies to maintain a minimum risk-based capital ratio of 8 percent (of which at least 4 percent must be in the form of common stockholders' equity). The risk-based capital rules are designed to make regulatory capital requirements more 3 sensitive to differences in risk profiles among banks and bank holding companies and to minimize disincentives for holding liquid assets. The Registrant and the Bank have capital ratios exceeding regulatory requirements. For information concerning the Registrant's ratios, please see page 35 of the Registrant's 1996 Annual Report to Shareholders, which page is included at Exhibit 13 hereto and incorporated herein by reference. A detailed discussion of the Bank's regulatory capital requirements is set forth below in "Supervision and Regulation--The Bank." Under the Pennsylvania Banking Code of 1965, as amended, (the "Code"), the Registrant is permitted to control an unlimited number of banks. However, as discussed above, the Registrant would be required, under the Holding Company Act, to obtain the prior approval of the Board. The Holding Company Act has been amended by The Riegle-Neal Interstate Banking and Branching Act of 1994 (the "Riegle-Neal Act") to authorize bank holding companies, subject to certain limitations and restrictions, to acquire banks located in any state. The Riegle-Neal Act permitted interstate banking after September 29, 1995. Bank holding companies can acquire a bank located in any state, as long as the acquisition does not result in the bank holding company controlling more than 10 percent of the deposits in the United States, or 30 percent of the deposits in the target bank's state. The legislation permits states to waive the concentration limits and require that the target institution be in existence for up to five years before it can be acquired by an out-of-state bank or bank holding company. Interstate branching and merging of existing banks is permitted after September 29, 1998, if the bank is adequately capitalized and demonstrates good management. The Riegle-Neal Act also amends the International Banking Act to allow a foreign bank to establish and operate a federal branch or agency upon approval of the appropriate federal and state banking regulator. In 1995, the Pennsylvania legislature amended the Code to harmonize Pennsylvania law with the Riegle-Neal Act to enable Pennsylvania institutions to participate fully in interstate banking and to remove obstacles to the selection, by banks from other states engaged in interstate banking, of Pennsylvania as a head office location. Some of the more salient features of the amendment are described below. A bank holding company located in Pennsylvania, another state, the District of Columbia or a territory or possession of the United States, with the prior approval of the Department, may control one or more banks, bank and trust companies, national banks or interstate banks located in Pennsylvania. A Pennsylvania-chartered institution may maintain branches in any other state, the District of Columbia, or a territory or possession of the United States upon the written approval of the Department. A banking institution existing under the laws of another jurisdiction may establish a branch in Pennsylvania, if the laws of the jurisdiction in which such institution is located permit establishment and maintenance of a branch by a Pennsylvania-chartered institution or a national bank (located in Pennsylvania) in such jurisdiction on substantially the same terms and conditions. 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 4 institutions are frequently made in Congress, and before various bank regulatory agencies. The Registrant can not predict the likelihood of any major changes or the impact such changes might have on the Registrant 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. Set forth below are some of the proposals advanced by the federal banking agencies. Congress is considering legislative reform centered on repealing the Glass-Steagall Act, which prohibits commercial banks from engaging in the securities industry. The Registrant'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 Board have had, and will likely continue to have, an impact on the operating results of commercial banks because of the Board's power to implement national monetary policy, to, among other things, curb inflation or combat recession. The Board 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. Federal Taxation. The Registrant and the Bank are subject to those rules of federal income taxation generally applicable to corporations and report their respective income and expenses on the accrual method of accounting. The Registrant and its subsidiary file a consolidated federal income tax return on a calendar year basis. Intercompany distributions (including dividends) and certain other items of income and loss derived from intercompany transactions are eliminated upon consolidation of all the consolidated group members' respective taxable income and losses. The Internal Revenue Code (the "IRC") imposes a corporate alternative minimum tax (AMT). The corporate AMT only applies if such tax exceeds a corporation's regular tax liability. In general, the AMT is calculated by multiplying the corporate AMT rate of 20% by an amount equal to the excess of (i) the sum of (a) regular taxable income plus (b) certain adjustments and tax preference items ("alternative minimum taxable income" or "AMTI") over (ii) an exemption amount ($40,000 for a corporation, that such amount is reduced by 25% of the excess of AMTI over $150,000 and is completely eliminated when AMTI equals $310,000). There are certain applicable adjustment and preference items (E.G., the adjustment for depreciation) for determining AMTI. If a banking institution is subject to AMT, then all or a portion of the amount of a preference will effectively be subject to a 20% surtax. State Tax. The Registrant is subject to the Pennsylvania Corporate Net Income Tax and Capital Stock Tax. The Corporate Net Income Tax rate for 1996 and thereafter is 9.99% and is imposed upon a corporate taxpayer's unconsolidated taxable income for federal tax purposes with certain adjustments. In general, the Capital Stock Tax is a property tax imposed on a corporate taxpayer's capital stock value apportionable to the Commonwealth of Pennsylvania, which is determined in accordance with a fixed formula based upon average book income and 5 net worth. In the case of a holding company, an optional elective method permits the corporate taxpayer to be taxed on only 10% of such capital stock value. The Capital Stock Tax rate is presently 1.275%. Supervision and Regulation--The Bank The Bank's deposits are insured by the BIF of the FDIC. The Bank is not a member of the Federal Reserve System. The Bank is subject to supervision, regulation and examination by the Department and by the FDIC. In addition, the Bank is subject to a variety of local, state and federal laws that affect its operation. The laws of Pennsylvania applicable to the Bank include provisions that, among other things: (1) require the maintenance of certain reserves against deposits; (2) limit the type and amount of loans that may be made and the interest that may be charged thereon; (3) restrict investments and other activities; (4) set limits on the payment of dividends; and (5) regulate activities of the Bank with respect to mergers and consolidations and the establishment of branches. The amount of funds that the Bank may lend to a single borrower is limited, generally, under Pennsylvania law, to 15 percent of the aggregate of its capital, surplus, undivided profits and loan loss reserves and capital securities (all as defined by statute and by regulation). The Bank, as a subsidiary bank of a bank holding company, is subject to certain restrictions imposed by the Federal Reserve Act on (1) any extensions of credit to the Registrant or its subsidiaries; (2) investments in the stock or other securities of the Registrant or its subsidiaries; and (3) taking such stock or securities as collateral for loans. The Federal Reserve Act and Board regulations also place certain limitations and reporting requirements on extensions of credit by a bank to principal shareholders of its parent holding company, among others, and to related interests of such principal shareholders. In addition, legislation and regulations promulgated thereunder may affect the terms upon which any person becoming a principal shareholder of a holding company may obtain credit from banks with which the subsidiary bank maintains a correspondent relationship. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), federal regulatory agencies classify institutions into one of five defined capital categories, as illustrated below (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized).
Total Tier 1 Under a Risk- Risk- Tier 1 Capital Based Based Leverage Order or Ratio Ratio Ratio Directive ----- ----- ----- --------- CAPITAL CATEGORY Well capitalized greater than 10.0 greater than 6.0 greater than 5.0 No Adequately capitalized greater than 8.0 greater than 4.0 greater than 4.0* Undercapitalized less than 8.0 less than 4.0 less than 4.0* Significantly undercapitalized less than 6.0 less than 3.0 less than 3.0 Critically undercapitalized less than 2.0
*3.0 for those banks having the highest available regulatory rating. 6 In the event an institution's capital deteriorates to the undercapitalized category or below, FDICIA prescribes an increasing amount of regulatory intervention, including: (1) the institution by a bank of a capital restoration plan and a guarantee of the plan by a parent institution; and (2) the placement of a hold on increases in assets, number of branches or lines of business. If capital has reached the significantly or critically undercapitalized level, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and (in critically undercapitalized situations) appointment of a receiver. For well capitalized institutions, FDICIA provides authority for regulatory intervention where the institution is deemed to be engaging in unsafe or unsound practices or receives a less than satisfactory examination report rating for asset quality, management, earnings or liquidity. All but well capitalized institutions are prohibited from accepting brokered deposits without prior regulatory approval. Under FDICIA, financial institutions are subject to increased regulatory scrutiny and must comply with certain operational, managerial and compensation standards to be developed by Federal Reserve Board regulations. FDICIA also requires the regulators to issue new rules establishing certain minimum standards to which an institution must adhere including standards requiring a minimum ratio or classified assets to capital, minimum earnings necessary to absorb losses and a minimum ratio of market value to book value for publicly held institutions. Additional regulations are required to be developed relating to internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth and excessive compensation, fees and benefits. A separate subtitle within FDICIA, called the "Bank Enterprise Act of 1991," requires "truth-in-savings" on consumer deposit accounts so that consumers can make meaningful comparisons between the competing claims of banks with regard to deposit accounts and products. Under this provision, the Bank will be required to provide information to depositors concerning the terms of their deposit accounts, and in particular, to disclose the annual percentage yield. There will inevitably be some operational cost of complying with the Truth-In-Savings law. Management believes that full implementation of FDICIA has had no material impact on the Registrant's or the Bank's liquidity, capital resources or reported results of operations. If all FDIC insurance premium assessments increase in the future, Management believes that such increase might have a material impact on future reported results of operations. Under the Federal Deposit Insurance Act (the "FDIA"), federal regulatory agencies possess the power to prohibit institutions from engaging in any activity that would be an unsafe or unsound banking practice or would otherwise be in violation of law. Moreover, the Financial Institutions Regulatory and Interest Rate Control Act of 1978 ("FIRA") generally expanded the circumstances under which officers or directors of a bank may be removed by the institution's federal supervisory agency, restricts lending by a bank to its executive officers, directors, principal shareholders or related interests thereof and restricts management personnel of a bank from serving as directors or in other management positions with certain depository institutions whose assets exceed a specified amount or which have an office within a specified geographic area, and restricts the relationships of management personnel of a bank with securities companies and securities dealers. Additionally, FIRA 7 prohibits acquisition of control of a bank unless the appropriate federal supervisory agency has received sixty (60) days prior written notice, and, within that time, has not disapproved the acquisition of control or otherwise extended the period for disapproval. Control, for purposes of FIRA, means the power to direct, either directly or indirectly, the management or policies or to vote twenty-five percent (25%) or more of any class of outstanding stock of a financial institution or its respective holding company. A person or group holding revocable proxies to vote twenty-five percent (25%) or more of the outstanding common stock of a financial institution or holding company would be presumed to be in control the institution for purposes of FIRA. Under the Community Reinvestment Act of 1977, as amended ("CRA"), an institutions federal regulator is required to assess a financial institutions record to determine if the institution is meeting the credit needs of the community (including low and moderate income neighborhoods) which it serves and to take this record into account evaluating any application made by an institution for, among other things, approval of a branch or other deposit facility, office relocation, a merger or any acquisition of bank shares. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") amended the CRA to require, among other things, that a bank's record of meeting the credit needs of its community, including low and moderate income neighborhoods be made available to the public. This evaluation includes a descriptive rating ("outstanding", "satisfactory", "needs to improve" or "substantial noncompliance") and a statement describing the basis for the rating. These ratings are publicly disclosed. FIRREA was enacted primarily to improve the supervision of savings associations by strengthening capital, accounting and other supervisory standards. In addition, FIRREA reorganized the FDIC by creating two deposit insurance funds to be administered by the FDIC: the Savings Association Insurance Fund and BIF. Customers' deposits held by the Bank are insured under the BIF. FIRREA also regulates real estate appraisal standards and the supervisory/enforcement powers and penalty provisions in connection with the regulation of the Bank. In 1995, federal regulators revised the CRA rules to emphasize performance over process and documentation. Under the revised rules, a five-point rating scale is used; A bank's compliance is determined by a three-prong test whereby examiners assign a numerical score for a bank's performance in each of three areas: lending, service and investment. The area of lending is weighted to increase its importance in the application of the test. When rating a bank in the area of lending, regulators examine the number and amount of loan originations, the location of where the loans were made, and the income levels of the borrowers. Although banks, under the revised rules, are not required to make loans in every area, if there are apparent tracts in which there is little lending, examiners will focus their investigations in that area. The service prong evaluates how a bank delivers its products to the community through branching. As with lending, banks are not required to branch in every area, although conspicuous gaps will be investigated. The third prong, investment in community, examines how the bank meets the investment needs in the community within which it operates. Assessment of investment is accomplished using a "performance context" pursuant to which regulators meet with civic, community and bank officials in order to determine the credit needs of the community. 8 Expanded Home Mortgage Disclosure Act reporting requirements were also approved for large banks and thrifts which require reporting of census tract data on mortgages made outside of the delineated communities. In addition, effective March 1, 1997, institutions with assets above $250 million are required to report their aggregate small business loans made by geographic region. Independent banks with total assets of less than $250 million and bank subsidiaries with total assets of less than $250 million that have holding companies with total assets of less than $1 billion are subjected to less stringent CRA examinations. Under the new regulation, banks enjoy a reduction in compliance burden. Banks are not required to keep extensive documentation to prove that directors have participated in drafting and review of CRA policies. A formal CRA statement need not be prepared. The efforts banks make to market in low - and moderate-income communities do not have to be documented, nor will banks have to justify the basis for their community delineation or the methods used to determine the credit needs of the community. Under the Bank Secrecy Act ("BSA"), banks and other financial institutions are required to report to the Internal Revenue Service currency transactions of more than $10,000 or multiple transactions of which the Bank is aware in any one day that aggregate in excess of $10,000. Civil and criminal penalties are provided under the BSA for failure to file a required report, for failure to supply information required by the BSA or for filing a false or fraudulent report. The Competitive Equality Banking Act ("CEBA"), included the legislation which (1) imposes certain restrictions on transactions between banks and their affiliates; (2) expands the powers available to Federal bank regulators in assisting failed or failing banks; (3) limits the amount of time banks may hold certain deposits prior to making such funds available for withdrawal and any interest thereon; and (4) requires that any adjustable rate mortgage loan secured by a lien on a one-to-four family dwelling include a limitation on the maximum rate at which interest may accrue on the principal balance during the term of such loan. 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. 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. 9 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 Offices Drive-In 11 East Main Street Elizabethville, PA 17023 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 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 All of these properties are in good condition and are deemed by management to be adequate for the Bank's purposes. 10 ITEM 3. LEGAL PROCEEDINGS. Management, after consulting with the Registrant's legal counsel, is not aware of any litigation that would have a material adverse effect on the consolidated financial position of the Registrant. There are no proceedings pending other than ordinary routine litigation incident to the business of the Registrant and of the Bank. In addition, management does not know of any material proceedings contemplated by governmental authorities against the Registrant or the Bank. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required by this Item, regarding market value, dividend payment, and number of shareholders is set forth on page 2 of the Registrant's Annual Report to Shareholders, which page is included at Exhibit 13 hereto, and incorporated herein by reference. As of March 6, 1997, there were approximately 648 shareholders of record of the Registrant's common stock. ITEM 6. SELECTED FINANCIAL DATA. The information required by this Item is set forth on page 35 of the Registrant's Annual Report to Shareholders, which pages are included at Exhibit 13 hereto, and incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The information required by this Item is set forth on page 21 through 34 of the Registrant'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 4 through 20 of the Registrant's Annual Report to Shareholders, which pages are included at Exhibit 13 hereto, and incorporated herein by reference. 11 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item, relating to directors, executive officers, control persons is set forth on pages 6 through 8 and 14 through 18 of the Registrant's definitive Proxy Statement to be used in connection with the 1997 Annual Meeting of Shareholders, which pages are incorporated herein by reference. Section 16(a) Beneficial Ownership Compliance. Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Registrant's officers and directors, and persons who own more than 10 percent of a registered class of the Registrant's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Officers, directors and greater than 10 percent shareholders are required by SEC regulation to furnish the Registrant with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it or written representations from certain reporting persons that no Forms 5 were required for those persons, the Registrant believes that during the period January 1, 1996 through December 31, 1996, its officers and directors were in compliance with all filing requirements applicable to them. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item, relating to executive compensation, is set forth in pages 9 through 12 of the Registrant's definitive Proxy Statement to be used in connection with the 1997 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 the Registrant's Common Stock, is set forth in pages 3 and 4 of the Registrant's definitive Proxy Statement to be used in connection with the 1997 Annual Meeting of Shareholders, which pages are incorporated herein by reference. 12 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 14, of the Registrant's definitive Proxy Statement to be used in connection with the 1997 Annual Meeting of Shareholders, which page is incorporated herein by reference. PART IV ITEM 14. 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 Sheets. Consolidated Statements of Income. Consolidated Statements 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) Registrant's Articles of Incorporation. (ii) Registrant's By-laws. 10 Retirement Bonus Plan for the Board of Directors of Mid Penn Bank. 13 11 Statement re: Computation of Earnings per share. (Included herein at Exhibit 13, at page 2 of Registrant's Annual Report to Shareholders.) 13 Excerpts from Registrant's 1996 Annual Report to Shareholders. 21 Subsidiaries of the Registrant. 23 Consent of Parente, Randolph, Orlando Carey & Associates, independent auditors. 27 Financial Data Schedule. (b) No Current Report on Form 8-K was filed by the Registrant during the fourth quarter of the fiscal year ended December 31, 1996. (c) The exhibits required to be filed by this Item are listed under Item 14(a)3, above. (d) NOT APPLICABLE. 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MID PENN BANCORP, INC. --------------------------------------------- (Registrant) By /s/ Eugene F. Shaffer --------------------------------------- Eugene F. Shaffer President and Chief Executive Officer Date March 25, 1997 --------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. DATE ---- By /s/ Eugene F. Shaffer March 25, 1997 ------------------------------------------ -------------- Eugene F. Shaffer Chairman of the Board of Directors, President, Chief Executive Officer and Director (principal executive officer) By /s/ Gerald D. Schoffstall March 25, 1997 ------------------------------------------ --------------- Gerald D. Schoffstall Treasurer (principal financial and accounting officer) By /s/ Jere M. Coxon March 25, 1997 ------------------------------------------ -------------- Jere M. Coxon, Director By /s/ Alan W. Dakey March 25, 1997 ------------------------------------------ -------------- Alan W. Dakey, Director By /s/ Earl R. Etzweiler March 25, 1997 ------------------------------------------ -------------- Earl R. Etzweiler, Director By /s/ Harvey J. Hummel March 25, 1997 ------------------------------------------ -------------- Harvey J. Hummel, Director By /s/ Charles F. Lebo March 25, 1997 ------------------------------------------ -------------- Charles F. Lebo, Director By /s/ Warren A. Miller March 25, 1997 ------------------------------------------ -------------- Warren A. Miller, Director By /s/ William G. Nelson March 25, 1997 ------------------------------------------ -------------- William G. Nelson, Director By /s/ Charles R. Phillips March 25, 1997 ------------------------------------------ -------------- Charles R. Phillips, Director By March 25, 1997 ------------------------------------------ -------------- Edwin D. Schlegel, Director By /s/ Guy J. Snyder, Jr. March 25, 1997 ------------------------------------------ -------------- Guy J. Snyder, Jr., Director EXHIBIT INDEX Page Number in Manually Signed Exhibit No. Original - ----------- -------- 3(i) Registrant's Articles of Incorporation. 21 3(ii) Registrant's By-laws. 26 10 Retirement Bonus Plan for the Board of Directors of Mid Penn Bank. 48 11 Statement re: Computation of Earnings per share. (Included herein at Exhibit 13, at page 2 of Registrant's Annual Report to Shareholders.) 13 Excerpts from Registrant's 1996 Annual Report to Shareholders. 51 21 Subsidiaries of the Registrant. 86 23 Consent of Parente, Randolph, Orlando Carey & Associates, independent auditors. 88 27 Financial Data Schedule. 90 EX-3.I 2 ARTICLES OF INCORPORATION EXHIBIT 3(i) Registrant's Articles of Incorporation ARTICLES OF INCORPORATION OF MID PENN BANCORP, INC. In compliance with the requirements of 15 Pa.C.S. Section 1306 (relating to Articles of Incorporation), the undersigned, desiring to be incorporated as a business corporation, hereby state that: 1. The name of the Corporation is Mid Penn Bancorp, Inc. 2. The address, including street and number, if any, of this Corporation's initial registered office in this Commonwealth is 349 Union Street, Millersburg, Pennsylvania 17061, and the county of venue is Dauphin. 3. The Corporation is incorporated under the provisions of the Pennsylvania Business Corporation Law of 1988 (15 Pa.C.S. Section 1101 et seq.), as the same may be amended. 4. The purpose or purposes of the Corporation are to have unlimited power to engage in and to do any lawful act concerning any or all business for which corporations may be incorporated under the provisions of the Pennsylvania Business Corporation Law of 1988, as the same may be amended. 5. The aggregate number of shares that the Corporation shall have authority to issue is ten million (10,000,000) shares of Common Stock having a par value of One Dollar ($1.00) per share. 6. The name and address, including street and number, if any, of each of the Incorporators, and the number and class of shares subscribed to by each Incorporator is: Number and Name Address Class of Shares - ---- ------- --------------- Earl R. Etzweiler R.D.#1, Box 316 1 share of Common Stock Millersburg, PA 17061 Charles F. Lebo 141 Lebo Road 1 share of Common Stock Halifax, PA 17032 William G. Nelson 900 Center Street 1 share of Common Stock Millersburg, PA 17061 Eugene F. Shaffer 903 East Union Street 1 share of Common Stock Millersburg, PA 17061 1 7. No merger, consolidation, liquidation or dissolution of the Corporation, nor any action that would result in the sale or other disposition of all or substantially all of the assets of the Corporation shall be valid unless first approved by the affirmative vote of: (a) the holders of at least eighty percent (80%) of the outstanding shares of Common Stock of the Corporation; or (b) the holders of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of Common Stock of the Corporation, provided that such transaction has received the prior approval of at least eighty percent (80%) of all of the members of the Board of Directors. 8. Cumulative voting rights shall not exist with respect to the election of directors. 9. (a) The Board of Directors may, if it deems advisable, oppose a tender or other offer for the corporation's securities, whether the offer is in cash or in the securities of a corporation or otherwise. When considering whether to oppose an offer, the Board of Directors may, but is not legally obligated to, consider any relevant, germane or pertinent issue; by way of illustration, but not to be considered any limitation on the power of the Board of Directors to oppose a tender or other offer for this corporation's securities, the Board of Directors may, but shall not be legally obligated to, consider any or all of the following: (i) Whether the offer price is acceptable based on the historical and present operating results or financial condition of the corporation; (ii) Whether a more favorable price could be obtained for this corporation's securities in the future; (iii) The social and economic effects of the offer or transaction on this corporation and any of its subsidiaries, employees, depositors, loan and other customers, creditors, shareholders and other elements of the communities in which this corporation and any of its subsidiaries operate or are located; (iv) The reputation and business practice of the offeror and its management and affiliates as they would affect the shareholders, employees, depositors and customers of the corporation and its subsidiaries and the future value of the corporation's stock; (v) The value of the securities (if any) which the offeror is offering in exchange for the corporation's securities, based on an analysis of the worth of the corporation or other entity whose securities are being offered; (vi) The business and financial conditions and earnings prospects of the offeror, including, but not limited to, debt service and other existing or likely financial obligations of the offeror, and the possible affect of such conditions upon this corporation and any of its subsidiaries and the other elements of the communities in which this corporation and any of its subsidiaries operate or are located; 2 (vii) Any antitrust or other legal and regulatory issues that are raised by the offer. (b) If the Board of Directors determines that an offer should be rejected, it make take any lawful action to accomplish its purpose including, but not limited to, any or all of the following: advising shareholders not to accept the offer; litigation against the offeror; filing complaints with all governmental and regulatory authorities; acquiring the offeror corporation's securities; selling or otherwise issuing authorized but unissued securities or treasury stock or granting options with respect thereto; acquiring a company to create an antitrust or other regulatory problem for the offeror; and obtaining a more favorable offer from another individual or entity. 10. Opt Out and Nonapplicability of Subchapter G. This Corporation specifically opts out and shall not be governed by Subchapter G, Control-share Acquisitions, of Chapter 25 of the Business Corporation Law of 1988, as added and amended by Act 36 of 1990. Subchapter G, Control-share Acquisitions, of Chapter 25 of the Business Corporation Law of 1988, as added and amended by Act 36 of 1990, shall not be applicable to the Corporation. 11. Opt Out and Nonapplicability of Subchapter H. This Corporation specifically opts out and shall not be governed by Subchapter H, Disgorgement by Certain Controlling Shareholders Following Attempts to Acquire Control, of Chapter 25 of the Business Corporation Law of 1988, as added and amended by Act 36 of 1990. Subchapter H, Disgorgement by Certain Controlling Shareholders Following Attempts to Acquire Control, of Chapter 25 of the Business Corporation Law of 1988, as added and amended by Act 36 of 1990, shall not be applicable to the Corporation. 12. Articles 7, 8, 9, 10, 11 and 12 shall not be amended unless first approved by the affirmative vote of: (a) the holders of at least eighty percent (80%) of the outstanding shares of Common Stock of the Corporation; or (b) the holders of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of Common Stock of the Corporation, provided that such amendment has received the prior approval of at least eighty percent (80%) of all of the members of the Board of Directors. 3 IN TESTIMONY WHEREOF, the incorporators have signed these Articles of Incorporation this 14th day of August, 1991. /s/ Earl R. Etzweiler /s/ William G. Nelson - ------------------------ ------------------------ Ear. R. Etzweiler William G. Nelson /s/ Charles F. Lebo /s/ Eugene F. Shafer - ------------------------ ------------------------ Charles F. Lebo Eugene F. Shafer 4 EX-3.II 3 BY-LAWS EXHIBIT 3(ii) Registrant's By-laws BY-LAWS of MID PENN BANCORP, INC. Article 1 CORPORATION OFFICE Section 1.1 The Corporation shall have and continuously maintain in Pennsylvania a registered office which may, but need not, be the same as its place of business and at an address to be designated from time to time by the Board of Directors. Section 1.2 The Corporation may also have offices at such other places as the Board of Directors may from time to time designated or the business of the Corporation may require. Article 2 SHAREHOLDERS MEETINGS Section 2.1 All meetings of the shareholders shall be held at such time and place as may be fixed from time to time by the Board of Directors. Section 2.2 The annual meeting of the shareholders shall be held no later than the thirty-first day of May in each year, when the shareholders shall elect members to the Board of Directors and transact such other business as may properly be brought before the meeting. Section 2.3 Special meetings of the shareholders may be called at any time by the Chairman of the Board, the President, a majority of the Board of Directors or of its Executive Committee or by shareholders entitled to cast at least twenty percent (20%) of the votes which all shareholders are entitled to cast at a particular meeting. At any time, upon written request of any person who has called a special meeting, it shall be the duty of the Secretary to fix the time of the meeting which, if the meting is called pursuant to a statutory right, shall be held not more than sixty (60) days after the receipt of the request. If the Secretary neglects or refuses to fix the time of the meeting, the person or persons calling the meeting may do so. Section 2.4 Written notice of all shareholder meetings (other than adjourned meetings of shareholders), shall state the place, date, hour, the purpose thereof and shall be served upon, or mailed, postage prepaid, or telegraphed, charges prepaid, at least ten days before such meeting, unless a greater period of notice is required by statute or by these By-laws, to each shareholder entitled to vote thereat at such address as appears on the transfer books for shares of the Corporation. 1 Section 2.5 When a meeting of shareholders is adjourned, it shall not be necessary to give any notice of the adjourned meeting or of the business to be transacted at an adjourned meeting, other than by announcement at the meeting at which the adjournment is taken, unless the Board of Directors fixes a new record date for the adjourned meeting. Article 3 QUORUM OF SHAREHOLDERS Section 3.1 The presence, in person or by proxy, of shareholders entitled to cast on the particular matter shall constitute a quorum for purposes of considering such matter, and unless otherwise provided by statute the acts of such shareholders at a duly organized meeting shall be the acts of the shareholders. If, however, any meeting of shareholders cannot be organized because of lack of a quorum, those present, in person or by proxy, shall have the power, except as otherwise provided by statute, to adjourn the meeting to such time and place as they may determine, without notice other than an announcement at the meeting, until the requisite number of shareholders for a quorum shall be present, in person or by proxy, except that in the case of any meeting called for the election of directors such meeting may be adjourned only for periods not exceeding fifteen (15) days as the holders of a majority of the shares present, in person or by proxy, shall direct, and those who attend the second of such adjourned meetings, although less than a quorum, shall nevertheless constitute a quorum for the purpose of electing directors. At any adjourned meeting at which a quorum shall be present or so represented, any business may be transacted which might have been transacted at the original meeting if a quorum had been present. The shareholders present, in person or by proxy, at a duly organized meeting can continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Article 4 VOTING RIGHTS Section 4.1 Except as may be otherwise provided by statute or by the Articles of Incorporation, at every shareholders meeting, every shareholder entitled to vote thereat shall have the right to one vote for every share having voting power standing in such shareholder's name on the transfer books for shares of the Corporation on the record date fixed for the meeting. Section 4.2 When a quorum is present at any meeting the voice vote of the holders of a majority of the stock having voting power, present, in person or by proxy, shall decide any question brought before such meeting except as provided differently by statute or by the Articles of Incorporation. Section 4.3 Upon demand made by a shareholder entitled to vote at any election for directors before the voting begins, the election shall be by ballot. 2 Article 5 PROXIES Section 5.1 Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such shareholder by proxy. Every proxy shall be executed in writing by the shareholder or such shareholder's duly authorized attorney in fact and filed with the Secretary of the Corporation. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until notice thereof has been given to the Secretary of the Corporation. No unrevoked proxy shall be valid after eleven (11) months from the date of its execution, unless a longer time is expressly provided therein, but in no event shall a proxy, unless coupled with an interest, be voted after three years from the date of its execution. A proxy shall not be revoked by the death or incapacity of the maker, unless before the vote is counted or the authority is exercised, written notice of such death or incapacity is given to the Secretary of the Corporation. Article 6 RECORD DATE Section 6.1 The Board of Directors may fix a time, not more than ninety (90) days prior to the date of any meeting of shareholders, or the date fixed for the payment of any dividend or distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or go into effect, as a record date for the determination of the shareholders entitled to notice of, and to vote at, any such meeting, or entitled to receive payment of any such dividend or distribution, or to receive any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares. In such case, only such shareholders as shall be shareholders of record on the date so fixed shall be entitled to notice of, or to vote at, such meeting or to receive payment of such dividend or distribution or to receive such allotment of rights or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the transfer books for shares of the Corporation after any record date fixed as aforesaid. The Board of Directors may close the books of the Corporation against transfers of shares during the whole or any part of such period, and in such case written or printed notice thereof shall be mailed at least ten (10) days before closing thereof to each shareholder of record at the address appearing on the records of the Corporation or supplied by such shareholder to the Corporation for the purpose of notice. While the stock transfer books of the Corporation are closed, no transfer of shares shall be made thereon. If no record date is fixed by the Board of Directors for the determination of shareholders entitled to receive notice of, and vote at, a shareholders meeting, transferees of shares which are transferred on the books of the Corporation within ten (10) days next preceding the date of such meeting shall not be entitled to notice of or to vote at such meeting. 3 Article 7 VOTING LISTS Section 7.1 The Secretary shall have charge of the transfer books for shares of the Corporation and shall make a complete list of the shareholders entitled to vote at any meeting of shareholders, arranged in alphabetical order, with their addresses and number of shares held by each, which list shall be kept on file at the registered office or principal place of business of the Corporation. The list shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the entire meeting for the purposes thereof. Section 7.2 Failure to comply with the requirements of Section 7.1 shall not affect the validity of any action taken at a meeting prior to a demand at the meeting by any shareholder entitled to vote thereat to examine the list. The original share register or transfer book, or a duplicate thereof kept in the Commonwealth of Pennsylvania shall be prima facie evidence as to who are the shareholders entitled to exercise the rights of a shareholder. Article 8 JUDGES OF ELECTION Section 8.1 In advance of any meeting of shareholders, the Board of Directors may appoint judges of election, who need not be shareholders, to act at such meeting or any adjournment thereof. If judges of election are not so appointed, the presiding officer of the meeting may, and on the request of any shareholder, or such shareholder's proxy, appoint judges of election at the meeting. The number of judges shall be one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares present and entitled to vote shall determine whether one or three judges are to be appointed. A person who is a candidate for office to be filled at the meeting shall not act as a judge. Section 8.2 In case any person appointed as a judge fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the Board of Directors in advance of the convening of the meeting or at the meeting by the presiding officer thereof. Section 8.3 The judges of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, receive votes or ballots, hear and determine all challenges and questions in any way arising in connection with the right to vote, county and tabulate all votes, determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. The judges of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three judges of election, the decision, act or certificate of a majority shall be effective in all respects as the decision, act or certificate of all. 4 Section 8.4 On request of the presiding officer of the meeting, or of any shareholder, the judges of election shall make a report in writing of any challenge or question or matter determined by them, and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts stated therein. Article 9 CONSENTS OF SHAREHOLDERS IN LIEU OF MEETING Section 9.1 Any action required to be taken at a meeting of the shareholders, or of a class of shareholders, may be taken without a meeting, if a consent or consents in writing setting forth the action so taken shall be signed by all of the shareholders who would be entitled to vote at a meeting for such purpose and shall file with the Secretary of the Corporation. Article 10 DIRECTORS Section 10.1 Any shareholder who intends to nominate or to cause to have nominated any candidate for election to the Board of Directors (other than any candidate proposed by the Corporation's then existing Board of Directors) shall so notify the Secretary of the Corporation in writing not less than sixty (60) days prior to the date of any meeting of shareholders called for the election of directors. Such notification shall contain the following information to the extent known by the notifying shareholder. (a) the name and address of each proposed nominee; (b) the age of each proposed nominee; (c) the principal occupation of each proposed nominee; (d) the number of shares of the Corporation owned by each proposed nominee; (e) the total number of shares that to the knowledge of the notifying shareholder will be voted for each proposed nominee; (f) the name and residence address of the notifying shareholder; and (g) the number of shares of the Corporation owned by the notifying shareholder. 5 Any nomination for director not made in accordance with this Section shall be disregarded by the presiding officer of the meeting, and votes cast for each such nominee shall be disregarded by the judges of election. In the event that the same person is nominated by more than one shareholder, if at least one nomination for such person complies with this Section, the nomination shall be honored and all votes cast for such nominee shall be counted. Section 10.2 The number of directors that shall constitute the whole Board of Directors shall be not less than five (5), nor more than twenty-five (25). The Board of Directors shall be classified into three (3) classes, each class to be elected for a term of three (3) years. The terms of the respective classes shall expire in successive years as provided in Section 10.3 hereof. Within the foregoing limits, the Board of Directors may from time to time fix the number of directors and their respective classifications. Section 10.3 At the 1992 annual meeting of shareholders of the Corporation, the shareholders shall elect eleven (11) directors as follows: four (4) Class A directors to serve until the 1993 annual meeting of Shareholders, four (4) Class B directors to serve until the 1994 annual meeting of shareholders, and three (3) Class C directors to serve until the 1995 annual meeting of shareholders. Each class shall be elected in a separate election. At each annual meeting of shareholders thereafter, successors to the class of directors whose term shall then expire shall be elected to hold office for a term of three (3) years, so that the term of office of one class of directors shall expire in each year. The Board of Directors shall have the sole discretion to increase the number of Directors that shall constitute the whole Board of directors; provided however, that the total number of Directors in each class remains relatively proportionate to the others. Section 10.4 The Board of Directors may declare vacant the office of a director who has been judicially declared of unsound mind or who has been convicted of an offense punishable by imprisonment for a term of more than one year or for any other proper cause which these By-laws may specify or if, within sixty (60) days or such other time as these By-laws may specify after notice of such director's selection, he does not accept the office either in writing or by attending a meeting of the Board of Directors and fulfill such other requirements of qualification as these By-laws may specify. Section 10.5 Upon application of any shareholder or director, the court may remove from office any director in case of fraudulent or dishonest acts, or gross abuse of authority or discretion with reference to the Corporation, or for any other proper cause, and may bar from office any director so removed for a period prescribed by the court. The Corporation shall be made a party to the action and, as a prerequisite to the maintenance of an action under this Section 10.5, a shareholder shall comply with Section 1782 of the Business Corporation Law of 1988, as amended. Section 10.6 An act of the Board of Directors done during the period when a director has been suspended or removed for cause shall not be impugned or invalidated if the suspension or removal is thereafter rescinded by the shareholders or by the Board of Directors or by the final judgment of a court. 6 Section 10.7 The Board of Directors may appoint a person who previously held the position of Director to be a Director Emeritus. A Director Emeritus may attend meetings of the Board of Directors and shall have such other rights and privileges as may be determined from time to time by resolution of the Board of Directors. Article 11 VACANCIES ON BOARD OF DIRECTORS Article 11.1 Vacancies on the Board of Directors, including vacancies resulting from an increase in the number of directors, shall be filled by a majority of the remaining members of the Board of Directors, though less than a quorum, and each person so appointed shall be a director until the expiration of the term of office of the class of directors to which such director was appointed. Article 12 POWERS OF BOARD OF DIRECTORS Section 12.1 The business and affairs of the Corporation shall be managed by its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these By-laws directed or required to be exercised and done by the shareholders. Section 12.2 The Board of Directors shall have the power and authority to appoint an Executive Committee and such other committees as may be deemed necessary by the Board of Directors for the efficient operation of the Corporation. The Executive Committee shall consist of the Chairman of the Board, the President and not less than two (2) nor more than five (5) other directors (one of which other directors may be an employee of the Corporation or any of its subsidiaries). The Executive Committee shall meet at such time as may be fixed by the Board of Directors, or upon call of the Chairman of the Board or the President. A majority of members of the Executive Committee shall constitute a quorum. The Executive Committee shall have an exercise and authority of the Board of Directors in the intervals between the meetings of the Board of Directors as far as may be permitted by law. Section 12.3 A director shall stand in a fiduciary relation to the Corporation and shall perform such director's duties as a director, including those duties undertaken as a member of any committee of the Board of Directors upon which such director may serve, in good faith, in a manner such director reasonably believes to be in the best interests of the Corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. In performing duties as a director, a director shall be entitled to rely in good faith on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following: 7 (a) One or more officers or employees of the Corporation whom the director reasonably believes to be reliable and competent in the matters presented. (b) Counsel, public accountants or other persons as to matters which the director reasonably believes to be within the professional or expert competence of such persons. (c) A committee of the Board of Directors upon which such director does not serve, duly designated in accordance with law, as to matters within its designated authority, which committee the director reasonably believes to merit confidence. A director shall not be considered to be acting in good faith if such director has knowledge concerning the matter in question that would cause such director's reliance to be unwarranted. Section 12.4 In discharging the duties of their respective positions, the Board of Directors, committees of the Board of Directors and individual directors may, in considering the best interests of the Corporation, consider the effects of any action upon employees, upon suppliers and customers of the Corporation and upon communities in which offices or other establishments of the Corporation are located, and all other pertinent factors. The consideration of those factors shall not constitute a violation of Section 12.3. Section 12.5 Absent breach of fiduciary duty, lack of good faith or self-dealing, actions taken as a director or any failure to take any action shall be presumed to be in the best interests of the Corporation. Section 12.6 A director shall not be personally liable, as such, for monetary damages for any action taken, or any failure to take any action, unless: (a) the director has breached or failed to perform the duties of such director's office under this Article 12; and (b) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. Section 12.7 The provisions of Section 12.6 shall not apply to: (a) the responsibility or liability of a director pursuant to any criminal statute; or (b) the liability of a director for the payment of taxes pursuant to local, State or Federal law. Section 12.8 A director of the Corporation who is present at a meeting of the Board of Directors, or of a committee of the Board of Directors, at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless such director's dissent is entered in the minutes of the meeting or unless such director files such director's written dissent to the action with the Secretary of the Corporation before the adjournment thereof or transmits 8 the dissent in writing to the Secretary of the Corporation immediately after the adjournment of the meeting. The right to dissent shall not apply to a director who voted in favor of the action. Nothing in this Section 12.8 shall bar a director from asserting that minutes of any meeting incorrectly omitted such director's dissent if, promptly upon receipt of a copy of such minutes, such director notifies the Secretary of the Corporation, in writing, of the asserted omission or inaccuracy. Article 13 COMMITTEES OF THE BOARD OF DIRECTORS Section 13.1 The Board of Directors may, by resolution adopted by a majority of the directors in office, establish one or more committees to consist of one or more directors of the Corporation. Any committee, to the extend provided in the resolution of the Board of Directors or in these By-laws, shall have and may exercise all of the powers and authority of the Board of Directors, except that a committee shall not have any power or authority as to the following: (a) The submission to shareholders of any action requiring approval of shareholders under applicable law, the Articles of Incorporation or these By-laws. (b) The creation or filling of vacancies in the Board of Directors. (c) The adoption, amendment or repeal of these By-laws. (d) The amendment or repeal of any resolution of the Board of Directors that by its terms is amendable or repealable only by the Board of Directors. (e) Action on matters committed by these By-laws or resolution of the Board of Directors to another committee of the Board of Directors. Section 13.2 The Board of Directors may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee or for the purposes of any written action by the committee. In the absence or disqualification of a member and alternate member or members of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another director to act at the meeting in the place of the absent or disqualified member. 9 Section 13.3 Each committee of the Board of Directors shall serve at the pleasure of the Board of Directors. The term "Board of Directors," when used in any provision of this Article 13 relating to the organization or procedures of or the manner of taking action by the Board of Directors, shall be construed to include and refer to any executive or other committee of the Board of Directors. Any provision of this Article 13 relating or referring to action to be taken by the Board of Directors or the procedure required therefor shall be satisfied by the taking of corresponding action by a committee of the Board of Directors to the extent authority to take the action has been delegated to the committee pursuant to this Article 13. Article 14 MEETINGS OF THE BOARD OF DIRECTORS Section 14.1 An organization meeting may be held immediately following the annual shareholders meeting without the necessity of notice to the directors to constitute a legally convened meeting, or the directors may meet at such time and place as may be fixed by either a notice or waiver of notice or consent signed by all such directors. Section 14.2 Regular meetings of the Board of Directors shall be held not less often then semi-annually at a time and place determined by the Board of Directors at the preceding meeting. One or more directors may participate in any meeting of the Board of Directors, or of any committee thereof, by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear one another. Section 14.3 Special meetings of the Board of Directors may be called by the Chairman of the Board or the President on one (1) day's notice to each director, either personally or by mail, telegram or telephone; special meetings shall be called by the Chairman of the Board or the President in like manner and on like notice upon the written request of three (3) directors. Section 14.4 At all meetings of the Board of Directors, a majority of the directors shall constitute a quorum for the transaction of business, and the acts of a majority of the directors present at a meeting in person or by conference telephone or similar communications equipment at which a quorum is present in person or by such communications equipment shall be the acts of the Board of Directors, except as may be otherwise specifically provided by statute or by the Articles of Incorporation or by these By-laws. If a quorum shall not be present in person or by communications equipment at any meeting of the directors, the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or as permitted herein. 10 Article 15 INFORMAL ACTION BY THE BOARD OF DIRECTORS Section 15.1 Any action required or permitted to be taken at a meeting of the directors may be taken without a meeting and shall be as valid a corporate action as though it had been authorized at a meeting of the Board of Directors if, prior or subsequent to the action, a consent or consent's thereto by all of the directors in office is filed with the Secretary of the Corporation. Article 16 COMPENSATION OF DIRECTORS Section 16.1 Directors, as such, may receive a stated salary for their services or a fixed sum and expenses for attendance at regular and special meetings, or any combination of the foregoing as may be determined from time to time by resolution of the Board of Directors, and nothing contained herein shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Article 17 OFFICERS Section 17.1 The officers of the Corporation shall be elected by the Board of Directors at its organizational meeting and shall be a Chairman of the Board, a President, at least one Vice President, a Secretary and Treasurer. The Board of Directors may elect more than one Vice President and such other officers and appoint such agents as it shall deem necessary, who shall hold their offices for such terms, have such authority and perform such duties as may from time to time be prescribed by the Board of Directors. Any two or more of offices may be held by the same person. Section 17.2 The compensation of all officers of the Corporation shall be fixed by the Board of Directors. Section 17.3 Each officer shall hold office for a term of one year and until such officer's successor has been selected and qualified or until such officer's earlier death, resignation or removal. Any officer may resign at any time upon written notice to the Corporation. The resignation shall be effective upon receipt thereof by the Corporation or at such subsequent time as may be specified in the notice of resignation. The Corporation may secure the fidelity of any or all of the officers by bond or otherwise. 11 Section 17.4 Any officer or agent of the Corporation may be removed by the Board of Directors with or without cause. The removal shall be without prejudice to the contract rights, if any, of any person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. Section 17.5 An officer shall perform such officer's duties as an officer in good faith, in a manner such officer reasonably believes to be in the best interests of the Corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. An officer who so performs such duties shall not be liable by reason of having been an officer of the Corporation. Article 18 THE CHAIRMAN AND VICE-CHAIRMEN OF THE BOARD Section 18.1 The Chairman of the Board shall preside at all meetings of the shareholders and directors. The Chairman shall supervise the carrying out of the policies adopted or approved by the Board of Directors. The Chairman shall also have and may exercise such further powers and duties as from time to time may be conferred upon or assigned to the Chairman by the Board of Directors. Section 18.2 The Vice-Chairman of the Board or, if more than one, the Vice-Chairmen in the order established by the Board of Directors, shall preside at meetings of the shareholders and directors as a result of the absence or incapacity of the Chairman of the Board. If there is no Chairman of the Board, Vice-Chairmen designated by the Board shall also have and may exercise such further powers and duties as from time to time may be conferred upon or assigned to the Vice-Chairman or the Vice-Chairmen by the Board of Directors. Article 19 THE PRESIDENT Section 19.1 The President shall be the chief executive officer of the Corporation; shall have general and active management of the business of the Corporation; shall see that all orders and resolutions of the Board of Directors are put into effect, subject however, to the right of the Board of Directors to delegate any specific powers, except such as may be by the statute exclusively conferred on the President, to any other officer or officers of the Corporation. The President shall execute bonds, mortgages and other contracts requiring a seal under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. The President shall also have and may exercise such further powers and duties as from time to time may be conferred upon or 12 assigned to the President by the Board of Directors. In the absence or incapacity of the Chairman of the Board and Vice Chairman of the Board, if any, the President shall preside at meetings of the shareholders and the directors. If there is no Chairman or Vice Chairman of the Board, the President shall have and exercise all powers conferred by the By-laws or otherwise on the Chairman of the Board. Article 20 THE VICE PRESIDENT Section 20.1 The Vice President or, if more than one, the Vice Presidents in the order established by the Board of Directors shall, in the absence or incapacity of the President, exercise all powers and perform the duties of the President. The Vice Presidents, respectively, shall also have such other authority and perform such other duties as may be provided in these By-laws or as shall be determined by the Board of Directors or the President. Any Vice President may, in the discretion of the Board of Directors, be designated as "executive," "senior," or by departmental or functional classification. Article 21 THE SECRETARY Section 21.1 The Secretary shall attend all meetings of the Board of Directors and of the shareholders and keep accurate records thereof in one or more minute books kept for that purpose and shall perform the duties customarily performed by the secretary of a corporation and such other duties as may be assigned to the secretary by the Board of Directors or the President. Article 22 THE TREASURER Section 22.1 The Treasurer shall have the custody of the corporate funds and securities; shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall perform such other duties as may be assigned to the Treasurer by the Board of Directors or the President. The Treasurer shall give bond in such sum and with such surety as the Board of Directors may from time to time direct. 13 Article 23 ASSISTANT OFFICERS Section 23.1 Each assistant officer shall assist in the performance of the duties of the officer to whom such person is an assistant and shall perform such duties in the absence of the officer. Each assistant officer shall perform such additional duties as may be assigned by the Board of Directors, the Chairman of the Board, the President or the officer to whom such person is an assistant. Such officers may be given such functional titles as the Board of Directors shall from time to time determine. Article 24 INDEMNIFICATION Section 24.1 (Third Party Actions) The Corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), by reason of the fact that he is or was a representative of the Corporation, or is or was serving at the request of the Corporation as a representative of another domestic or foreign corporation for profit or not-for-profit, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action or proceeding by judgment, order, settlement or conviction or upon a plea of nolo contendere or its equivalent shall not of itself create a presumption that the person did not act in good faith and in a manner that he reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to any criminal proceeding, had reasonable cause to believe that his conduct was unlawful. Section 24.2 (Derivative Actions) The Corporation shall have power to indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a representative of the Corporation or is or was serving at the request of the Corporation as a representative of another domestic or foreign corporation for profit or not-for-profit, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of the action if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation. Indemnification shall not be made under this section in respect of any claim, issue or matter as to which the person has been adjudged to be liable to the Corporation unless and only to the extent that the court of common pleas of the judicial district embracing the county in which the registered office of the Corporation is located 14 or the court in which the action was brought determines upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for the expenses that the court of common please or other court deems proper. Section 24.3 (Mandatory Indemnification) To the extent that a representative of the Corporation has been successful on the merits or otherwise in defense of any action or proceeding referred to in Sections 24.1 (relating to third party actions) or 24.2 (relating to derivative actions) or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 24.4 (Procedure for Effecting Indemnification) Unless ordered by a court, any indemnification under Sections 24.1 (relating to third party actions) or 24.2 (relating to derivative actions) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the person is proper in the circumstances because he has met the applicable standard of conduct set forth in those sections. The determination shall be made: (a) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to the action or proceeding; (b) if such a quorum is not obtainable or if obtainable and a majority vote of a quorum of disinterested directors so directs, by independent legal counsel in a written opinion; or (c) by the shareholders. Section 24.5 (Advancing Expenses) Expenses (including attorneys' fees) incurred in defending any action or proceeding referred to in this Article 24 may be paid by the Corporation in advance of the final disposition of the action or proceeding upon receipt of an undertaking by or on behalf of the person to repay the amount if it is ultimately determined that he is not entitled to be indemnified by the Corporation as authorized in this Article 24 or otherwise. Section 24.6 (Supplementary Coverage) (a) The indemnification and advancement of expenses provided by, or granted pursuant to, the other sections of this Article 24 shall not be deemed exclusive of any other rights to which a person seeking indemnification or advancement of expenses may be entitled under any By-law, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding that office. The Corporation may create a fund of any nature, which may, but need not be, under the control of a trustee, or otherwise secure or insure in any manner its indemnification obligations, whether arising under or pursuant to this Section 24.6 or otherwise. (b) Indemnification pursuant to subsection (a) of this Section 24.6 shall not be made in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness. 15 (c) Indemnification pursuant to subsection (a) of this Section 24.6 under any By-law, agreement, vote of shareholders or directors or otherwise, may be granted for any action taken or any failure to take any action and may be made whether or not the Corporation would have the power to indemnify the person under any other provision of law except as provided in this Section 24.6 and whether or not the indemnified liability arises or arose from any threatened, pending or completed action by or in the right of the Corporation. Section 24.7 (Power to Purchase Insurance) The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a representative of the Corporation or is or was serving at the request of the Corporation as a representative of another domestic or foreign corporation for profit or not-for-profit, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against that liability under the provisions of this Article 24. Section 24.8 (Application to Surviving or New Corporations) For the purpose of this Article 24, references to "the Corporation" include all constituent corporations absorbed in a consolidation, merger or division, as well as the surviving or new corporations surviving or resulting therefrom, so that any person who is or was a representative of the constituent, surviving or new corporation, or is or was serving at the request of the constituent, surviving or new corporation as a representative of another domestic or foreign corporation for profit or not-for-profit, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article 24 with respect to the surviving or new corporation as he would if he had served the surviving or new corporation in the same capacity. Section 24.9 (Application to Employee Benefit Plans) For purposes of this Article 24: (a) References to "other enterprises" shall include employee benefit plans and references to "serving at the request of the Corporation" shall include any service as a representative of the Corporation that imposes duties on, or involves services by, the representative with respect to an employee benefit plan, its participants or beneficiaries. (b) Excise taxes assessed on a person with respect to an employee benefit plan pursuant to applicable law shall be deemed "fines." (c) Action with respect to an employee benefit plan taken or omitted in good faith by a representative of the Corporation in a manner he reasonably believed to be in the interest of the participants and beneficiaries of the plan shall be deemed to be action in a manner that is not opposed to the best interests of the Corporation. Section 24.10 (Duration and Extent of Coverage) The indemnification and advancement of expenses provided by, or granted pursuant to, this Article 24 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a representative of the Corporation and shall inure to the benefit of the heirs and personal representative of that person. 16 Article 25 SHARE CERTIFICATES Section 25.1 The share certificates of the Corporation shall be numbered and registered in a share register as they are issued; shall bear the name of the registered holder, the number and class of shares represented thereby, the par value of each share or a statement that such shares are without par value, as the case may be; shall be signed by the President and the Secretary or the Treasurer or any other person properly authorized by the Board of Directors, and shall bear the corporate seal, which seal may be a facsimile engraved or printed. Where the certificate is signed by a transfer agent or a registrar, the signature of any corporate officer on such certificate may be a facsimile engraved or printed. In case any officer who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer because of death, resignation or otherwise before the certificate is issued, it may be issued by the Corporation with the same effect as if the officer had not ceased to be such at the date of its issue. Article 26 TRANSFER OF SHARES Upon surrender to the Corporation of a share certificate duly endorsed by the person named in the certificate or by attorney duly appointed in writing and accompanied where necessary by proper evidence of succession, assignment or authority to transfer, a new certificate shall be issued to the person entitled thereto and the old certificate canceled and the transfer recorded upon the transfer books for shares of the Corporation. No transfer shall be made if it would be inconsistent with the provisions of Article 8 of the Pennsylvania Uniform Commercial Code. Article 27 LOST CERTIFICATES Section 27.1 Where a shareholder of the Corporation alleges the loss, theft or destruction of one or more certificates for shares of the Corporation and requests the issuance of a substitute certificate therefor, the Board of Directors may direct a new certificate of the same tenor and for the same number of shares to be issued to such person upon such person's making of an affidavit in form satisfactory to the Board of Directors setting forth the facts in connection therewith, provided that prior to the receipt of such request the Corporation shall not have either registered a transfer of such certificate or received notice that such certificate has been acquired by a bona fide purchaser. When authorizing such issue of a new certificate the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or such owner's heirs or legal representatives, as the case may be, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such 17 form and with surety or sureties, with fixed or open penalty, as shall be satisfactory to the Board of Directors, as indemnity for any liability or expense which it may incur by reason of the original certificate remaining outstanding. Article 28 DIVIDENDS Section 28.1 The Board of Directors may, from time to time, at any duly convened regular or special meeting or by unanimous consent in writing, declare and pay dividends upon the outstanding shares of capital stock of the Corporation in cash, property or shares of the Corporation, so long as any dividend shall not be in violation of law and the Articles of Incorporation. Section 28.2 Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purposes as the Board of Directors shall believe to be for the best interests of the Corporation, and the Board of Directors may reduce or abolish any such reserve in the manner in which it was created. Article 29 FINANCIAL REPORT TO SHAREHOLDERS Section 29.1 The Chairman of the Board, the President and the Board of Directors shall present prior to each annual meeting of the shareholders a full and complete statement of the business and affairs of the Corporation for the preceding year. Article 30 INSTRUMENTS Section 30.1 All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other persons as the President or the Board of Directors may from time to time designate. Section 30.2 Any note, mortgage, evidence of indebtedness, contract or other document, or any assignment or endorsement thereof, executed or entered into between the Corporation and any other person, when signed by one or more officers or agents having actual or apparent authority to sign it, or by the Chairman of the Board, the President or the Vice President and 18 Secretary or Assistant Secretary or Treasurer or Assistant Treasurer of the Corporation, shall be held to have been properly executed for and in behalf of the Corporation. Section 30.3 The affixation of the corporate seal shall not be necessary to the valid execution, assignment or endorsement by the Corporation of any instrument or other document. Article 31 FISCAL YEAR Section 31.1 The fiscal year of the Corporation shall be the calendar year. Article 32 SEAL Section 32.1 The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the works "Corporate Seal, Pennsylvania." Such seal may be used by causing it or a facsimile thereof to be impressed or affixed in any manner reproduced. Article 33 NOTICES AND WAIVERS THEREOF Section 33.1 Whenever written notice is required to be given to any person under the provisions of applicable law, by the Articles of Incorporation or of these By-laws, it may be given to the person either personally or by sending a copy thereof by first class or express mail, postage prepaid, or by telegram (with messenger service specified), telex or TWX (with answer back received) or courier service, charges prepaid or by telecopier, to such person's address (or to such person's telex, TWX, telecopier or telephone number) appearing on the books of the Corporation or, in the case of directors, supplied by such person to the Corporation for the purpose of notice. If the notice is sent by mail, telegraph or courier service, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office or courier service for delivery to that person or, in the case of telex or TWX, when dispatched. A notice of meeting shall specify the place, day and hour of the meeting and any other information required by any other provision of these By-laws. Section 33.2 Whenever any written notice is required to be given under the provisions of applicable law, the Articles of Incorporation or of these By-laws, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of the notice. Except as otherwise required by these By-laws, neither the business to be transacted at, nor the purpose of, a meeting need be 19 specified in the waiver of notice of the meeting. In the case of a special meeting of shareholders, the waiver of notice shall specify the general nature of the business to be transacted. Section 33.3 Attendance of a person at any meeting shall constitute a waiver of notice of the meeting except where a person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Section 33.4 Whenever any notice or communication is required to be given to any person under the provisions of applicable law, the Articles of Incorporation, these By-laws, the terms of any agreement and any other instrument or as a condition precedent to taking any corporate action, and communication with that person is then unlawful, the giving of the notice or communication to that person shall not be required and there shall be no duty to apply for a license or other permission to do so. Any action or meeting that is taken or held without notice or communication to that person shall have the same validity as if the notice or communication had been duly given. If the action taken is such as to require the filing of any document with respect thereto under any provision of law or any agreement or other instrument, it shall be sufficient, if such is the fact and if notice or communication in required, to state therein that notice or communication was given to all persons entitled to receive notice or communication except persons with whom communication was unlawful. Section 33.5 Section 33.4 shall also be applicable to any shareholder with whom the Corporation has been unable to communicate for more than twenty-four (24) consecutive months because communications to the shareholder are returned unclaimed or the shareholder has otherwise failed to provide the Corporation with a current address. Whenever the shareholder provides the Corporation with a current address, Section 33.4 shall cease to be applicable to the shareholder under this Section 33.5. Article 34 EMERGENCIES Section 34.1 The Board of Directors may adopt emergency By-laws, subject to repeal or change by action of the shareholders, which shall, notwithstanding any different provisions of law, of the Articles of Incorporation or of these By-laws, be effective during any emergency resulting from an attack on the United States, a nuclear disaster or another catastrophe as a result of which a quorum of the Board of Directors cannot readily be assembled. The emergency By-laws may make any provision that may be appropriate for the circumstances of the emergency including, procedures for calling meetings of the Board of Directors, quorum requirements for meetings and procedures for designating additional or substitute directors. Section 34.2 The Board of Directors, either before or during any emergency, may provide, and from time to time modify, lines of succession in the event that during the emergency any or all officers or agents of the Corporation shall for any reason be rendered incapable of 20 discharging their duties and may, effective in the emergency, change the head offices or designate several alternative head offices or regional offices of the Corporation or authorize the officers to do so. Section 34.3 A representative of the Corporation acting in accordance with any emergency By-laws shall not be liable except for willful misconduct and shall not be liable for any action taken by such representative in good faith in an emergency in furtherance of the ordinary business affairs of the Corporation even though not authorized by the emergency or other By-laws then in effect. Section 34.4 To the extent not inconsistent with any emergency By-laws so adopted, the By-laws of the Corporation shall remain in effect during any emergency and, upon its termination, the emergency By-laws shall cease to be effective. Section 34.5 Unless otherwise provided in emergency By-laws, notice of any meeting of the Board of Directors during an emergency shall be given only to those directors to whom it is feasible to reach at the time and by such means as are feasible at the time, including publication, radio or television. To the extent required to constitute a quorum at any meeting of the Board of Directors during any emergency, the officers of the Corporation who are present shall, unless otherwise provided in emergency By-laws, be deemed, in order of rank and within the same rank in order of seniority, directors for the meeting. Article 35 AMENDMENTS Section 35.1 These By-laws may be altered, amended or repealed by the affirmative vote of the holders of eighty percent (80%) of the outstanding shares of Common Stock at any regular or special meeting duly convened after notice to the shareholders of that purpose, or by a majority vote of the members of the Board of Directors at any regular or special meeting thereof duly convened after notice to the directors of that purpose, subject always to the power of the shareholders to change such action of the Board of Directors by the affirmative vote of the holders of eighty percent (80%) of the outstanding shares of Common Stock. 21 EX-10 4 RETIREMENT BONUS PLAN EXHIBIT 10 Retirement Bonus Plan for the Board of Directors of Mid Penn Bank RETIREMENT BONUS PLAN FOR THE BOARD OF DIRECTORS OF MID PENN BANK DECLARATION OF PURPOSE Mid Penn Bank, a Pennsylvania banking company existing under the laws of the Commonwealth, with its primary office at 349 Union Street, Millersburg, Pennsylvania, desires to provide an annual retirement bonus to qualified retired members of its Board of Directors. The purpose of this bonus is not intended as a comprehensive plan of retirement benefits, but rather as a gratuitous payment for meritorious years of service. This Plan does not, by its terms, confer any express rights or obligations on either part, nor does it alter any rights that may be in, or come into existence, by virtue of any retirement plan that may be authorized by the Board. ELIGIBILITY This plan applies to all persons presently designated and subsequently named as a member or Chairman of the Board of Directors of Mid Penn Bank, who have voluntarily retired from service on the Board, or have attained the mandatory retirement age. In the event that a Board Member is involuntarily terminated of his or her position as a member of the Board, the provisions of this plan shall not apply. BONUS TERMS Mid Penn Bank, acting by and through its duly appointed Board of Directors, hereby declares that it does provide eligible Directors with a gratuitous retirement bonus to be computed on an annual basis. Said bonus under this plan will be paid quarterly at the end of each calendar quarter. This bonus will begin at the end of the first full calendar quarter immediately following retirement and will continue such time as mandated under this plan. COMPUTATION OF RETIREMENT BONUS The Director's bonus to be paid under this plan will be determined by multiplying the base retirement bonus for the member's position by the number of full years the eligible member served in that position. No credit shall be given for any portion of any year of service in that position. No credit shall be given for any portion of any year of service in that position. The first full year shall be the anniversary date from becoming a member of the Board or assuming the office of Chairman of the Board. The base retirement bonus figures shall be as follows: 1. Chairman of the Board $400.00 2. All other Board Members $200.00 1 INFLATIONARY ADJUSTMENT At the conclusion of the year 1996, and every year thereafter, the retirement bonus payable under this Agreement shall be the greater of the base retirement bonus amount times the number of full years of service, and the base retirement bonus amount times the number of full years of service adjusted for inflation according to the method outlined below. The adjusted minimum retirement bonus payment shall be determined by applying fluctuations in the Consumer Price Index-City Average Percentage Change for the months of December through December for the Philadelphia-Wilmington-Trenton, PA-DE-NJ-MD area. The method of calculation of the adjusted retirement bonus shall be as follows: The adjusted bonus shall equal the base retirement bonus for the particular position times the number of full years served in that position plus an amount equal to the percentage of change in the city average Consumer Price Index for the preceding year, as measured from December of one year through December of the following year, rounded to the next highest whole dollar amount. TERMINATION OF PAYMENTS Payments made under this plan are gratuitous payments for the sole benefit of the retired Board Member. No portion of this Agreement may be assigned or devised in any way. Bonus payments to individual members shall terminate upon the death of the eligible Board Member. No payment shall be made for any portion of the quarter in which the benefits are terminated. EFFECTIVE DATE This plan shall become effective immediately upon adoption of its terms by the Board of Directors of Mid Penn Bank. 2 EX-13 5 EXCERPTS FROM ANNUAL REPORT EXHIBIT 13 Excerpts from Annual Report to Shareholders for the year ended December 31, 1996 Mid Penn Bancorp, Inc. Financial Highlights AS OF AND FOR YEARS ENDED DECEMBER 31, 1996 AND 1995 (Dollars in thousands, except per share data.) Percent 1996 1995 Change ---- ---- -------- Total Assets .................................. $210,172 194,711 + 7.94 Total Deposits ................................ 174,671 162,268 + 7.64 Net Loans ..................................... 142,341 129,589 + 9.84 Total Investments and Interest Bearing Balances..................................... 57,166 55,243 + 3.48 Stockholders' Equity .......................... 24,650 22,694 + 8.62 Net Income .................................... 3,329 2,970 +12.09 Net Income Per Share .......................... 2.68 2.39 +12.13 Cash Dividend Per Share on Weighted Average Number of Shares Outstanding ................ .96 1.37 -29.93 Book Value Per Share .......................... $ 19.85 18.27 + 8.65 Mid Penn Bancorp, Inc. Stockholders' Information 1996 1995 ---- ---- High Low High Low Quarter ---- --- ---- --- ------- Market Value Per Share $ 35.25 33.33 35.00 31.00 1st 35.25 32.61 34.00 33.00 2nd 35.25 32.14 35.00 33.00 3rd 35.25 33.50 33.50 33.00 4th Market Value Information: The market share information was provided by National Quotation Bureau, Inc., 11 Penn Plaza, New York, NY 1001. The following brokerage firms make a market in Mid Penn Bancorp, Inc. stock: F. J. Morrissey & Company Janney Montgomery Scott Ryan Beck & Company Hopper Soliday & Co Legg Mason Wood 1700 Market Street 1801 Market Street 80 Main Street 1825 Oregon Pike Walker, Inc. Suite 1420 Philadelphia, PA 19103-2473 West Orange, NJ 07052 Lancaster, PA 17601 100 Pine Street Philadelphia, PA 19103-3913 1-800-526-6397 1-800-342-2325 1-800-456-9234 Harrisburg, PA 17101 1-800-842-8928 1-800-433-8186
Transfer Agent: Mid Penn Bank, Trust Department, 349 Union Street, Millersburg, Pennsylvania 17061 Telephone: (717) 692-2133 Number of Stockholders: At December 31, 1996, there were 664 stockholders. Dividends: Dividends have been paid semi-annually, in the middle of March and the middle of September. Cash dividends of $.50 were declared in March and September in 1996 and 1995. A special cash dividend of $.50 per share was declared in December of 1995 and 1994, payable in January of 1996 and 1995, respectively. Beginning in 1997, Mid Penn Bancorp, Inc is planning quarterly dividends 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, 1997, at 349 Union Street, Millersburg, Pennsylvania. 2 Report of Independent Certified Public Accountants [LOGO] The Board of Directors and Stockholders Mid Penn Bancorp, Inc. Millersburg, Pennsylvania We have audited the accompanying consolidated balance sheets of Mid Penn Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995 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, 1996. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 subsidiary as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Parente, Randolph, Orlando, Carey & Associates PARENTE o RANDOLPH o ORLANDO o CAREY & ASSOCIATES Williamsport, Pennsylvania January 17, 1997 4 Mid Penn Bancorp, Inc. Consolidated Balance Sheets DECEMBER 31, 1996 AND 1995
(Dollars in thousands, except share data) 1996 1995 ---- ---- ASSETS Cash and due from banks ......................................... $ 4,442 3,389 Interest bearing balances ....................................... 28,433 30,059 Available-for-sale securities ................................... 28,733 25,184 Loans ........................................................... 146,393 133,665 Less: Unearned income ................................. (1,879) (1,729) Allowance for loan losses ....................... (2,173) (2,347) --------- ------- Net Loans ..................................... 142,341 129,589 --------- ------- Bank premises and equipment, net ................................ 3,397 3,451 Foreclosed assets held for sale ................................. 548 507 Accrued interest receivable ..................................... 1,335 1,386 Deferred income taxes ........................................... 536 484 Other assets .................................................... 407 662 --------- ------- Total Assets $ 210,172 194,711 ========= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand .................................................. $ 15,350 11,766 NOW ..................................................... 24,211 25,223 Money market ............................................ 11,575 10,298 Savings ................................................. 17,061 17,412 Time .................................................... 106,474 97,569 --------- ------- Total Deposits 174,671 162,268 Short-term borrowings ........................................... 4,512 4,314 Accrued interest payable ........................................ 1,020 1,052 Other liabilities ............................................... 609 1,054 Long-term debt .................................................. 4,710 3,329 --------- ------- Total Liabilities 185,522 172,017 --------- ------- Stockholders' Equity: Common stock, par value $1 per share; authorized 10,000,000 shares; 1,261,029 and 1,202,161 shares issued in 1996 and 1995 respectively ............ 1,261 1,202 Surplus ................................................. 11,817 9,889 Undivided profits ....................................... 11,937 11,788 Net unrealized holding gain on securities ............... 168 348 Treasury stock at cost (19,056 shares) .................. (533) (533) --------- ------- Stockholders' Equity, Net 24,650 22,694 --------- ------- Total Liabilities and Stockholders' Equity $ 210,172 194,711 ========= =======
The accompanying notes are an integral part of these consolidated financial statements. 5 Mid Penn Bancorp, Inc. Consolidated Statements of Income FOR YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except share data) 1996 1995 1994 ---- ---- ---- INTEREST INCOME Interest and fees on loans ........................................ $ 12,557 11,561 10,808 Interest on interest-bearing balances ............................. 1,938 1,681 1,195 Interest and dividends on investment securities: U.S. Treasury and government agencies ..................... 878 680 412 State and political subdivision obligations, taxable ...... 6 12 17 State and political subdivision obligations, tax-exempt ... 720 822 944 Other securities .......................................... 51 39 37 Interest on federal funds sold and securities purchased under agreement to resell ................................. 16 53 70 ---------- ---------- ---------- Total Interest Income ............................. 16,166 14,848 13,483 ---------- ---------- ---------- INTEREST EXPENSE Interest on deposits .............................................. 7,145 6,403 5,436 Interest on short-term borrowings ................................. 182 121 100 Interest on long-term debt ........................................ 185 197 204 ---------- ---------- ---------- Total Interest Expense ............................ 7,512 6,721 5,740 ---------- ---------- ---------- Net Interest Income ............................... 8,654 8,127 7,743 ---------- ---------- ---------- PROVISION FOR LOAN LOSSES ................................................. 50 0 0 ---------- ---------- ---------- Net Interest Income After Provision for Loan Losses 8,604 8,127 7,743 ---------- ---------- ---------- NONINTEREST INCOME Trust department income ........................................... 83 68 75 Service charges on deposits ....................................... 252 249 184 Investment securities gains, net .................................. 12 15 5 Other income ...................................................... 453 363 358 ---------- ---------- ---------- Total Noninterest Income .......................... 800 695 622 ---------- ---------- ---------- NONINTEREST EXPENSE Salaries and employee benefits .................................... 2,419 2,373 2,278 Occupancy expense, net ............................................ 299 278 206 Equipment expense ................................................. 389 353 341 Pennsylvania bank shares tax expense .............................. 229 215 201 FDIC insurance premium ............................................ 2 171 323 Marketing and advertising ......................................... 141 152 129 Loss on mortgage sales ............................................ 26 3 91 Other expenses .................................................... 1,211 1,180 1,077 ---------- ---------- ---------- Total Noninterest Expense ......................... 4,716 4,725 4,646 ---------- ---------- ---------- INCOME BEFORE PROVISION FOR INCOME TAXES .................................. 4,688 4,097 3,719 Provision for income taxes ........................................ 1,359 1,127 983 ---------- ---------- ---------- Net Income ........................................ $ 3,329 2,970 2,736 ========== ========== ========== Net Income Per Share (1) .......................... $ 2.68 2.39 2.20 ========== ========== ========== Weighted Average Number of Shares Outstanding ..... 1,241,973 1,241,973 1,241,973
(1) Earnings per share for all periods presented have been restated to reflect 5% stock dividends effective October 7, 1996, December 15, 1995, and December 15, 1994. The accompanying notes are an integral part of these consolidated financial statements. 6 Mid Penn Bancorp, Inc. Consolidated Statements of Changes in Stockholders' Equity FOR YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except per share data) Net Unrealized Holding Common Undivided Gain (Loss) Treasury Stock Surplus Profits on Securities Stock Total ----- -------- ------- ------------- -------- ----- Balance, December 31, 1993 .......................... $ 1,093 6,289 13,107 682 (533) 20,638 Net income .................................. 0 0 2,736 0 0 2,736 Cash dividends ($ 1.44 per share, historical) 0 0 (1,618) 0 0 (1,618) 5% stock dividend (additional 53,425 shares) 53 1,777 (1,830) 0 0 0 Net unrealized holding loss ................. 0 0 0 (774) 0 (774) ------- ------ ------ ----- ---- ------ Balance, December 31, 1994 .......................... $ 1,146 8,066 12,395 (92) (533) 20,982 Net income .................................. 0 0 2,970 0 0 2,970 Cash dividends ($1.44 per share, historical) 0 0 (1,698) 0 0 (1,698) 5% stock dividend (additional 56,085 shares) 56 1,823 (1,879) 0 0 0 Net unrealized holding gain ................. 0 0 0 440 0 440 ------- ------ ------ ----- ---- ------ Balance, December 31, 1995 .......................... $ 1,202 9,889 11,788 348 (533) 22,694 Net income .................................. 0 0 3,329 0 0 3,329 Cash dividends ($.96 per share) ............. 0 0 (1,193) 0 0 (1,193) 5% stock dividend (additional 58,868 shares) 59 1,928 (1,987) 0 0 0 Net unrealized holding gain ................. 0 0 0 (180) 0 (180) ------- ------ ------ ----- ---- ------ Balance, December 31, 1996 .......................... $ 1,261 11,817 11,937 168 (533) 24,650 ======= ====== ====== ===== ==== ======
The accompanying notes are an integral part of these consolidated financial statements. [GRAPHIC OMITTED] 7 Mid Penn Bancorp, Inc. Consolidated Statement of Cash Flows FOR YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands) 1996 1995 1994 ---- ---- ----- Operating Activities: Net income .......................................................... $ 3,329 2,970 2,736 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ............................... 50 0 0 Depreciation ............................................ 361 319 272 Loss (gain) on sales of investment securities ........... (12) (15) (7) Loss (gain) on sale/disposal of bank premises and equipment ...................................... (3) (8) 40 Loss (gain) on sale of foreclosed assets ................ (189) 11 (116) Deferred income taxes ................................... (52) 67 48 Change in interest receivable ........................... 51 (172) (154) Change in other assets .................................. 255 (387) (80) Change in interest payable .............................. (32) 302 (5) Change in other liabilities ............................. (445) 217 416 Other, net .............................................. 0 0 (78) -------- ------ ------ Net Cash Provided By Operating Activities ... 3,313 3,304 3,072 -------- ------ ------ Investing Activities: Net (increase) decrease in interest-bearing balances ................ 1,626 (6,178) 1,665 Proceeds from the maturity of investment securities ................. 4,133 6,788 3,548 Proceeds from the sale of investment securities ..................... 3,786 3,017 3,008 Proceeds from the sale of bank premises and equipment ............... 12 10 0 Purchases of investment securities .................................. (11,636) (8,278) (13,485) Net (increase) decrease in loans .................................... (13,196) (14,756) 1,448 Net purchases of bank premises and equipment ........................ (316) (1,305) (406) Proceeds from the sale of foreclosed assets ......................... 555 109 331 Capitalized additions - foreclosed assets ........................... (13) (166) (35) -------- ------ ------ Net Cash Used In Investing Activities ....... (15,049) (20,759) (3,926) -------- ------ ------ Financing Activities: Net increase (decrease) in demand and savings deposits .............. 3,498 (396) 5,338 Net increase (decrease) in time deposits ............................ 8,905 13,364 215 Assumption of deposit liabilities ................................... 0 2,342 0 Net increase (decrease) in short-term borrowings .................... 198 2,578 (2,774) Long-term borrowings ................................................ 1,500 0 1,500 Long-term debt repayment ............................................ (119) (110) (369) Cash dividends ...................................................... (1,193) (1,698) (1,618) -------- ------ ------ Net Cash Provided By Financing Activities ... 12,789 16,080 2,292 -------- ------ ------ Net increase (decrease) in cash and cash equivalents ........................ 1,053 (1,375) 1,438 Cash and cash equivalents at January 1 ...................................... 3,389 4,764 3,326 -------- ------ ------ Cash and cash equivalents at December 31 .................................... $ 4,442 3,389 4,764 ======== ====== ====== Supplemental Disclosures of Cash Flow Information: Cash payments of interest expense ................................... $ 7,544 6,419 4,907 Cash payments of income taxes ....................................... $ 1,177 1,186 1,193 Supplemental Noncash Disclosures: Loan charge-offs .................................................... $ 464 366 207 Transfers to foreclosed assets held for sale ........................ $ 394 341 45 The accompanying notes are an integral part of these consolidated financial statements.
8 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements for 1996 Report (1) Nature of Business Mid Penn Bancorp, Inc. (Corporation), is a one-bank holding company with a wholly owned subsidiary, Mid Penn Bank (Bank). All significant intercompany transactions have been eliminated. 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, VISA credit cards, 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 nine 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. At the end of the second quarter of 1996, Mid Penn Bancorp, Inc. contracted the services of Invest Financial Corporation, a third-party provider of investment services headquartered in Tampa, Florida. Invest provides financial planning and investment services, particularly mutual fund and annuity-type investments, through an office leased from the Bank. (2) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reporting 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 may differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination for the allowance for loan losses and the valuation of real estate acquired through, or in lieu of, foreclosure in settlement of debt. While it is reasonably possible that the estimate of the effect on the financial statements of a condition, situation, or set of circumstances that existed at the date of the financial statements will change in the near term due to one or more future confirming events, based on current information known to management, management is not aware of a condition, situation, or set of circumstances whereby the effect of the change would be material to the financial statements. (3) Summary of Significant Accounting Policies The accounting and reporting policies of the Corporation conform to generally accepted accounting principles and to general practice within the banking industry. The following is a description of the more significant accounting policies. (a) Investment Securities The Corporation has adopted the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" for accounting and reporting for investment securities. In accordance with the provisions of SFAS No. 115, such investments are accounted for as follows: Held-to-Maturity Securities - includes debt securities that the Corporation has the positive intent and ability to hold to maturity. These securities are reported at amortized cost. At December 31, 1996 and 1995, the Corporation did not have any held-to-maturity securities. Available-for-Sale Securities - includes debt and equity securities not classified as held-to-maturity securities. Such securities are reported at fair value, with unrealized holding gains and losses excluded from earnings and reported, net of deferred income taxes, as a separate component of stockholders's equity. 9 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements for 1996 Report (cont'd) (b) 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 except when loans are well-secured and in the process of collection. 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 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. (c) Allowance for Loan Losses The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses that may become uncollectible. Management's judgment is based upon evaluation of individual loans, risk characteristics of categories of loans, credit loss experience, economic conditions, appraisals and other relevant factors which in management's judgment deserve recognition. The allowance for loan losses is established by a charge to operations. Loan losses and recoveries on previously charged-off loans are charged or credited directly to the allowance. (d) Bank Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straightline basis. Maintenance and repairs are charged to expense when incurred. Gains and losses on dispositions are reflected in current operations. (e) Foreclosed Assets Held for Sale Foreclosed assets held for sale consist of real estate acquired through, or in lieu of, foreclosure in settlement of debt and are recorded at fair market value at the date of transfer. Any valuation adjustments required at the date of transfer are charged to the allowance for loan losses. Subsequent to acquisition, foreclosed assets are carried at the lower of cost or fair market value less costs of disposal, based upon periodic evaluations that consider changes in market conditions and development and disposition costs. Operating results from assets acquired in satisfaction of debt, including rental income less operating costs and gains or losses on the sale of or the periodic evaluation of foreclosed assets, are recorded in noninterest income and/or noninterest expense. (f) 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. (g) Benefit Plans A funded contributory profit-sharing plan is maintained for substantially all employees. The cost of the Bank's profit-sharing plan is charged to current operating expenses and is funded annually. In addition to providing a profit-sharing plan, the Bank provides health care coverage for employees who retire with twenty years or more of full-time service with the Bank, for a period up to five years from the date of retirement under the group plan of the other employees, provided the Bank is providing such health care coverage for other employees. The Bank also provides continued coverage on group life insurance for those employees who retire with twenty years or more of full-time service with the Bank. Substantially all of the Bank's employees may become eligible for those benefits if they continue working for the Bank until retirement age. The Bank currently does not offer post-employment benefits. During 1995, the Board of Directors adopted a defined benefit retirement bonus plan to qualified members of the Board of Directors who either voluntarily retire from service or attain mandatory retirement age (age 70). The benefit is based on years of service and is funded based on the expected future years of service of active participants consistent with the requirements of SFAS No. 87 "Employers' Accounting for Pensions." (h) Trust Assets and Income Assets held by the Bank in a fiduciary or agency capacity for customers of the Trust Department are not included in the financial statements since such items are not assets of the Bank. Trust income is recognized on the cash basis which is not materially different than if it were reported on the accrual basis. 10 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) (i) Net Income Per Share Net income 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. (j) Statement of Cash Flows For purposes of the statement of cash flows, the Corporation considers cash and due from banks to be cash equivalents. (k) Reclassifications Certain prior year amounts have been reclassified to conform to the current year's classifications. (4) Restrictions on Cash and Due from Bank Accounts The Bank is required to maintain required reserve balances. The amount of those required reserve balances at December 31, 1996 and 1995 was approximately $1,227,000 and $1,185,000, respectively. (5) Investment Securities At December 31, 1996 and 1995, the face amount, amortized cost, fair value, and gross unrealized gains and losses on investment securities are as follows:
(Dollars in thousands) Gross Gross Face Amortized Unrealized Unrealized Fair December 31, 1996 Amount Cost Gains Losses Value ------ --------- ---------- --------- ----- U.S. Treasury and U.S. Government Agencies .... $ 12,850 12,833 48 60 12,821 Mortgage Backed U.S. Government Agencies ..... 1,184 1,178 0 12 1,166 State and Political Subdivision Obligations . 13,218 13,218 289 10 13,497 Equity Securities ............... 1,249 1,249 0 0 1,249 -------- ------ ----- ----- ------ $ 28,501 28,478 337 82 28,733 ======== ====== ===== ===== ====== December 31, 1995 U.S. Treasury and U.S. Government Agencies .... $ 9,750 9,776 135 0 9,911 Mortgage Backed U.S. Government Agencies ..... 1,454 1,439 18 0 1,457 State and Political Subdivision Obligations . 12,878 12,906 391 17 13,280 Equity Securities ............... 536 536 0 0 536 -------- ------ ----- ----- ------ $ 24,618 24,657 544 17 25,184 ======== ====== ===== ===== ======
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. Equity securities consist of stock in the Federal Home Loan Bank of Pittsburgh and Atlantic Central Bankers Bank and do not have a readily determinable fair value for purposes of SFAS No. 115, because their ownership is restricted and they lack a market. Therefore, these securities are classified as restricted investment securities, carried at cost, and evaluated for impairment. Investment securities and interest bearing balances having a fair value of $12,952,000 and $10,649,000 at December 31, 1996 and 1995, respectively, were pledged, as required by law, to secure public and trust deposits and other borrowings. Proceeds from the sale of investment securities in 1996 amounted to $3,786,000. Gross gains from such sales of investment securities, as determined on the basis of specific identification of the adjusted cost of each security sold, amounted to $12,000. Gross gains of $15,000 were realized in 1995 on the sale of investment securities amounting to $3,017,000. 11 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) The following is a schedule of the maturity distribution of investment securities at amortized cost and fair value as of December 31, 1996:
December 31, 1996 (Dollars in thousands) Amortized Fair Cost Value ---- ----- Due in 1 year or less .................................... $3,476 3,487 Due after 1 year but within 5 years ...................... 10,843 10,935 Due after 5 years but within 10 years .................... 8,419 8,508 Due after 10 years ....................................... 3,313 3,388 -------- ------ 26,051 26,318 Mortgage-Backed Securities ............................... 1,178 1,166 Equity Securities ........................................ 1,249 1,249 -------- ------ $ 28,478 28,733 ======== ======
The Corporation has no derivative financial instruments requiring disclosure under SFAS No. 119. (6) Loans A summary of loans at December 31, 1996 and 1995 is as follows:
(Dollars in thousands) 1996 1995 ---- ---- Commercial real estate, construction and land development... $ 75,200 65,671 Commercial, industrial and agricultural..................... 18,588 16,682 Real estate - residential .................................. 26,718 27,821 Consumer ................................................... 25,874 23,473 Lease financing ............................................ 13 18 --------- ------- $ 146,393 133,665 ========= =======
Included within the loan portfolio are loans on which the Bank has ceased the accrual of interest. These loans amounted to $1,183,000 as of December 31, 1996 and $1,753,000 as of December 31, 1995. Income recognized on nonaccrual loans in 1996 and 1995 was $144,000 and $79,000, respectively. Interest income which would have been recognized in 1996 and 1995 in accordance with the contractual terms would have been $248,000 and $159,000, respectively. In addition, loans which were past due 90 days or more for which interest continued to be accrued as of December 31, 1996 and 1995, amounted to approximately $519,000 and $195,000, respectively. During 1996, $1,022,000 in commercial real estate loans and $420,000 in agricultural loans were restructured compared to none in 1995. The restructurings were done on terms and conditions available at current market rates and did not have an impact on net income. Loans to Bank executive officers, directors, and corporations in which such executive officers and directors are beneficially interested as stockholders, executive officers, or directors aggregated approximately $1,123,000 and $1,228,000 at December 31, 1996 and 1995, respectively. New loans extended were $230,000 and $199,000 and repayments on these loans were $335,000 and $146,000 during 1996 and 1995, respectively. 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. (7) Allowance for Loan Losses Changes in the allowance for loan losses for the years 1996, 1995, and 1994 are summarized as follows: (Dollars in thousands) 1996 1995 1994 ---- ---- ---- Balance, January 1 ............ $2,347 2,511 2,646 Provision charged to operations 50 0 0 Loans charge off............... (464) (366) (207) Recoveries on loans charged off 240 202 72 ------ ----- ----- Balance, December 31 .......... $2,173 2,347 2,511 ====== ===== ===== 12 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) The recorded investment in loans that are considered impaired amounted to $220,000 (all in nonaccrual) and $809,000 ($659,000, of which, in nonaccrual) on December 31, 1996 and December 31, 1995, 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 contractural terms of the loan agreement. The allowance for loan losses related to loans classified as impaired amounted to approximately $298,000 at December 31, 1995. The average balances of these loans amounted to approximately $464,000 and $794,000 for the years 1996 and 1995, respectively. Due to the low levels of loans classified as impaired and the fact that the majority of such impaired loans are adequately collateralized by real estate, impaired loans should not have a material effect on the allowance for loan losses or the earnings of the Bank. 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 1996 and 1995.
(Dollars in thousands) 1996 1995 ---- ---- Cash receipts applied to reduce principal balance........... $ 60 84 Cash receipts recognized as interest income................. 0 14 ----- ---- Total cash receipts......................................... $ 60 98 ===== ====
In addition, at December 31, 1996 and 1995, the Bank had other nonaccrual loans of approximately $963,000 and $1,094,000, for which impairment had not been recognized. The Bank has no commitments to loan additional funds to borrowers with impaired or nonaccrual loans. (8) Bank Premises and Equipment At December 31, 1996 and 1995, bank premises and equipment are as follows:
(Dollars in thousands) 1996 1995 ---- ----- Land ...................................................... $ 545 554 Buildings ................................................. 3,396 3,247 Furniture and Fixtures .................................... 2,442 2,274 ------ ----- 6,383 6,075 Less accumulated depreciation.............................. 2,986 2,624 ----- ----- $3,397 3,451 ====== =====
Depreciation expense amounted to $361,000, $319,000 and $272,000 for the years ended December 31, 1996, 1995 and 1994, respectively. (9) Deposits At December 31, 1996 and 1995, certificates of deposit in denominations of $100,000 or more amounted to $14,527,000 and $10,065,000, respectively. Interest expense on such certificates of deposit amounted to approximately $754,000, $501,000 and $333,000 for the years ended December 31, 1996, 1995 and 1994, respectively. (10) Short-term Borrowings Short-term borrowings and the related interest expense as of December 31, 1996 and 1995 consisted of: (Dollars in thousands) 1996 1995 ---- ---- Interest Interest Balance Expense Balance Expense ------- -------- ------- -------- Federal funds purchased .... $3,700 132 2,100 44 Repurchase agreements ...... 18 32 1,814 56 Treasury, tax and loan notes 794 18 400 21 ------- ---- ----- ---- $4,512 182 4,314 121 ====== ==== ===== ==== Federal funds purchased represent overnight funds. Securities sold under repurchase agreements generally mature between one day and one year. Discount window borrowings represent short-term borrowings from the Federal Reserve Bank. Treasury, tax and loan notes are open-ended interest bearing notes payable to the U.S. Treasury upon call. All tax deposits 13 accepted by the Bank are placed in the Treasury note option account. The Bank also has unused lines of credit with several banks amounting to $9.5 million dollars at December 31, 1996. (11) 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, 1996, the Bank had long-term debt in the amount of $4,710,000 outstanding to the FHLB consisting of a $1,500,000 term loan at 6.67% due September 4, 2001, a $1,210,000 loan at 7.30% due April 5, 2004, amortized in equal monthly payments and a $2,000,000 bullet loan which will mature on August 4, 1997. The aggregate amounts of maturities of long-term debt for the five years subsequent to December 31, 1996 are $2,128,000 (1997), $137,000 (1998), $147,000 (1999), $159,000 (2000), and $1,671,000 (2001). As of December 31, 1995, the Bank had long-term debt in the amount of $3,329,000. Most of the Bank's investments and mortgage loans are pledged to secure FHLB borrowings. (12) Lease Commitments The Bank leases certain premises under long-term lease agreements which are classified as operating leases. Commitments under these agreements are not material. Rental expense for 1996, 1995 and 1994 was approximately $35,000, $33,000 and $21,000, respectively. (13) Benefit Plans The Bank has a funded contributory profit-sharing plan covering substantially all employees. The total employee benefits expense related to the Bank's contribution to the plan for 1996, 1995 and 1994 was $229,000, $213,000 and $190,000, respectively. In addition, the Bank sponsors two defined benefit postretirement plans that cover all full-time employees. One plan provides health insurance benefits, and the other provides life insurance benefits. 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 retirement date, the Bank will pay, at its discretion, premiums for 65 Special coverage or a similar supplemental coverage. After the five year period has expired, all employer-paid benefits will cease; the employee may continue coverage through the employer at his/her own expense. Life Insurance Full-time employees will be provided with term life insurance. The amounts of coverage are determined as follows: At retirement after 20 or more years of service, the insurance amount prior to age 65 will be the lesser of three times the participant's annual salary at retirement or $50,000. After age 65, the insurance amount will decrease by 10% of the age 65 amount per year, subject to a minimum amount of $2,000. The following table sets forth the plans' combined funded status reconciled with the amount included in other liabilities in the balance sheet at December 31, 1996 and 1995:
(Dollars in thousands) 1996 1995 ---- ---- Accumulated postretirement benefit obligation: Retirees ..................................................... $ (32) (38) Fully eligible active plan participants ...................... (99) (92) Other active plan participants ............................... (173) (177) ----- ---- (304) (307) Plan assets at fair value ..................................... 0 0 ----- ---- Accumulated postretirement benefit obligation in excess of plan assets................................................. (304) (307) Unrecognized net gain ......................................... (97) (60) Unrecognized transition obligation ............................ 235 250 ----- ---- Accrued postretirement benefit cost ........................... $(166) (117) ===== ====
14 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) The Bank's postretirement health insurance plan is not funded; the accumulated benefit obligation for the health plan is $209,810 and $214,462 at December 31, 1996 and 1995, respectively. Net periodic postretirement benefit cost for 1996, 1995 and 1994 included the following components:
(Dollars in thousands) 1996 1995 1994 ---- ---- ---- Service cost - benefits attributed to service during the period $22 19 20 Interest cost on accumulated postretirement benefit obligation 21 20 19 Actual return on plan assets .................................. 0 0 0 Amortization of transition obligation over 20 years ........... 13 12 15 --- --- -- Net periodic postretirement benefit cost ...................... $56 51 54 === === ==
For measurement purposes, a 10.5 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1996; the rate was assumed to decrease gradually to 6.5 percent for 2000 and remain at that level thereafter. The health care cost trend assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rate by 1 percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996, by $36,275 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $6,542. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.25 percent. Retirement Plan On May 24, 1995, the Bank adopted 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 $273,675 which is being amortized based on the expected future years of service of active participants. The following table sets forth the plan's funded status and amounts recognized in the Corporation's consolidated balance sheet at December 31, 1996: (Dollars in thousands) 1996 1995 ---- ---- Actuarial present value of benefit obligations: Accumulated vested benefit obligation ............. $(317) (291) ===== ==== Projected benefit obligation ...................... $(317) (291) Plan assets at fair value ........................... 0 0 ----- ---- Projected benefit obligation in excess of fair value (317) (291) Unrecognized prior service cost ..................... 235 261 Unrecognized net gain ............................... (9) 0 Adjustment to recognize additional minimum liability (153) (190) ----- ---- Pension Liability .................... $(244) (220) ===== ==== Net pension cost included the following components for 1996: (Dollars in thousands) Service cost ........................................ $ 18 8 Interest cost ....................................... 20 10 Actual return on plan assets ........................ 0 0 Amortization of transition obligation over 10.5 years 26 13 ----- ---- Net Pension Cost .................... $ 64 31 ===== ==== The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 7% in 1996 and in 1995. 15 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) The following temporary differences gave rise to the deferred tax asset at December 31, 1996 and 1995: (Dollars in thousands) 1996 1995 ---- ---- Deferred tax assets: Allowance for loan losses ........... $ 610 682 Nonaccrual interest ................. 78 75 Benefit plans ....................... 87 50 Deferred income ..................... 38 43 Other ............................... 5 0 ----- ----- Total ............... $ 818 850 ----- ----- Deferred tax liabilities: Unrealized gains on securities........ $ (87) (179) Depreciation ......................... (141) (159) Loan fees ............................ (37) (19) Bond accretion ....................... (17) (9) ----- ----- Total ................ $(282) (366) ----- ----- Deferred tax asset, net ................. $ 536 484 ===== ===== The provision for income taxes consists of the following: (Dollars in thousands) Year Ended December 31, 1996 1995 1994 ---- ---- ---- Current provision................... $ 1,319 1,060 935 Deferred provision.................. 40 67 48 -------- ----- --- Provision for income taxes.......... $ 1,359 1,127 983 ======== ===== === A reconciliation of income tax at the statutory rate to the Corporation's effective rate is as follows: (Dollars in thousands) 1996 1995 1994 ---- ---- ---- Provision at the expected statutory rate............................ $ 1,594 1,393 1,264 Effect of tax-exempt income........ (266) (300) (341) Nondeductible interest............. 35 36 35 Other items........................ (4) (2) 25 -------- ----- ----- Provision for income taxes........ $ 1,359 1,127 983 ======== ===== ===== (15) Regulatory Matters The Pennsylvania Banking Code restricts the availability of Bank retained earnings for dividend purposes. At December 31, 1996 and 1995, $11,817,000 and $9,889,000, respectively, was not available for dividends to the Corporation. The Bank is subject to various regulatory capital requirements administered by the federal and state banking agencies. 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. 16 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd)
(Dollars in thousands) To Be Well Capitalized As of December 31, 1996: Capital Adequacy Under Prompt Corrective ---------------- Action Provisions: Actual Required ------------------ Amount (Ratio) Amount (Ratio) Amount (Ratio) Tier I Capital (to Average Assets) ......... $24,266 (12.0%) 8,082 (4.0%) 10,103 (5.0%) Tier I Capital (to Risk Weighted Assets).... 24,266 (16.1%) 6,041 (4.0%) 9,062 (6.0%) Total Capital (to Risk Weighted Assets)..... 26,159 (17.3%) 12,082 (8.0%) 15,103 (10.0%) As of December 31, 1995: Tier I Capital (to Average Assets) ......... $22,320 (12.3%) 7,256 (4.0%) 9,070 (5.0%) Tier I Capital (to Risk Weighted Assets).... 22,320 (14.9%) 5,980 (4.0%) 8,970 (6.0%) Total Capital (to Risk Weighted Assets)..... 24,195 (16.2%) 11,960 (8.0%) 14,950 (10.0%)
As of December 31, 1996, the Bank's capital ratios are well in excess of the minimum and well-capitalized guidelines. The Corporation,s capital ratios are not materially different from those of the Bank. (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 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 sheets. 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 non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The term of these standby letters of credit is generally one year or less. As of December 31, 1996, commitments to extend credit amounted to $29,956,000 and standby letters of credit amounted to $2,062,000. Significant concentration of credit risk may occur when the obligations of the same or affiliated parties engage in similar activities or have similar economic characteristics that would cause those parties to be similarly affected by changes in economic or other conditions. In analyzing the Bank's exposure to significant concentration of credit risk, management set a parameter of 10% or more of the Bank's total net loans outstanding as the threshold in determining whether the obligations of the same or affiliated parties would be classified as significant concentration of credit risk. Concentrations by industry, product line, type of collateral, etc., were also considered. U.S. Treasury securities, obligations of U.S. government agencies and corporations, and any assets collateralized by the same were excluded. 17 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) As of December 31, 1996, there were no similar activities that met the requirements to be classified as significant concentration of credit risk. However, there is a geographical concentration in that most of the Bank's business activity is with customers located in Central Pennsylvania, specifically within the Bank's trading area made up of Dauphin County, lower Northumberland County, western Schuylkill County and Hampden Township in Cumberland County. The Bank's highest concentrations of credit are in the areas of mobile home park land and commercial real estate office financing. Outstanding credit to these sectors amounted to $12,700,000 or 8.9% and $10,800,000 or 7.6% of total net loans outstanding as of December 31, 1996. These concentrations, however, are less than the Bank's parameter of 10% of total net loans outstanding. (17) Commitments and Contingencies In the ordinary course of business, the Bank has various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial condition of the Bank. (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 As of December 31, 1996, 1995 and 1994 (Dollars in thousands)
1996 1995 1994 ---- ---- ---- ASSETS Cash .............................................. $ 19 588 549 Investment in Subsidiary .......................... 24,631 22,669 20,970 -------- ------ ------ Total Assets ...................... $ 24,650 23,257 21,519 ======== ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Other Liabilities ................................. $ 0 563 537 Stockholders' Equity .............................. 25,183 23,227 21,515 Less Treasury Stock ............................... (533) (533) (533) -------- ------ ------ Total Liabilities and Equity .................... $ 24,650 23,257 21,519 ======== ====== ====== CONDENSED STATEMENT OF INCOME For the Years Ended December 31, 1996, 1995 and 1994 (Dollars in thousands) 1996 1995 1994 ---- ---- ---- Dividends from Bank ............................... $ 1,212 1,728 1,657 Other income from Bank ............................ 13 8 0 Undistributed Earnings of Bank .................... 2,142 1,259 1,079 Other Expenses .................................... (38) (25) 0 -------- ------ ------ Net Income ............................... $ 3,329 2,970 2,736 ======== ====== ======
[GRAPHIC OMITTED] 18 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) CONDENSED STATEMENT OF CASH FLOWS For the Years Ended December 31, 1996, 1995 and 1994 (Dollars in thousands)
1996 1995 1994 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income ......................................... $ 3,329 2,970 2,736 Net Change in Other Liabilities .................... (563) 26 503 Undistributed Earnings of Subsidiary ............... (2,142) (1,259) (1,079) ------- ------ ------ Net Cash Provided By Operating Activities .. 624 1,737 2,160 ------- ------ ------ 1996 1995 1994 ---- ---- ---- CASH FLOWS FROM FINANCING ACTIVITIES Dividends Declared ................................. (1,193) (1,698) (1,618) Purchase of Treasury Stock ......................... 0 0 0 ------- ------ ------ Net Cash used By Financing Activities .. (1,193) (1,698) (1,618) ------- ------ ------ Net Increase (Decrease) in Cash and Cash Equivalents (569) 39 542 Cash and Cash Equivalents at Beginning of Period ... 588 549 7 ------- ------ ------ Cash and Cash Equivalents at End of Period ......... $ 19 588 549 ======= ====== ======
(19) Fair Value of Financial Instruments Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures about Fair Value of Financial Instruments" requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate that value. In cases where quoted market values are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets, and in many cases, could not be realized in immediate settlement of the instrument. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. The following methodologies and assumptions were used to estimate the fair value of the Corporation's financial instruments: Cash and due from banks: The carrying value of cash and due from banks was considered to be a reasonable estimate of fair value. Interest bearing balances with other financial institutions: The estimate of fair value was determined by comparing the present value of quoted interest rates on like deposits with the weighted average yield and weighted average maturity of the balances. Investment securities: As indicated in Note 5, estimated fair values of investment securities are based on quoted market prices, where applicable. If quoted market prices are not available, fair values are based on quoted market prices for comparable instruments, adjusted for differences between the quoted instruments and the instruments being valued. Loans: The loan portfolio was segregated into pools of loans with similar economic characteristics and was further segregated into fixed rate and variable rate and each pool was treated as a single loan with the estimated fair value based on the discounted value of expected future cash flows. Fair value of loans with significant collectibility concerns (that is, problem loans and potential problem loans) was determined on an individual basis using an internal rating system and appraised values of each loan. Assumptions regarding problem loans are judgmentally determined using specific borrower information. Deposits: The fair value for demand deposits (e.g., interest and noninterest checking, savings and money market deposit accounts) are by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). Fair value for fixed-rate certificates of deposit was estimated using a discounted cash flow calculation by combining all fixed-rate certificates into a pool with a weighted average yield and a weighted average maturity for the pool and comparing the pool with interest rates currently being offered on a similar maturity. 19 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) Short-term borrowed funds: Because of time to maturity, the estimated fair value of short-term borrowings approximates the book value. Long-term debt: The estimated fair values of long-term debt was determined using discounted cash flow analysis, based on borrowing rates for similar types of borrowing arrangements. Accrued interest: The carrying amounts of accrued interest approximates their fair values. Off-balance-sheet financial instruments: There are no unearned fees outstanding on off-balance-sheet financial instruments and the fair values are determined to be equal to the carrying values. The following table summarizes the book value and fair value of financial instruments at December 31, 1996 and 1995.
December 31, 1996 December 31, 1995 (Dollars in thousands) Book Fair Book Fair Value Value Value Value ----- ----- ----- ----- Financial assets: Cash and due from banks ........ $ 4,442 4,442 3,389 3,389 Interest bearing balances ...... 28,433 28,632 30,059 30,493 Investment securities .......... 28,478 28,733 24,657 25,184 Net loans ...................... 142,341 141,581 129,589 129,731 Financial liabilities Deposits ....................... $ 174,671 175,420 162,268 163,932 Short-term borrowed funds ...... 4,512 4,512 4,314 4,314 Long-term debt ................. 4,710 4,751 3,329 3,314 Off-balance sheet financial instruments: Commitments to extend credit ... $ 29,956 29,956 31,425 31,425 Standby letters of credit ...... 2,062 2,062 2,686 2,686
(20) Common Stock: The Corporation has reserved 50,000 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. Shares reserved will be reduced by any shares issued under the Plan which come from treasury stock or are obtained in the open market. At December 31, 1996, no shares have been awarded under the Plan. [GRAPHIC OMITTED] 20 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. (the Corporation). The Corporation 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 the Corp- oration's liquidity, capital resources or operations. This discussion should be read in conjunction with the financial statements appearing elsewhere in this report. Financial Summary The consolidated earnings of the Corporation are derived primarily from the operations of its wholly-owned subsidiary, Mid Penn Bank. The Corporation achieved record net income of $3,329,000 for the year 1996, an increase of $359,000 or 12.09% over 1995's net income of $2,970,000, which was an increase of $234,000 or 8.55% over 1994's net income of $2,736,000. This represents net income in 1996 of $2.68 per share compared to $2.39 per share in 1995 and $2.20 per share in 1994. The increase in earnings was primarily due to growth in net interest income, a 15.1% increase in noninterest income and a slight decrease in noninterest expense. Per share data has been restated to reflect the effect of stock dividends. Total assets of the Corporation continued to grow in 1996, exceeding two hundred million dollars for the first time, reaching the level of $210,172,000, an increase of $15,461,000 or 7.94% over $194,711,000 at year end 1995. The growth can be attributed to an increase of $12,728,000 or 9.52% in loans. The loan growth was funded primarily through an increase in demand and time deposits. The Corporation continued to achieve an excellent return of average assets, (ROA), a widely recognized performance indicator in the financial industry. The ROA was 1.65% in 1996, 1.64% in 1995 and 1.58% in 1994. Return on average stockholders' equity (ROE), another performance indicator, was 14.32% in 1996, 13.57% in 1995 and 13.09% in 1994. Tier one capital (to risk weighted assets) of $24,266,000 or 16.07% and total capital (to risk weighted assets) of $26,159,000 or 17.32% at December 31, 1996 are well above the December 31, 1996 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. At the end of the second quarter, the Corporation contracted the services of Invest Financial Corporation, a third-party provider of investment services headquartered in Tampa, Florida. Invest provides financial planning and investment services, particularly mutual fund and annuity-type investments through an office leased from the Bank. Net Interest Income Net interest income, the Corporation'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 1996, net interest income increased $527,000 or 6.48% as compared to $384,000 or 4.96% in 1995 and $290,000 or 3.89% in 1994. The average balances, effective interest differential and interest yields for the years ended December 31, 1996, 1995 and 1994, the components of net interest rate growth, are presented in Table 1. A comparative presentation of the changes in net interest income for 1996 compared to 1995, and 1995 compared to 1994, 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. Although the yield on earning assets decreased to 8.65% in 1996 from 8.89% in 1995, interest income increased by $1,318,000 or 8.88% during 1996, reflecting the growth in total earning assets during the year. The yield on earning assets for 1994 was 8.49%. The decrease in the yield on earning assets for 1996 as compared to 1995 and the increase for 1995 as compared to 1994 was due primarily to changes in the "prime rate." The average "prime rate" for 1996 was 8.29% as compared to 8.81% for 1995 and 7.33% for 1994. 21 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) Interest expense increased by $791,000 or 11.77% in 1996 compared to $981,000 or 17.09% in 1995 and a decrease of $226,000 or 3.79% in 1994. The increases in 1996 and 1995 were due primarily to the increase in the total of interest bearing liabilities and the increase in the cost of those supporting liabilities. Primarily resulting from the fluctuations in interest rates, the net interest margin, on a tax equivalent basis, in 1996 was 4.73% compared to 4.99% in 1995 and 5.01% in 1994. Management continues to closely monitor the net interest margin and is encouraged by the increase in demand deposits, from $11,766,000 in 1995 to $15,350,000 in 1996, providing additional funds for earning assets. A provision of $50,000 for loan losses was made in 1996. There was no provision for loan losses expenses in 1995 or 1994. TABLE 1: AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS INCOME AND RATES ON A TAXABLE EQUIVALENT BASIS FOR YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands) 1996 Average Interest Average Rates Balance Income/Expense Earned/Paid -------- -------------- ------------- ASSETS: Interest Bearing Balances ........... $ 29,939 1,938 6.47% Investment Securities: Taxable ............................. 14,330 935 6.52% Tax-Exempt .......................... 12,630 1,091 8.64% -------- Total Investment Securities . 26,960 -------- Assets Held in Trading Account ...... 0 0 0 Federal Funds Sold .................. 297 16 5.39% Loans, Net .......................... 134,489 12,592 9.36% -------- ------ Total Earning Assets ................ 191,685 16,572 8.65% -------- ------ Cash and Due from Banks ............. 3,594 Other Assets ........................ 6,781 -------- Total Assets ........ $202,060 ======== LIABILITIES & STOCKHOLDERS' EQUITY: Interest Bearing Deposits: NOW ............................. $ 25,264 661 2.62% Money Market .................... 11,061 265 2.40% Savings ......................... 17,315 437 2.52% Time ............................ 102,683 5,782 5.63% Short-term Borrowings ........... 3,380 182 5.38% Long-term Debt ...................... 2,860 185 6.47% -------- ------ Total Interest Bearing Liabilities .. 162,563 7,512 4.62% ------ Demand Deposits ..................... 13,781 Other Liabilities ................... 2,476 Stockholders' Equity ................ 23,240 -------- Total Liabilities and Stockholders' Equity $202,060 ======== Net Interest Income ......................... $ 9,060 ======== Net Yield on Interest Earning Assets: Total Yield on Earning Assets ....... 8.65% Rate on Supporting Liabilities ...... 3.92% Net Interest Margin ................. 4.73%
22 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 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands) 1995 Average Interest Average Rates Balance Income/Expense Earned/Paid ------- -------------- ------------- ASSETS: Interest Bearing Balances ........... $ 26,685 1,681 6.30% Investment Securities: Taxable ......................... 11,212 746 6.65% Tax-Exempt ...................... 13,277 1,223 9.21% -------- Total Investment Securities . 24,489 -------- Assets Held in Trading Account ...... 0 0 0 Federal Funds Sold .................. 902 53 5.88% Loans, Net .......................... 120,026 11,597 9.66 -------- ------ Total Earning Assets ................ 172,102 15,300 8.89% -------- ------ Cash and Due from Banks ............. 3,429 Other Assets ........................ 5,874 -------- Total Assets ........ $181,405 ======== LIABILITIES & STOCKHOLDERS' EQUITY: Interest Bearing Deposits: NOW ......................... $ 20,261 449 2.22% Money Market ................ 11,387 273 2.40% Savings ..................... 17,414 439 2.52% Time ........................ 90,377 5,241 5.80% Short-term Borrowings ............... 2,211 121 5.47% Long-term Debt ...................... 3,380 197 5.83% -------- ------ Total Interest Bearing Liabilities .. 145,030 6,720 4.63% ------ Demand Deposits ..................... 12,493 Other Liabilities ................... 1,988 Stockholders' Equity ................ 21,894 -------- Total Liabilities and Stockholders' Equity $181,405 ======== Net Interest Income ......................... $ 8,580 ======= Net Yield on Interest Earning Assets: Total Yield on Earning Assets ....... 8.89% Rate on Supporting Liabilities ...... 3.90% Net Interest Margin ................. 4.99%
[GRAPHIC OMITTED] 23 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 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In thousands) 1994 Average Interest Average Rates Balance Income/Expense Earned/Paid ------- -------------- ------------- ASSETS: Interest Bearing Balances ................. $ 23,785 1,195 5.02% Investment Securities: Taxable ........................... 8,040 465 5.78% Tax-Exempt ........................ 14,004 1,430 10.21% -------- Total Investment Securities 22,044 -------- Assets Held in Trading Account ............ 0 0 0 Federal Funds Sold ........................ 1,563 70 4.48% Loans, Net ................................ 117,582 10,846 9.22% -------- ------ Total Earning Assets ...................... 164,974 14,006 8.49% ------ Cash and Due from Banks ................... 3,092 Other Assets .............................. 4,978 -------- Total Assets .............. $173,044 ======== LIABILITIES & STOCKHOLDERS' EQUITY: Interest Bearing Deposits: NOW ............................... $ 18,776 343 1.83% Money Market ...................... 13,675 318 2.33% Savings ........................... 17,526 436 2.49% Time .............................. 82,293 4,339 5.27% Short-term Borrowings ..................... 2,415 100 4.14% Long-term Debt ............................ 3,401 204 6.00% -------- ------ Total Interest Bearing Liabilities ....... 138,086 5,740 4.16% ------ Demand Deposits ........................... 12,174 Other Liabilities ......................... 1,889 Stockholders' Equity ...................... 20,895 -------- Total Liabilities and Stockholders' Equity ...... $173,044 ======== Net Interest Income ............................... $ 8,266 ====== Net Yield on Interest Earning Assets: Total Yield on Earning Assets ............. 8.49% Rate on Supporting Liabilities ............ 3.48% Net Interest Margin ....................... 5.01%
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 non-accrual loans. Loan fees of $138,000, $292,000 and $112,000 are included with interest income above for the years 1996, 1995 and 1994, respectively. 24 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) TABLE 2: VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME (Dollars in thousands)
1996 Compared to 1995 1995 Compared to 1994 Increase (Decrease) Increase (Decrease) Due to Change In: Due to Change In: Taxable Equivalent Basis Volume Rate Net Volume Rate Net ------ ---- ---- ------ ---- ---- INTEREST INCOME: Interest Bearing Balances ..................... $ 205 52 257 146 340 486 Investment Securities: Taxable ....................................... 207 (18) 189 183 98 281 Tax-Exempt .................................... (60) (72) (132) (74) (133) (207) ------- ---- ----- --- --- ----- Total Investment Securities ... 147 (90) 57 109 (35) 74 Funds Sold .................................... (36) (1) (37) (30) 13 (17) Loans, Net .................................... 1,397 (402) 995 225 526 751 ------- ---- ----- --- --- ----- Total Interest Income ......... $ 1,713 (441) 1,272 450 844 1,294 ------- ---- ----- --- --- ----- INTEREST EXPENSE: Interest Bearing Deposits: NOW ................................... $ 111 101 212 27 79 106 Money Market .......................... (8) 0 (8) (53) 8 (45) Savings ............................... (2) 0 (2) (3) 6 3 Time .................................. 714 (173) 541 426 476 902 ------- ---- ----- --- --- ----- Total Interest Bearing Deposits........ 815 (72) 743 397 569 966 Short-term Borrowings ......................... 64 (3) 61 (8) 29 21 Long-term Debt ................................ (30) 18 (12) (1) (6) (7) ------- ---- ----- --- --- ----- Total Interest Expense......... $ 849 (57) 792 388 592 980 ------- ---- ----- --- --- ----- NET INTEREST INCOME: .................................. $ 864 (384) 480 62 252 314 ======= ==== ==== === === =====
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 bankruptcy's in 1996, management thought it purdent to make a $50,000 allocation now during stronger economic times. Due to the relative strength of unallocated reserves, $835,000 in 1995 and $1,068,000 in 1994, and the favorable trend in non-performing assets, no provision for loan losses was charged to expense during 1995 or 1994. The allowance for loan losses as a percentage of average total loans was 1.67% at December 31, 1996, compared to 2.09% and 2.21% for the years ended December 31, 1995 and 1994, which continues to be higher than peer financial institutions. A summary of charge-offs and recoveries of loans is presented in Table 3. [GRAPHIC OMITTED] 25 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, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Balance beginning of period ................... $2,347 2,511 2,646 2,755 2,301 Loans charged-off: Commercial real estate, construction and land development .......... 25 86 0 33 492 Commercial, industrial and agricultural 213 55 14 157 285 Real estate-residential ............... 0 0 34 30 18 Consumer .............................. 226 225 159 116 85 ------ ----- ----- ----- ----- Total loans charged off 464 366 207 336 880 ------ ----- ----- ----- ----- Recoveries on loans previously charged-off: Commercial real estate, construction and land development .......... 39 33 8 71 253 Commercial, industrial and agricultural 105 111 33 26 53 Real estate-residential ............... 35 4 1 30 0 Consumer .............................. 61 54 30 25 28 ------ ----- ----- ----- ----- Total recoveries ...... 240 202 72 152 334 ------ ----- ----- ----- ----- Net charge-offs ............................... 224 164 135 184 546 ------ ----- ----- ----- ----- Current period provision for loan losses ........................... 50 0 0 75 1,000 ------ ----- ----- ----- ----- Balance end of period ......................... $2,173 2,347 2,511 2,646 2,755 ====== ===== ===== ===== ===== Ratio of net charge-offs during the period to average loans outstanding during the period, net of unearned discount ...... 0.16% 0.13 0.11 0.16 0.49 ====== ===== ===== ===== =====
Noninterest Income During 1996, the Corporation earned $800,000 in noninterest income, an increase of $105,000 or 15.11% over the 1995 total of $695,000, which was $73,000 or 11.74% over the 1994 total of $622,000. The bulk of the increase in 1996 reflected nonrecurring gains of $137,000 from the sale of other real estate as compared to a noninterest expense of $22,000 in other real estate in 1995 and noninterest income of $85,000 in 1994. Trust department income for 1996 was $83,000, a $15,000 or 22.06% increase over $68,000 in 1995, which was $7,000 or 9.33% less than the $75,000 earned in 1994. Trust Department income fluctuates from year to year, primarily due to the number of estates being settled during the year. Service charges on deposit accounts was $252,000 for 1996, basically unchanged from $249,000 for 1995, which was $65,000 or 35.33% higher than the $184,000 for 1994. The majority of this increase resulted from an increase in NSF charges in 1995. The Corporation also earned $16,000 in fees from Invest, the third-party provider of investments whose services the Bank has contracted. Other operating income increased to $453,000 in 1996 from $363,000 and $358,000 in 1995 and 1994, respectively. Noninterest Expense A summary of the major components of noninterest expense for the years ended December 31, 1996, 1995 and 1994 is reflected in Table 4. Noninterest expense decreased $9,000 to $4,716,000 in 1996 from $4,725,000 in 26 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) 1995 which increasing $79,000 from $4,646,000 in 1994. The major component of noninterest expense is salaries and employee benefits which increased $46,000 or 1.94% in 1996. Increases of $95,000, or 4.17% and $81,000, or 3.69% were recorded in 1995 and 1994, respectively. Prior to 1996, the Bank's Performance Bonus Plan cash payment was paid in December based upon an estimate of the current years performance compared to its peer group based upon the June 30th federally compiled uniform bank performance report. To use a more conservative approach, beginning in 1996, most of the performance bonus payment will be paid in May of the following year when the final year end performance information is available. This change resulted in a decrease of $103,000 or 42.21%, from $244,000 paid in 1995 to $141,000 paid in 1996. The largest component of decrease in noninterest expense was due to an FDIC premium for deposit insurance of only $2,000 in 1996 as compared to $171,000 in 1995 and $323,000 in 1994. As part of the fiscal year 1997 Omnibus Appropriations Bill signed into law on September 30, 1996, beginning on January 1, 1997, the banking industry will be required to help pay the annual $780 million Financing Corporation (FICO) bond obligation. It is currently estimated that for three years, until January 1, 2000, banks will be required to pay 1.29 cents per $100 in deposits as FICO assessment. After January 1, 2000, the FICO assessment on bank deposits is anticipated to be 2.4 cents per $100 in deposits. Based on the Bank's current FDIC assessment base of $170,000,000, at 1.29 cents per $100 in deposits, the projected annual FICO assessment for 1997 would be approximately $22,000. As long as the current annual statutory minimum Insurance Fund (BIF) remains fully capitalized, healthy banks will pay no premium for the BIF fund. They will only pay the FICO assessment. During 1995, the Corporation received a refund of FDIC insurance premium of approximately $92,000. Net occupancy expenses increased $21,000 or 7.55% in 1996 compared to $72,000 or 34.95% in 1995 and $32,000 or 18.39% in 1994. The additional expenses in 1996 and especially in 1995 were associated with the Dauphin and Carlisle Pike offices, which were added in 1995. Equipment expense increased $36,000 or 10.19% in 1996 compared to $12,000 or 3.52% in 1995 and $32,000 or 10.36% in 1994. The increase in 1996 is due to additional depreciation expense on equipment purchased. Other expenses, including postage and supplies, marketing and advertising, PA shares tax, professional services, telephone, loss on mortgage sales and other expenses increased $79,000 or 5.17% in 1996 compared to a decrease of $55,000 or 3.47% in 1995 and an increase of $74,000 or 4.90% in 1994. The loss on mortgage sales of $91,000 during 1994 resulted from the rapid escalation of mortgage interest rates during the year. The losses of $26,000 and $3,000 during 1996 and 1995, respectively, were offset by origination fees earned on these loans. TABLE 4: NONINTEREST EXPENSE (Dollars in thousands) Years ended December 31, 1996 1995 1994 ---- ---- ---- Salaries and employee benefits $2,419 2,373 2,278 Occupancy, net ............... 299 278 206 Equipment .................... 389 353 341 Postage and supplies ......... 239 252 169 FDIC assessments ............. 2 171 323 Marketing and advertising .... 141 152 129 Other real estate, net ....... 0 22 (85) Pennsylvania bank shares tax . 229 215 201 Professional services ........ 82 88 93 Telephone .................... 46 45 45 Loss on mortgage sales ....... 26 3 91 Other ........................ 844 773 855 ------ ----- ----- Total Noninterest Expense .. $4,716 4,725 4,646 ====== ===== ===== Investments The Corporation investment portfolio is utilized to improve earnings through investments of funds in high-yielding assets which provide the necessary balance sheet liquidity for the Corporation. 27 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) At December 31, 1996, SFAS No. 115 resulted in an increase in shareholders' equity of $168,000 (unrealized gain on securities of $255,000, less estimated income tax effect of $87,000). SFAS No. 115 as of December 31, 1995 resulted in an increase in stockholders' equity of $348,000 (unrealized gain on securities of $527,000, less estimated income tax effect of $179,000) compared to a decrease in stockholders' equity of $92,000 (unrealized loss on securities of $139,000, less estimated income tax benefit of $47,000) as of December 31, 1994. Proceeds from the sale of investment securities during 1996 were $3,786,000. Net gains of $12,000 were realized on those sales. Proceeds from the sale of investment securities during 1995 were $3,017,000. Net gains of $15,000 were realized on those sales. Proceeds from the maturities of investment securities were $4,133,000 in 1996 compared with $6,758,000 in 1995 and $3,548,000 in 1994. The Corporation does not have any significant concentrations of investment securities. Table 5 provides a history of the amortized cost of investment securities at December 31, for each of the past three years. The gross unrealized gains and losses on investment securities are outlined in Note 5 to the Consolidated Financial Statements. TABLE 5: BOOK VALUES OF INVESTMENT SECURITIES (Dollars in thousands) December 31, 1996 1995 1994 ---- ---- ---- U. S. Treasury and U.S. government agencies $ 12,833 9,776 9,323 Mortgage backed U.S. government agencies .. 1,178 1,439 1,624 State and political subdivision obligations 13,218 12,906 14,702 Corporate bonds ........................... 0 0 0 Equity securities ......................... 1,249 536 520 -------- ------- ------ Total ............. $ 28,478 $24,657 26,169 ======== ======= ====== Loans At December 31, 1996, net loans totaled $142,341,000, a $12,752,000 or 9.84% increase over December 31, 1995. During 1996, the Corporation experienced an increase in commercial real estate loan demand during the third and fourth quarters. Nearly $10 million of this increase was generated through the Swatara Twp., Dauphin County office. These loans contributed to the $9,529,000 net increase in the commercial real estate loan category from December 31, 1995 to December 31, 1996. During 1996, consumer loans increased approximately $2,401,000 with the growth in the areas of installment loans and student loans. The current environment in lending is extremely competitive with financial institutions aggressively pursuing potential borrowers. At December 31, 1996, loans, net of unearned income, represented 70.1% of earning assets as compared to 70.5% on December 31, 1995 and 71.3% on December 31, 1994. The Bank's loan portfolio is diversified among individuals, farmers, and small and medium-sized businesses generally located within the Bank's trading area of Dauphin County, lower Northumberland County, western Schuylkill County and eastern Cumberland County. Commercial real estate, construction and land development loans are collateralized mainly by mortgages on the income-producing real estate or land involved. Commercial, financial and agricultural loans are made to business entities and may be secured by business assets, including commercial real estate, or may be unsecured. Residential real estate loans are secured by liens on the residential property. Consumer loans include installment, credit card, 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. 28 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) TABLE 6: LOAN PORTFOLIO
(Dollars in thousands) December 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Commercial real estate, construction and land development ............... $ 75,200 65,671 54,225 54,148 56,521 Commercial, industrial and agricultural 18,588 16,682 19,397 21,506 18,634 Real estate-residential mortgage ...... 26,718 27,821 25,142 25,407 24,454 Consumer .............................. 25,874 23,473 20,409 19,595 17,653 Lease financing ....................... 13 18 0 9 21 -------- ------- ------- ------- ------- Total Loans ...................... 146,393 133,665 119,173 120,665 117,283 Unearned income ....................... (1,879) (1,729) (1,488) (1,353) (1,572) -------- ------- ------- ------- ------- Loans net of unearned discount ........ 144,514 131,936 117,685 119,312 115,711 Allowance for loan losses ............. (2,173) (2,347) (2,511) (2,646) (2,755) -------- ------- ------- ------- ------- Net Loans ........................ $142,341 129,589 115,174 116,666 112,956 ======== ======= ======= ======= =======
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. The Corporation has a loan review department that is charged with establishing a "watchlist" 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 "watchlist." Each credit on the "watchlist" is evaluated to estimate potential losses. In addition, estimates for each category of credit are provided based on Management's judgment which considers past experience, current economic conditions and other factors. For installment and real estate mortgages, specific allocations are based on past loss experience adjusted for recent portfolio growth and economic trends. The total of reserves resulting from this analysis are "allocated" reserves. The amounts not specifically provided for individual classes of loans are considered "unallocated." This unallocated amount is determined and based on judgments regarding risk of error, economic conditions, trends and other factors. 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, 1996, was $2,173,000 or 1.50% of total loans less unearned discount as compared to $2,347,000 or 1.78% at December 31, 1995, and $2,511,000 or 2.13% at December 31, 1994. TABLE 7: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands) December 31, 1996 1995 1994 1993 1992 ---- ---- ----- ---- ---- Percent Percent Percent Percent Percent Amount of Loans Amount of Loans Amount of Loans Amount of Loans Amount of Loans ------ -------- ------ -------- ------ -------- ------ -------- ------- -------- Commercial real estate, construction and land development............ $ 666 51.3% 574 49.1% 776 45.5 1,148 44.9 1,477 48.2 Commercial, industrial and agricultural ......... 375 12.7% 573 12.5% 301 16.3 437 17.8 369 16.0 Real estate-residential mortgage ............. 172 18.3% 120 20.8% 118 21.1 114 21.1 133 20.8 Consumer...................... 303 17.7% 245 17.6% 248 17.1 214 16.2 187 15.0 Unallocated................... 657 - 835 - 1,068 733 - 589 - ------- ----- ----- ----- ----- ----- ----- ----- ----- ----- Total loans $ 2,173 100.0% 2,347 100.0% 2,511 100.0 2,646 100.0 2,755 100.0 ======= ===== ===== ===== ===== ===== ===== ===== ===== =====
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). 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 29 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) provide for a reduction of 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 $89,000, $103,000, and $80,000 in 1996, 1995, and 1994, 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, 1996, totaled $2,395,000 or 1.14% of total assets compared to $2,455,000 or 1.26% of total assets in 1995, and $2,553,000 or 1.46% of total assets in 1994. The increase in non-accrual loans in 1994 was due to a large commercial real estate loan going into Chapter 11 bankruptcy in 1994. In addition, a $400,000 non-accrual loan was paid in full in January, 1 995. The foreclosed assets held for sale consist of two pieces of commercial real estate, one agricultural parcel, one commercial property and one multi-family residence that the Corporation had available for sale. The improvement in nonperforming assets can be attributed to the current improved economic climate, including commercial real estate, and the Corporation's ongoing commitment to controlling credit risk. Nonperforming assets are taken into consideration by Management when assessing the adequacy of the Allowance for Loan Losses. TABLE 8: NONPERFORMING ASSETS
Dollars in thousands) December 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Non-accrual loans ................ $ 1,183 1,753 2,181 1,347 1,479 Past due 90 days or more ......... 519 195 252 191 508 Restructured loans ............... 145 0 0 1,885 3,025 ------- ----- ----- ----- ----- Total nonperforming loans 1,847 1,948 2,433 3,423 5,012 Foreclosed assets held for sale .. 548 507 120 256 764 ------- ----- ----- ----- ----- Total nonperforming assets $ 2,395 2,455 2,553 3,679 5,776 ======= ====== ===== ===== ===== Percent of total loans outstanding 1.64% 1.84 2.14 3.05 4.91 Percent of total assets .......... 1.14% 1.26 1.46 2.16 3.51
There are no loans classified for regulatory purposes that have not been included in Table 8. At December 31, 1996, no loans were considered impaired because management is aware of information which causes doubt as to the ability of the borrower to comply with loan repayment terms except for those identified as non-accrual loans. 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 The Corporation's primary source of funds is its deposits. Deposits at December 31, 1996 were $174,671,000, which increased $12,403,000 or 7.64% from December 31, 1995, compared to an increase of $15,513,000 or 10.42% in 1995. A limited-time, special-rate certificate of deposit offer in the spring of 1996 aided the bank in attaining the increase. The Corporation's newest office on the Carlisle Pike in Hampden Township contributed $4,207,000 in increased deposits during 1996. Time deposits accounted for the majority of deposit growth in 1995 as depositors moved funds from the lower-yielding demand and savings accounts. A limited-time, special rate NOW account promotion at this office attracted $4,783,000 in interest-bearing transaction account balances during the last quarter of 1995. Average balances and average interest rates applicable to the major classifications of deposits for the years ended December 31, 1996, 1995, and 1994 are presented in Table 9. 30 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) Average short-term borrowings for 1996 were $3,380,000 as compared to $2,211,000 in 1995. 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, 1996 1995 1994 ---- ---- ---- Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate ------- ----- ------- ------- ------- ------ Non-interest bearing demand deposits $ 13,781 0.00% 12,493 0.00 12,174 0.00 Interest bearing demand deposits ... 25,264 2.62% 20,261 2.22 18,776 1.83 Money market ....................... 11,061 2.40% 11,387 2.40 13,675 2.33 Savings ............................ 17,315 2.52% 17,414 2.52 17,526 2.49 Time ............................... 102,683 5.63% 90,377 5.80 82,293 5.27 --------- ---- ------- ---- ------- ---- Total ..... $ 170,104 4.20% 151,932 4.21 144,444 3.76 ========= ==== ======= ==== ======= ====
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. For these reasons capital adequacy has been, and will continue to be, of paramount importance. In 1996, capital grew $1,956,000 or 8.62% above 1995. Comparatively, 1995 capital grew $1,712,000 or 8.16% above 1994. Capital growth in both periods was achieved through earnings retention. The Corporation's normal dividend payout allows for semi-annual cash returns to its stockholders and provides earnings retention at a level sufficient to finance future Corporation growth. The regular semi-annual cash dividend payment in 1996 was $1,193,000, and $1,127,000 in 1995. Beginning in 1997, the Corporation is planning quarterly dividends payable in February, May, August and November. A special cash dividend of $.50 per share was declared in November of 1995, bringing the total cash dividends declared in 1995 to $1,698,000. The Board declared the special dividend in light of the Corporation's capital position in excess of that of peer group banks. The special dividend still left the Corporation with a strong capital position while enhancing the Corporation's return on equity. The dividend payout ratio, which represents the percentage of annual net income returned to the stockholders in the form of cash dividends, was 36% for 1996 compared to 57% for 1995 and 59% for 1994. The Pennsylvania Banking Code restricts the availability of retained earnings for dividend purposes. At December 31, 1996, and 1995, $11,817,000 and $9,889,000, respectively, was not available for dividends. Federal Income Taxes Federal income tax expense for 1996 was $1,359,000 compared to $1,127,000 and $983,000 in 1995 and 1994, respectively. The effective tax rate was 29% for 1996, 28% for 1995 and 26% for 1994. Liquidity The Corporation's asset-liability management policy addresses the management of the Corporation's liquidity position and its ability to raise sufficient funds to meet deposit withdrawals, fund loan growth and meet other operational needs. The Corporation 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 the Corporation through loans from the Federal Home Loan Bank and established federal funds lines of credit. The Corporation's major source of funds is its core deposit base as well as its capital resources. 31 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) During 1996, the major sources of cash were provided by operations, the sale and maturity of investment securities of $7,919,000, a net increase in demand and savings deposits of $3,498,000 and a net increase in time deposits of $8,905,000. As noted, the increase in deposits arose primarily through the Carlisle Pike office which opened in September of 1995. The increase was further aided by a limited-time special rate certificate of deposit offer in the spring of 1996. Additionally, interest bearing balances were decreased by $1,626,000 during the year. Major uses of funds again included the funding of commercial loans primarily during the latter half of 1996, which resulted in a net increase of $13,196,000 in outstanding loans. Purchases of investment securities were $11,636,000 yielding a net increase of $3,717,000 in securities during the year. Borrowings were increased by $1,579,000 to generate the additional funds needed to meet the loan demand. In 1995, the major sources of cash were provided by operations, maturities and sales of investment securities of $9,775,000 and a net increase in time deposits of $13,364,000 as depositors took advantage of higher time deposit rates during 1995. The increase in deposits was positively impacted by a special-rate time deposit promotion in the spring of 1995 and the opening of two new offices during the year, namely the Dauphin office and the Carlisle Pike office. The major uses of these funds included the following: funding of a marked increase in commercial loan demand during the third and fourth quarters which resulted in a net increase in loans of $11,951,000, the purchase of investment securities of $8,278,000 to partially replace those which matured and were called during 1995, and the funding of the net increase of $6,178,000 in interest-bearing balances in anticipation of lower interest rates in 1996. Short-term borrowings increased by $2,578,000 to generate the additional funds needed to meet the loan demand. Asset-Liability Management and Interest Rate Sensitivity Interest rate sensitivity is a function of the repricing characteristics of the Corporation'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. The Corporation 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. The Corporation 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 the Corporation's management. The Corporation does not attempt to achieve an exact match between interest sensitive assets and liabilities because it believes that a controlled amount of interest risk is desirable. The maturity distribution and weighted average yields of investments is presented in Table 10. The maturity distribution and repricing characteristics of the Corporation's loan portfolio is shown in Table 11. The Corporation's gap position is presented in Table 12. 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, 1996 After One After Five One Year Year thru Years thru After Ten and Less Five Years Ten Years Years Total -------- ---------- ----------- -------- ----- U.S. Treasury and U.S.government agencies ........................... $ 2,503 6,730 3,600 0 12,833 State and political subdivision obligations ......................... 973 4,113 4,819 3,313 13,218 Mortgage-backed U.S. government agencies ............................ 21 661 0 496 1,178 Equity securities ................................................... 0 0 0 0 1,249 ------- ------ ----- ----- ------ Total ....................................... $ 3,497 11,504 8,419 3,809 28,478 ======= ====== ===== ===== ======
32 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) TABLE 10: INVESTMENT MATURITY AND YIELD (cont'd)
(Dollars in thousands) December 31, 1996 After One After Five One Year Year thru Years thru After Ten and Less Five Years Ten Years Years Total -------- ---------- ----------- -------- ----- Weighted Average Yields U.S. Treasury and U.S. government agencies .......................... 6.33 6.31 6.94 0 6.49 State and political subdivision obligations ......................... 6.53 7.98 8.58 8.71 8.27 Mortgage-backed U.S. government agencies ............................ 9.50 6.35 0 7.34 6.82 Equity securities ................................................... 0 0 0 0 6.12 ---- ---- ---- ---- ---- Total ................................................. 6.40 6.90 7.88 8.53 7.31 ==== ==== ==== ==== ====
TABLE 11: LOAN MATURITY AND INTEREST SENSITIVITY
(Dollars in thousands) December 31, 1996 After One One Year Year thru After Five and Less Five Years Years Total -------- ---------- ----------- ------ Commercial, real estate, construction and land development ................. $ 28,758 38,597 7,641 74,996 Commercial, industrial and agricultural 12,388 4,746 1,653 18,787 Real estate-residential mortgages .... 7,219 7,455 12,066 26,740 Consumer .............................. 15,178 9,939 753 25,870 -------- ------ ------ ------- Total Loans ............... $ 63,543 60,737 22,113 146,393 ======== ====== ====== ======= Rate Sensitivity Predetermined rate .................... $ 5,763 21,870 19,014 46,647 Floating or adjustable rate ........... 57,780 38,867 3,099 99,746 -------- ------ ------ ------- Total ......... $ 63,543 60,737 22,113 146,393 ======== ====== ====== =======
TABLE 12: INTEREST RATE SENSITIVITY GAP
(Dollars in thousands) December 31, 1996 After Three After One Three Months Thru Twelve Year Thru After Five and Less Months Five Years Years Total -------- ---------- ---------- --------- ----- Interest-earning assets: Interest bearing balances ....................... $ 3,170 10,102 15,161 0 28,433 Securities ...................................... 2,184 1,306 11,504 13,484 28,478 Loans ........................................... 51,548 16,678 56,054 22,113 146,393 -------- ------ ------ ------ ------- Total Interest-Earning Assets $ 56,902 28,086 82,719 35,597 203,304 -------- ------ ------ ------ -------
[GRAPHIC OMITTED] 33 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) TABLE 12: INTEREST RATE SENSITIVITY GAP (cont'd)
(Dollars in thousands) December 31, 1996 After Three After One Three Months Thru Twelve Year Thru After Five and Less Months Five Years Years Total ---------- -------- ---------- ----- ----- Interest-bearing liabilities: Interest-bearing deposits .................. $ 49,313 32,279 68,213 9,516 159,321 Short-term borrowed funds .................. 4,512 0 0 0 4,512 Long-term debt ............................. 31 2,097 2,114 468 4,710 -------- ------ ------- ----- ------- Total Interest-Bearing Liabilities $ 53,856 34,376 70,327 9,984 168,543 -------- ------ ------- ----- ------- Rate sensitive gap: Periodic gap............................. $ 3,046 -6,290 12,392 25,613 Cumulative gap........................... $ 3,046 -3,244 9,148 34,761 Cumulative gap as a percentage of total assets 1.45% -1.54% 4.35%
TABLE 13: MATURITY OF TIME DEPOSITS $100,000 OR MORE (Dollars in thousands) December 31, 1996 1995 1994 ---- ---- ---- Three months or less ............. $ 3,996 3,607 3,458 Over three months to twelve months 5,575 2,725 1,984 Over twelve months ............... 4,956 3,733 2,438 ------- ------ ----- Total ............ $14,527 10,065 7,880 ======= ====== ===== 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 the Corporation'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 the Corporation is positioned to react to changing interest rates and inflationary trends. In particular, the summary of net liabilities, the composition of loans, investments and deposits should be considered. Off-Balance-Sheet Items The Corporation makes contractual commitments to extend credit and extends lines of credit which are subject to the Corporation's credit approval and monitoring procedures. As of December 31, 1996, commitments to extend credit amounted to $29,956,000 as compared to $31,425,000 as of December 31, 1995. The Corporation also issues standby letters of credit to its customers. The risk associated with standby letters of credit is essentially the same as the credit risk involved in loan extensions to customers. Standby letters of credit decreased to $2,062,000 at December 31, 1996, from $2,686,000 at December 31, 1995. 34 Mid Penn Bancorp, Inc. Summary of Selected Financial Data
(Dollars in thousands, except per share data) 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- INCOME: Total Interest Income ............. $ 16,166 14,848 13,483 13,419 14,495 Total Interest Expense ............ 7,512 6,721 5,740 5,966 6,907 Net Interest Income ............... 8,654 8,127 7,743 7,453 7,588 Provision for Possible Loan Losses 50 0 0 75 1,000 Non-Interest Income ............... 800 695 622 681 400 Non-Interest Expense .............. 4,716 4,725 4,646 4,388 3,926 Income Before Income Taxes ........ 4,688 4,097 3,719 3,671 3,062 Income Tax Expense ................ 1,359 1,127 983 958 715 Extraordinary Income, Net of Tax.. 0 0 0 108 0 Net Income ....................... 3,329 2,970 2,736 2,821 2,347 COMMON STOCK DATA PER SHARE:* Net Income Per Share ............. 2.68 2.39 2.20 2.25 1.86 Cash Dividends Declared .......... .96 1.37 1.30 .86 .86 Stockholders' Equity ............. $ 19.85 18.27 16.89 16.43 14.82 AVERAGE SHARES OUTSTANDING ............... 1,241,973 1,241,973 1,241,973 1,256,008 1,264,880 AT YEAR-END: Investments** ................... $ 28,733 25,184 26,030 20,188 19,722 Loans, Net of Unearned Discount 144,514 131,936 117,685 119,312 115,711 Allowance for Loan Losses ....... 2,173 2,347 2,511 2,646 2,755 Total Assets .................... 210,172 194,711 174,702 170,037 164,614 Total Deposits .................. 174,671 162,268 146,958 141,405 138,720 Long-term Debt .................. 4,710 3,329 3,439 2,308 308 Stockholders' Equity ............ $ 24,650 22,694 20,982 20,638 18,740 RATIOS: Return on Average Assets ........ 1.65 1.64 1.58 1.70 1.43 Return on Average Stockholders' Equity 14.32 13.57 13.09 14.90 12.91 Cash Dividend Payout Ratio ....... 35.84 57.17 59.14 38.25 44.43 Allowance for Loan Losses to Loans 1.50 1.78 2.13 2.22 2.38 Average Stockholders' Equity to Average Assets ................... 11.50 12.07 12.07 11.39 11.05
* Per share figures are based on weighted average shares outstanding for the respective years as restated after giving effect to stock splits. ** Beginning with 1993, investments are listed at fair value rather than amortized cost the method used in prior years. 35 EX-21 6 LIST OF SUBSIDIARIES EXHIBIT 21 Subsidiaries of the Registrant Exhibit 21 Subsidiaries of Mid Penn Bancorp, Inc. Mid Penn Bank, a Pennsylvania commercial banking institution. EX-23 7 CONSENT OF PARENTE, RANDOLPH, ORLANDO EXHIBIT 23 Consent of Parente, Randolph, Orlando, Carey & Associates, independent auditors CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report on Form 10-K for the fiscal year ended December 31, 1996, of Mid Penn Bancorp, Inc. of our report dated January 17, 1997, included in the 1996 Annual Report to Shareholders of Mid Penn Bancorp, Inc. /s/Parente, Randolph, Orlando Carey & Associates Williamsport, Pennsylvania PARENTE, RANDOLPH, ORLANDO March 26, 1997 CAREY & ASSOCIATES Certified Public Accountants EX-27 8 ARTICLE 9 FDS FOR FOURTH QUARTER 10-K
9 1,000 YEAR DEC-31-1996 DEC-31-1996 4,442 28,433 0 0 28,733 0 0 144,512 2,173 210,172 174,671 4,512 1,629 4,710 0 0 1,261 23,389 210,172 12,557 3,593 16 16,166 7,145 7,512 8,654 50 12 4,716 4,688 4,688 0 0 3,329 2.68 2.68 8.65 1,183 519 145 1,725 2,347 464 240 2,173 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----