-----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, GRskJb7bKBpTcbwvsZ5T9NTPDLkAx2YvSd+f6bOX/Kio1Sa22ZcbSAXpe1jGbP45 c6iT/jJ+q7YpZ079j6v8kQ== 0001036050-98-000469.txt : 19980330 0001036050-98-000469.hdr.sgml : 19980330 ACCESSION NUMBER: 0001036050-98-000469 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: AMEX 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: SEC FILE NUMBER: 001-13677 FILM NUMBER: 98575084 BUSINESS ADDRESS: STREET 1: 349 UNION ST CITY: MILLERSBURG STATE: PA ZIP: 17061 BUSINESS PHONE: 7176922133 MAIL ADDRESS: STREET 1: 349 UNION STREET STREET 2: 349 UNION STREET CITY: MILLERSBURG STATE: PA ZIP: 17061 10-K405 1 FORM 10-K405 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, 1997 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: Common Stock, $1.00 Par Value ----------------------------- (Title of Class) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in 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 $52,128,147 at March 20, 1998 (a date within 60 days of the date hereof). As of March 20, 1998, the Registrant had 2,607,289 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Excerpts from the Registrant's 1997 Annual Report to Shareholders are incorporated herein by reference in response to Part II, hereof. The Registrant's Proxy Statement to be used in connection with the 1998 Annual Meeting of Shareholders is incorporated herein by reference in partial response to Part III, hereof. 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. As of January 9, 1998, the Registrant entered into an Agreement and Plan of Reorganization (the "Agreement") with Miners Bank of Lykens ("Miners"), pursuant to which Miners will merge with, into and under the Charter of the Bank. Under the terms of the Agreement, shareholders of Miners will receive ten (10) shares of the Registrant's Common Stock for each share of Miners common stock. Management of the Registrant estimates that the aggregate value of the transaction is approximately $4,595,750. Management believes that the acquisition is an excellent opportunity for the Registrant and will result in substantial benefit to shareholders, the community and the Bank's customers. Miners, headquartered in Lykens, Dauphin County, Pennsylvania, had total assets of approximately $28 million as of December 31, 1997. Under the terms of the Agreement, the Miners Bank at 550 Main Street, Lykens, will operate as a branch office of the Bank and all employees of Miners will be employed by the Bank. The Bank, which is headquartered in Millersburg, Dauphin County, Pennsylvania, presently has 9 offices in Dauphin, Northumberland, Schuylkill, and Cumberland Counties, Pennsylvania with total assets of approximately $229 million as of December 31, 1997. Subject to receipt of required regulatory approvals, including the approval of the Federal Deposit Insurance Corporation and the Department of Banking of the Commonwealth of Pennsylvania, management anticipates consummation of the transaction in late spring, 1998. At December 31, 1997, the Registrant's consolidated assets, deposits and shareholders' equity were approximately $228,755,000, $192,239,000 and $26,883,000, 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. 1 The Registrant may include forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters in this and other filings with the Commission. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Registrant notes that a variety of factors could cause the Registrant's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Registrant's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Registrant's business include the following: general economic conditions, including their impact on capital expenditures; business conditions in the banking industry; the regulatory environment; rapidly changing technology and evolving banking industry standards; competitive factors, including increased competition with community, regional and national financial institutions; new service and product offerings by competitors and price pressures; and similar items. 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, 1997, the Registrant had 71 full-time and 30 --------- 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 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 2 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. 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 3 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 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 17 of the Registrant's 1997 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 4 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 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 5 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 tentative 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, as provided in IRC Sections 56 and 58 and tax preference items, as provided in IRC Section 57 ("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). The excess of the tentative AMT over the regular tax for the taxable year is the tax payer's net minimum tax liability. 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 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 .0125%. 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). 6 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 or equal to 10.0 greater than or equal to 6.0 greater than or equal to 5.0 No Adequately capitalized greater than or equal to 8.0 greater than or equal to 4.0 greater than or equal to 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 or equal to 2.0
*3.0 for those banks having the highest available regulatory rating. 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 7 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 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", 8 "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. 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. 9 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. 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 10 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. 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. 11 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 20, 1998, there were approximately 715 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 page 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 pages 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. - -------- ---------------------------------------------------------- The information required by this Item is set forth on pages 32 through 34 of theRegistrant's Annual Report to Shareholders, which page is included at Exhibit 13 hereto and incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ------- ------------------------------------------- The information required by this Item is set forth on pages 5 through 20 of the Registrant's Annual Report to Shareholders, which pages are included at Exhibit 13 hereto, and incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------ --------------------------------------------------------------- FINANCIAL DISCLOSURE. --------------------- None. 12 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 5 through 7 and 13 and 14 of the Registrant's Proxy Statement to be used in connection with the 1998 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, with the exception of Mr. Dakey, who inadvertently filed one late form to report one transaction. ITEM 11. EXECUTIVE COMPENSATION. - ------- ---------------------- The information required by this Item, relating to executive compensation, is set forth in pages 8 through 12 of the Registrant's 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 Proxy Statement to be used in connection with the 1998 Annual Meeting of Shareholders, which pages are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - ------- ---------------------------------------------- The information required by this Item, relating to transactions with management and others, certain business relationships and indebtedness of management, is set forth on page 13, of the Registrant's Proxy Statement to be used in connection with the 1998 Annual Meeting of Shareholders, which page is incorporated herein by reference. 13 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. (Incorporated by Reference to Exhibit 3(i) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, and filed with the Commission on March 31, 1997.) 3(ii) Registrant's By-laws. (Incorporated by Reference to Exhibit 3(ii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, and filed with the Commission on March 31, 1997.) 10.1 Retirement Bonus Plan for the Board of Directors of Mid Penn Bank. (Incorporated by Reference to Exhibit 10 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, and filed with the Commission on March 31, 1997.) 10.2 Agreement and Plan of Reorganization, dated as of January 9, 1998, among Mid Penn Bancorp, Inc., Mid Penn Bank and Miners Bank of Lykens, (Lykens, PA.). 14 11 Statement re: Computation of Earnings per share. (Included herein at Exhibit 13, at page 6 of Registrant's Annual Report to Shareholders.) 12 Statements re: Computation of Ratios. (Included herein at Exhibit 13, at page 17 of Registrant's Annual Report to Shareholders.) 13 Excerpts from Registrant's 1997 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, 1997. (c) The exhibits required herein are included under Item 14(a), above. (d) NOT APPLICABLE. 15 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, 1998 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, 1998 ----------------------------------- ---------------------- Eugene F. Shaffer Chairman of the Board of Directors, President, Chief Executive Officer and Director (principal executive officer) By /s/ Kevin W. Laudenslager March 25, 1998 ----------------------------------- ---------------------- Kevin W. Laudenslager Treasurer (principal financial and accounting officer) By /s/ Jere M. Coxon March 25, 1998 ----------------------------------- ---------------------- Jere M. Coxon, Director By /s/ Alan W. Dakey March 25, 1998 ----------------------------------- ---------------------- Alan W. Dakey, Director 16 By /s/ Earl R. Etzweiler March 25, 1998 ----------------------------------- ---------------------- Earl R. Etzweiler, Director By /s/ Charles F. Lebo March 25, 1998 ----------------------------------- ---------------------- Charles F. Lebo, Director By /s/ Warren A. Miller March 25, 1998 ----------------------------------- ---------------------- Warren A. Miller, Director By /s/ William G. Nelson March 25, 1998 ----------------------------------- ---------------------- William G. Nelson, Director By /s/ Edwin D. Schlegel March 25, 1998 ----------------------------------- ---------------------- Edwin D. Schlegel, Director By /s/ Guy J. Snyder, Jr. March 25, 1998 ----------------------------------- ---------------------- Guy J. Snyder, Jr., Director 17 EXHIBIT INDEX Page Number in Manually Signed Exhibit No. Original - ----------- -------- 3(i) Registrant's Articles of Incorporation. (Incorporated by Reference to Exhibit 3(i) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, and filed with the Commission on March 31, 1997.) 3(ii) Registrant's By-laws. (Incorporated by Reference to Exhibit 3(ii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, and filed with the Commission on March 31, 1997.) 10.1 Retirement Bonus Plan for the Board of Directors of Mid Penn Bank. (Incorporated by Reference to Exhibit 10 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, and filed with the Commission on March 31, 1997.) 10.2 Agreement and Plan of Reorganization, dated as of January 9, 1998, among Mid Penn Bancorp, Inc., Mid Penn Bank and Miners Bank of Lykens, (Lykens, PA.). 11 Statement re: Computation of Earnings per share. (Included herein at Exhibit 13, at page 6 of Registrant's Annual Report to Shareholders.) 12 Statements re: Computation of Ratios. (Included herein at Exhibit 13, at page 17 of Registrant's Annual Report to Shareholders.) 13 Excerpts from Registrant's 1997 Annual Report to Shareholders. 21 Subsidiaries of the Registrant. 23 Consent of Parente, Randolph, Orlando Carey & Associates, independent auditors. 27 Financial Data Schedule. 18 EX-10.2 2 AGREEMENT AND PLAN OF REORGANIZATION AGREEMENT AND PLAN OF REORGANIZATION AMONG MID PENN BANCORP, INC. MID PENN BANK AND MINERS BANK OF LYKENS (LYKENS, PA.) January 9, 1998 TABLE OF CONTENTS ----------------- Page ---- ARTICLE I AGREEMENT AND PLAN OF MERGER.............................. 1 1.1 Agreement and Plan of Merger......................... 1 ARTICLE II CONVERSION OF SHARES AND EXCHANGE OF STOCK CERTIFICATES..................................... 2 2.1 Conversion of Shares................................. 2 2.2 Exchange of Stock Certificates....................... 3 ARTICLE III REPRESENTATIONS AND WARRANTIES OF MINERS BANK OF LYKENS.................................. 5 3.1 Authority............................................ 5 3.2 Organization and Standing............................ 6 3.3 No Subsidiaries...................................... 6 3.4 Capitalization....................................... 6 3.5 Articles of Incorporation, Bylaws and Minute Books... 6 3.6 Consents............................................. 6 3.7 Financial Statements and Regulatory Reports.......... 7 3.8 Absence of Undisclosed Liabilities................... 7 3.9 Absence of Changes................................... 7 3.10 Dividends, Distributions and Stock Purchases......... 7 3.11 Taxes................................................ 8 3.12 Title to and Condition of Assets..................... 8 3.13 Contracts............................................ 8 3.14 Litigation and Governmental Directives............... 9 3.15 Compliance with Laws; Governmental Authorizations... 9 3.16 Insurance............................................ 10 3.17 Financial Institutions Bonds......................... 10 3.18 Labor Relations...................................... 10 3.19 Employee Benefit Plans............................... 11 3.20 Related Party Transactions........................... 11 3.21 Deleted.............................................. 12 3.22 Deleted.............................................. 12 3.23 Complete and Accurate Disclosure..................... 12 3.24 Beneficial Ownership of Mid Penn Bancorp, Inc. Common Stock......................................... 12 3.25 Environmental Matters................................ 12 ii 3.26 Proxy Statement/Prospectus........................... 14 3.27 Non-Registration Under the 1934 Act.................. 14 3.28 Deposit Insurance.................................... 14 3.29 Repurchase Agreements................................ 15 3.30 Assumability of Contracts and Leases................. 15 3.31 Loans................................................ 15 3.32 Materiality.......................................... 15 3.33 Deleted.............................................. 15 3.34 Deleted.............................................. 15 3.35 Adjustable Rate Mortgages............................ 15 3.36 CRA Compliance....................................... 15 3.37 Deleted.............................................. 16 3.38 Loan Loss Reserve.................................... 16 3.39 Deleted.............................................. 16 3.40 Deleted.............................................. 16 3.41 Deleted.............................................. 16 3.42 Accuracy of Representations.......................... 16 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF MID PENN BANCORP, INC.............................................. 16 4.1 Authority............................................ 16 4.2 Organization and Standing............................ 16 4.3 Capitalization....................................... 17 4.4 Deleted.............................................. 17 4.5 Financial Statements................................. 17 4.6 Absence of Undisclosed Liabilities................... 17 4.7 Absence of Changes................................... 18 4.8 Litigation........................................... 18 4.9 Proxy Statement/Prospectus........................... 18 ARTICLE V REPRESENTATIONS AND WARRANTIES OF MID PENN BANK............................................. 18 5.1 Capital Structure of Mid Penn Bank................... 18 5.2 Organization and Standing............................ 19 5.3 Authorized and Effective Agreement................... 19 ARTICLE VI COVENANTS OF MINERS BANK OF LYKENS........................ 19 6.1 Conduct of Business.................................. 19 6.2 Best Efforts......................................... 22 6.3 Access to Properties and Records..................... 23 iii 6.4 Subsequent Financial Statements...................... 23 6.5 Board and Committee Minutes.......................... 23 6.6 Update Schedule...................................... 23 6.7 Notice............................................... 23 6.8 Other Proposals...................................... 24 6.9 Dividends............................................ 24 6.10 Core Deposits........................................ 24 6.11 Affiliate Letters.................................... 24 6.12 No Purchases or Sales of Mid Penn Bancorp, Inc. Common Stock During Price Determination Period....... 24 6.13 Accounting Treatment 6.14 Press Releases....................................... 25 6.15 Deleted.............................................. 25 6.16 Phase I Environmental Audit.......................... 25 6.17 Deleted.............................................. 25 ARTICLE VII COVENANTS OF MID PENN BANCORP, INC. AND MID PENN BANK............................................. 25 7.1 Best Efforts......................................... 25 7.2 Access to Properties and Records..................... 26 7.3 Subsequent Financial Statements...................... 26 7.4 Update Schedule...................................... 26 7.5 Notice............................................... 26 7.6 No Purchase or Sales of Mid Penn Bancorp, Inc. Common Stock During Price Determination Period....... 26 ARTICLE VIII CONDITIONS PRECEDENT...................................... 27 8.1 Common Conditions.................................... 27 8.2 Conditions Precedent to Obligations of Mid Penn Bancorp, Inc. and Mid Penn Bank.......... 28 8.3 Conditions Precedent to the Obligations of Miners Bank of Lykens............................. 30 ARTICLE IX TERMINATION, AMENDMENT AND WAIVER......................... 31 9.1 Termination.......................................... 31 9.2 Effect of Termination................................ 32 9.3 Amendment............................................ 32 9.4 Waiver............................................... 33 iv ARTICLE X RIGHTS OF DISSENTING SHAREHOLDERS OF MINERS BANK OF LYKENS..................................... 33 10.1 Rights of Dissenting Shareholders of Miners Bank of Lykens............................. 33 ARTICLE XI CLOSING AND EFFECTIVE DATE................................ 33 11.1 Closing.............................................. 33 11.2 Effective Date....................................... 33 ARTICLE XII NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES............................................ 34 12.1 No Survival.......................................... 34 ARTICLE XIII POST-MERGER AGREEMENTS.................................... 34 13.1 Employees............................................ 34 13.2 Miners Office Board.................................. 35 13.3 Additional Commitments of MP Corp. and MP Bank....... 36 13.4 Merger of Profit Sharing Plans....................... 36 ARTICLE XIV GENERAL PROVISIONS........................................ 36 14.1 Expenses............................................. 36 14.2 Other Mergers and Acquisitions....................... 36 14.3 Access; Confidentiality.............................. 37 14.4 Notices.............................................. 37 14.5 Captions............................................. 38 14.6 Counterparts......................................... 38 14.7 Severability......................................... 38 14.8 Parties in Interest.................................. 38 14.9 Entire Agreement..................................... 38 14.10Governing Law........................................ 38 EXHIBITS: AGREEMENT AND PLAN OF MERGER..............................A-1 ("BANK MERGER AGREEMENT") SUPPORT AGREEMENT.........................................B-1 EXHIBIT 10.2 AGREEMENT AND PLAN OF REORGANIZATION ------------------------------------ This Agreement and Plan of Reorganization (hereinafter "Agreement") is dated and made this 9th day of January, 1998, by and among MID PENN BANCORP, INC., a Pennsylvania business corporation having its corporate headquarters at 349 Union Street, P.O. Box 111, Millersburg, Pennsylvania 17061 ("MP Corp."), Mid Penn Bank, a Pennsylvania state-chartered banking institution and the wholly-owned subsidiary of MP Corp., having its corporate headquarters at 349 Union Street, P.O. Box 111, Millersburg, Pennsylvania 17061 ("MP Bank"); and Miners Bank of Lykens (Lykens, PA.), a Pennsylvania state-chartered banking institution having its corporate headquarters at 550 Main Street, P.O. Box 38, Lykens, Pennsylvania 17048-0038 ("Miners"). Background: ---------- MP Corp. is a Pennsylvania business corporation and a registered bank holding company. MP Bank is a Pennsylvania state-chartered banking institution and a wholly-owned subsidiary of MP Corp. Miners is a Pennsylvania state- chartered banking institution. MP Corp. wishes to acquire Miners, and Miners wishes to merge with and into MP Bank. Subject to the terms and conditions of this Agreement, the foregoing transaction will be accomplished by means of a reorganization and merger under which Miners will be merged with and into MP Bank. MP Bank will survive the merger, and all of the outstanding shares of the $5.00 par value common stock of Miners ("Miners Common Stock") will be converted into shares of the $1.00 par value common stock of MP Corp. ("MP Corp. Common Stock") in the manner, on the terms, and subject to the conditions of this Agreement. WITNESSETH: ---------- NOW, THEREFORE, in consideration of the premises, mutual promises, covenants, agreements, representations and warranties hereinafter set forth, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties agree as follows: ARTICLE I AGREEMENT AND PLAN OF MERGER ---------------------------- Section 1.1. Agreement and Plan of Merger. Subject to the terms and ----------- ---------------------------- conditions of this Agreement, Miners shall merge with and into MP Bank (the "Merger") in accordance with the Agreement and Plan of Merger attached hereto as Exhibit "A" ("Bank Merger Agreement") and pursuant to the provisions of the Pennsylvania Banking Code of 1965, as amended (the "Banking Code"). 1 ARTICLE II CONVERSION OF SHARES AND EXCHANGE OF STOCK CERTIFICATES ------------------------------ Section 2.1. Conversion of Shares. On the Effective Date (as defined in ----------- -------------------- Section 11.2 of this Agreement) the shares of Miners Common Stock then outstanding shall be converted into shares of MP Corp. Common Stock, as follows: (a) General. Subject to the provisions of Section 2.1(b); 2.1(c) and ------- 2.1(d) of this Article II, each share of Miners Common Stock issued and outstanding immediately before the Effective Date shall, on the Effective Date, be converted into and become, without any action on the part of the holder thereof, ten (10) shares of MP Corp. Common Stock. Subject to the provisions of Section 2.1(b), the aggregate number of shares of MP Corp. Common Stock to be issued under this Agreement shall not exceed 148,250 shares. (b) Anti-dilution Provision. In the event that MP Corp. shall at any ----------------------- time before the Effective Date: (i) declare or pay a dividend in shares of MP Corp. Common Stock, (ii) combine the outstanding shares of MP Corp. Common Stock into a smaller number of shares, or (iii) subdivide the outstanding shares of MP Corp. Common Stock into a greater number of shares, or (iv) reclassify the shares of MP Corp. Common Stock, then the exchange provisions of Section 2.1 (a) of this Article II shall be proportionately adjusted accordingly. (c) No Fractional Shares. No fractional shares of MP Corp. Common -------------------- Stock , and no scrip or certificates therefor, shall be issued in connection with the Merger. In lieu of the issuance of any fractional share to which he would otherwise be entitled, each former shareholder of Miners shall receive in cash an amount equal to the fair market value of his fractional interest, which fair market value shall be determined by multiplying such fraction by the closing market price of MP Corp. Common Stock. (d) Miners Treasury Stock. Each share of Miners Common Stock issued --------------------- and held in the treasury of Miners as of the Effective Date, if any, shall be canceled, and no cash, stock, or other property shall be delivered in exchange therefor. (e) MP Corp. Common Stock. --------------------- (i) Each share of MP Corp. Common Stock issued and outstanding immediately prior to the Effective Date, shall, on and after the Effective Date, continue to be issued and outstanding as an identical share of MP Corp. Common Stock. 2 (ii) Each share of MP Corp. Common Stock issued and held in the treasury of MP Corp. as of the Effective Date, if any, shall, on and after the Effective Date, continue to be issued and held in the treasury of MP Corp. Section 2.2. Exchange of Stock Certificates. Miners Common Stock ----------- ------------------------------ certificates shall be exchanged for MP Corp. Common Stock certificates in accordance with the following procedures: (a) Exchange Agent. The transfer agent of MP Corp. shall act as -------------- exchange agent (the "Exchange Agent") to receive Miners Common Stock certificates from the holders thereof and to exchange such stock certificates for MP Corp. Common Stock certificates and (if applicable) to pay cash for fractional shares of Miners Common Stock pursuant to Section 2.1(c) above. The Exchange Agent shall, on or promptly after the Effective Date, mail to each former shareholder of Miners a notice specifying the procedures to be followed in surrendering such shareholder's Miners Common Stock certificates. (b) Surrender of Certificates. As promptly as possible after receipt ------------------------- of the Exchange Agent's notice, each former shareholder of Miners shall surrender his Miners Common Stock certificates to the Exchange Agent; provided, that if any former shareholder of Miners shall be unable to surrender his Miners Common Stock certificates due to loss or mutilation thereof, he may make a constructive surrender by following procedures comparable to those customarily used by MP Corp. for issuing replacement certificates to MP Corp. shareholders whose MP Corp. Common Stock certificates have been lost or mutilated. Upon receiving a proper actual or constructive surrender of Miners Common Stock certificates from a former Miners shareholder, the Exchange Agent shall issue to such shareholder, in exchange therefor, a MP Corp. Common Stock certificate representing the whole number of shares of MP Corp. Common Stock into which such shareholder's shares of Miners Common Stock have been converted in accordance with this Article II, together with a check in the amount of any cash to which such shareholder is entitled, pursuant to Section 2.1(c) of this Agreement, in lieu of the issuance of a fractional share. (c) Dividend Withholding. Dividends, if any, payable by MP Corp. -------------------- after the Effective Date to any former shareholder of Miners who has not, prior to the payment date, surrendered his Miners Common Stock certificates may, at the option of MP Corp., be withheld. Any dividends so withheld shall be paid, without interest, to such former shareholder of Miners upon proper surrender of his Miners Common Stock certificates. (d) Failure to Surrender Certificates. All Miners Common Stock --------------------------------- certificates must be surrendered to the Exchange Agent within two (2) years after the Effective Date. In the event that any former shareholder of Miners shall not have properly surrendered his Miners Common Stock certificates within two (2) years after the Effective Date, the shares of MP Corp. Common Stock that would otherwise have been issued to him may, at the option of MP Corp., be sold and the net proceeds of such sale, together with the cash (if any) to which he is entitled in lieu of the issuance of a fractional share and any previously accrued dividends, shall be held in a non-interest bearing account for his benefit. From and after any 3 such sale, the sole right of such former shareholder of Miners shall be the right to collect such net proceeds, cash and accumulated dividends. Subject to all applicable laws of escheat, such net proceeds, cash and accumulated dividends shall be paid to such former shareholder of Miners, without interest, upon proper surrender of his Miners Common Stock certificates. (e) Expenses of Share Surrender and Exchange. All costs and expenses ---------------------------------------- associated with the foregoing surrender and exchange procedure shall be borne by MP Corp. Notwithstanding the foregoing, no party hereto will be liable to any holder of Miners Common Stock for any amount paid in good faith to a public official or agency pursuant to any applicable abandoned property, escheat or similar law. (f) Exchange Procedures. Each certificate for shares of Miners Common ------------------- Stock delivered for exchange under this Article II must be endorsed in blank by the registered holder thereof or be accompanied by a power of attorney to transfer such shares endorsed in blank by such holder. If more than one certificate is surrendered at one time and in one transmittal package for the same shareholder account, the number of whole shares of MP Corp. Common Stock for which certificates will be issued pursuant to this Article II will be computed on the basis of the aggregate number of shares represented by the certificates so surrendered. If shares of Miners Common Stock or payments of cash are to be issued or made to a person other than the one in whose name the surrendered certificate is registered, the certificate so surrendered must be properly endorsed in blank, with signature(s) guaranteed, or otherwise in proper form for transfer, and the person to whom certificates for shares of MP Corp. Common Stock is to be issued or to whom cash is to be paid shall pay any transfer or other taxes required by reason of such issuance or payment to a person other than the registered holder of the certificate for shares of Miners Common Stock which are surrendered. As promptly as practicable after the Effective Date, MP Corp. shall send or cause to be sent to each shareholder of record of Miners Common Stock transmittal materials for use in exchanging certificates representing Miners Common Stock for certificates representing MP Corp. Common Stock into which the former have been converted in the Reorganization and Merger. (g) Closing of Stock Transfer Books; Cancellation of Miners ------------------------------------------------------- Certificates. Upon the Effective Date, the stock transfer books for Miners ------------ Common Stock will be closed and no further transfers of shares of Miners Common Stock will thereafter be made or recognized. All certificates for shares of Miners Common Stock surrendered pursuant to this Article II will be canceled by MP Corp. (h) Rights Evidenced by Certificate. Each certificate for shares of ------------------------------- MP Corp. Common Stock issued in exchange for certificates for Miners Common Stock pursuant to Section 2.2(f) hereof will be dated as of the Effective Date and be entitled to dividends and all other rights and privileges pertaining to such shares of MP Corp. Common Stock from and after the Effective Date. Until surrendered, each certificate theretofore evidencing shares of Miners Common Stock will, from and after the Effective Date, evidence solely the right 4 to receive certificates for shares of MP Corp. Common Stock pursuant to Section 2.2(f) hereof. If certificates for shares of Miners Common Stock are exchanged for MP Corp. Common Stock at a date following one or more record dates for the payment of dividends or of any other distribution on the shares of MP Corp. Common Stock subsequent to the Effective Date, MP Corp. will pay cash in an amount equal to dividends theretofore payable on such MP Corp. Common Stock and pay or deliver any other distribution to which holders of shares of MP Corp. Common Stock have theretofore become entitled. No interest will accrue or be payable in respect of dividends or cash otherwise payable under this Section 2.2 upon surrender of certificates for shares of MP Corp. Common Stock. Notwithstanding the foregoing, no party hereto will be liable to any holder of Miners Common Stock for any amount paid in good faith to a public official or agency pursuant to any applicable abandoned property, escheat or similar law. Until such time as certificates for shares of Miners Common Stock are surrendered by a Miners shareholder to MP Corp. for exchange, MP Corp. shall have the right to withhold dividends or any other distributions, without interest, on the shares of the MP Corp. Common Stock issuable to such shareholder. (i) Payment Procedures. As soon as practical after the Effective ------------------ Date, MP Corp. shall make payment of the cash consideration provided for in Section 2.1(c) to each person entitled thereto. ARTICLE III REPRESENTATIONS AND WARRANTIES OF MINERS ---------------------------------------- Miners represents and warrants to MP Corp. and MP Bank as of even date herewith as follows: Section 3.1. Authority. Miners has all requisite corporate power and ----------- --------- authority to enter into and perform all of its obligations under this Agreement and the Bank Merger Agreement. The execution and delivery of this Agreement and the Bank Merger Agreement and the performance of the transactions contemplated herein and therein have been duly and validly authorized by the Board of Directors of Miners and, except for the approval of this Agreement and the Bank Merger Agreement by its shareholders, Miners has taken all corporate action necessary on its part to authorize this Agreement and the Bank Merger Agreement and the performance of the transactions contemplated herein and therein. This Agreement and the Bank Merger Agreement have been duly executed and delivered by Miners and, assuming due authorization, execution and delivery by MP Corp. and MP Bank, constitute valid and binding obligations of Miners, in each case enforceable against it in accordance with their respective terms, subject to bankruptcy, insolvency, and other laws of general applicability relating to or affecting creditors' rights and general equity principles. Neither the execution and delivery of this Agreement and the Bank Merger Agreement, nor consummation of the transactions contemplated hereby or thereby, nor compliance by Miners with any of the provisions hereof or thereof shall (i) conflict with or result in a breach of any provisions of the Articles of Incorporation or By- laws of Miners, (ii) constitute or result in a material breach of any 5 term, condition or provisions of, or constitute a default under or give rise to any right of termination, cancellation or acceleration with respect to, or result in the creation of any lien, charge, security interest or other encumbrance upon any property or asset of Miners pursuant to any note, bond, mortgage, indenture, deed of trust, license, agreement or other instrument or obligation, or (iii) violate any order, writ, injunction, decree, statute, code, ordinance, rule, regulation or judgment applicable to Miners. Section 3.2. Organization and Standing. Miners is a duly organized bank, ----------- ------------------------- validly existing and in good standing under the laws of the Commonwealth of Pennsylvania. Miners (i) has full power and authority to carry out its business as now conducted and (ii) is duly qualified to do business in the states of the United States and foreign jurisdictions where its ownership or leasing of property or the conduct of its business requires such qualification and where failure to so qualify would have a material adverse effect on the financial condition, results of operations, business or prospects of Miners. Section 3.3. No Subsidiaries. Miners owns no subsidiaries, directly or ----------- --------------- indirectly. Section 3.4. Capitalization. The authorized capital stock of Miners ----------- -------------- consists solely of 15,000 shares of common stock, par value five dollars ($5.00) per share ("Miners Common Stock"), of which, at the date hereof, 14,825 shares are issued and outstanding. All outstanding shares of Miners Common Stock have been duly issued and are validly outstanding, fully paid and nonassessable. None of the shares of Miners Common Stock have been issued in violation of the preemptive rights of any person or entity. There are no authorized, issued, or outstanding options, convertible securities, warrants or other rights to purchase or acquire any of the Miners Common Stock from Miners, and there is no commitment of Miners to issue the same. There are no outstanding agreements, restrictions, contracts, commitments or demands of any character to which Miners is a party, which relate to the transfer or restrict the transfer of any shares of Miners Common Stock. Except as previously disclosed, to the knowledge of Miners, there are no shareholder agreements, understandings or commitments relating to the right of Miners to vote or dispose of its shares. Section 3.5. Articles of Incorporation, Bylaws and Minute Books. The ----------- -------------------------------------------------- copies of the Articles of Incorporation and Bylaws of Miners which have been delivered to MP Corp. and MP Bank are true, correct and complete. Except as previously disclosed, all minute books of Miners have been made available to MP Corp. and MP Bank for inspection and are true, correct and complete in all material respects and record the actions taken by the Board of Directors of Miners at the meetings documented in the minutes. Section 3.6. Consents. Except for the consents, approvals, filings and ----------- -------- registrations contemplated by Sections 8.1(b) and (d) hereof, and compliance with any conditions contained therein, and the approval of this Agreement and the Bank Merger Agreement by the Board of Directors and shareholders of Miners, no consents or approvals of, or filings or registrations with, any public body or authority are necessary, and no consents or approvals of any third parties are necessary, or will be, in connection with (i) the execution and delivery of this Agreement or the Bank 6 Merger Agreement by Miners, and (ii) the consummation by Miners of the transactions contemplated hereby. Miners has no reason to believe that any required consents or approvals will not be received or will be received with conditions, limitations or restrictions unacceptable to it or which would adversely impact Miners's ability to consummate the transactions contemplated by this Agreement. Section 3.7. Financial Statements and Regulatory Reports. Miners has ----------- ------------------------------------------- delivered to MP Corp. and MP Bank its (i) Balance Sheets, Statements of Income, and Statements of Stockholders' Equity for the years ended December 31, 1996 and December 31, 1995, and (ii) Call Reports, Consolidated Reports of Condition and Income, (the aforementioned consolidated report of condition and income as of September 30, 1997, is referred to herein as the "Bank Balance Sheet") and accompanying schedules, filed by Miners with any regulatory authority for each calendar quarter, beginning with the quarter ended September 30, 1997, through the Closing Date ("Miners Regulatory Reports"). Each of the foregoing financial statements fairly presents the financial condition, assets and liabilities, and results of operations of Miners at their respective dates and for the respective periods then ended and have been prepared in accordance with generally accepted accounting principles consistently applied, except as otherwise noted in a footnote thereto. The books and records of Miners are maintained in accordance with generally accepted accounting principles consistently applied. The Miners Regulatory Reports have been, or will be, prepared in accordance with applicable regulatory accounting principles and practices applied on a consistent basis throughout the periods issued by such statements, and fairly present, or will fairly present, the financial position, results of operations and changes in shareholders' equity of Miners as of and for the periods ended on the dates thereof, in accordance with applicable regulatory accounting principles applied on a consistent basis. Section 3.8. Absence of Undisclosed Liabilities. Except as previously ----------- ---------------------------------- disclosed, or as reflected, noted or adequately reserved against in the Bank Balance Sheet, as at September 30, 1997, Miners had no liabilities (whether accrued, absolute, contingent or otherwise) or asset impairment which are required to be reflected, noted or reserved against therein under generally accepted accounting principles or which are in any case or in the aggregate material. Except as previously disclosed, since September 30, 1997, Miners has not incurred any such liability, other than liabilities of the same nature as those set forth in the Bank Balance Sheet, all of which have been reasonably incurred in the ordinary course of business consistent with customary business practices of prudently managed banks (hereinafter referred to as "Ordinary Course of Business"). Section 3.9. Absence of Changes. Since September 30, 1997, Miners has ----------- ------------------ conducted its business in the Ordinary Course of Business and, except as previously disclosed, Miners has not undergone any change in condition (financial or otherwise), assets, liabilities, business or operations, other than changes in the Ordinary Course of Business which have not been, either in any case or in the aggregate, materially adverse. Section 3.10. Dividends, Distributions and Stock Purchases. Except as ------------ -------------------------------------------- previously disclosed, since September 30, 1997, Miners has not declared, set aside, made or paid any dividend or other distribution in respect of the Miners Common Stock, or purchased, issued or sold any shares of Miners Common Stock. 7 Section 3.11. Taxes. Miners has filed all federal, state, county, ------------ ----- municipal and foreign tax returns, reports and declarations which are required to be filed by Miners. Except as previously disclosed, (i) Miners has paid all taxes, penalties and interest which have become due pursuant thereto or which became due pursuant to assessments, and (ii) Miners has not received any notice of deficiency or assessment of additional taxes and no tax audits are in process. The Internal Revenue Service ("IRS") has not, to the knowledge of Miners, commenced, or given notice of its intention to commence any examination or audit of the federal income tax returns of Miners for any year through and including the year ended December 31, 1996. Miners has not granted any waiver of any statute of limitations or otherwise agreed to any extension of a period for the assessment of any federal, state, county, municipal or foreign income tax. Except as previously disclosed, the accruals and reserves reflected in the Bank Balance Sheet are adequate to cover all taxes (including interest and penalties, if any, thereon) payable or accrued as a result of its operations for all periods prior to the date of the Bank Balance Sheet. Section 3.12. Title to and Condition of Assets. Miners has good and ------------ -------------------------------- marketable title to all real and personal properties and assets reflected in the Bank Balance Sheet or acquired subsequent to September 30, 1997 (other than property and assets disposed of in the Ordinary Course of Business), free and clear of all liens or encumbrances of any kind whatsoever other than: (i) as reflected in the Bank Balance Sheet; (ii) liens of current taxes not yet due; and (iii) such imperfections of title, encumbrances and easements, if any, as are not substantial in character, amount or extent and do not materially detract from the value, or interfere with the present or pro posed use, of the properties and assets subject thereto. The structures and other improvements to real estate, furniture, fixtures and equipment reflected in the Bank Balance Sheet or acquired subsequent to September 30, 1997, are in good operating condition and repair (ordinary wear and tear excepted) and comply in all material respects with all applicable laws, ordinances and regulations, including without limitation all building codes, zoning ordinances and other similar laws. Miners owns or has the right to use all real and personal properties and assets necessary to the conduct of its business as now conducted. Section 3.13. Contracts. All contracts, agreements, leases, licenses and ------------ --------- other commitments are valid and in full force and effect, and all parties thereto have in all material respects performed all obligations required to be performed by them to date and are not in default in any material respect. Miners is not a party to or subject to (i) any employment, consulting or severance contract or arrangement with any past or present officer, director or employee, except for "at will" arrangements (ii) any plan, arrangement or contract providing for bonuses, options, deferred compensation, profit sharing or similar arrangements for or with any past or present officers, directors or employees of Miners; (iii) any collective bargaining agreement with any labor union relating to employees of Miners; (iv) any agreement which by its terms limits the payment of dividends by Miners; (v) any instrument evidencing or related to indebtedness for borrowed money in excess of $20,000, whether directly or indirectly, by way of purchase money obligation, conditional sale, lease purchase, guaranty or otherwise, in respect of which Miners is an obligor to any person, which instrument evidences or relates to indebtedness other than deposits, repurchase 8 agreements, bankers acceptances and "treasury tax and loan" accounts established in the Ordinary Course of Business and transactions in federal funds or which contains financial covenants or other restrictions (other than those relating to the payment of principal and interest when due) which would be applicable on or after the Closing Date to MP Corp. or any MP Corp. subsidiary; (vi) any contract (other than this Agreement) limiting the freedom of Miners to engage in any type of banking or banking-related business permissible under law; or (vii) any contract, plan or arrangement which provides for payments or benefits in certain circumstances which, together with other payments or benefits payable to any participant therein or party thereto, might render any portion of any such payments or benefits subject to disallowance of deduction therefor as a result of the application of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). No party to any material contract, plan, arrangement or instrument that requires annual payments in excess of $10,000 will have the right to terminate any or all of the provisions of any such contract, plan, arrangement or instrument as a result of the transactions contemplated by this Agreement, and none of the employees of Miners possess the right to terminate their employment as a result of the execution of this Agreement. No plan, employment agreement, termination agreement, or similar agreement or arrangement to which Miners is a party or under which Miners may be liable contains provisions which permit an employee or independent contractor to terminate it without cause and continue to accrue future benefits thereunder. No such agreement, plan or arrangement provides for acceleration in the vesting of benefits or payments due thereunder upon the occurrence of a change in ownership or control of Miners absent the occurrence of a subsequent event; provides for benefits which may cause the disallowance of a federal income tax deduction under Section 280G of the Code; or requires Miners to provide a benefit in the form of Miners Common Stock or determined by reference to the value of Miners Common Stock. Section 3.14. Litigation and Governmental Directives. There is no ------------ -------------------------------------- litigation, investigation or proceeding pending, or to the knowledge of Miners threatened, that involves Miners or its properties and that, if determined adversely, would materially and adversely affect the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of Miners; there are no outstanding orders, writs, injunctions, judgments, decrees, regulations, directives, consent agreements or memoranda of understanding issued by any federal, state or local court or governmental authority or arbitration tribunal issued against or with the consent of Miners that materially and adversely affect the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of Miners or that in any manner restrict Miners's right to conduct its business as presently conducted, or challenge the validity or propriety of any of the transactions contemplated by the Agreement, or which could adversely affect the ability of Miners to perform under this Agreement; and Miners is not aware of any fact or condition presently existing that might give rise to any litigation, investigation or proceeding which, if determined adversely to Miners, would materially and adversely affect the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of Miners. Section 3.15. Compliance with Laws; Governmental Authorizations. Miners is ------------ ------------------------------------------------- in compliance with all statutes, laws, ordinances, rules, regulations, judgments, orders, decrees, directives, consent agreements, memoranda of understanding, permits, concessions, grants, 9 franchises, licenses, and other governmental authorizations or approvals applicable to Miners or to any of its properties; all permits, concessions, grants, franchises, licenses and other governmental authorizations and approvals necessary for the conduct of the business of Miners as presently conducted have been duly obtained and are in full force and effect, and there are no proceedings pending, or to the knowledge of Miners threatened, which may result in the revocation, cancellation, suspension or materially adverse modification of any thereof; and Miners has not received any notification or communication from any regulatory authority (A) asserting that it is not in substantial compliance with any of the statues, regulations or ordinances which such regulatory authorities enforce; (B) requiring or threatening to require Miners, or indicating that Miners may be required, to enter into a cease and desist order, agreement or memorandum of understanding or any other agreement restricting or limiting, or purporting to restrict or limit, in any manner the operations of Miners, including without limitation, any restriction on the payment of dividends (any such notice, communication, memorandum, agreement or order described herein is referred to as a "Regulatory Agreement"); (C) threatening to revoke any license, franchise, permit or governmental authorization which is material to Miners; Miners has not consented to or entered into any Regulatory Agreement; (D) requesting board resolutions be adopted pursuant to regulatory action. Section 3.16. Insurance. All policies of insurance, including all ------------ --------- policies of title insurance and financial institutions bonds, held by or on behalf of Miners are in full force and effect and no notices of cancellation have been received in connection therewith. All such policies of insurance have been issued by reputable insurers which in respect of amounts, types and risks, such insurance is customary with industry practices for the business conducted by Miners. Section 3.17. Financial Institutions Bonds. Since January 1, 1991, Miners ------------ ---------------------------- has continuously maintained in full force and effect a financial institutions bond insuring Miners against acts of dishonesty by each of its employees. Except as previously disclosed, no claim has been made under any such bond, and Miners is not aware of any fact or condition presently existing which might form the basis of a claim under any such bond. Miners has no reason to believe that its present financial institutions bond will not be renewed by its carrier on substantially the same terms and at the same rate as now in effect. Section 3.18. Labor Relations. Miners is not a party to or bound by any ------------ --------------- collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization, nor is Miners the subject of a proceeding asserting that Miners has committed an unfair labor practice or seeking to compel Miners to bargain with any labor organization as to wages and conditions of employment, nor is there any strike or other labor dispute involving Miners pending, or to the knowledge of Miners, threatened, that might materially adversely affect the condition (financial or otherwise), assets, liabilities, business or operations of Miners. Miners is not subject to or a party in any Complaint or action before the Pennsylvania Human Relations Commission, the Equal Employment Opportunity Commission, or the Department of Labor. There are no labor disputes pending, or to the knowledge of Miners threatened, that might materially and adversely affect the condition (financial or otherwise), assets, liabilities, business or operations of Miners. 10 Section 3.19. Employee Benefit Plans. Each "employee benefit plan", as ------------ ---------------------- defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), that now covers any employee of Miners, its predecessors or affiliates, complies in all material respects with all applicable requirements of ERISA, the Code and other applicable laws. Neither Miners nor any of its predecessors or affiliates has engaged in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) or any breach of fiduciary responsibility under Part 4 of Title I of ERISA, with respect to any such plan which prohibited transaction is likely to result in any material penalties or taxes under Section 502 of ERISA or Section 4975 of the Code, or any material liability to any participant or beneficiary of such plan. No material liability to the Pension Benefit Guaranty Corporation has been or is expected to be incurred by Miners with respect to itself or its predecessors or affiliates with respect to any such plan which is subject to Title IV of ERISA, or with respect to any "single employer plan" (as defined in Section 4001(a)(15) of ERISA) currently or formerly maintained. No such plan had an "accumulated funding deficiency" (as defined in Section 302 of ERISA) (whether or not waived) as of the last day of the end of the most recent plan year ending prior to the date hereof. The fair market value of the assets of each such plan exceeds the present value of the "benefit liabilities" (as defined in Section 4001(a)(16) of ERISA) under each such plan as of the end of the most recent plan year, calculated on the basis of the actuarial assumptions used in the most recent actuarial valuation for each such plan. No notice of a "reportable event" (as defined in Section 4043 of ERISA) for which the 30-day reporting requirement has not been waived has been required to be filed for any of such plans within the 12-month period ending on the date hereof. Neither Miners, its predecessors or affiliates has provided, or is required to provide, security to any such plans pursuant to Section 401(a)(29) of the Code. Miners, its predecessors and affiliates have contributed to no "multi-employer plan", as defined in Section 3(37) of ERISA, on or after September 26, 1980. All actuarial valuations and other documents and information concerning benefit plans delivered or made available in connection with this Agreement are true and correct as of the date(s) shown thereon, and all actuarial methods and assumptions are appropriate for such plans, and are consistent with the methods and assumptions permitted by the Code and ERISA. All such plans are funded to such level as assets of each such plan would then be sufficient to pay all vested accrued benefits thereunder, and there would be no employer liability under Title IV of ERISA. Since 1990, there has been no audit of any benefit plan of Miners by the Department of Labor, the IRS or the Pension Benefit Guaranty Corporation ("PBGC"). There has not been any audit of the Pension Plan or any of Miners's other employee benefit plans by the Department of Labor, the IRS or the PBGC since 1988. Miners, its predecessors and affiliates, have no obligation for retiree health and life benefits under any benefit plan, contract, or arrangement. Miners has no obligation for any post-retirement benefits under any plan, contract or arrangement except as previously disclosed. Section 3.20. Related Party Transactions. Except as previously disclosed, ------------ -------------------------- Miners has no contract, extension of credit, business arrangement or other relationship of any kind with any of the following persons: (i) any present or former officer or director of Miners; (ii) any shareholder owning five percent or more of the outstanding Miners Common Stock; and (iii) any "associate" (as defined in SEC Rule 405) of the foregoing persons or any business in which any of the foregoing persons is an officer, director, employee or five percent or greater equity owner. Each such extension of credit previously disclosed has been made in the Ordinary Course of Business on 11 substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable arms' length transactions with other persons that do not involve more than a normal risk of collectibility or present other unfavorable features. Section 3.21. DELETED. ------------ Section 3.22. DELETED. ------------ Section 3.23. Complete and Accurate Disclosure. Neither this Agreement ------------ -------------------------------- (insofar as it relates to Miners, Miners Common Stock and Miners's involvement in the transactions contemplated hereby) nor any financial statement, schedule, certificate, or other statement or document delivered by Miners to MP Corp. and MP Bank in connection herewith contains any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact or omits to state any material fact necessary to make the statements contained herein or therein not false or misleading. In particular, without limiting the generality of the foregoing sentence, the information provided and the representations made by Miners to MP Corp. and MP Bank in connection with the Registration Statement (as defined in Section 7.1(b) of this Agreement), both at the time such information and representations are provided and made and at the time of the Closing, will be true and accurate in all material respects and will not contain any false or misleading statement with respect to any material fact or omit to state any material fact necessary (i) to make the statements made therein not false or misleading, or (ii) to correct any statement contained in an earlier communication with respect to such information or representations which has become false or misleading. Section 3.24. Beneficial Ownership of MP Corp. Common Stock. Prior to the ------------ --------------------------------------------- Effective Date, Miners and its officers and directors will not beneficially own, in the aggregate, (within the meaning of SEC Rule 13d-3(d)(1)) more than five percent of the outstanding shares of MP Corp. Common Stock. Section 3.25. Environmental Matters. For purposes of this Section 3.25, ------------ --------------------- the following terms shall have the indicated meaning: "Environmental Law" means any federal, state or local law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction or agreement with any governmental entity relating to: the protection, preservation or restoration of the environment (including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface soil, subsurface soil, plant and animal life or any other natural resource); and the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Substances. The term Environmental Law includes without limitation: the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C. (S)9601, et seq., the Resource -- --- Conservation and Recovery Act, as amended, 42 U.S.C. (S)6901, et seq., the -- --- Clean Air Act, as amended, 42 U.S.C. 12 (S)7401, et seq., the Federal Water Pollution Control Act, as amended, 33 -- --- U.S.C. (S)1251, et seq., the Toxic Substances Control Act, as amended, 15 -- --- U.S.C. (S)9601, et seq., the Emergency Planning and Community Right to Know -- --- Act, 42 U.S.C. (S)11001, et seq., the Safe Drinking Water Act, 42 U.S.C. -- --- (S)300f, et seq., and all comparable state and local laws; and any common -- --- law (including without limitation common law that may impose strict liability) that may impose liability or obligation for injuries or damages due to, or threatened as a result of, the presence of or exposure to any Hazardous Substance. "Hazardous Substance" means any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous or otherwise regulated under any Environmental Law, whether by type or by quantity, including any material containing any such substance as a component. Hazardous Substances include, without limitation, petroleum or any derivative or by-product thereof, asbestos, radioactive material, and polychlorinated biphenyls. "Miners Loan Portfolio Properties and Other Properties Owned" means those properties serving as collateral for loans in Miners' loan portfolio, or properties owned or operated by Miners (including, without limitation, in a fiduciary capacity). Except as previously disclosed: (a) Miners has not been and is not in violation of or liable under any Environmental Law. (b) To the knowledge of Miners, after reasonable investigation, none of the Miners Loan Portfolio Properties and Other Properties Owned have been or are in violation of or liable under any Environmental Law. (c) After reasonable investigation, Miners has no knowledge that any environmental contaminant, pollutant, toxic or hazardous waste or other similar substance has been generated, used, stored, processed, disposed of or discharged onto any of the real estate now or previously owned or acquired (including without limitation any real estate acquired by means of foreclosure or exercise of any other creditor's right) or leased by Miners, except as previously disclosed. In particular, without limiting the generality of the foregoing sentence, except as previously disclosed, Miners has no knowledge that: (i) any materials containing asbestos have been used or incorporated in any building or other structure or improvement located on any of the real estate now or previously owned or acquired (including without limitation any real estate acquired by means of foreclosure or exercise of any other creditor's right) or leased by Miners; (ii) any electrical transformers, fluorescent light fixtures with ballasts or other equipment containing PCB's are or have been located on any of the real estate now or previously owned or acquired (including without limitation any real estate acquired by means of foreclosure or exercise of any other 13 creditor's right) or leased by Miners; (iii) any underground storage tanks for the storage of gasoline, petroleum products or other toxic or hazardous substances are or have ever been located on any of the real estate now or previously owned or acquired (including without limitation any real estate acquired by means of foreclosure or exercise of any other creditor's right) or leased by Miners. (d) Except as previously disclosed, there is no legal, administrative, arbitration or other proceeding, claim, action, or to the knowledge of Miners cause of action or governmental investigation of any nature seeking to impose, or that could result in the imposition, on Miners of any liability arising under any local, state or federal environmental statute, regulation or ordinance including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, pending or to the knowledge of Miners threatened against Miners; there is no reasonable basis for any such proceeding, claim, action or governmental investigation; and Miners is not subject to any agreement, order, judgment, decree or memorandum by or with any court, governmental authority, regulatory agency or third party imposing any such liability. Section 3.26. Proxy Statement/Prospectus. At the time the Proxy ------------ -------------------------- Statement/ Prospectus (as defined in Section 7.1(b) of this Agreement) is mailed to the shareholders of Miners, and at all times subsequent to such mailing, up to and including the Effective Date, such Proxy Statement/Prospectus (including any pre- and post-effective amendments and supplements thereto), with respect to all information relating to Miners, Miners Common Stock, and actions taken and statements made by Miners in connection with the transactions contemplated herein (except for information provided by MP Corp. and MP Bank to Miners) will: (i) comply in all material respects with applicable provisions of the Securities Act of 1933, as amended (the "1933 Act"), and the pertinent rules and regulations thereunder; and (ii) not contain any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omits to state any material fact that is necessary to be stated therein in order (A) to make the statements therein not false or misleading, or (B) to correct any statement in an earlier communication with respect to the Proxy Statement/Prospectus which has become false or misleading. Section 3.27. Non-Registration Under the 1934 Act. Miners Common Stock is ------------ ----------------------------------- neither registered nor required to be registered under Section 12 of the Securities Exchange Act of 1934 (the "1934 Act") and is not subject to the periodic reporting requirements imposed by Section 13 or 15(d) of the 1934 Act. Section 3.28. Deposit Insurance. The deposits of Miners are insured by ------------ ----------------- the Bank Insurance Fund, as administered by the Federal Deposit Insurance Corporation ("FDIC") in accordance with the Federal Deposit Insurance Act, and Miners has paid all assessments and filed all reports required by the Federal Deposit Insurance Act. 14 Section 3.29. Repurchase Agreements. With respect to any agreement, ------------ --------------------- pursuant to which Miners has purchased securities subject to an agreement to resell, if any, Miners has a valid, perfected first lien or security interest in the government securities or other collateral securing the repurchase agreement, and the value of such collateral equals or exceeds the amount of the debt secured thereby. Section 3.30. Assumability of Contracts and Leases. Except as previously ------------ ------------------------------------ disclosed, all Material Contracts between Miners and any other entity or person are assumable and assignable and do not contain any term or provision that would accelerate or increase payments that would otherwise be due by Miners to such person or entity, or change or modify the provisions or terms of such leases, contracts and agreements by reason of this Agreement or the transactions contemplated hereby. Except as previously disclosed, each lease pursuant to which Miners, as lessee, leases real or personal property is valid and in effect in accordance with its respective terms, and there is not, under any of such leases, on the part of the lessee any material existing default or any event which, with notice or lapse of time, or both, would constitute such a default, other than defaults which would not individually or in the aggregate have a material adverse effect on the financial condition, business, prospects, or operating results of Miners. Section 3.31. Loans. Except as previously disclosed, each loan reflected ------------ ----- as an asset on Miners's financial statements as of September 30, 1997, or acquired since that date, is the legal, valid and binding obligation of the obligor named therein, enforceable in accordance with its terms, subject to bankruptcy, insolvency and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. All such loans, and the collateral and other security therefor, and the documentation for the same, meet the requirements, rules, regulations or directives of the FDIC, or other applicable governmental authorities. Section 3.32. Materiality. For purposes of this Article III, unless ------------ ----------- otherwise defined, the term "material" or "materially" refers to amounts in excess of $20,000. Section 3.33. DELETED. ------------ Section 3.34. DELETED. ------------ Section 3.35. Adjustable Rate Mortgages. Miners has made all interest ------------ ------------------------- rate adjustments to any mortgage loan according to the terms of said mortgage loan and has complied and is in compliance in all material respects with all federal, state and other applicable laws, rules and regulations, including orders, writs, decrees, injunctions and other requirements of any court or governmental authorities having jurisdiction over adjustable rate mortgages. Section 3.36. CRA Compliance. Miners has received a satisfactory ------------ -------------- compliance rating and has received a satisfactory Community Reinvestment Act rating. Miners has no knowledge of any facts or circumstances which would prevent it from receiving such satisfactory ratings upon its next appropriate examination. 15 Section 3.37. DELETED. ------------ Section 3.38. Loan Loss Reserve. The loan loss reserve of Miners is and ------------ ----------------- shall remain adequate in light of generally accepted accounting principles, directives of governmental authorities, and all regulations, rules and directives of the Banking Department and the FDIC. No regulatory authority requested Miners to increase the allowance for loan losses during 1997, 1996, 1995 or 1994. Section 3.39. DELETED. ------------ Section 3.40. DELETED. ------------ Section 3.41. DELETED. ------------ Section 3.42. Accuracy of Representations. Miners will promptly notify MP ------------ --------------------------- Corp. if any of the representations contained in this Article III cease to be true and correct subsequent to the date hereof. Further, no representations made by Miners pursuant to this Agreement contain any untrue statement of material fact or omit to state a material fact necessary to make the statements not misleading. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF MP CORP. ------------------------------------------ MP Corp. represents and warrants to Miners, as of even date herewith, as follows: Section 4.1. Authority. The execution and delivery of this Agreement and ----------- --------- the Bank Merger Agreement and the consummation of the transactions contemplated herein and therein have been duly and validly authorized by the Board of Directors of MP Corp., and no other corporate action on the part of MP Corp. is necessary to authorize the approval of this Agreement and the Bank Merger Agreement or the consummation of the transactions contemplated herein and therein. This Agreement and the Bank Merger Agreement have been duly executed and delivered by MP Corp. and, assuming due authorization, execution and delivery by Miners, and receipt of all required regulatory and shareholder approvals, constitutes a valid and binding obligation of MP Corp. Assuming regulatory and shareholder approval, the execution, delivery and consummation of this Agreement will not constitute a violation or breach of or default under the Articles of Incorporation or the Bylaws of MP Corp. or any statute, rule, regulation, order, decree, directive, agreement, indenture or other instrument to which MP Corp. is a party or by which MP Corp. or any of its properties are bound. Section 4.2. Organization and Standing. MP Corp. is a business ----------- ------------------------- corporation that is duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania. MP Corp. is a registered bank holding company under the Bank Holding Company 16 Act of 1956, as amended, and has full power and lawful authority to own and hold its properties and to carry on its present business. MP Corp. owns all of the issued and outstanding shares of capital stock of Mid Penn Bank. Mid Penn Bank is a Pennsylvania state-chartered banking institution validly existing and in good standing under the laws of the Commonwealth of Pennsylvania and of the United States, and is duly authorized to engage in the banking business as an insured bank under the Federal Deposit Insurance Act, as amended. Section 4.3. Capitalization. The authorized capital stock of MP Corp. ----------- -------------- consists of Ten Million (10,000,000) shares of common stock, par value one dollar ($1.00) per share ("MP Corp. Common Stock") of which, at September 30, 1997, 2,607,552 shares were issued and outstanding. All outstanding shares of MP Corp. Common Stock have been duly issued and are validly outstanding, fully paid and nonassessable. The shares of MP Corp. Common Stock to be issued in connection with the Bank Merger have been duly authorized and, when issued in accordance with the terms of this Agreement and the Bank Merger Agreement, will be validly issued, fully paid and nonassessable. Section 4.4. DELETED. ----------- Section 4.5. Financial Statements. MP Corp. has delivered to Miners the ----------- -------------------- following financial statements: (i) Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Shareholders' Equity, and Consolidated Statements of Cash Flows as of and for the years ended December 31, 1996 and December 31, 1995, certified by Parente, Randolph, Orlando, Carey and Associates and set forth in the Annual Report to the shareholders of MP Corp. for the year ended on December 31, 1996; and (ii) a Consolidated Statement of Condition, a Consolidated Statement of Income and a Consolidated Statement of Changes in Shareholders' Equity for the three-month period ended September 30, 1997, set forth in a "Quarterly Report" to the shareholders of MP Corp. (the foregoing Consolidated Statement of Condition being hereinafter referred to as the "MP Corp. Balance Sheet"). Each of the foregoing financial statements fairly presents the consolidated financial position, assets, liabilities and results of operations of MP Corp. at their respective dates and for the respective periods then ended and has been prepared in accordance with generally accepted accounting principles consistently applied, except as otherwise noted in a footnote thereto and subject, in the case of the interim financial statements contained in the aforesaid Quarterly Report, to normal recurring year-end adjustments, which are not material in any case or in the aggregate. Section 4.6. Absence of Undisclosed Liabilities. Except as previously ----------- ---------------------------------- disclosed, or as reflected, noted or adequately reserved against in the MP Corp. Balance Sheet, at September 30, 1997, MP Corp. had no material liabilities (whether accrued, absolute, contingent or otherwise) which are required to be reflected, noted or reserved against therein under generally accepted accounting principles or which are in any case or in the aggregate material. Except as previously disclosed, since September 30, 1997, MP Corp. has not incurred any such liability other than liabilities of the same nature as those set forth in the MP Corp. Balance Sheet, all of which have been reasonably incurred in the Ordinary Course of Business. 17 Section 4.7. Absence of Changes. Since September 30, 1997, there has not ----------- ------------------ been any material and adverse change in the condition (financial or otherwise), assets, liabilities, business or operations of MP Corp. or MP Bank. Section 4.8. Litigation. Except as previously disclosed: (i) there is no ----------- ---------- litigation, investigation or proceeding pending, or to the knowledge of MP Corp. threatened, that involves MP Corp. or its properties and that, if determined adversely to MP Corp., would materially and adversely affect the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of MP Corp.; (ii) there are no outstanding orders, writs, injunctions, decrees, consent agreements, memoranda of understanding or other directives of any federal, state or local court or governmental authority or of any arbitration tribunal against MP Corp. which materially and adversely affect the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of MP Corp., or restrict in any manner the right of MP Corp. to conduct its business as presently conducted; and (iii) MP Corp. is not aware of any fact or condition presently existing that might give rise to any litigation, investigation or proceeding which, if determined adversely to MP Corp., would materially and adversely affect the condition (financial or otherwise), assets, liabilities, business or operations of MP Corp. For purposes of this Section 4.8, MP Corp. shall be deemed to include MP Bank. Section 4.9. Proxy Statement/Prospectus. At the time the Proxy ----------- -------------------------- Statement/ Prospectus (as defined in Section 7.1(b) of this Agreement) is mailed to the shareholders of Miners, and at all times subsequent to such mailing, up to and including the Effective Date, the Proxy Statement/Prospectus (including any pre- and post-effective amendments and supplements thereto), with respect to all information relating to MP Corp. and MP Bank, MP Corp. Common Stock, and actions taken and statements made by MP Corp. and MP Bank in connection with the transactions contemplated herein (other than information provided by Miners to MP Corp. and MP Bank), will: (i) comply in all material respects with applicable provisions of the 1933 Act and the 1934 Act and the pertinent rules and regulations thereunder; and (ii) not contain any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omits to state any material fact that is necessary to be stated therein in order (A) to make the statements therein not false or misleading, or (B) to correct any statement in an earlier communication with respect to the Proxy Statement/Prospectus which has become false or misleading. ARTICLE V REPRESENTATIONS AND WARRANTIES OF MP BANK ----------------------------------------- MP Bank represents and warrants to Miners, as of even date herewith, as follows: Section 5.1. Capital Structure of MP Bank. MP Bank is authorized to ----------- ---------------------------- issue ten million (10,000,000) shares of capital stock, par value one dollar ($1.00) per share, of which all shares outstanding are owned by MP Corp. 18 Section 5.2. Organization and Standing. MP Bank is a Pennsylvania state- ----------- ------------------------- chartered banking institution which is duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania and of the United States. MP Bank has full power and lawful authority to own and hold its properties and to carry on its present business. Section 5.3. Authorized and Effective Agreement. The execution, delivery ----------- ---------------------------------- and performance of this Agreement and the Bank Merger Agreement have been duly and validly authorized by the Board of Directors of MP Bank. Subject to appropriate shareholder and regulatory approvals, neither the execution and delivery of this Agreement or the Bank Merger Agreement nor the consummation of the transactions provided for herein or therein will violate any agreement to which MP Bank is a party or by which it is bound or any law, regulation, order, decree or any provision of its Articles of Incorporation or By-laws. ARTICLE VI COVENANTS OF MINERS ------------------- From the date of this Agreement until the Effective Date (as defined in Section 11.2 of this Agreement), Miners covenants and agrees to do the following: Section 6.1. Conduct of Business. Except as otherwise consented to by MP ----------- ------------------- Corp. and MP Bank in writing, Miners shall: (a) use all reasonable efforts to carry on its business in, and only in, the Ordinary Course of Business, consistent with past practices and written policies; (b) to the extent consistent with prudent business judgment, use all reasonable efforts to preserve its present business organization, to retain the services of its present officers and employees, to maintain good relationships with its employees, and to maintain its relationships with customers, suppliers and others having business dealings with Miners; (c) maintain all of Miners's structures, equipment and other real property and tangible personal property in good repair, order and condition, except for ordinary wear and tear and damage by unavoidable casualty; (d) use all reasonable efforts to preserve or collect all material claims and causes of action belonging to Miners; (e) keep in full force and effect all insurance policies now carried by Miners; (f) perform in all material respects each of Miners's obligations under all material agreements, contracts, instruments and other commitments to which Miners is a party or by which Miners may be bound or which relate to or affect its properties, assets and business; 19 (g) maintain its books of account and other records in the Ordinary Course of Business; (h) comply in all material respects with all statutes, laws, ordinances, rules and regulations, decrees, orders, consent agreements, examination reports, memoranda of understanding and other federal, state, county, local and municipal governmental directives applicable to Miners and to the conduct of its business; (i) not amend Miners's Articles of Incorporation or Bylaws; (j) not enter into or assume any material contract, incur any material liability or obligation, make any material commitment, acquire or dispose of any property or asset or engage in any transaction or subject any of Miners's properties or assets to any material lien, claim, charge, or encumbrance of any kind whatsoever; (k) not take or permit to be taken any action which would constitute a breach of any representation, warranty or covenant set forth in this Agreement; (l) not declare, set aside or pay any dividend or make any other distribution in respect of Miners Common Stock, except as provided in Section 6.9 of this Article VI; (m) not authorize, purchase, issue or sell (or authorize, issue or grant options, warrants or rights to purchase or sell) any shares of Miners Common Stock or any other equity or debt securities of Miners or any securities convertible into Miners Common Stock; (n) not increase the rate of compensation of, pay a bonus or severance compensation to, or enter into any employment, severance, deferred compensation or other agreement with any officer, director, employee or consultant of Miners; (o) not enter into any related party transaction of the kind contemplated in Section 3.20 of Article III of this Agreement except such related party transactions relating to extensions of credit made in accordance with all applicable laws, regulations and rules and in the Ordinary Course of Business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable arms' length transactions with other persons that do not involve more than the normal risk of collectibility or present other unfavorable features and after disclosure of such to MP Corp.; (p) not change the presently outstanding number of shares or declare or effect any capitalization, reclassification, stock dividend, stock split or like change in capitalization; (q) not enter into or substantially modify (except as may be required by applicable law) any pension, retirement, stock option, stock warrant, stock purchase, stock appreciation right, savings, profit sharing, deferred compensation, severance, consulting, bonus, group insurance or other employee benefit, incentive or welfare contract, or plan or 20 arrangement, or any trust agreement related thereto, in respect to any of its directors, officers, or other employees; (r) not merge with or into, or consolidate with, or be purchased or acquired by, any other corporation, financial institution, entity, or person (or agree to any such merger, consolidation, affiliation, purchase or acquisition) or permit (or agree to permit) any other corporation, financial institution, entity or person to be merged with it or consolidate or affiliate with any other corporation, financial institution, entity or person; acquire control over any other firm, financial institution, corporation or organization or create any subsidiary; acquire, liquidate, sell or dispose (or agree to acquire, liquidate, sell or dispose) of any assets, other than in the Ordinary Course of Business and consistent with prior practice; (s) not solicit or encourage inquiries or proposals with respect to, furnish any information relating to, or participate in any negotiations or discussions concerning any acquisition or purchase of all or a substantial equity interest or portion of the assets in or of Miners or any business combination with Miners, other than as contemplated by this Agreement, or authorize or permit any officer, director, agent or affiliate of it to do any of the above; or fail to notify MP Corp. immediately if any such inquiries or proposals are received by, any such information is requested from, or any such negotiations are sought to be initiated with Miners; (t) not change any method, practice or principle of accounting except as may be required by generally accepted accounting principles or any applicable regulator or take any action that would preclude satisfaction of the condition to closing contained in Section 8.1(c) relating to financial accounting treatment of the Merger; (u) DELETED. (v) DELETED. (w) DELETED. (x) take any action which would result in any of the representations and warranties of Miners set forth in this Agreement becoming untrue as of any date after the date hereof; (y) not sell, exchange or otherwise dispose of any investment securities or loans that are held for sale, prior to scheduled maturity and other than pursuant to policies agreed upon from time to time by the parties; (z) not purchase any security for its investment portfolio not rated "A" or higher by either Standard & Poor's Corporation or Moody's Investor Services, Inc.; 21 (aa) not waive, release, grant or transfer any rights of value or modify or change in any material respect any existing agreement to which Miners is a party, other than in the ordinary course of business consistent with past practice; (bb) not knowingly take any action that would, under any statute, regulation or administrative practice of any regulatory agency, materially or adversely affect the ability of any party to this Agreement to obtain any required approvals for consummation of the transaction; and (cc) not agree to any of the foregoing items (i) through (bb). Section 6.2. Best Efforts. Miners shall cooperate with MP Corp. and MP ----------- ------------ Bank and shall use its best efforts to do or cause to be done all things necessary or appropriate on its part in order to fulfill the conditions precedent set forth in Article VIII of this Agreement and to consummate this Agreement. In particular, without limiting the generality of the foregoing sentence, Miners shall: (a) cooperate with MP Corp. and MP Bank in the preparation of all required applications for regulatory approval of the transactions contemplated by this Agreement and in the preparation of the Registration Statement (as defined in Section 7.1(b) of this Agreement); (b) call a special or annual meeting of its shareholders and take, in good faith, all actions which are necessary or appropriate on its part in order to secure the approval and adoption of this Agreement and the Bank Merger Agreement by its shareholders at that meeting, including recommending the approval of such agreements by the shareholders of Miners; (c) cooperate with MP Corp. and MP Bank in making Miners's employees reasonably available for training by MP Corp. and MP Bank prior to the Effective Date, to the extent that such training is deemed reasonably necessary by MP Corp. and MP Bank to ensure that Miners's office will be properly operated as a part of MP Bank after the Merger; (d) make additions to loan loss reserves and make loan write-offs, write-downs and other adjustments that reasonably should be made by Miners in light of generally accepted accounting principles, directives of governmental authorities, and all regulations, rules and directives of the FDIC, Department of Banking, and Federal Reserve, prior to the closing of Miners's books of account for its fiscal year ending December 31, 1997, and for the period from that date until the Effective Date; (e) suspend any dividend reinvestment and/or stock repurchase plan, as soon as practicable; 22 (f) modify the Articles of Incorporation or Bylaws or any other documents of Miners reasonably requested by MP Corp. necessary to effectuate the transactions contemplated hereby; and (g) use its best efforts to assure that the directors of Miners shall have executed and delivered the Support Agreement in the form attached hereto as Exhibit "B". Section 6.3. Access to Properties and Records. Miners shall give to MP ----------- -------------------------------- Corp., MP Bank and their authorized representatives (including, without limitation, their counsel, accountants, economic and environmental consultants and other designated representatives) reasonable access during normal business hours to all properties, books, contracts, documents and records of Miners as MP Corp. or MP Bank may reasonably request, subject to the obligation of MP Corp., MP Bank and their authorized representatives to maintain the confidentiality of all non-public information concerning Miners obtained by reason of such access. Section 6.4. Subsequent Financial Statements. Between the date of ----------- ------------------------------- execution of this Agreement and the Effective Date, Miners shall promptly prepare and deliver to MP Corp. and MP Bank, as soon as practicable, all internal monthly and quarterly financial statements, reports to shareholders and reports to regulatory authorities prepared by or for Miners, including all audit reports submitted to Miners by independent auditors in connection with each annual, interim or special audit of the books of Miners made by such accountants. In particular, without limiting the generality of the foregoing sentence, Miners shall deliver to MP Corp. and MP Bank, as soon as practicable, a balance sheet as of December 31, 1997, and a related statement of income for the twelve (12) months then ended (which financial statements are hereinafter referred to as the "December 31, 1997 Bank Financial Statements"). The representations and warranties set forth in Sections 3.7, 3.8 and 3.9 of this Agreement shall apply to the December 31, 1997 Bank Financial Statements. Section 6.5. Board and Committee Minutes. Miners shall provide to MP ----------- --------------------------- Corp., within 10 days after any meeting of the Board of Directors, or any committee thereof, or any senior or executive management committee, a copy of the minutes of such meeting. Section 6.6. Update Information. Miners shall promptly disclose to MP ----------- ------------------ Corp. and MP Bank, in writing, any change, addition, deletion or other modification to the information previously disclosed. Section 6.7. Notice. Miners shall promptly notify MP Corp. and MP Bank, ----------- ------ in writing, of any actions, claims, investigations, proceedings or other developments which, if pending or in existence on the date of this Agreement, would have been required to be disclosed to MP Corp. and MP Bank in order to ensure the accuracy of the representations and warranties set forth in this Agreement or which otherwise could materially and adversely affect the condition (financial or otherwise), assets, liabilities, business operations or future prospects of Miners. 23 Section 6.8. Other Proposals. Miners shall not, nor shall it permit any ----------- --------------- officer, director, employee, agent, consultant, counsel or other representative, to directly or indirectly solicit, encourage, initiate or engage in discussions or negotiations with, or respond to requests for information, inquiries or other communications from, any person, other than MP Corp., concerning the fact of, or the terms and conditions of, this Agreement, or concerning any acquisition of Miners, or any assets or business thereof (except that Miners' officers may respond to inquiries from analysts, regulatory authorities and holders of Miners Common Stock in the Ordinary Course of Business); and Miners shall notify MP Corp. immediately if any such discussions or negotiations are sought to be initiated with Miners by any such person other than MP Corp. or if any such requests for information, inquiries, proposals or communications are received from any person other than MP Corp. Section 6.9. Dividends. Between the date of this Agreement and the ----------- --------- Effective Date, Miners shall only declare and pay cash dividends as provided herein. Miners shall only pay regular semi-annual cash dividends in amounts and on dates consistent with past practices. Section 6.10. Core Deposits. Miners shall use commercially reasonable ------------ ------------- efforts to maintain deposits. Section 6.11. Affiliate Letters. Miners shall deliver or cause to be ------------ ----------------- delivered to MP Corp. and MP Bank, at or before the Closing (as defined in Section 11.1 of this Agreement), a letter or agreement from each officer, director and shareholder of Miners who may be deemed to be an "affiliate" (as that term is defined for purposes of Rules 145 and 405 promulgated by the SEC under the 1933 Act) of Miners, in form and substance satisfactory to MP Corp. and MP Bank, under the terms of which each such officer, director or shareholder acknowledges and agrees to abide by all limitations imposed by the 1933 Act and by all rules, regulations and releases promulgated thereunder with respect to the sale or other disposition of the shares of MP Corp. Common Stock to be received by such person pursuant to this Agreement. Section 6.12. No Purchases or Sales of MP Corp. Common Stock During Price ------------ ----------------------------------------------------------- Determination Period. Neither Miners nor any executive officer or director of - -------------------- Miners nor any shareholder of Miners who may be deemed to be an "affiliate" (as that term is defined for purposes of Rules 145 and 405 promulgated by the SEC under the 1933 Act) of Miners shall purchase or sell or submit a bid to purchase or an offer to sell directly or indirectly, any shares of MP Corp. Common Stock or any options, rights or other securities convertible into shares of MP Corp. Common Stock within 20 days of the Effective Date. Section 6.13. Accounting Treatment. Miners acknowledges that MP Corp. and ------------ -------------------- MP Bank intend to treat the business combination contemplated by this Agreement as a "pooling of interests" for financial reporting purposes. Miners shall not take (and shall use its best efforts not to permit any of its directors, officers, employees, shareholders, agents, consultants or other representatives to take) any action which would preclude MP Corp. and MP Bank from treating such business combination as a "pooling of interests" for financial reporting purposes. 24 Section 6.14. Press Releases. Miners shall not issue any press release ------------ -------------- related to this Agreement and the Bank Merger Agreement or the transactions contemplated hereby or thereby as to which MP Corp. has not given its prior written consent, and shall consult with MP Corp. as to the form and substance of other public disclosures related thereto. Section 6.15. DELETED. ------------ Section 6.16. Phase I Environmental Audit. Miners shall permit, if MP ------------ --------------------------- Corp. elects to do, at its own expense, a "phase I environmental audit" to be performed at any physical location owned or occupied by Miners on the date hereof. Section 6.17. DELETED. ------------ ARTICLE VII COVENANTS OF MP CORP. AND MP BANK --------------------------------- From the date of this Agreement until the Effective Date (as defined in Section 11.2 of this Agreement), MP Corp. and MP Bank covenant and agree to do the following: Section 7.1. Best Efforts. MP Corp. and MP Bank shall cooperate with ----------- ------------ Miners and shall use their best efforts to do or cause to be done all things necessary or appropriate on their part in order to fulfill the conditions precedent set forth in Article VIII of this Agreement and to consummate this Agreement. In particular, without limiting the generality of the foregoing sentence, MP Corp. and MP Bank agree to do the following: (a) Applications for Regulatory Approval. MP Corp. and MP Bank shall ------------------------------------ promptly prepare and file, with the cooperation and assistance of Miners, all required applications for regulatory approval of the transactions contemplated by this Agreement and the Bank Merger Agreement. (b) Registration Statement. MP Corp. shall promptly prepare, with the ---------------------- cooperation and assistance of Miners, and file with the SEC a registration statement under the 1933 Act (the "Registration Statement") for the purpose of registering the shares of MP Corp. Common Stock to be issued under the provisions of this Agreement. MP Corp. may rely upon all information provided to it by Miners in this connection, and MP Corp. shall not be liable for any untrue statement of a material fact or any omission to state a material fact in the Registration Statement or in the proxy statement and prospectus (the "Proxy Statement/Prospectus") which is prepared as a part thereof, if such statement is made by MP Corp. in reliance upon any information provided to MP Corp. by Miners or by its agents and representatives. MP Corp. will advise Miners, after it receives notice thereof, of the time when the Registration Statement or any Pre- or Post- Effective Amendment thereto has become effective or any supplement or amendment, thereto has been filed. 25 (c) State Securities Laws. MP Corp. and MP Bank, with the cooperation --------------------- of Miners, shall promptly take all such actions as may be necessary or appropriate in order to comply with all applicable securities laws of any state having jurisdiction over the transactions contemplated by this Agreement. Section 7.2. Access to Properties and Records. MP Corp. and MP Bank ----------- -------------------------------- shall give to Miners and to its authorized representatives (including without limitation Miners's counsel, accountants, economic and environmental consultants and other designated representatives) reasonable access during normal business hours to all properties, books, contracts, documents and records of MP Corp. and MP Bank as Miners may reasonably request, subject to the obligation of Miners and its authorized representatives to maintain the confidentiality of all non- public information concerning MP Corp. or MP Bank obtained by reason of such access. Section 7.3. Subsequent Financial Statements. Between the date of ----------- ------------------------------- execution of this Agreement and the Effective Date, MP Corp. shall promptly prepare and deliver to Miners, as soon as practicable, each Quarterly Report to MP Corp.'s shareholders and any Annual Report to MP Corp.'s shareholders normally prepared by MP Corp. The representations and warranties set forth in Sections 4.5, 4.6 and 4.7 of this Agreement shall apply to the financial statements set forth in the foregoing Quarterly Reports and any Annual Report to MP Corp.'s shareholders. Section 7.4. Update Information. MP Corp. and MP Bank shall promptly ----------- ------------------ disclose to Miners, in writing, any change, addition, deletion or other modification to the information previously disclosed. Section 7.5. Notice. MP Corp. and MP Bank shall promptly notify Miners, ----------- ------ in writing, of any actions, claims, investigations or other developments which, if pending or in existence on the date of this Agreement, would have been required to be disclosed to Miners in order to ensure the accuracy of the representations and warranties set forth in this Agreement or which otherwise could materially and adversely affect the condition (financial or otherwise), assets, liabilities, business or operations of MP Corp. or MP Bank. Section 7.6. No Purchase or Sales of MP Corp. Common Stock During Price ----------- ---------------------------------------------------------- Determination Period. Neither MP Corp. nor any subsidiary of MP Corp., nor any - -------------------- executive officer or director of MP Corp. or any subsidiary of MP Corp., nor any shareholder of MP Corp. who may be deemed to be an "affiliate" (as that term is defined for purposes of Rules 145 and 405 promulgated by the SEC under the 1933 Act) of MP Corp., shall purchase or sell on AMEX, or submit a bid to purchase or an offer to sell on AMEX, directly or indirectly, any shares of MP Corp. Common Stock or any options, rights or other securities convertible into shares of MP Corp. Common Stock within 20 days of the Effective Date; provided, however, that MP Corp. may purchase shares of MP Corp. Common Stock in the Ordinary Course of Business during this period pursuant to MP Corp.'s employee benefit plans or MP Corp.'s dividend reinvestment plan. 26 ARTICLE VIII CONDITIONS PRECEDENT -------------------- Section 8.1. Common Conditions. The obligations of the parties to ----------- ----------------- consummate this Agreement shall be subject to the satisfaction of each of the following common conditions prior to or as of the Closing, except to the extent that any such condition shall have been waived in accordance with the provisions of Section 9.4 of this Agreement: (a) Shareholder and Regulatory Approvals. The Parties hereto are not ------------------------------------ under any obligation to consummate the Agreement until the approval of the FRB (or waiver thereof), the Banking Department and any other approvals that may be necessary or required by the federal or state regulators has been received, and all conditions and waiting periods required by such approvals, if any, have been satisfied or have expired, and until any other approvals required under the Articles of Incorporation or Bylaws of Miners, MP Corp. or MP Bank, or from the shareholders of Miners or MP Corp., as the case may be, have been received. Provided, however, that no such approval shall have imposed any condition or requirement which, in the opinion of the Board of Directors of MP Corp., renders consummation of the transactions contemplated herein inadvisable. (c) Tax Matters. There shall have been received an opinion of counsel ----------- from Shumaker Williams, P.C., reasonably satisfactory in form and substance to MP Corp. and MP Bank and to Miners, to the effect that: (i) The transactions contemplated by this Agreement and by the Bank Merger Agreement will constitute a reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of 1986, as amended; (ii) No gain or loss will be recognized by MP Corp. or MP Bank or by Miners as a result of the reorganization; (iii) No gain or loss will be recognized by the shareholders of Miners upon receipt of MP Corp. Common Stock in exchange for Miners Common Stock pursuant to the provisions of this Agreement (except in respect of cash which is received in lieu of the issuance of fractional shares of MP Corp. Common Stock and any shareholder of Miners who receives payment in cash as a dissenting shareholder); (iv) The tax basis of the MP Corp. Common Stock to be received by the shareholders of Miners pursuant to the provisions of this Agreement will be the same as the tax basis of the Miners Common Stock surrendered in exchange therefor; (v) The holding periods of the MP Corp. Common Stock to be received by the shareholders of Miners pursuant to the provisions of this Agreement will include the holding periods of the Miners Common Stock surrendered in exchange 27 therefor, provided that such Miners Common Stock is held as a capital asset on the Effective Date; and (vi) MP Bank, as the surviving bank to the Bank Merger, will carry-over and take into account all accounting items and tax attributes of Miners, including, but not limited, to earnings and profits, methods of accounting, and tax basis and holding periods of the assets of Miners. (d) Registration Statement. The Registration Statement (as defined in ---------------------- Section 7.1(b) of this Agreement, including any amendments thereto) shall have been declared effective by the SEC; the information contained therein shall be true, complete and correct in all material respects as of the date of mailing of the Proxy Statement/Prospectus (as defined in Section 7.1(b) of this Agreement) to the shareholders of Miners; regulatory clearance for the offering contemplated by the Registration Statement (the "Offering") shall have been received from each federal and state regulatory authority having jurisdiction over the Offering, and no stop order shall have been issued or proceedings instituted or threatened by any federal or state regulatory authority to suspend or terminate the effectiveness of the Registration Statement or the Offering. (e) No Suits. No action, suit or proceeding shall be pending or -------- threatened before any federal, state or local court or governmental authority or before any arbitration tribunal which seeks to modify, enjoin or prohibit or otherwise adversely and materially affect the transactions contemplated by this Agreement. (f) Statutes; Orders. No statute, rule, regulation, order, injunction ---------------- or decree shall have been enacted, entered, promulgated or enforced by any governmental authority which prohibits, restricts or makes illegal the consummation of the transactions contemplated by this Agreement. (g) Antitrust Laws. All applicable notifications, statutory and -------------- regulatory Antitrust Law requirements have been met. (h) Other Requirements. All other requirements prescribed by law, and ------------------ the Articles of Incorporation, Bylaws and Contracts of the parties hereto which are necessary to the consummation of the transactions contemplated by this Agreement shall have been satisfied. Section 8.2. Conditions Precedent to Obligations of MP Corp. and MP Bank. ----------- ----------------------------------------------------------- The obligations of MP Corp. and MP Bank to consummate this Agreement shall be subject to the satisfaction of each of the following conditions prior to or as of the Closing, except to the extent that any such condition shall have been waived by MP Corp. and MP Bank in accordance with the provisions of Section 9.4 of this Agreement: 28 (a) Accuracy of Representations and Warranties. All of the ------------------------------------------ representations and warranties of Miners, as set forth in this Agreement and the information contained in all Bank Closing Documents (as defined in Section 8.2(j) of this Agreement), shall be true and correct in all material respects as of the Closing as if made on such date (or on the date to which it relates in the case of any representation or warranty which expressly relates to an earlier date). (b) Covenants Performed. Miners shall have performed or complied in ------------------- all material respects with each of the covenants required by this Agreement to be performed or complied with by it. (c) DELETED. (d) Financial Confirmation. Within sixty (60) days of the execution ---------------------- of this Agreement, MP Corp. and MP Bank (and their accountants if the advice of such accountants is deemed necessary or desirable by MP Corp. and MP Bank) shall have established to their satisfaction that the Bank Balance Sheet fairly presents the financial condition, assets and liabilities of Miners as at September 30, 1997, and that, since September 30, 1997, there has not been any material and adverse change in the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of Miners. (e) DELETED. (f) Accounting Treatment. MP Corp., MP Bank and their accountants -------------------- shall have established to their satisfaction that, as of the Closing, the transactions contemplated by this Agreement can be accounted for as a "pooling of interests" for financial reporting purposes. (g) Federal and State Securities and Antitrust Laws. MP Corp., MP ----------------------------------------------- Bank and their counsel shall have determined to their satisfaction that, as of the Closing, all applicable securities and antitrust laws of the federal government and of any state government having jurisdiction over the transactions contemplated by this Agreement shall have been complied with. (h) DELETED. (i) Environmental Matters. No environmental problem of the kind --------------------- contemplated in Section 3.25 of Article III of this Agreement, and not previously disclosed shall have been discovered which would, or which potentially could, materially and adversely affect the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of Miners. The result of any "Phase I environmental audit" conducted pursuant to Section 6.16 with respect to owned or occupied bank premises shall be reasonably satisfactory to MP Corp. 29 (j) Closing Documents. Miners shall have delivered to MP Corp. and MP ----------------- Bank: (i) a certificate signed by Miners' Chairman of the Board or President and by its Secretary, or such other designated and authorized officers, verifying that, to the best of their knowledge after reasonable investigation, all of the representations and warranties of Miners set forth in this Agreement are true and correct in all material respects as of the Closing and that Miners has performed in all material respects each of the covenants required to be performed by it under this Agreement; (ii) all consents and authorizations of landlords and other persons that are necessary to permit this Agreement to be consummated without violation of any lease or other agreement to which Miners is a party or by which Miners or any of its properties are bound; and (iii) such other certificates and documents as MP Corp., MP Bank and their counsel may reasonably request (all of the foregoing certificates and other documents being herein referred to as the "Bank Closing Documents"). (k) DELETED. (l) DELETED. (m) Support Agreement. Each of the Directors of Miners shall have ----------------- executed and delivered to MP Corp. a "Support Agreement" in the form attached hereto as Exhibit "B". (n) Shareholder Approval. MP Corp. shareholders, if required, have -------------------- approved and/or adopted this Agreement and the transactions contemplated thereby. Section 8.3. Conditions Precedent to the Obligations of Miners. The ----------- ------------------------------------------------- obligation of Miners to consummate this Agreement shall be subject to the satisfaction of each of the following conditions prior to or as of the Closing, except to the extent that any such condition shall have been waived by Miners in accordance with the provisions of Section 9.4 of this Agreement: (a) Accuracy of Representations and Warranties. All of the ------------------------------------------ representations and warranties of MP Corp. and MP Bank, as set forth in this Agreement and the information contained in Schedule II and all MP Corp./MP Bank Closing Documents (as defined in Section 8.3(e) of this Agreement), shall be true and correct in all material respects as of the Closing as if made on such date (or on the date to which it relates in the case of any representation or warranty which expressly relates to an earlier date). (b) Covenants Performed. MP Corp. and MP Bank shall have performed or ------------------- complied in all material respects with each of the covenants required by this Agreement to be performed or complied with by them. (c) DELETED. (d) DELETED. 30 (e) Closing Documents. MP Corp. shall have delivered to Miners: (i) a ----------------- certificate signed by its Chairman of the Board or President and its Secretary verifying that, to the best of their knowledge after reasonable investigation, all of the representations and warranties of MP Corp. and MP Bank set forth in this Agreement are true and correct in all material respects as of the Closing and that MP Corp. and MP Bank have performed in all material respects each of the covenants required to be performed by them; and (ii) such other certificates and documents as Miners and its counsel may reasonably request (all of the foregoing certificates and documents being herein referred to as the "MP Corp./MP Bank Closing Documents"). ARTICLE IX TERMINATION, AMENDMENT AND WAIVER --------------------------------- Section 9.1. Termination. This Agreement may be terminated at any time ----------- ----------- before the Effective Date (whether before or after the authorization, approval and adoption of this Agreement by the shareholders) as follows: (a) Mutual Consent. This Agreement may be terminated by mutual -------------- consent of the parties upon the affirmative vote of a majority of each of the Boards of Directors of Miners, MP Corp. and MP Bank, followed by written notices given to each of the other parties. (b) Unilateral Action by MP Corp. and MP Bank. This Agreement may be ----------------------------------------- terminated unilaterally by the affirmative vote of each of the Boards of Directors of MP Corp. and MP Bank, followed by written notice given to Miners, if: (i) there has been a material breach by Miners of any representation, warranty or covenant set forth in this Agreement and such breach has not been cured within thirty (30) days after written notice of such breach has been given by MP Corp. and MP Bank to Miners; or (ii) any condition precedent to MP Corp.'s and MP Bank's obligations, as set forth in Article VIII of this Agreement, remains unsatisfied, through no fault of MP Corp. or MP Bank, on December 31, 1998. (c) Unilateral Action By Miners. This Agreement may be terminated --------------------------- unilaterally by the affirmative vote of a majority of the Board of Directors of Miners, followed by written notice given to MP Corp. and MP Bank, if: (i) there has been a material breach by MP Corp. or MP Bank of any representation, warranty or covenant set forth in this Agreement and such breach has not been cured within thirty (30) days after written notice of such breach has been given to MP Corp. and MP Bank; or (ii) any condition precedent to Miners's obligations as set forth in Article VIII of this Agreement remains unsatisfied, through no fault of Miners, on December 31, 1998. 31 (d) Automatic Termination. If, for any reason, this transaction shall --------------------- not have been consummated by December 31, 1998, this Agreement shall terminate automatically as of that date unless extended, in writing, prior to said date by mutual action of the Boards of Directors of the parties hereto. (e) Due Diligence Termination. MP Corp. and MP Bank may terminate ------------------------- this Agreement by giving written notice to Miners, if any matter or thing has come to the attention of MP Corp. in the course of its due diligence investigation or otherwise with respect to Miners that, in its sole opinion, leads it to believe that any such matter or thing materially and adversely affects the financial or business performance or prospects of Miners so that it would be inadvisable for MP Corp., in its sole and exclusive judgment, exercised in a commercial and reasonable manner, to proceed with this transaction. Section 9.2. Effect of Termination. ----------- --------------------- (a) Effect. In the event of termination, this Agreement shall become ------ null and void and the transactions contemplated herein shall thereupon be abandoned, except that the provisions relating to limited liability and confidentiality set forth in Sections 9.2(b) and 9.2(c) of this Agreement shall survive. (b) Limited Liability. The termination of this Agreement in ----------------- accordance with the terms of Section 9.1 shall create no liability on the part of any party, or on the part of any party's directors, officers, shareholders, agents or representatives, except that if this Agreement is terminated by MP Corp. and MP Bank by reason of a material breach by Miners, or if this Agreement is terminated by Miners by reason of a material breach by MP Corp. or MP Bank, and such breach involves an intentional, willful or grossly negligent misrepresentation or breach of covenant, the breaching party shall be liable to the non-breaching party or parties for all costs and expenses reasonably incurred by the non-breaching party or parties in connection with the preparation, execution and consummation of this Agreement, including the fees of its or their counsel, accountants, consultants and other representatives. (c) Confidentiality. In the event of the termination of this --------------- Agreement, neither MP Corp. nor MP Bank nor Miners shall use or disclose to any other person any confidential information obtained by it during the course of its investigation of the other party or parties. Section 9.3. Amendment. To the extent permitted by law, this Agreement ----------- --------- may be amended at any time before the Effective Date (whether before or after the authorization, approval and adoption of this Agreement by the shareholders of Miners) by a written instrument duly authorized, executed and delivered by MP Corp. and MP Bank and by Miners; provided, however, that any amendment to the provisions of Article II of this Agreement relating to the consideration to be received by the former shareholders of Miners in exchange for their shares of Miners Common Stock shall not take effect until such amendment has been approved, adopted or ratified by the shareholders of Miners in accordance with applicable federal and state law. 32 Section 9.4. Waiver. Any term or condition of this Agreement may be ----------- ------ waived, to the extent permitted by law, by the party or parties entitled to the benefit thereof at any time before the Effective Date (whether before or after the authorization, approval and adoption of this Agreement by the shareholders of Miners) by a written instrument duly authorized, executed and delivered by such party or parties. ARTICLE X RIGHTS OF DISSENTING SHAREHOLDERS OF MINERS ------------------------------------------- Section 10.1. Rights of Dissenting Shareholders of Miners. The ------------ ------------------------------------------- shareholders of Miners shall be entitled to and may exercise dissenters' rights if and to the extent they are entitled to do so under the provisions of the Banking Code or applicable law. ARTICLE XI CLOSING AND EFFECTIVE DATE -------------------------- Section 11.1. Closing. Provided that all conditions precedent set forth ------------ ------- in Article VIII of this Agreement shall have been satisfied or shall have been waived in accordance with Section 9.4 of this Agreement, the parties shall hold a closing (the "Closing") at the offices of MP Corp. at 349 Union Street, P. O. Box 111 Millersburg, Pennsylvania, or such other mutually agreed upon location, within sixty (60) days after the receipt of all required regulatory approvals and after the expiration of all applicable waiting periods, at which time the parties shall deliver the Miners Closing Documents, the MP Corp./MP Bank Closing Documents, and such other documents and instruments as may be necessary or appropriate to effectuate the purposes of this Agreement. Section 11.2. Effective Date. The Merger of Miners with and into MP Bank ------------ -------------- shall become effective and this Agreement and the Bank Merger Agreement shall be consummated on the date upon which Articles of Merger shall be filed with the Pennsylvania Department of State, or such later date as shall be specified as the Effective Date in the Articles of Merger pursuant to the mutual agreement of MP Corp., MP Bank and Miners and in accordance with the Pennsylvania Banking Code ("Effective Date"). At the Effective Date, Miners shall cease to exist as a separate banking institution, and MP Bank shall become the surviving institution of the Merger. 33 ARTICLE XII NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES --------------------------------------------- Section 12.1. No Survival. The representations and warranties of Miners ------------ ----------- and of MP Corp. and MP Bank set forth in this Agreement shall expire and be terminated on the Effective Date by consummation of this Agreement, and no such representation or warranty shall thereafter survive. ARTICLE XIII POST-MERGER AGREEMENTS ---------------------- Section 13.1. Employees. ------------ --------- (a) Immediately after the Effective Date, MP Bank shall employ all of the former Miners employees who are employed by Miners immediately prior to the Effective Date. The aggregate cost of the compensation and benefit package of such employees shall not be less after the Effective Date than immediately prior to the Effective Date and will not be reduced during their employment. (b) Immediately following the Effective Date, former Miners employees who are employed by MP Bank shall be entitled to participate in all benefit, health, incentive, retirement, life insurance, disability, eye and dental, performance award, vacation, leave and personal days plans, policies and programs in effect at such time for employees of MP Bank, subject, however, to the terms of such plans. Former Miners employees who are employed by MP Bank shall receive service credit from their respective hire dates for employment at Miners for purposes of eligibility and vesting requirements under MP Bank's benefit plans and vacation plans. (c) Immediately after the Effective Date, Allen Trawitz shall be employed by MP Bank as Executive Vice President, with the aggregate cost of his compensation and benefits package to be no less than the cost of his total compensation and benefits package in effect immediately prior to the date of this Agreement. (d) Immediately after the Effective Date, Greg Kerwin shall be employed by MP Bank as Vice President and Chairman of the Salary and Human Resource Committee of MP Bank, with the aggregate cost of his compensation and benefits package to be no less than the cost of his total compensation and benefits package in effect immediately prior to the date of this Agreement. 34 Section 13.2. Miners Office Board. ------------ ------------------- (a) Composition; Term; Duties. Immediately following the Effective ------------------------- Date and until fewer than three (3) of the original members remain, there shall be established an advisory board (the "Miners Office Board") comprised of the following members of the Board of Directors of Miners as of the date of this Agreement and for the position on the Board as indicated, if any: Allen Trawitz, Franklin Ruth (Chairman and President), Greg Kerwin, Raymond Donley (Vice Chairman and Secretary), Don Sauve, Richard Klinger, Harold Jury, and Terrence Kerwin. Except as provided herein, the Board of Directors of MP Bank shall determine from time to time, the duties, obligations and responsibilities of the Miners Office Board. Members of the Miners Office Board who are age 66 or older shall be grandfathered for a five (5) year period commencing on the Effective Date from the MP Bank mandatory retirement policy at age 70. (b) Fees of Miners Office Board Members. Following the Effective ----------------------------------- Date, members of the Miners Office Board shall receive fees for services no less than those currently received as a Miners Board member for service as a Miners Office Board member and as a member of the MP Bank Board, as may be the case. Miners Office Board members who also serve on the MP Bank Board of Directors shall receive the full fees paid to MP Bank Board members. In no case, however, shall the fees paid to any Miners Office Board member who serves on both Boards, for his service as a member of the Miners Office Board, exceed $1,800. Miners Office Board salaried members shall have salaries and bonuses continued for a five (5) year period following the Effective Date. (c) Benefits. Members of the Miners Office Board shall continue to -------- receive the benefits received by them in their capacity as Miners' Directors immediately before the Effective Date for service on the Miners Office Board, and such benefits, subject to the terms and conditions of MP Bank's Plans, shall be continued for a period of five (5) years following the Effective Date, as follows: 1. For five years following the Effective Date, members of the Miners Office Board who, prior to the Effective Date, were enrolled in the Blue Cross/Blue Shield Plan of Miners shall be entitled to have 100% of the premiums paid by MP Bank for participation in MP Bank's current Blue Cross/Blue Shield health insurance plan, subject to the terms and conditions of the plans. 2. For five years following the Effective Date, medical insurance for widows and retired employees, covered by Miners as of the date of this Agreement, will, subject to the terms and conditions of those plans, be provided by MP Bank, at MP Bank's expense. 3. For five years following the Effective Date, MP Bank shall use its best efforts to obtain eye and dental insurance coverage for the members of the Miners Office Board, who prior to the Effective Date were covered under the Miners eye and dental plan, under the MP Bank Blue Cross/Blue Shield Plan. If such plan is not 35 available, MP Bank will include the members of the Miners Office Board in its eye and dental plan, subject to the terms and conditions of the Plans. 4. For five years following the Effective Date, MP Bank shall pay 100% of the premiums for the current group life insurance policies for the members of the Miners Office Board, subject to the availability of such continued participation. If such participation or Plan is not available, MP Bank will use its best efforts to obtain coverage in another group health, life, eye and dental, insurance plan, the benefits and terms of which are comparable, for the remainder of the five-year period. Section 13.3. Board Appointments. ------------ ------------------ Immediately after the Effective Date, the following persons shall be appointed to serve as members of the Board of Directors of MP Bank until the 1999 Annual Meeting of Shareholders, and until their successors are elected and qualified: Greg Kerwin and Don Sauve. Mr. Kerwin shall also serve as a member of the Trust Committee of MP Bank. Mr. Sauve shall serve as a member of the Executive Committee of MP Bank. Section 13.4. Merger of Profit Sharing Plans. ------------ ------------------------------ Miners Profit Sharing Retirement Plan shall be merged into MP Bank's Profit Sharing Retirement Plan as soon as practicable. ARTICLE XIV GENERAL PROVISIONS ------------------ Section 14.1. Expenses. Except as provided in Section 9.2(b) of this ------------ -------- Agreement, each party shall pay its own expenses incurred in connection with this Agreement and the consummation of the transactions contemplated herein. For purposes of this Section 14.1, the cost of printing the Proxy Statement/Prospectus shall be deemed to be an expense of MP Corp. and MP Bank. Section 14.2. Other Mergers and Acquisitions. Subject to the right of ------------ ------------------------------ Miners to not consummate this Agreement pursuant to Section 9.1(c) of this Agreement, nothing set forth in this Agreement or any Exhibit hereto shall be construed: (a) to preclude MP Corp. from acquiring, or to limit in any way the right of MP Corp. to acquire, prior to or following the Effective Date, the stock or assets of any other financial services institution or other corporation or entity, whether by issuance or exchange of MP Corp. Common Stock or otherwise; 36 (b) to preclude MP Corp. from issuing, or to limit in any way the right of MP Corp. to issue, prior to or following the Effective Date, MP Corp. Common Stock or other securities; (c) to preclude MP Corp. from granting options at any time with respect to MP Corp. Common Stock or other securities; (d) to preclude option holders of MP Corp. from exercising options at any time with respect to MP Corp. Common Stock or other securities; or (e) to preclude MP Corp. from taking, or to limit in any way the right of MP Corp. to take, any other action not expressly and specifically prohibited by the terms of this Agreement. Section 14.3. Access; Confidentiality. The parties hereby agree to ------------ ----------------------- conduct the investigations and discussions contemplated by Section 6.3 and Section 7.2 of this Agreement in a manner so as to not interfere unreasonably with normal operations and customer and employee relationships. If the transactions contemplated by this Agreement are not consummated, the parties hereby agree to destroy or return all documents and records obtained from the other or their respective representatives, during the course of any investigation and will cause all information with respect to the other party obtained pursuant to this Agreement or preliminarily thereto to be kept confidential, except to the extent such information becomes public through no fault of the party which has obtained such information or any of its respective representatives or agents and except to the extent disclosure of any such information is legally required. Each party hereby agrees to give the other party prompt notice of any contemplated disclosure where such disclosure is so legally required. Section 14.4. Notices. All notices, claims, requests, demands and other ------------ ------- communications which are required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly delivered if delivered in person, transmitted by facsimile machine (but only if receipt is acknowledged in writing), mailed by registered or certified mail, return receipt requested or sent by recognized overnight delivery service guaranteeing next day delivery addressed as follows: (a) If to Mid Penn Bancorp, Inc. and/or Mid Penn Bank, to: Mr. Eugene F. Shaffer Chairman, President & Chief Executive Officer MID PENN BANCORP, INC. 349 Union Street, P. O. Box 111 Millersburg, Pennsylvania 17061 37 (b) If to Miners Bank of Lykens to: Mr. Franklin W. Ruth President and Chief Executive Officer MINERS BANK OF LYKENS 550 Main Street, P. O. Box 38 Lykens, Pennsylvania 17048 Section 14.5. Captions. The captions contained in this Agreement are for ------------ -------- reference purposes only and are not part of this Agreement. Section 14.6. Counterparts. This Agreement may be executed simultaneously ------------ ------------ in several counterparts, each of which shall be deemed an original, but all such counterparts together shall be deemed to be one and the same instrument. Section 14.7. Severability. If any provision of this Agreement or the ------------ ------------ application thereof to any party or circumstance shall be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provisions to other parties or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. Section 14.8. Parties in Interest. This Agreement shall be binding upon ------------ ------------------- and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that the rights and obligations of any party under this Agreement may not be assigned or delegated by that party without the prior written consent of each other party. Section 14.9. Entire Agreement. This Agreement, including the documents ------------ ---------------- and other writings referred to herein or delivered pursuant hereto, sets forth the entire understanding and agreement of the parties hereto and supersedes any and all prior agreements, arrangements and understandings, oral or written, relating to the subject matter hereof. Section 14.10. Governing Law. This Agreement shall be governed by and ------------- ------------- construed in accordance with the domestic internal laws of the Commonwealth of Pennsylvania, without regard to the conflict laws principles thereof. 38 IN WITNESS WHEREOF, intending to be legally bound hereby, this Agreement is executed as of the day and year first above written. ATTEST: MID PENN BANCORP, INC. By: ______________________ By: ______________________________________ Cindy L. Wetzel Eugene F. Shaffer, Chairman Secretary President, and Chief Executive Officer [CORPORATE SEAL] ATTEST: MID PENN BANK By: ______________________ By: ______________________________________ Cindy L. Wetzel Alan W. Dakey, President and Secretary Chief Executive Officer [BANK SEAL] ATTEST: MINERS BANK OF LYKENS By: ______________________ By: ______________________________________ Raymond C. Donley Franklin W. Ruth, Jr., President and Secretary Chief Executive Officer [BANK SEAL] 39 Taken from Section 13.2: (d) Liability Insurance. For a period of two years following the Effective ------------------- Date, MP Corp. shall purchase for the benefit of the former directors of Miners, liability insurance, commonly referred to as tail coverage on terms comparable to the Miners insurance plan currently in effect, so long as said insurance can be purchased from a reputable insurer at commercially reasonable rates and terms, including the term that such policy be on a "claims made" basis. Taken from page 2, Section 2.1 - (d): Closing Market Price. For purposes of this Agreement, the Closing Market -------------------- Price shall be the arithmetic average of the per share closing prices for MP Corp. Common Stock for the twenty (20) trading days immediately preceding the date which is five (5) business days before the Effective Date, as reported on the American Stock Exchange ("AMEX"), the foregoing twenty (20) trading days being hereinafter sometimes referred to as the "Price Determination Period". (For example, if January 30, 1998 were to be the Effective Date, then the Price Determination Period would be January 22, 21, 20, 16, 15, 14, 13, 12, 9, 8, 7, 6, 5, 2, December 31, 30, 29, 26, 24, 23.) In the event that AMEX shall fail to report a closing price for MP Corp. Common Stock for any trading day during the Price Determination Period, then the closing price for that day shall be equal to the average of the closing bid price and the closing asked price as quoted on AMEX for that day. In the event that AMEX shall fail to report a closing price, closing bid price and closing asked price, respectively, for MP Corp. Common Stock for any trading day during the Price Determination Period, then the closing price for that day shall be equal to the average of the closing bid prices and the closing asked prices as quoted: (i) by _________________________ and by _____________________________; or, in the event that neither of these firms is then making a market in MP Corp. Common Stock, (ii) by two brokerage firms then making a market in MP Corp. Common Stock to be selected by MP Corp. and approved by Miners. 3.21 No Finder. Except as previously disclosed, Miners has not paid or become ------- obligated to pay any fee or commission of any kind whatsoever to any broker, finder or other intermediary for, on account of or in connection with the transactions contemplated in this Agreement. 3.22 Significant Customers. All significant customers of Miners have been ---------- previously identified. For purposes of this Section 3.22, a "significant customer" shall mean any customer who, at any time between January 1, 1997 and the date of this Agreement, had or has (i) aggregate outstanding loans in the amount of $50,000 or more, or (ii) aggregate daily deposits in the amount of $50,000 or more. 3.33 Absence of Questionable Payments. Miners has not, nor, to the knowledge of ------------------------- Miners, has any director, officer, agent, employee, consultant or other person associated with or acting on behalf of Miners (i) used any Miners corporate funds for unlawful contributions, gifts, entertainment or unlawful expenses relating to political activity; or (ii) made any direct or indirect unlawful payments to governmental officials from any Miners corporate funds, or established or maintained any unlawful or unrecorded accounts with funds received from Miners. 40 3.34 Powers of Attorney; Guarantees. Except as previously disclosed, Miners ------------------------------ does not have any power of attorney outstanding, or any obligation or liability either actual, construing or contingent, as guarantor, surety, cosigner, endorser, co-maker or indemnitor in respect of the obligation of any person, corporation, partnership, joint venture, association, organization or other entity, except for letters of credit issued in the ordinary course of business which have been previously disclosed. 3.37 Derivatives. Except as previously disclosed, Miners does not own or hold ----------- any derivatives, "caps", or "floors", in its investment portfolio. 3.39 Loan Portfolio. Except as previously disclosed, all evidences of -------------- indebtedness reflected as assets of Miners are in all respects binding obligations of the respective primary obligors associated therewith, and no material amount thereof is subject to any defenses known to Miners which may be asserted against Miners. Except as previously disclosed, Miners has delivered to MP Corp. a true and correct list and brief description of all real property (other than personal residences) in which Miners has an interest as a creditor or mortgagee securing an amount or amounts greater than $25,000 to one borrower or a series of related borrowers. Except as set forth in such list (i) there are no outstanding loans by Miners with an unpaid balance of $10,000 or more on which a default has occurred, and (ii) Miners has no loans reflected as assets in such financial statements which have principal balances in excess of $10,000 except for fully-secured mortgage loans. For purposes hereof, "default" shall include, but not be limited, to a failure of an obligor to make payments with respect to any loans for 30 days or more past the due date for such payment. 3.40 Annual Meeting Documents. Miners has delivered, or will deliver, to MP - ---- ------------------------ Corp. copies of its (i) annual reports to shareholders for the three years ended December 31, 1997, 1996 and 1995, (ii) semi-annual reports to shareholders for the period ended September 30, 1997, and (iii) proxy materials used or for use in connection with its meetings of shareholders held in 1997, 1996 and 1995. 3.41 Trust Department and Fiduciary Relationships. Miners has established, -------------------------------------------- maintained and administered all fiduciary and custodian relationships, accounts and agreements; and undertaken and performed all fiduciary and custodian duties, obligations, and responsibilities in compliance with all applicable laws, statutes, rules, regulations and the governing instruments of such fiduciary and custodian relationships. 4.4 Articles of Incorporation and Bylaws. The copies of the Articles of ---------------------------- Incorporation, as amended, and of the Bylaws, as amended, of MP Corp. which have been delivered to Miners are true, correct, and complete in all material respects. 6.1 (u) not make any loan or other credit facility commitment in excess of $100,000 (including without limitation, lines of credit and letters of credit) to any affiliate or compromise, expend, renew or modify any such outstanding commitment; 41 (v) not enter into any swap or similar commitment, agreement or arrangement which is not consistent with past practice and which increases the credit or interest rate risk over the levels existing at September 30, 1997; (w) not enter into any derivative, cap or floor or similar commitment, agreement or arrangement, except in the Ordinary Course of Business and consistent with past practices; 6.15 Professional Fees. Miners shall not incur professional expenses in ----- connection with the transactions contemplated by this Agreement in excess of $30,000, unless Miners and MP Corp. mutually agree, in writing, to increase such amount because of unique and unforeseen circumstances. Such professional expenses shall include those paid and payable to attorneys, accountants, consultants and investment bankers. 6.17 Loan Loss Reserves. Miners shall increase its Loan Loss Reserves by -------------- $_______ from the date hereof to Closing. 8.1(C) Opinion of Counsel for Miners. Miners shall have delivered to MP ---------------------- Corp. and MP Bank an opinion of its counsel in form and substance reasonably satisfactory to MP Corp. and MP Bank, to the effect that, as of the Closing: (i) Miners is a Pennsylvania state-chartered banking institution, duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania and has full power and lawful authority to own and hold its properties and to carry on its present business; (ii) Miners is an insured bank under the provisions of the Federal Deposit Insurance Act, as amended; (iii) the authorized capital of Miners consists exclusively of 15,000 shares of common stock of the par value of five dollars ($5.00) par value per share, of which 15,000 shares are validly issued, 14,825 shares are outstanding, fully paid and non-assessable and 175 shares are held as treasury shares; and, to the knowledge of such counsel after reasonable inquiry, there are no outstanding obligations, options or rights of any kind entitling other persons to purchase or sell any such shares, and there are no outstanding securities or other instruments of any kind convertible into such shares; (iv) Miners has full corporate power and authority to execute and deliver this Agreement and to carry out the transactions contemplated herein, and all corporate actions required to be taken by Miners to authorize the execution and delivery of this Agreement and the performance of the transactions contemplated herein have been taken; 42 (v) this Agreement has been duly executed and delivered by Miners and, assuming due authorization, execution and delivery by MP Corp. and MP Bank, constitutes a valid and binding obligation of Miners and is enforceable against Miners in accordance with its terms, subject to bankruptcy, insolvency, and other laws of general applicability relating to or affecting creditors' rights and general equity principles; (vi) the performance of this Agreement by Miners will not violate the Articles of Incorporation or the Bylaws of Miners or, to the knowledge of such counsel after reasonable inquiry, any applicable statute, rule, regulation, order, decree, directive, consent agreement, memorandum of understanding, contract, indenture or other instrument to which Miners is a party or by which its properties are bound; (vii) to the knowledge of such counsel after reasonable inquiry, there is no action, suit or proceeding, pending or threatened, of the kind contemplated under Section 8.1(e) of this Agreement; (viii) to the knowledge of such counsel after reasonable inquiry, there is no action, suit or proceeding pending or threatened against Miners (except as previously disclosed or in such counsel's opinion) that, if determined adversely to Miners, would have a material and adverse effect upon the condition (financial or otherwise), assets, liabilities, business or operations of Miners; (ix) no consent, approval, authorization or order of any federal, state or local court or governmental authority is required to be obtained by Miners in connection with the consummation of the transactions contemplated in this Agreement, other than such consents, approvals, authorizations and orders as have been obtained prior to the Closing; and (x) such other legal matters incident to the matters contemplated hereby as may reasonably be requested by MP Corp. and MP Bank. For purposes of Clause (viii) above, any action, suit or proceeding seeking to recover from Miners damages, fines, penalties or other relief having a monetary value of $10,000 or more shall be deemed to be "material". In giving the foregoing opinion, such counsel may rely as to matters of fact without independent investigation, to the extent such counsel deems such reliance necessary, appropriate, and reasonable, provided, however, that such reliance is expressly noted in such opinion, and on certificates of federal, state or local governmental officials and on certificates of officers and directors of Miners. Such counsel may expressly exclude any opinions as to choice of law matters and antitrust matters and may add other qualifications and explanations of the basis of its opinions as are reasonably acceptable to MP Corp. and MP Bank. 43 [The opinion of Miners' counsel shall be governed by the Legal Opinion Accord ("Accord") of the American Bar Association Section of Business Law (1991). The term "Actual Knowledge" as used herein shall have the meaning set forth in the Accord. In addition, such opinion may be limited to present statutes, regulations, rulings and formal agency and judicial interpretations and to facts as they presently exist; in rendering such opinion, such counsel need assume no obligation to revise or supplement it should the present laws be changed by the legislative or regulatory action, judicial decision or otherwise after such opinion is rendered. Such counsel may assume that any agreement is the valid and binding obligation of any parties to such agreement other than Miners. In giving such opinion, such counsel may rely as to all matters of facts or certificates of officers or directors of Miners and certificates of public officials, so long as such reliance and the facts thereunder are expressly stated. Such counsel's opinion shall be limited to matters governed by federal laws and by the laws of the Commonwealth of Pennsylvania. With respect to matters involving the application of Pennsylvania law, such counsel may rely, to the extent it deems proper and as specified in its opinion, upon the opinion of local counsel.] 8.1(E) Accountants' Comfort Letter. MP Corp. shall have received "comfort" --------------- letters from Miners' independent certified public accountants dated (i) the date of the mailing of the Proxy Statement and (ii) the Effective Date, in each case substantially to the effect that: (A) it is a firm of independent public accountants with respect to Miners within the rules and regulations of the SEC; (B) in its opinion, the audited financial statements of Miners examined by it and included in the Proxy Statement comply as to form in all material respects with the applicable rules and regulations of the SEC; and (C) on the basis of specified procedures (which do not constitute an examination in accordance with generally accepted auditing standards), nothing has come to its attention which causes it to believe: (1) that the financial statements, if any, of Miners included in such Proxy Statement do not comply in all material respects with the applicable accounting requirements and with the rules and regulations of the SEC and (2) that any such unaudited financial statements of Miners from which unaudited, quarterly financial information set forth in such Proxy Statement has been derived, are not fairly presented in conformity with generally accepted accounting principles applied on a basis consistent with that of the audited financial statements. 8.1 (h) Dissenting Shareholders. Holders of no more than five percent (5%) ----------------------- of the issued and outstanding shares of Miners shall have exercised their statutory appraisal or Dissenters' Rights. 8.1 (k) Miners's Shareholders Equity. The total shareholders equity of Miners ---------------------------- (excluding the reserve for loan losses), on a generally accepted accounting basis, on the Effective Date shall be no less than ___________________________________ Dollars ($__00,000). 44 8.1 (l) Benefit Plans. MP Corp. and MP Bank shall have determined, within 60 ------------- days of the execution of this Agreement, that the medical, health, insurance, and employee benefit plans or programs of Miners shall not contain any provision or term which, upon assumption by MP Corp. or MP Bank, on the Effective Date would require MP Corp. or MP Bank to provide benefits or incur cost in excess of those provided or paid by MP Corp. or MP Bank to or on behalf of its existing employees. 8.3 (c) Opinion of Counsel for MP Corp. and MP Bank. MP Corp. and MP Bank shall ------------------------------------------- have delivered to Miners an opinion of its special counsel, Shumaker Williams, P.C., in form and substance reasonably satisfactory to Miners, to the effect that, as of the Closing: (i) MP Corp. is a business corporation that is duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania; (ii) MP Corp. is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and has full corporate power and authority to own and hold its properties and to carry on its present business; (iii) MP Bank is a Pennsylvania state-chartered banking institution that is duly organized and validly existing under the laws of the Commonwealth of Pennsylvania and of the United States and has full corporate power and authority to own and hold its properties and to carry on its present business; (iv) MP Corp. and MP Bank have full corporate power and authority to execute and deliver this Agreement and to carry out the transactions contemplated herein, and all corporate actions required to be taken by MP Corp. and MP Bank to authorize the execution and delivery of this Agreement and the performance of the transactions contemplated herein have been taken; (v) this Agreement has been duly authorized, executed and delivered by MP Corp. and MP Bank and, assuming due authorization, execution and delivery by Miners, constitutes a valid and binding obligation of each of MP Corp. and MP Bank and is enforceable against MP Corp. in accordance with its terms, subject to bankruptcy, insolvency, and other laws of general applicability relating to or affecting creditors' rights and general equity principles; (vi) to the knowledge of such counsel, there is no action, suit, or proceeding pending or threatened against MP Corp. or MP Bank (except as described in Schedule II to this Agreement or in such counsel's opinion) that, if determined adversely to MP Corp. or MP Bank, would have a material and adverse affect upon the condition (financial or otherwise), assets, liabilities, business or operations of MP Corp. or MP Bank; 45 (vii) to the knowledge of such counsel after reasonable investigation, there is no action, suit or proceeding pending or threatened of the kind contemplated under Section 8.1(e) of this Agreement; (viii) the shares of MP Corp. Common Stock to be issued under this Agreement have been duly authorized and, when issued, will be validly issued, fully paid and non-assessable; (ix) no consent, approval, authorization or order of any federal, state or local court or governmental authority is required to be obtained by MP Corp. or MP Bank in connection with the consummation of the transactions contemplated in this Agreement, other than such consents, approvals, authorizations and orders as have been obtained prior to the Closing; and (x) such other legal matters incident to the matters contemplated hereby as may reasonably be requested by Miners. In giving the foregoing opinion, such counsel may rely as to matters of fact without reasonable investigation, to the extent such counsel deems such reliance necessary, appropriate and reasonable, provided, however, that such reliance is expressly noted on such opinion, and on certificates of federal, state or local governmental officials and on certificates of officers and directors of MP Corp. and MP Bank. Such counsel may exclude any opinions as to choice of law matters and antitrust matters and may add other qualifications and explanations of the basis of its opinions as are reasonably acceptable to Miners. 8.3 (d) Fairness Opinion. Miners shall have obtained from an independent ---------------- financial advisor selected by the Board of Directors of Miners, an opinion, dated as of the date of the Proxy Statement/Prospectus for the special or annual meeting of Miners' shareholders, contemplated by Section 6.2(b) of this Agreement, stating that the consideration to be received by the holders of Miners Common Stock is fair, from a financial point of view, to such shareholders. 46 EX-13 3 EXCERPTS FROM REGISTRANT'S 1997 ANNUAL REPORT Mid Penn Bancorp, Inc. Financial Highlights AS OF AND FOR YEARS ENDED DECEMBER 31, 1997 AND 1996
(Dollars in thousands, except per share data.) Percent 1997 1996 Change ---- ---- ------- Total Assets....................................... $ 228,775 210,172 + 8.9% Total Deposits..................................... 192,239 174,671 + 10.1% Net Loans.......................................... 141,510 142,341 - 0.6% Total Investments and Interest Bearing Balances.... 75,228 57,166 + 31.6% Stockholders' Equity............................... 26,883 24,650 + 9.1% Net Income......................................... 4,006 3,329 + 20.3% Net Income Per Share............................... 1.54 1.28 + 20.3% Cash Dividend Per Share on Weighted Average Number of Shares Outstanding.................... .76 .46 + 65.2% Book Value Per Share............................... $ 10.31 9.45 + 9.1%
Mid Penn Bancorp, Inc. Stockholders' Information
1997 1996 ---- ---- High Low High Low Quarter ---- --- ---- --- ------- Market Value Per Share........................... $ 16.19 15.95 16.07 15.95 1st 16.31 15.36 16.07 15.71 2nd 18.00 17.38 16.07 16.07 3rd 32.50 21.25 16.07 15.95 4th
Market Value Information: The market share information was provided by National - ------------------------ Quotation Bureau, Inc., 11 Penn Plaza, New York, NY 1001. Beginning in December of 1997, Mid Penn Bancorp, Inc. common stock trades on the American Stock Exchange under the symbol: MBP. The following brokerage firms make a market in Mid Penn Bancorp, Inc. stock: F. J. Morrissey & Company Janney Montgomery Scott 1700 Market Street 1801 Market Street Suite 1420 Philadelphia PA 19103-2473 Philadelphia PA 19103-3913 1-800-526-6397 1-800-842-8928 Ryan Beck & Company Hopper Soliday & Co Legg Mason Wood 80 Main Street 1825 Oregon Pike Walker, Inc. West Orange NJ 07052 Lancaster PA 17601 214 Senate Avenue 1-800-342-2325 1-800-456-9234 Camp Hill PA 17011 1-800-433-8186 Transfer Agent: Norwest Shareholder Services, P.O. Box 64854, St. Paul, MN - -------------- 55164-0854. Phone: 1-800-468-9716. Number of Stockholders: At December 31, 1997, there were 713 stockholders. - ---------------------- Dividends: A dividend of $.19 per share was paid during each quarter of 1997. - --------- Cash dividends of $ .50 were declared in March and September in 1996. A special cash dividend of $ .50 per share was declared in December of 1995, payable in January of 1996. Mid Penn Bancorp, Inc. plans to continue a quarterly dividend payable in February, May, August and November. Dividend Reinvestment and Stock Purchases: Stockholders of Mid Penn Bancorp, - ----------------------------------------- Inc. may acquire additional shares of common stock by reinvesting their cash dividends under the Dividend Reinvestment Plan without paying a brokerage fee. Voluntary cash contributions may also be made under the Plan. For additional information about the Plan, contact the Transfer Agent. Form 10-K: A Copy of Mid Penn Bancorp, Inc.'s Annual Report on Form 10-K, as - --------- filed with the Securities and Exchange Commission, will be provided to stockholders without charge upon written request to: Secretary, Mid Penn Bancorp, Inc., 349 Union Street, Millersburg, PA 17061. Annual Meeting: The Annual Meeting of the Stockholders of Mid Penn Bancorp, Inc. - -------------- will be held at 10:00 a.m. on Tuesday, April 28, 1998, at 349 Union Street, Millersburg, Pennsylvania. 2 Report of Independent Certified Public Accountants 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 subsidiaries as of December 31, 1997 and 1996 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, 1997. 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 subsidiaries as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES Williamsport, Pennsylvania January 13, 1998 4 Mid Penn Bancorp, Inc. Consolidated Balance Sheets DECEMBER 31, 1997 AND 1996
(Dollars in thousands, except share data) 1997 1996 ---- ---- ASSETS Cash and due from banks............................................. $ 4,409 4,442 Interest bearing balances........................................... 35,727 28,433 Available-for-sale securities....................................... 39,501 28,733 Federal funds sold.................................................. 400 0 Loans............................................................... 145,629 146,393 Less: Unearned income.............................................. (1,943) (1,879) Allowance for loan losses.................................... (2,176) (2,173) -------- -------- Net loans.................................................... 141,510 142,341 -------- -------- Bank premises and equipment, net ................................... 3,186 3,397 Foreclosed assets held for sale..................................... 1,355 548 Accrued interest receivable......................................... 1,594 1,335 Deferred income taxes............................................... 387 536 Other assets........................................................ 706 407 -------- -------- Total Assets $ 228,775 210,172 ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand.......................................................... $ 19,612 15,350 NOW............................................................. 23,086 24,211 Money market.................................................... 11,675 11,575 Savings......................................................... 17,454 17,061 Time............................................................ 120,412 106,474 -------- -------- Total Deposits 192,239 174,671 Short-term borrowings............................................... 2,234 4,512 Accrued interest payable............................................ 1,178 1,020 Other liabilities................................................... 553 609 Long-term debt...................................................... 5,688 4,710 -------- -------- Total Liabilities 201,892 185,522 -------- -------- Stockholders' Equity: Common stock, par value $1 per share; authorized 10,000,000 shares; 2,626,608 and 1,261,029 shares issued in 1997 and 1996 respectively......................... 2,627 1,261 Surplus......................................................... 13,872 11,817 Undivided profits............................................... 10,605 11,937 Net unrealized holding gain on securities....................... 318 168 Treasury stock at cost (19,241 and 19,056 shares, in 1997 and 1996, respectively).......................................... (539) (533) -------- -------- Stockholders' Equity, Net 26,883 24,650 -------- -------- Total Liabilities and Stockholders' Equity $ 228,775 210,172 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 Mid Penn Bancorp, Inc. Consolidated Statement of Income FOR YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except share data) 1997 1996 1995 ---- ---- ---- INTEREST INCOME Interest and fees on loans................................. $ 13,317 12,557 11,561 Interest on interest-bearing balances...................... 1,978 1,938 1,681 Interest and dividends on investment securities: U.S. Treasury and government agencies.................. 1,198 878 680 State and political subdivision obligations, taxable... 0 6 12 State and political subdivision obligations, tax-exempt 770 720 822 Other securities....................................... 53 51 39 Interest on federal funds sold and securities purchased under agreement to resell.............................. 9 16 53 --------- --------- --------- Total Interest Income 17,325 16,166 14,848 --------- --------- --------- INTEREST EXPENSE Interest on deposits....................................... 7,385 7,145 6,403 Interest on short-term borrowings.......................... 186 182 121 Interest on long-term debt................................. 371 185 197 --------- --------- --------- Total Interest Expense 7,942 7,512 6,721 --------- --------- --------- Net Interest Income 9,383 8,654 8,127 PROVISION FOR LOAN LOSSES....................................... 100 50 0 --------- --------- --------- Net Interest Income After Provision for Loan Losses 9,283 8,604 8,127 --------- --------- --------- NONINTEREST INCOME Trust department income.................................... 90 83 68 Service charges on deposits................................ 300 252 249 Investment securities (losses) gains, net.................. (2) 12 15 Gain on sale of loans...................................... 924 0 0 Other income............................................... 409 453 363 --------- --------- --------- Total Noninterest Income 1,721 800 695 --------- --------- --------- NONINTEREST EXPENSE Salaries and employee benefits............................. 2,923 2,419 2,373 Occupancy expense, net..................................... 293 299 278 Equipment expense.......................................... 390 389 353 Pennsylvania bank shares tax expense ...................... 242 229 215 FDIC insurance premium..................................... 22 2 171 Marketing and advertising.................................. 139 141 152 Loss on mortgage sales..................................... 18 26 3 Other expenses............................................. 1,295 1,211 1,180 --------- --------- --------- Total Noninterest Expense 5,322 4,716 4,725 --------- --------- --------- INCOME BEFORE PROVISION FOR INCOME TAXES........................ 5,682 4,688 4,097 Provision for income taxes................................. 1,676 1,359 1,127 --------- --------- --------- Net Income $ 4,006 3,329 2,970 ========= ========= ========= Earnings Per Share (1) $ 1.54 1.28 1.14 ========= ========= ========= Weighted Average Number of Shares Outstanding 2,607,540 2,607,552 2,607,552
(1) Earnings per share for all periods presented have been restated to reflect a stock split effected in the form of a 100% stock dividend effective August 25, 1997, a 5% stock dividend effective May 26, 1997, a 5% stock dividend effective October 7, 1996, and a 5% stock dividend effective December 15, 1995. The accompanying notes are an integral part of these consolidated financial statements. 6 MidPenn Bancorp, Inc. Consolidated Statement of Changes in Stockholders' Equity FOR YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except share data) Net Unrealized Holding Common Undivided Gain (Loss) Treasury Stock Surplus Profits on Securities Stock Total ----- ------- ------- ------------- ----- ----- 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, historical)........... 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 loss........................... 0 0 0 (180) 0 (180) -------- -------- -------- -------- -------- -------- Balance, December 31, 1996................................. 1,261 11,817 11,937 168 (533) 24,650 Net income............................................ 0 0 4,006 0 0 4,006 Cash dividends ($.76 per share)....................... 0 0 (1,917) 0 0 (1,917) 5% stock dividend (additional 61,803 shares).......... 62 2,055 (2,117) 0 0 0 Stock split effected in the form of a 100% stock dividend (additional 1,303,776 shares)........ 1,304 0 (1,304) 0 0 0 Purchase of treasury stock (185 shares)............... 0 0 0 0 (6) (6) Net unrealized holding gain........................... 0 0 0 150 0 150 -------- -------- -------- -------- -------- -------- Balance, December 31, 1997................................. $ 2,627 13,872 10,605 318 (539) 26,883 ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 7 Mid Penn Bancorp, Inc. Consolidated Statement of Cash Flows FOR YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in thousands)
1997 1996 1995 ---- ---- ---- Operating Activities: Net income............................................. $ 4,006 3,329 2,970 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses.......................... 100 50 0 Depreciation....................................... 330 361 319 Investment securities (losses) gains, net.......... 2 (12) (15) Gain on sale/disposal of bank premises and equipment....................................... 0 (3) (8) (Gain) Loss on sale of foreclosed assets........... (41) (189) 11 Gain on sale of loans.............................. (924) 0 0 Deferred income taxes.............................. 73 40 67 Change in interest receivable...................... (259) 51 (172) Change in other assets............................. (299) 255 (387) Change in interest payable......................... 158 (32) 302 Change in other liabilities........................ (56) (445) 217 ---------- ---------- --------- Net Cash Provided By Operating Activities 3,090 3,405 3,304 ---------- ---------- --------- Investing Activities: Net (increase) decrease in interest-bearing balances... (7,294) 1,626 (6,178) Increase in federal funds sold......................... (400) 0 0 Proceeds from the maturity of investment securities.... 8,989 4,041 6,788 Proceeds from the sale of investment securities........ 4,370 3,786 3,017 Proceeds from the sale of bank premises and equipment.. 0 12 10 Purchases of investment securities..................... (23,903) (11,636) (8,278) Proceeds from sale of loans............................ 8,378 0 0 Net increase in loans.................................. (7,809) (13,196) (14,756) Net purchases of bank premises and equipment........... (119) (316) (1,305) Proceeds from the sale of foreclosed assets............ 324 555 109 Capitalized additions - foreclosed assets.............. (4) (13) (166) ---------- ---------- --------- Net Cash Used In Investing Activities (17,468) (15,141) (20,759) ---------- ---------- --------- Financing Activities: Net increase (decrease) in demand and savings deposits. 3,630 3,498 (396) Net increase in time deposits.......................... 13,938 8,905 13,364 Assumption of deposit liabilities...................... 0 0 2,342 Net increase (decrease) in short-term borrowings....... (2,278) 198 2,578 Long-term borrowings................................... 3,106 1,500 0 Long-term debt repayment............................... (2,128) (119) (110) Cash dividends......................................... (1,917) (1,193) (1,698) Purchase of treasury stock............................. (6) 0 0 ---------- ---------- --------- Net Cash Provided By Financing Activities 14,345 12,789 16,080 ---------- ---------- --------- Net increase (decrease) in cash and cash equivalents........ (33) 1,053 (1,375) Cash and cash equivalents at January 1...................... 4,442 3,389 4,764 ---------- ---------- --------- Cash and cash equivalents at December 31.................... $ 4,409 4,442 3,389 ========== ========== ========= Supplemental Disclosures of Cash Flow Information: Cash payments of interest expense...................... $ 7,784 7,544 6,419 Cash payments of income taxes.......................... $ 1,694 1,177 1,186 Supplemental Noncash Disclosures: Loan charge-offs....................................... $ 242 464 366 Transfers to foreclosed assets held for sale........... $ 1,086 394 341
The accompanying notes are an integral part of these consolidated financial statements. 8 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements for 1997 Report (1) Principles of Consolidation The accompanying consolidated financial statements include the accounts of Mid Penn Bancorp, Inc. and its wholly-owned subsidiaries Mid Penn Bank ("Bank") and Mid Penn Investment Corporation (collectively the "Corporation"). All significant intercompany balances and transactions have been eliminated. (2) Nature of Business The Bank engages in a full-service commercial banking and trust business, making available to the community a wide range of financial services, including, but not limited to, installment loans, 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. Mid Penn Investment Corporation is engaged in investing activities. (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) 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 a 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. (b) Investment Securities 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, 1997 and 1996, 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' equity. (c) Loans Interest on loans is recognized on a method which approximates a level yield basis over the life of the loans. The accrual of interest on loans, including impaired loans, is discontinued when principal or interest has consistently been in default for a period of 90 days or more, or because of a deterioration in the financial condition of the borrower, payment in full of principal or interest is not expected 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. 9 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) (d) Allowance for Loan Losses The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses that may become uncollectible. Management's judgment is based upon evaluation of individual loans, risk characteristics of categories of loans, credit loss experience, economic conditions, appraisals and other relevant factors which in management's judgment deserve recognition. The allowance for loan losses is established by a charge to operations. Loan losses and recoveries on previously charged-off loans are charged or credited directly to the allowance. (e) Bank Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straightline basis. Maintenance and repairs are charged to expense when incurred. Gains and losses on dispositions are reflected in current operations. (f) Foreclosed Assets Held for Sale Foreclosed assets held for sale consist of real estate acquired through, or in lieu of, foreclosure in settlement of debt and are recorded at fair market value at the date of transfer. Any valuation adjustments required at the date of transfer are charged to the allowance for loan losses. Subsequent to acquisition, foreclosed assets are carried at the lower of cost or fair market value less costs of disposal, based upon periodic evaluations that consider changes in market conditions and development and disposition costs. Operating results from assets acquired in satisfaction of debt, including rental income less operating costs and gains or losses on the sale of or the periodic evaluation of foreclosed assets, are recorded in noninterest expense. (g) Income Taxes Certain items of income and expense are recognized in different accounting periods for financial reporting purposes than for income tax purposes. Deferred income tax assets and liabilities are provided in recognition of these timing differences at currently enacted income tax rates. As changes in tax laws or rates are enacted, deferred income tax assets and liabilities are adjusted through the provision for income taxes. (h) 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." (i) 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. (j) Earnings Per Share Earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during each of the years presented giving retroactive effect to stock dividends and stock splits. (k) Statement of Cash Flows For purposes of the statement of cash flows, the Corporation considers cash and due from banks to be cash equivalents. (l) Reclassifications Certain prior year amounts have been reclassified to conform to the current year's classifications. 10 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) (4) Restrictions on Cash and Due from Bank Accounts The Bank is required to maintain reserve balances. The amount of those required reserve balances at December 31, 1997 and 1996 was approximately $1,284,000 and $1,227,000, respectively. (5) Investment Securities At December 31, 1997 and 1996, 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 Amount Cost Gains Losses Value ------ --------- ---------- ---------- ---- December 31, 1997 U.S. Treasury and U.S. Government Agencies...................... $ 19,300 19,294 125 21 19,398 Mortgage-Backed U.S. Government Agencies....................... 3,579 3,556 13 13 3,556 State and Political Subdivision Obligations................... 15,555 15,527 378 1 15,904 Restricted Equity Securities................ 643 643 0 0 643 ------ ------ ---- --- ------ $ 39,077 39,020 516 35 39,501 ====== ====== ==== === ====== December 31, 1996 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 Restricted Equity Securities................ 1,249 1,249 0 0 1,249 ------ ------ ---- --- ------ $ 28,501 28,478 337 82 28,733 ====== ====== ==== === ======
Estimated fair values of debt securities are based on quoted market prices, where applicable. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments, adjusted for differences between the quoted instruments and the instruments being valued. Restricted equity securities consist of stock in the Federal Home Loan Bank of Pittsburgh and Atlantic Central Bankers Bank and do not have a readily determinable fair value for purposes of SFAS No. 115, because their ownership is restricted and they lack a market. Therefore, these securities are classified as restricted investment securities, carried at cost, and evaluated for impairment. Investment securities and interest bearing balances having a fair value of $18,742,000 at December 31, 1997, were pledged to secure public and trust deposits and other borrowings. Proceeds from the sale of investment securities in 1997 amounted to $4,370,000. Gross losses from such sales of investment securities, as determined on the basis of specific identification of the adjusted cost of each security sold, amounted to $2,000. Gross gains of $12,000 and $15,000 were realized on the sale of investment securities amounting to $3,786,000 and $3,017,000 in 1996 and 1995, respectively. 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, 1997:
December 31, 1997 (Dollars in thousands) Amortized Fair Cost Value --------- ------ Due in 1 year or less............................................ $ 3,744 3,752 Due after 1 year but within 5 years.............................. 11,402 11,689 Due after 5 years but within 10 years............................ 13,424 13,545 Due after 10 years 6,251 6,316 ------ ------ 34,821 35,302 Mortgage-Backed Securities....................................... 3,556 3,556 Restricted Equity Securities..................................... 643 643 ------ ------ $ 39,020 39,501 ====== ======
The Corporation has no derivative financial instruments requiring disclosure under SFAS No. 119. (6) Loans A summary of loans at December 31, 1997 and 1996 is as follows:
(Dollars in thousands) 1997 1996 ---- ---- Commercial real estate, construction and land development........ $ 79,240 75,200 Commercial, industrial and agricultural.......................... 20,001 18,588 Real estate - residential........................................ 27,009 26,718 Consumer......................................................... 19,371 25,874 Lease financing.................................................. 8 13 ------- ------- $ 145,629 146,393 ======= =======
Included within the loan portfolio are loans on which the Bank has ceased the accrual of interest. These loans amounted to $312,000 as of December 31, 1997 and $1,183,000 as of December 31, 1996. Income recognized on nonaccrual loans in 1997 and 1996 was $19,000 and $144,000, respectively. Interest income which would have been recognized in 1997 and 1996 in accordance with the contractual terms would have been $22,000 and $248,000, respectively. In addition, loans which were past due 90 days or more for which interest continued to be accrued as of December 31, 1997 and 1996, amounted to approximately $207,000 and $519,000, respectively. During 1997, $212,000 in commercial loans were restructured compared to $1,442,000 in 1996. The restructurings were done on terms and conditions available at current market rates. 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 $1,173,000 and $1,123,000 at December 31, 1997 and 1996, respectively. New loans extended were $404,000 and $230,000 and repayments on these loans were $354,000 and $335,000 during 1997 and 1996, 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. Net unamortized loan fees deducted from loans was $381,957 and $315,545 at December 31, 1997 and 1996, respectively. (7) Allowance for Loan Losses Changes in the allowance for loan losses for the years 1997, 1996, and 1995 are summarized as follows: (Dollars in thousands) 1997 1996 1995 ---- ---- ---- Balance, January 1........................ $ 2,173 2,347 2,511 Provision charged to operations........... 100 50 0 Loans charged off......................... (242) (464) (366) Recoveries on loans charged off........... 145 240 202 ----- ----- ----- Balance, December 31...................... $ 2,176 2,173 2,347 ===== ===== ===== 12 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) The recorded investment in loans that are considered impaired amounted to $120,000 (all in nonaccrual) and $220,000 (all in nonaccrual) on December 31, 1997 and December 31, 1996, respectively. By definition, impairment of a loan is considered when, based on current information and events, it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. The allowance for loan losses related to loans classified impaired amounted to approximately $40,000 at December 31, 1997. The average balances of these loans amounted to approximately $204,000 and $464,000 for the years 1997 and 1996, respectively. Due to the low levels of loans classified as impaired, 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 1997 and 1996.
(Dollars in thousands) 1997 1996 ---- ---- Cash receipts applied to reduce principal balance................ $ 8 60 Cash receipts recognized as interest income...................... 9 0 ------- -------- Total cash receipts.............................................. $ 17 60 ======= ========
In addition, at December 31, 1997 and 1996, the Bank had other nonaccrual loans of approximately $193,000 and $963,000, 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, 1997 and 1996, bank premises and equipment are as follows:
(Dollars in thousands) 1997 1996 ---- ---- Land ............................................. $ 545 545 Buildings ....................................... 3,419 3,396 Furniture and Fixtures............................ 2,506 2,442 ------- ------- 6,470 6,383 Less accumulated depreciation..................... 3,284 2,986 ------- ------- $ 3,186 3,397 ======= =======
Depreciation expense amounted to $330,000, $361,000 and $319,000 for the years ended December 31, 1997, 1996 and 1995, respectively. (9) Deposits -------- At December 31, 1997 and 1996, time deposits in denominations of $100,000 or more amounted to $25,504,000 and $14,527,000, respectively. Interest expense on such certificates of deposit amounted to approximately $911,000, $754,000 and $501,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Time deposits at December 31, 1997, mature as follows: (in thousands) 1998, $58,519; 1999, $29,063; 2000, $10,584; 2001, $7,525; 2002, $5,120; thereafter, $9,601. (10) Short-term Borrowings --------------------- Short-term borrowings and the related interest expense as of December 31, 1997 and 1996 consisted of:
(Dollars in thousands) 1997 1996 ---- ---- Interest Interest Balance Expense Balance Expense ------- -------- ------- -------- Federal funds purchased $ 1,200 163 3,700 132 Repurchase agreements 0 0 18 32 Treasury, tax and loan notes 1,034 23 794 18 ------- ----- ------ ------ $ 2,234 186 4,512 182 ======= ===== ====== ======
Federal funds purchased represent overnight funds. Securities sold under repurchase agreements generally mature between one day and one year. Treasury, tax and loan notes are open-ended interest bearing notes payable to the U.S. Treasury upon call. All tax deposits accepted by the Bank are placed in the Treasury note option account. The Bank also has unused lines of credit with several banks amounting to $17.3 million dollars at December 31, 1997. 13 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) (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, 1997, the Bank had long-term debt in the amount of $5,688,000 outstanding to the FHLB consisting of a $1,500,000 term loan at 6.67% due September 4, 2001, a $1,082,000 loan at 7.30% due April 5, 2004 amortized in equal monthly payment, a $2,000,000 bullet loan at 6.08% which will mature on March 19, 2002, a $1,000,000 bullet loan at 6.03% maturing October 4, 1999, and a $106,000 amortizing note at 6.71% maturing on February 22, 2027. The aggregate amounts of maturities of long-term debt subsequent to December 31, 1997 are $138,000 (1998), $1,149,000 (1999), $160,000 (2000), $1,672,000 (2001), $2,185,000 (2002), and $384,000 thereafter. As of December 31, 1996, the Bank had long-term debt in the amount of $4,710,000. 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 1997, 1996 and 1995 was approximately $35,000, $35,000 and $33,000, 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 1997, 1996 and 1995 was $258,000, $229,000 and $213,000, 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, 1997 and 1996:
(Dollars in thousands) 1997 1996 ---- ---- Accumulated postretirement benefit obligation: Retirees............................................................. $ (53) (32) Fully eligible active plan participants.............................. (72) (99) Other active plan participants....................................... (186) (173) --------- ------- (311) (304) Plan assets at fair value.............................................. 0 0 --------- ------- Accumulated postretirement benefit obligation in excess of plan assets. (311) (304) Unrecognized net gain.................................................. (127) (97) Unrecognized transition obligation..................................... 221 235 --------- ------- Accrued postretirement benefit cost.................................... $ (217) (166) ========= =======
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 $215,000 and $210,000 at December 31, 1997 and 1996, respectively. Net periodic postretirement benefit cost for 1997, 1996 and 1995 included the following components: (Dollars in thousands)
1997 1996 1995 ---- ---- ---- Service cost - benefits attributed to service during the period.. $ 24 22 19 Interest cost on accumulated postretirement benefit obligation... 21 21 20 Actual return on plan assets..................................... 0 0 0 Amortization of transition obligation over 20 years.............. 11 13 12 --------- --------- --------- Net periodic postretirement benefit cost......................... $ 56 56 51 ========= ========= =========
For measurement purposes, a 9.5 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1997; 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, 1997, by $37,359 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $6,545. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 6.75 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, 1997 and 1996:
(Dollars in thousands) 1997 1996 ---- ---- Actuarial present value of benefit obligations: Accumulated vested benefit obligation....................... $ (378) (317) ======== ======== Projected benefit obligation................................ $ (378) (317) Plan assets at fair value..................................... 0 0 -------- -------- Projected benefit obligation in excess of fair value.......... (378) (317) Unrecognized prior service cost............................... 209 235 Adjustments................................................... 19 (9) Adjustment to recognize additional minimum liability.......... (142) (153) -------- -------- Pension Liability $ (292) (244) ======== ======== Net pension cost included the following components for 1997 and 1996: (Dollars in thousands) Service cost.................................................. $ 15 18 Interest cost................................................. 22 20 Actual return on plan assets.................................. 0 0 Amortization of transition obligation over 10.5 years......... 26 26 -------- -------- Net Pension Cost $ 63 64 ======== ========
The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 6.75% in 1997 and 7.00% in 1996. 15 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) (14) Federal Income Taxes -------------------- The following temporary differences gave rise to the deferred tax asset at December 31, 1997 and 1996:
(Dollars in thousands) 1997 1996 ---- ---- Deferred tax assets: Allowance for loan losses................................... $ 610 610 Nonaccrual interest......................................... 1 78 Benefit plans............................................... 124 87 Deferred income............................................. 19 38 Other....................................................... 8 5 ------- -------- Total $ 762 818 ------- -------- Deferred tax liabilities: Unrealized gains on securities.............................. $ (163) (87) Depreciation ............................................... (123) (141) Loan fees................................................... (71) (37) Bond accretion.............................................. (18) (17) ------- -------- Total $ (375) (282) ------- -------- Deferred tax asset, net....................................... $ 387 536 ======= ========
The provision for income taxes consists of the following:
(Dollars in thousands) 1997 1996 1995 ---- ---- ---- Current provision............................................. $ 1,603 1,319 1,060 Deferred provision............................................ 73 40 67 ------- ------- ------- Provision for income taxes.................................... $ 1,676 1,359 1,127 ======= ======= =======
A reconciliation of income tax at the statutory rate to the Corporation's effective rate is as follows:
(Dollars in thousands) 1997 1996 1995 ---- ---- ---- Provision at the expected statutory rate...................... $ 1,932 1,594 1,393 Effect of tax-exempt income................................... (284) (266) (300) Nondeductible interest........................................ 37 35 36 Other items................................................... (9) (4) (2) ------- ------- ------- Provision for income taxes.................................... $ 1,676 1,359 1,127 ======= ======= =======
(15) Regulatory Matters ------------------ The Pennsylvania Banking Code restricts the availability of Bank retained earnings for dividend purposes. At December 31, 1997 and 1996, $13,872,000 and $11,817,000, 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. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. The regulations require the Bank to meet specific capital adequacy guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Tier I capital (as defined in the regulations) to total average assets (as defined), and minimum ratios of Tier I and total capital (as defined) to risk-weighted assets (as defined). To be considered adequately capitalized (as defined) under the regulatory framework for prompt corrective action, the Bank must maintain minimum Tier I leverage, Tier I risk-based and total risk-based ratios as set forth in the table. The Bank's actual capital amounts and ratios are also presented in the table. 16 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd)
(Dollars in thousands) To Be Well Capitalized As of December 31, 1997: Capital Adequacy Under Prompt Corrective ---------------- Action Provisions: Actual Required ----------------- Amount (Ratio) Amount (Ratio) Amount (Ratio) ------------- ------------- ------------- Tier I Capital (to Average Assets) $ 21,041 (9.8%) 8,606 (4.0%) 10,757 (5.0%) Tier I Capital (to Risk Weighted Assets) 21,041 (13.7%) 6,130 (4.0%) 9,195 (6.0%) Total Capital (to Risk Weighted Assets) 22,960 (15.0%) 12,260 (8.0%) 15,325 (10.0%) As of December 31, 1996: 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, 1997, the Bank's capital ratios are well in excess of the minimum and well-capitalized guidelines and the Corporation's capital ratios are in excess of the Bank's capital ratios. (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 nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The term of these standby letters of credit is generally one year or less. As of December 31, 1997, commitments to extend credit amounted to $21,426,500 and standby letters of credit amounted to $1,323,000. 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, 1997, 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 $12,815,000 or 9.1% and $11,869,000 or 8.4% of total net loans outstanding as of December 31, 1997. 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, 1997, 1996 and 1995 (Dollars in thousands)
1997 1996 1995 ---- ---- ---- ASSETS Cash.......................................................... $ 320 19 588 Investment in Subsidiaries..................................... 26,563 24,631 22,669 --------- --------- --------- Total Assets $ 26,883 24,650 23,257 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Other Liabilities............................................. $ 0 0 563 Stockholders' Equity.......................................... 27,422 25,183 23,227 Less Treasury Stock........................................... (539) (533) (533) --------- --------- --------- Total Liabilities and Equity $ 26,883 24,650 23,257 ========= ========= ========= CONDENSED STATEMENT OF INCOME For the Years Ended December 31, 1997, 1996 and 1995 (Dollars in thousands) 1997 1996 1995 ---- ---- ---- Dividends from Bank........................................... $ 2,310 1,212 1,728 Other income from Bank........................................ 28 13 8 Undistributed Earnings of Bank................................ 1,750 2,142 1,259 Other Expenses................................................ (82) (38) (25) --------- --------- --------- Net Income $ 4,006 3,329 2,970 ========= ========= =========
18 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) CONDENSED STATEMENT OF CASH FLOWS For the Years Ended December 31, 1997, 1996 and 1995 (Dollars in thousands)
1997 1996 1995 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income................................................... $ 4,006 3,329 2,970 Net Change in Other Liabilities.............................. 0 (563) 26 Undistributed Earnings of Subsidiary......................... (1,750) (2,142) (1,259) ------- ------- ------- Net Cash Provided By Operating Activities 2,256 624 1,737 ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends Declared............................................ (1,949) (1,193) (1,698) Purchase of Treasury Stock.................................... (6) 0 0 ------- ------- ------- Net Cash Used By Financing Activities (1,955) (1,193) (1,698) ------- ------- ------- Net Increase (Decrease) in Cash and Cash Equivalents.......... 301 (569) 39 Cash and Cash Equivalents at Beginning of Period.............. 19 588 549 ------- ------- ------- Cash and Cash Equivalents at End of Period.................... $ 320 19 588 ======= ======= =======
(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 or notional value and fair value of financial instruments at December 31, 1997 and 1996.
December 31, 1997 December 31, 1996 (Dollars in thousands) Book or Book or Notional Fair Notional Fair Value Value Value Value ----- ----- ----- ----- Financial assets: Cash and due from banks....................................... $ 4,409 4,409 4,442 4,442 Interest bearing balances and federal funds sold.............. 36,127 35,727 28,433 28,632 Investment securities......................................... 39,501 39,501 28,733 28,733 Net loans..................................................... 141,510 144,858 142,341 141,581 Financial liabilities Deposits...................................................... $ 192,239 193,095 174,671 175,420 Short-term borrowings......................................... 2,234 2,234 4,512 4,512 Long-term debt................................................ 5,688 5,494 4,710 4,751 Off-balance sheet financial instruments: Commitments to extend credit $ 21,427 21,427 29,956 29,956 Standby letters of credit..................................... 1,323 1,323 2,062 2,062
(20) Common Stock: The Corporation has reserved 50,000 of authorized, but unissued shares of its common stock for issuance under a Stock Bonus Plan (the "Plan"). Shares issued under the Plan are at the discretion of the board of directors. 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, 1997, no shares have been awarded under the plan. In November, 1997, the Corporation amended and restated its dividend reinvestment plan, (DRIP). Two hundred thousand shares of the Corporation's authorized but unissued common stock are reserved for issuance under the DRIP. The DRIP also allows for voluntary cash payments within specified limits, for the purchase of additional shares. (21) Earnings Per Share: Earnings per share is based on the weighted-average number of shares of common stock outstanding. Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," simplifies the computation of earnings per share (EPS) and requires presentation of two new amounts, basic and diluted earnings per share, and additional informational disclosures. The adoption of SFAS No. 128 is required for all reporting periods after December 15, 1997 and requires the restatement of EPS for all prior periods. The adoption of SFAS No. 128 did not affect previously reported amounts of EPS. The Bank's basic and diluted are the same since there are no dilutive potential shares of common stock outstanding. (22) Subsequent Event: On January 9, 1998, the Corporation entered into an agreement to acquire, subject to regulatory approval, all of the outstanding common stock of Miners Bank of Lykens in exchange for 148,250 shares of the Corporation's common stock, in a business combination expected to be accounted for as a pooling of interests. 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 Corporation's liquidity, capital resources or operations. This discussion should be read in conjunction with the financial statements appearing elsewhere in this report. Per share data has been restated to reflect the effect of stock dividends and splits. 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 $4,006,000 for the year 1997, an increase of $677,000 or 20.34% over 1996's net income of $3,329,000, which was an increase of $359,000 or 12.09% over 1995's net income of $2,970,000. This represents net income in 1997 of $1.54 per share compared to $1.28 per share in 1996 and $1.14 per share in 1995. Approximately $568,000 of the earnings of 1997 were the result of the net gain on the sale of the Mid Penn Bank credit card portfolio. Total assets of the Corporation continued to grow in 1997, reaching the level of $228,775,000, an increase of $18,603,000 or 8.89% over $210,172,000 at year end 1996. The growth can be attributed to an increase of $18,062,000 in interest-bearing balances and investment securities purchased in anticipation of falling interest rates. The Corporation continued to achieve an excellent return of average assets, (ROA), a widely recognized as performance indicator in the financial industry. The ROA was 1.85% in 1997, 1.65% in 1996 and 1.64% in 1995. Return on average stockholders' equity (ROE), another performance indicator, was 15.75% in 1997, 14.32% in 1996 and 13.57% in 1995. Tier one capital (to risk weighted assets) of $21,041,000 or 13.70% and total capital (to risk weighted assets) of $22,960,000 or 15.00% at December 31, 1997 are well above the December 31, 1997 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. On December 31, 1997, the Corporation transferred approximately $5,000,000 in investment securities from the Bank to a wholly-owned investment company, Mid Penn Investment Corporation in Wilmington, Delaware. The state of Delaware offers a beneficial state tax environment for these assets. On January 9, 1998, the Corporation entered into an agreement to acquire, subject to regulatory approval, all outstanding common stock of Miners Bank of Lykens in exchange for 148,250 shares of the Corporation's common stock, in a business combination expected to be accounted for a pool of interests. Miners Bank of Lykens (MBL) is a one office, full service bank with total assets of approximately $27,950,000 at December 31, 1997. MBL earned net income of $163,000 in 1997 and $148,000 in 1996. This pooling would allow Mid Penn Bank to bridge a gap between its Elizabethville and Tower City offices. Management anticipates that Mid Penn Bank will be able to reduce the operating expenses of the MBL location through the elimination of duplicate cost areas. 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 1997, net interest income increased $729,000 or 8.42% as compared to $527,000 or 6.48% in 1996 and $384,000 or 4.96% in 1995. The average balances, effective interest differential and interest yields for the years ended December 31, 1997, 1996 and 1995, the components of net interest rate growth, are presented in Table 1. A comparative presentation of the changes in net interest income for 1997 compared to 1996, and 1996 compared to 1995, 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. 21 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) The yield on earning assets remained fairly constant at 8.64% in 1997 from 8.65% in 1996. The yield on earning assets for 1995 was 8.89%. The change in the yield on earning assets was due primarily to changes in the "prime rate." The average "prime rate" for 1997 was 8.44% as compared to 8.29% for 1996 and 8.81% for 1995. Interest expense increased by $430,000 or 5.72% in 1997 as compared to $791,000 or 11.77% in 1996 and $981,000 or 17.09% in 1995. The increases were due primarily to the increase in the total of interest bearing liabilities. The average yield on NOW accounts dropped to 2.10% from 2.62% in 1996 due to the expiration of a special introductory rate at our Carlisle Pike office. Primarily resulting from the fluctuations in interest rates, the net interest margin, on a tax equivalent basis, in 1997 was 4.78% compared to 4.73% in 1996 and 4.99% in 1995. Management continues to closely monitor the net interest margin. TABLE 1: AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS INCOME AND RATES ON A TAXABLE EQUIVALENT BASIS FOR YEAR ENDED DECEMBER 31, 1997 (Dollars in thousands)
Average Interest Average Rates Balance Income/Expense Earned/Paid ------- -------------- ----------- ASSETS: Interest Bearing Balances............. $ 31,165 1,978 6.35% Investment Securities: Taxable............................. 18,978 1,251 6.59% Tax-Exempt ......................... 13,999 1,167 8.34% ---------- Total Investment Securities 32,977 ---------- Federal Funds Sold.................... 173 9 5.20% Loans, Net............................ 141,249 13,355 9.45% ---------- ------- Total Earning Assets.................. 205,564 17,760 8.64% Cash and Due from Banks............... 3,679 ------- Other Assets.......................... 6,876 ---------- Total Assets $ 216,119 ========== LIABILITIES & STOCKHOLDERS' EQUITY: Interest Bearing Deposits: NOW ................................ $ 23,770 498 2.10% Money Market........................ 11,821 295 2.50% Savings............................. 17,315 432 2.49% Time................................ 109,312 6,160 5.64% Short-term Borrowings................. 3,415 186 5.45% Long-term Debt........................ 5,719 371 6.49% ---------- ------- Total Interest Bearing Liabilities.... 171,352 7,942 4.64% Demand Deposits....................... 16,514 ------- Other Liabilities..................... 2,812 Stockholders' Equity.................. 25,441 ---------- Total Liabilities and Stockholders' Equity $ 216,119 ========== Net Interest Income...................... $ 9,818 ======= Net Yield on Interest Earning Assets: Total Yield on Earning Assets......... 8.64% Rate on Supporting Liabilities........ 3.86% Net Interest Margin................... 4.78%
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 YEAR ENDED DECEMBER 31, 1996 (In thousands)
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 ----------- 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%
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 YEAR ENDED DECEMBER 31, 1995 (Dollars in thousands)
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 ----------- 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%
Interest and average rates are presented on a fully taxable equivalent basis, using an effective tax rate of 34%. For purposes of calculating loan yields, average loan balances include nonaccrual loans. Loan fees of $254,000, $138,000 and $292,000 are included with interest income in Table 1 for the years 1997, 1996 and 1995, 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) 1997 Compared to 1996 1996 Compared to 1995 Increase (Decrease) Due to Change In: Increase (Decrease) Due to Change In: Taxable Equivalent Basis Volume Rate Net Volume Rate Net ------ ---- --- ------ ---- --- INTEREST INCOME: Interest Bearing Balances........ $ 79 (39) 40 205 52 257 Investment Securities: Taxable.......................... 303 13 316 207 (18) 189 Tax-Exempt....................... 118 (42) 76 (60) (72) (132) ------ ------ ------ ------ ------ ------ Total Investment Securities 421 (29) 392 147 (90) 57 Funds Sold....................... (7) 0 (7) (36) (1) (37) Loans, Net....................... 633 130 763 1,397 (402) 995 ------ ------ ------ ------ ------ ------ Total Interest Income $ 1,126 62 1,188 1,713 (441) 1,272 ------ ------ ------ ------ ------ ------ INTEREST EXPENSE: Interest Bearing Deposits: NOW ........................... $ (39) (124) (163) 111 101 212 Money Market................... 18 12 30 (8) 0 (8) Savings........................ 0 (5) (5) (2) 0 (2) Time........................... 373 5 378 714 (173) 541 ------ ------ ------ ------ ------ ------ Total Interest Bearing Deposits 352 (112) 240 815 (72) 743 Short-term Borrowings............ 2 2 4 64 (3) 61 Long-term Debt................... 185 1 186 (30) 18 (12) ------ ------ ------ ------ ------ ------ Total Interest Expense $ 539 (109) 430 849 (57) 792 ------ ------ ------ ------ ------ ------ NET INTEREST INCOME: $ 587 171 758 864 (384) 480 ====== ====== ====== ====== ====== ======
The effect of changing volume and rate has been allocated entirely to the rate column. Tax-exempt income is shown on a tax equivalent basis assuming a federal income tax rate of 34%. Provision for Loan Losses The provision for loan losses charged to operating expense represents the amount deemed appropriate by management to maintain an adequate allowance for possible loan losses. Due to the cyclical nature of the economy coupled with the Bank's substantial involvement in commercial loans and the record number of nationwide consumer bankruptcies in 1997, management thought it prudent to make a $100,000 allocation in 1997 as well as a provision of $50,000 during 1996. Due to the relative economic strength of our market area and the favorable trend in nonperforming assets, no provision for loan losses was charged to expense during 1995. The allowance for loan losses as a percentage of average total loans was 1.54% at December 31, 1997, compared to 1.67% and 2.09% for the years ended December 31, 1996 and 1995, which continues to be higher than that of peer financial institutions. A summary of charge-offs and recoveries of loans is presented in Table 3. 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, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Balance beginning of period................. $ 2,173 2,347 2,511 2,646 2,755 ------- ------ ----- ----- ----- Loans charged-off: Commercial real estate, construction and land development................... 4 25 86 0 33 Commercial, industrial and agricultural.. 32 213 55 14 157 Real estate-residential.................. 12 0 0 34 30 Consumer................................. 194 226 225 159 116 ------- ------ ----- ----- ----- Total loans charged off 242 464 366 207 336 ------- ------ ----- ----- ----- Recoveries on loans previously charged-off: Commercial real estate, construction and land development................... 4 39 33 8 71 Commercial, industrial and agricultural.. 107 105 111 33 26 Real estate-residential.................. 3 35 4 1 30 Consumer................................. 31 61 54 30 25 ------- ------ ----- ----- ----- Total recoveries 145 240 202 72 152 ------- ------ ----- ----- ----- Net charge-offs............................. 97 224 164 135 184 ------- ------ ----- ----- ----- Current period provision for loan losses.............................. 100 50 0 0 75 ------- ------ ----- ----- ----- Balance end of period....................... $ 2,176 2,173 2,347 2,511 2,646 ======= ====== ===== ===== ===== Ratio of net charge-offs during the period to average loans outstanding during the period, net of unearned discount......... 0.07 0.16 0.13 0.11 0.16 ======= ====== ===== ===== =====
Noninterest Income ------------------ During 1997, the Corporation earned $1,721,000 in noninterest income, an increase of $921,000 or 115.13% over the 1996 total of $800,000, which was $105,000 or 15.11% over the 1995 total of $695,000. The major contributor to noninterest income in 1997 was the one-time gain on the sale of the Bank's credit card portfolio that amounted to $860,000. The bulk of the increase in 1996 reflected nonrecurring gains of $189,000 from the sale of other real estate as compared to a noninterest expense of $22,000 in other real estate in 1995. Trust department income for 1997 was $90,000, a $7,000 or 8.43% increase over $83,000 in 1996, which was $15,000 or 22.06% more than the $68,000 earned in 1995. 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 amounted to $300,000 for 1997, an increase of $48,000 over $252,000 for 1996, which was basically unchanged from 1995. The majority of this increase resulted from the $55,000 increase in NSF charges in 1997. The Corporation also earned $31,000 in fees from Invest, the third-party provider of investments whose services the Bank has contracted. Other operating income amounted to $409,000 in 1997, $453,000 and $363,000 in 1996 and 1995, respectively. Noninterest Expense ------------------- A summary of the major components of noninterest expense for the years ended December 31, 1997, 1996 and 1995 is reflected in Table 4. Noninterest expense increased to $5,322,000 in 1997 from $4,716,000 in 1996 and $4,725,000 in 1995. The major component of noninterest expense is salaries and employee benefits which increased $504,000 or 20.84% in 1997. This expense includes approximately $198,000 of supplemental employee bonuses and incentives. 26 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) The largest component of decrease in noninterest expense during the past two years was due to an FDIC assessment of $22,000 in 1997 and $2,000 in 1996 as compared to $171,000 in 1995. 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. 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. Other noninterest expense increased by $84,000 in 1997. Included in this increase was $20,000 in costs and fees associated with the revision of the Corporation's Dividend Reinvestment Plan to make the Plan more accessible to shareholders. In addition, the Corporation incurred a $20,000 fee for listing on the American Stock Exchange. TABLE 4: NONINTEREST EXPENSE (Dollars in thousands) Years ended December 31, 1997 1996 1995 ---- ---- ---- Salaries and employee benefits........... $ 2,923 2,419 2,373 Occupancy, net........................... 293 299 278 Equipment................................ 390 389 353 Postage and supplies..................... 240 239 252 FDIC assessments......................... 22 2 171 Marketing and advertising................ 139 141 152 Other real estate, net................... 0 0 22 Pennsylvania bank shares tax............. 242 229 215 Professional services.................... 101 82 88 Telephone................................ 50 46 45 Loss on mortgage sales................... 18 26 3 Other.................................... 904 844 773 ----- ----- ----- Total Noninterest Expense $ 5,322 4,716 4,725 ===== ===== ===== 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. At December 31, 1997, SFAS No. 115 resulted in an increase in shareholders' equity of $318,000 (unrealized gain on securities of $482,000, less estimated income tax effect of $164,000). SFAS No. 115 as of December 31, 1996 resulted in an increase in stockholders' equity of $168,000 (unrealized gain on securities of $255,000, less estimated income tax effect of $87,000) compared to an increase in stockholders' equity of $348,000 (unrealized loss on securities of $527,000, less estimated income tax effect of $179,000) as of December 31, 1995. Proceeds from the sale of investment securities during 1997 were $4,370,000. A net loss of $2,000 was realized on those sales. 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 maturities of investment securities were $8,989,000 in 1997 compared with $4,041,000 in 1996 and $6,758,000 in 1995. 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. 27 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) TABLE 5: BOOK VALUES OF INVESTMENT SECURITIES
(Dollars in thousands) December 31, 1997 1996 1995 ---- ---- ---- U. S. Treasury and U.S. government agencies............... $ 19,294 12,833 9,776 Mortgage backed U.S. government agencies.................. 3,556 1,178 1,439 State and political subdivision obligations............... 15,527 13,218 12,906 Corporate bonds........................................... 0 0 0 Restricted equity securities.............................. 643 1,249 536 ------- ------- ------- Total $ 39,020 28,478 24,657 ======= ======= =======
Loans At December 31, 1997, net loans totaled $141,510,000, a $831,000 or 0.6% decrease from December 31, 1996. During 1997, the Corporation experienced an increase in commercial real estate loans of approximately $4,000,000, the majority of which were generated through the Carlisle Pike and Derry Street offices. In August of 1997, Mid Penn Bank sold its credit card portfolio of $5,100,000, generating a gain net of tax of $568,000. The portfolio was sold in light of the record number of consumer bankruptcies and the rising incidence of credit card fraud that were detrimentally affecting the overall return of the portfolio. The current environment in lending is extremely competitive with financial institutions aggressively pursuing potential borrowers. At December 31, 1997, loans, net of unearned income, represented 65.5% of earning assets as compared to 70.1% on December 31, 1996 and 70.5% on December 31, 1995. 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. TABLE 6: LOAN PORTFOLIO
(Dollars in thousands) December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Commercial real estate, construction and land development....................... $ 79,240 75,200 65,671 54,225 54,148 Commercial, industrial and agricultural...... 20,001 18,588 16,682 19,397 21,506 Real estate-residential mortgage............. 27,009 26,718 27,821 25,142 25,407 Consumer..................................... 19,371 25,874 23,473 20,409 19,595 Lease financing.............................. 8 13 18 0 9 ------- ------- ------- ------- ------- Total Loans 145,629 146,393 133,665 119,173 120,665 Unearned income.............................. (1,943) (1,879) (1,729) (1,488) (1,353) ------- ------- ------- ------- ------- Loans net of unearned discount............... 143,686 144,514 131,936 117,685 119,312 Allowance for loan losses.................... (2,176) (2,173) (2,347) (2,511) (2,646) ------- ------- ------- ------- ------- Net Loans $ 141,510 142,341 129,589 115,174 116,666 ======= ======= ======= ======= =======
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 28 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) 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, 1997, was $2,176,000 or 1.51% of total loans less unearned discount as compared to $2,173,000 or 1.50% at December 31, 1996, and $2,347,000 or 1.78% at December 31, 1995. TABLE 7: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands) December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- 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.................. $ 596 54.4% 666 51.3% 574 49.1% 776 45.5 1,148 44.9 Commercial, industrial and agricultural................. 362 13.7% 375 12.7% 573 12.5% 301 16.3 437 17.8 Real estate-residential mortgage..................... 193 18.6% 172 18.3% 120 20.8% 118 21.1 114 21.1 Consumer....................... 140 13.3% 303 17.7% 245 17.6% 248 17.1 214 16.2 Unallocated.................... 885 - 657 - 835 - 1,068 - 733 - ------- ------ ----- ------ ----- ------ ----- ----- ----- ------ Total loans $ 2,176 100.0% 2,173 100.0% 2,347 100.0% 2,511 100.0% 2,646 100.0% ====== ====== ===== ====== ===== ====== ===== ===== ===== ======
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 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 $118,000, $89,000 and $103,000 in 1997, 1996, and 1995, 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, 1997, totaled $2,086,000 or .91% of total assets compared to $2,395,000 or 1.14% of total assets in 1996, and $2,455,000 or 1.26% of total assets in 1995. The increase in nonaccrual loans in 1994 was due to a large commercial real estate loan going into Chapter 11 bankruptcy in 1994. The foreclosed assets held for sale at December 31, 1997, consist of four pieces of commercial real estate, two parcels of residential building lots, two one-family dwellings, 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. 29 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) TABLE 8: NONPERFORMING ASSETS
(Dollars in thousands) December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Nonaccrual loans............................. $ 312 1,183 1,753 2,181 1,347 Past due 90 days or more..................... 207 519 195 252 191 Restructured loans........................... 212 145 0 0 1,885 Total nonperforming loans 731 1,847 1,948 2,433 3,423 ------ ------ ------ ------ ------ Foreclosed assets held for sale.............. 1,355 548 507 120 256 ------ ------ ------ ------ ------ Total nonperforming assets $ 2,086 2,395 2,455 2,553 3,679 ====== ====== ====== ====== ====== Percent of total loans outstanding........... 1.43% 1.64% 1.84% 2.14% 3.05% Percent of total assets...................... .91% 1.14% 1.26% 1.46% 2.16%
There are no loans classified for regulatory purposes that have not been included in Table 8. At December 31, 1997, 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, 1997 were $192,239,000, which increased $17,568,000 or 10.06% from December 31, 1996, compared to an increase of $12,403,000 or 7.64% in 1996. A limited-time, special-rate certificate of deposit offer in both the spring of 1996 and the fall of 1997 aided the bank in attaining these increases. Included in the 1997 deposit growth are in excess of $10 million in jumbo certificates of deposit issued to municipalities. The Corporation's newest office on the Carlisle Pike in Hampden Township contributed $4,207,000 in increased deposits during 1996. Average balances and average interest rates applicable to the major classifications of deposits for the years ended December 31, 1997, 1996, and 1995 are presented in Table 9. Average short-term borrowings for 1997 were $3,415,000 as compared to $3,380,000 in 1996. 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, 1997 1996 1995 ---- ---- ---- Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate ------- ---- ------- ---- ------- ---- Noninterest bearing demand deposits..... $ 16,514 0.00% 13,781 0.00% 12,493 0.00% Interest bearing demand deposits........ 23,770 2.10% 25,264 2.62% 20,261 2.22% Money market............................ 11,821 2.50% 11,061 2.40% 11,387 2.40% Savings................................. 17,315 2.49% 17,315 2.52% 17,414 2.52% Time.................................... 109,312 5.64% 102,863 5.63% 90,377 5.80% ------- ------ ------- ------ ------- ------ Total $ 178,732 4.13% 170,104 4.20% 151,932 4.21% ======= ====== ======= ====== ======= ======
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. 30 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) In 1997, capital grew $2,233,000 or 9.06% above 1996. Comparatively, 1996 capital grew $1,956,000 or 8.62% above 1995. Capital growth in both periods was achieved through earnings retention. The Corporation's normal dividend payout allows for quarterly cash returns to its stockholders and provides earnings retention at a level sufficient to finance future Corporation growth and to enhance 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 48% for 1997 compared to 36% for 1996 and 57% for 1995. Until 1997, the Corporation acquired shares of its stock in the open market to meet the needs of its dividend reinvestment plan. The availability of shares for purchase has decreased significantly in recent years, and, as a result, the Corporations dividend reinvestment plan was changed in 1997 to allow for the use of authorized, but unissued shares of common stock under the plan. In December, 1997, the Corporation filed an application with the Internal Revenue Service to approve a employee stock ownership plan. At December 31, 1997, 19,241 shares of the Corporation's common stock are held as treasury stock and are available for issuance under the dividend reinvestment plan or the stock bonus plan. The treasury stock may also be used or available for the proposed employee stock ownership plan. Federal Income Taxes Federal income tax expense for 1997 was $1,676,000 compared to $1,359,000 and $1,127,000 in 1996 and 1995, respectively. The effective tax rate was 29% for 1997 and 1996, and 28% for 1995. 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. In 1997, the major sources of cash were provided by operations, the sale and maturity of investments of $13,359,000 and an increase in deposits of $17,568,000. Included in the time deposit increase is approximately $10,000,000 in short-term certificates issued to local municipalities. A special rate certificate of deposit promotion in the early fall of the year also aided in attracting additional deposit funds. Another major one-time source of funds was the $8,378,000 contributed by the sale of the Bank's entire credit card portfolio and a portion of its student loans. These funds included a gross gain on the sales of $924,000. The major use of funds during 1997 was the purchase of investment securities. Purchases of investment securities included largely agency and municipal securities of intermediate term. The large investment in securities was made initially to invest the funds generated from the loan sales. Purchases continued in the fourth quarter in an effort to lock in yields in anticipation of falling interest rates. Interest-bearing balances, jumbo certificates of deposit of other financial institutions, also offered favorable rates over treasury securities during the last half of 1997. These balances which also provide steady liquidity for the bank showed a net increase of $7,294,000 during the year. Loan growth while sporadic in a very competitive rate environment provided a net use of funds of $7,809,000. The majority of the loan growth occurring in commercial real estate and development loans particularly in the Harrisburg and Camp Hill markets. 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. 31 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) 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 $3,549,000 in securities during the year. Borrowings were increased by $1,579,000 to generate the additional funds needed to meet the loan demand. Market Risk - 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 rate risk is desirable. The maturity distribution and weighted average yields of investments is presented in Table 10. The maturity distribution and repricing characteristics of the Corporation's loan portfolio is shown in Table 11. Table 12 provides expected maturity information about the Corporation's financial instruments that are sensitive to changes in interest rates. Except for the effects of prepayments on mortgage related assets, the table presents principal cash flows and related average interest rates on interest bearing assets by contractual maturity. Residential loans are assumed to have annual payment rates between 12% and 18% of the portfolio. Loan and mortgage backed securities balances are not adjusted for unearned discounts, premiums, and deferred loan fees. The Corporation assumes that 75% of savings and NOW accounts are core deposits and are, therefore, expected to roll-off after 5 years. Transaction accounts, excluding money market accounts, are assumed to roll-off after five years. Money market accounts are assumed to be variable accounts and are reported as maturing within the first twelve months. No roll-off is applied to certificates of deposit. Fixed maturity deposits reprice at maturity. The maturity distribution of time deposits of $100,000 or more is shown in Table 13. TABLE 10: INVESTMENT MATURITY AND YIELD
(Dollars in thousands) December 31, 1997 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...... $ 2,995 6,491 8,558 1,250 19,294 State and political subdivision obligations.... 749 4,911 4,866 5,001 15,527 Mortgage-backed U.S. government agencies....... 505 481 1,264 1,306 3,556 Equity securities.............................. 0 0 0 643 643 ------ ------ ------ ------ ------ Total $ 4,249 11,883 14,688 8,200 39,020 ====== ====== ====== ====== ====== (Dollars in thousands) December 31, 1997 After One After Five One Year Year thru Years thru After Ten and Less Five Years Ten Years Years Total -------- ---------- --------- ----- ----- Weighted Average Yields ----------------------- U.S. Treasury and U.S. government agencies..... 5.63 6.44 6.85 6.19 6.46 State and political subdivision obligations.... 6.32 7.71 8.20 7.85 7.84 Mortgage-backed U.S. government agencies................................... 6.32 6.66 6.28 6.74 6.51 Equity securities.............................. 0 0 0 0 6.50 ----- ----- ----- ---- ----- Total 5.83 6.93 7.25 7.38 7.01 ===== ===== ===== ==== =====
32 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) TABLE 11: LOAN MATURITY AND INTEREST SENSITIVITY
(Dollars in thousands) December 31, 1997 After One One Year Year thru After Five and Less Five Years Years Total -------- ---------- ----- ----- Commercial, real estate, construction and land development................... $ 30,428 38,906 9,906 79,240 Commercial, industrial and agricultural... 11,799 6,870 1,340 20,009 Real estate- residential mortgages........ 8,195 7,593 11,221 27,009 Consumer.................................. 8,157 10,662 552 19,371 -------- ------- ------- ------- Total Loans $ 58,579 64,031 23,019 145,629 ======== ======= ======= ======= After One One Year Year thru After Five and Less Five Years Years Total -------- ---------- ----- ----- Rate Sensitivity Predetermined rate........................ $ 6,624 22,864 19,792 49,280 Floating or adjustable rate............... 51,955 41,167 3,227 96,349 -------- ------- ------- ------- Total $ 58,579 64,031 23,019 145,629 ======== ======= ======= =======
TABLE 12: INTEREST RATE SENSITIVITY GAP
(Dollars in thousands) Expected Maturity Year Ended December 31, 1998 1999 2000 2001 2002 Thereafter Total Fair Value ------------------------------------------------------------------------------- Assets: Interest bearing balances.......... $ 12,081 13,759 9,689 99 99 0 35,727 35,727 Average interest rate............ 6.35 6.38 6.55 6.75 6.70 - 6.42 Debt securities.................... $ 9,639 7,380 6,186 895 1,006 13,752 38,858 38,858 Average interest rate............ 6.47 6.51 7.00 8.36 8.26 7.64 7.08 Adjustable rate loans.............. $ 49,178 14,986 12,950 5,940 8,809 4,486 96,349 96,349 Average interest rate............ 9.17 9.25 9.37 8.82 9.10 8.67 9.16 Fixed rate loans................... $ 8,724 8,158 7,365 7,475 6,767 10,791 49,280 48,509 Average interest rate............ 8.66 9.34 9.48 9.04 9.25 8.88 9.08 Federal funds sold................. $ 400 0 0 0 0 0 400 400 6.31 - - - - - 6.31 -------- ------ ------ ------ ------ ------ ------- ------- Total $ 80,022 44,283 36,190 14,409 16,681 29,029 220,614 219,843 -------- ------ ------ ------ ------ ------ ------- ------- Interest liabilities: Variable rate savings and transaction accounts............. $ 23,900 0 0 0 0 50,342 74,242 74,242 Average interest rate............ 2.53 - - - - 1.39 1.76 Certificates of deposit and IRAs... $ 57,865 28,162 10,515 7,517 4,587 9,351 117,997 118,853 Average interest rate............ 5.40 5.89 6.10 5.91 6.08 6.02 5.69 Short term borrowings.............. $ 2,234 0 0 0 0 0 2,234 2,234 Average interest rate............ 5.57 - - - - - 5.57 Long term fixed rate borrowings.... $ 138 1,149 160 1,672 2,185 384 5,688 5,494 Average interest rate............ 7.28 6.19 7.28 6.74 6.18 7.28 6.48 -------- ------- ------- ------- -------- ------- ------- ------- Total $ 84,137 29,311 10,675 9,189 6,772 60,077 200,161 200,823 -------- ------- ------- ------- -------- ------- ------- ------- Rate sensitive gap: Periodic gap....................... $(4,115) 14,973 25,515 5,220 9,909 (31,048) Cumulative gap..................... $(4,115) 10,857 36,372 41,592 51,501 20,453 Cumulative gap as a percentage of total assets.................... -1.80% 4.75% 15.90% 18.18% 22.51% 8.94%
33 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) On December 31, 1997, management analyzed interest rate risk using the Vining Sparks Asset-Liability Management Model. Using the computerized model, management reviews interest rate risk on a monthly basis. This analysis includes an earnings scenario whereby interest rates are increased by 200 basis points and another whereby they are decreased by 200 basis points. At December 31, 1997, these scenarios indicate that there would not be a significant variance in net interest income at the one-year time frame due to interest rate changes; however, actual results could vary significantly from the calculations prepared by management. At December 31, 1997, all interest rate risk levels according to our model were within the tolerance guidelines set by management. The model noted above utilized by management to create the reports used for Table 12 makes various assumptions and estimates. Actual results could differ significantly from these estimates which would result in significant differences in cash flows. In addition, the table does not take into consideration changes which management would make to realign its portfolio in the event of a changing rate environment. TABLE 13: MATURITY OF TIME DEPOSITS $100,000 OR MORE
(Dollars in thousands) December 31, 1997 1996 1995 ---- ---- ---- Three months or less................................... $ 14,657 3,996 3,607 Over three months to twelve months..................... 3,738 5,575 2,725 Over twelve months..................................... 7,109 4,956 3,733 ------- ------ ------- Total $ 25,504 14,527 10,065 ======= ====== =======
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, 1997, commitments to extend credit amounted to $21,427,000 as compared to $29,956,000 as of December 31, 1996. 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 $1,323,000 at December 31, 1997, from $2,062,000 at December 31, 1996. Year 2000 Compliance; Management Information Systems: The Board of Directors has established a Year 2000 compliance committee to address the risks of the critical internal bank systems that are affected by date sensitive applications, as well as external systems provided by third parties. A comprehensive Year 2000 Business Action Plan was developed detailing the sequence of events and actions to be taken as the Year 2000 approaches. In November, 1997, the Company purchased and installed an upgrade to its current systems to improve efficiencies of operations and position itself for future growth. The cost of the new system was approximately $284,000. Preconversion testing demonstrated that the new hardware and software are Year 2000 compliant. Further testing will be performed as needed to ensure future hardware upgrades or software additions meet the same level of compliance. 34 Mid Penn Bancorp, Inc. Summary of Selected Financial Data (Dollars in thousands, except per share data)
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- INCOME: Total Interest Income.................... $ 17,325 16,166 14,848 13,483 13,419 Total Interest Expense................... 7,942 7,512 6,721 5,740 5,966 Net Interest Income...................... 9,383 8,654 8,127 7,743 7,453 Provision for Possible Loan Losses....... 100 50 0 0 75 Non-Interest Income...................... 1,721 800 695 622 681 Non-Interest Expense..................... 5,322 4,716 4,725 4,646 4,388 Income Before Income Taxes............... 5,682 4,688 4,097 3,719 3,671 Income Tax Expense....................... 1,676 1,359 1,127 983 958 Extraordinary Income, Net of Tax......... 0 0 0 0 108 Net Income............................... 4,006 3,329 2,970 2,736 2,821 COMMON STOCK DATA PER SHARE:* Earnings Per Share....................... 1.54 1.28 1.14 1.05 1.07 Cash Dividends Declared.................. .76 .46 .65 .62 .41 Stockholders' Equity..................... $ 10.31 9.45 8.70 8.04 7.82 AVERAGE SHARES OUTSTANDING.................. 2,607,540 2,607,552 2,607,552 2,607,552 2,637,617 AT YEAR-END: Investments.............................. $ 39,501 28,733 25,184 26,030 20,188 Loans, Net of Unearned Discount.......... 143,686 144,514 131,936 117,685 119,312 Allowance for Loan Losses................ 2,176 2,173 2,347 2,511 2,646 Total Assets............................. 228,775 210,172 194,711 174,702 170,037 Total Deposits........................... 192,239 174,671 162,268 146,958 141,405 Long-term Debt........................... 5,688 4,710 3,329 3,439 2,308 Stockholders' Equity..................... $ 26,883 24,650 22,694 20,982 20,638 RATIOS: Return on Average Assets................. 1.85 1.65 1.64 1.58 1.70 Return on Average Stockholders' Equity... 15.75 14.32 13.57 13.09 14.90 *Cash Dividend Payout Ratio.............. 47.85 35.84 57.17 59.14 38.25 Allowance for Loan Losses to Loans....... 1.51 1.50 1.78 2.13 2.22 Average Stockholders' Equity to Average Assets........................... 11.77 11.50 12.07 12.07 11.39
* Per share figures are based on weighted average shares outstanding for the respective years as restated after giving effect to stock dividends and splits. 35 EX-21 4 SUBSIDIARIES OF REGISTRANT EXHIBIT 21 SUBSIDIARIES OF REGISTRANT Name State of Incorporation ---- ---------------------- Mid Penn Bank Commonwealth of Pennsylvania Mid Penn Investment Corp. Delaware EX-23 5 CONSENT OF INDEPENDENT AUDITORS [LOGO OF PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES] Exhibit 23 CONSENT OF INDEPENDENT AUDITORS ------------------------------- We consent to the incorporation by reference in this Annual Report (Form 10-K) of Mid Penn Bancorp, Inc. of our report dated January 13, 1998, included in the 1997 Annual Report to Stockholders of Mid Penn Bancorp, Inc. /s/ Parente, Randolph, Orlando, Carey & Associates Wilkes-Barre, Pennsylvania March 27, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1997 DEC-31-1997 4,409 35,727 400 0 39,501 0 0 143,686 2,176 228,775 192,239 2,234 1,731 5,688 2,627 0 0 24,256 228,775 13,317 3,999 9 17,325 7,385 7,942 9,383 100 (2) 5,322 5,682 4,006 0 0 4,006 1.54 1.54 8.64 312 207 212 2,797 2,173 242 145 2,176 0 0 0
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