A N N U A L R E P O R T 2 0 0 0 Mid Penn Bancorp, Inc. A Traditional, Yet Progressive Bank In 1971, Eugene Shaffer, then Executive Vice President with Mid Penn Bank, was quoted as saying “Our customers are the bank. By putting you first, you are putting us first. We shall continue to give the most efficient and courteous service possible.” It seems like nothing has changed since then...at least none of Mid Penn Bank’s traditions and values. Today, Mid Penn Bank has eleven traditional offices and a vir- tual office at www.midpennbank.com. My, how times have changed. Mid Penn Bank bought the former Mellon Bank building on July 21, 2000, which opened as its eleventh office at 2615 North Front Street, Harrisburg in late August of 2000. Mid Penn Bank recognizes the need for community banks in the Capital Region area, while personal customers and business customers are rec- ognizing that bigger is not necessarily better. Many of the once local, community banks are now region- al banks with no concept of the community bank image which they so strongly want to preserve. In the meantime, Mid Penn Bank is committed to maintaining the true image of a local, community bank while at the same time pursuing progressive services traditionally only available at a larger financial institution. In 1931, Mid Penn Bank formed our Trust Department to serve the needs of a growing community. Mid Penn Bank’s Trust Division offers a complete range of traditional and innovative investment and trust services, including retirement plans, IRA Rollover accounts, trusts, investment management, custody ser- vices and Business savings accounts. Our institutional Trust Division offers sophisticated services for businesses of any size, including asset management and retirement plan administration. Personal trust ser- vices are designed to help clients manage their assets in the most efficient and profitable manner. A Trust relationship with Mid Penn Bank offers you the following benefits: • Objective and unbiased investment advice • Development of long-term relationship • Safekeeping and protection of assets • Competitive fees and commissions • Diversified investment opportunities Traditional value and personalized service combined with advanced technology enable us to provide you with responsive and effective trust and investment services. For more information, call anyone in our Trust Division. Indeed, we have come a long way from offering a safe deposit box and a simple checking and savings account. Today we have eleven locations located in four counties. Yet, we remain strong in our tradition. We are a very proud community bank. We serve customers first because that is what we have always believed in. As a traditional community bank, we offer free personal and free business checking; howev- er, we also offer Trust services, cash management, commercial loans and lines of credit, mobile banking, telephone banking, Check Card and ATM service along with access to investing, estate planning, retire- ment planning and so much more. As our customers’ needs change, so will our products and services, but our philosophy “Our customers are the bank” will never change. 1 Uncertainty about the economy and its possible impact on loan quality along with concerns about interest mar- gins contributed to a decline in most community bank stock prices during the year 2000. Mid Penn Bancorp’s stock was no exception. Mid Penn Bancorp, “MBP,” which is listed on the American Stock Exchange, closed the year at $15.00 per share. I would suggest that this price level, which results in a dividend yield of 5.33% and a price to earnings ratio of 11.7%, does not reflect the value of our stock which has had a tradition of high performance, strong asset quality, a high efficiency ratio and strong return on equity. I am optimistic that com- munity bank stock prices will recover, and Mid Penn’s value will be reflected in a higher stock price. We appreciate your confidence and support of Mid Penn Bank. Please call me at (717) 692-2133, or send any electronic correspondence to me at adakey@mid- pennbank.com, should you have any questions or sug- gestions. Sincerely, Alan W. Dakey President & CEO Dear Shareholder: It is my pleasure to present Mid Penn Bancorp’s finan- cial report for the year 2000. With the start of the new century, it seems appropriate to reflect on the 132 years we have operated as an independent community bank. Through all of these years, we have had a loyal share- holder base that has been rewarded for their investment in Mid Penn Bank and its parent company, Mid Penn Bancorp, Inc. Thanks to all of you for your support of Mid Penn Bank. Your Bank experienced growth in a number of areas in the year 2000. Total assets of $315,584,000 at year end increased by 9.75% over the prior year, and total loans of $181,396,000 increased over $169,789,000 the prior year, a gain of 6.84%. Deposits at year end totaled $231,408,000, an increase of $13,568,000 or 6.23% from the prior year. Net income for the year ended December 31, 2000, of $3,948,000 increased from $3,884,000 the prior year. Earnings per share of $1.30 increased from $1.28 the prior year, an increase of 1.6%. Your Bank’s return on average equity of 14.64% continues to be very strong when compared to peer banks. Strong earnings over the years have resulted in a well capitalized bank with an equity to assets ratio of 9.2%. Stockholders’ equity of $29,626,000 increased by 11.52% from the prior year. In February, we launched our eleventh office at www.midpennbank.com. Our customers can view their account balances, transfer funds and review account transactions instantaneously at no charge. New deposit accounts can be opened on line. Loan applications can also be completed on line as well. The site also offers cash management services for business customers. We have had a very positive response to our new site and anticipate continuing growth through this convenient delivery channel. We encourage shareholders to bank with us through this convenient “office.” Our cover this year is a photo representation of your Bank’s newest office located at 2615 N. Front Street, Harrisburg which opened in late August. As of December 31, 2000, we had approximately $3 million in deposits and $2.3 million in loans at this new location. We are very pleased with the new account activity levels to date. We encourage stockholders who live or work nearby to visit our newest office. You may find this office to be very convenient for your banking needs. 2 Mid Penn Bancorp, Inc. Financial Highlights AS OF AND FOR YEARS ENDED DECEMBER 31, 2000 AND 1999 (Dollars in thousands, except per share data.) 2000 1999 $ Total Assets ............................................................... Total Deposits............................................................ Net Loans .................................................................. Total Investments and Interest Bearing Balances...... Stockholders' Equity.................................................. Net Income ................................................................ Earnings Per Share .................................................... Cash Dividend Per Share based on Weighted Average Number of Shares Outstanding.............................. Book Value Per Share................................................ 315,584 231,408 181,396 116,261 29,626 3,948 1.30 .80 9.76 287,542 217,840 169,789 98,669 26,565 3,884 1.28 2.18 8.74 Percent Change +9.75% +6.23% +6.84% +17.83% +11.52 % +1.65% +1.56% -63.30% +11.67 % Mid Penn Bancorp, Inc. Stockholders' Information Market Value Per Share ........................................ $ 2000 1999 High 22.00 19.25 18.50 15.88 Low 13.25 15.38 15.25 14.75 High 26.50 25.75 26.38 27.25 Low 24.50 24.38 23.38 22.50 Quarter 1st 2nd 3rd 4th Market Value Information: The market share information was provided by the American Stock Exchange, New York, NY. Mid Penn Bancorp, Inc. common stock trades on the American Stock Exchange under the symbol: MBP. Transfer Agent: Norwest Shareholder Services, P.O. Box 64854, St. Paul, MN 55164-0854. Phone: 1-800-468-9716. Number of Stockholders: At December 31, 2000, there were 973 stockholders. Dividends: A dividend of $ .20 per share was paid during each quarter of 2000. A dividend of $ .19 as well as a special dividend of $1.50 per share was paid during the first quarter of 1999; a dividend of $.20 per share was paid during each subsequent quarter of the year. Mid Penn Bancorp, Inc. plans to continue a quarterly dividend payable in February, May, August and November. Dividend Reinvestment and Stock Purchases: Stockholders of Mid Penn Bancorp, Inc. may acquire additional shares of common stock by reinvesting their cash dividends under the Dividend Reinvestment Plan without paying a bro- kerage fee. Voluntary cash contributions may also be made under the Plan. For additional information about the Plan, contact the Transfer Agent. Form 10-K: A Copy of Mid Penn Bancorp, Inc.'s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, will be provided to stockholders without charge upon written request to: Secretary, Mid Penn Bancorp, Inc., 349 Union Street, Millersburg, PA 17061. Annual Meeting: The Annual Meeting of the Stockholders of Mid Penn Bancorp, Inc. will be held at 10:00 a.m. on Tuesday, April 24, 2001, at 349 Union Street, Millersburg, Pennsylvania. 3 Mid Penn Bancorp, Inc. Graphs (unaudited) 277.8 287.5 256.7 315.6 238.1 Total Assets 320 290 260 230 200 170 140 110 80 50 20 s n o i l l i M n I 199.7 Total Deposits 240 220 200 180 160 140 120 100 80 60 40 217.1 216.8 217.8 231.4 1996 1997 1998 Year 1999 2000 1996 1997 Net Income Total Equity 1999 2000 1998 Year 31.5 3.48 s n o i l l i M n I 4.5 4.0 3.5 3.0 2.5 2.0 4.17 3.87 3.88 3.95 s n o i l l i M n I 30 25 20 15 10 27.4 29.7 29.6 26.6 1996 1997 Book Value Per Share* 1999 2000 1996 1997 1998 Year 1999 2000 1998 Year 10.38 9.03 9.78 9.76 8.74 s r a l l o D n I 11 10 9 8 7 6 5 4 3 2 1996 1997 1998 Year 1999 2000 * Restated after giving effect to stock splits. 4 Independent Auditors’ Report The Board of Directors and Stockholders Mid Penn Bancorp, Inc. Millersburg, Pennsylvania We have audited the accompanying consolidated balance sheet of Mid Penn Bancorp, Inc. and subsidiaries (collec- tively, “Corporation”) as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mid Penn Bancorp, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. PARENTE RANDOLPH, PC Williamsport, Pennsylvania January 19, 2001 5 Mid Penn Bancorp, Inc. Consolidated Balance Sheet DECEMBER 31, 2000 AND 1999 (Dollars in thousands, except share data) 2000 1999 ASSETS Cash and due from banks ...................................................................... Interest bearing balances ....................................................................... Available-for-sale investment securities................................................ Loans ..................................................................................................... Less: Unearned income....................................................................... Allowance for loan losses.......................................................... Net loans ................................................................................ Bank premises and equipment, net ...................................................... Foreclosed assets held for sale .............................................................. Accrued interest receivable ................................................................... Deferred income taxes........................................................................... Cash surrender value of life insurance .................................................. Other assets............................................................................................ Total Assets LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing demand .......................................................... Interest-bearing demand................................................................. Money market ................................................................................ Savings ........................................................................................... Time................................................................................................ Total Deposits Short-term borrowings........................................................................... Accrued interest payable ....................................................................... Other liabilities ...................................................................................... Long-term debt ...................................................................................... Total Liabilities Stockholders' Equity: Common stock, par value $1 per share; authorized 10,000,000 shares; 3,056,501 shares issued ......................................................................................... Additional paid-in capital............................................................... Retained earnings ........................................................................... Accumulated other comprehensive loss......................................... Treasury stock at cost (19,057 and 19,996 shares in 2000 and 1999, respectively).............................................................. Stockholders' Equity, Net Total Liabilities and Stockholders' Equity $ $ $ 5,986 42,376 73,885 186,941 (2,730) (2,815) 181,396 3,581 70 2,502 1,069 4,288 431 315,584 23,274 28,293 17,494 25,912 136,435 231,408 22,738 1,546 1,025 29,241 285,958 3,057 20,368 7,078 (344) (533) 29,626 315,584 $ The accompanying notes are an integral part of these consolidated financial statements. 7,474 34,570 64,099 174,812 (2,518) (2,505) 169,789 3,307 63 2,120 1,676 4,089 355 287,542 22,331 26,962 22,899 25,815 119,833 217,840 24,636 1,202 899 16,400 260,977 3,057 20,368 5,557 (1,861) (556) 26,565 287,542 6 Mid Penn Bancorp, Inc. Consolidated Statement of Income FOR YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Dollars in thousands, except share data) INTEREST INCOME $ Interest and fees on loans........................................................ Interest on interest-bearing balances....................................... Interest and dividends on investment securities: U.S. Treasury and government agencies ......................... State and political subdivision obligations, tax-exempt .. Other securities ................................................................ Interest on federal funds sold and securities purchased under agreement to resell .................................................... Total Interest Income INTEREST EXPENSE Interest on deposits ................................................................. Interest on short-term borrowings........................................... Interest on long-term debt....................................................... Total Interest Expense Net Interest Income PROVISION FOR LOAN LOSSES .............................................. Net Interest Income After Provision for Loan Losses NONINTEREST INCOME Trust department income ........................................................ Service charges on deposits .................................................... Investment securities (losses) gains, net ................................. Gain on sale of loans............................................................... Income on cash surrender value of life insurance .................. Other income........................................................................... Total Noninterest Income NONINTEREST EXPENSE Salaries and employee benefits............................................... Occupancy expense, net.......................................................... Equipment expense ................................................................. Pennsylvania bank shares tax expense .................................. FDIC insurance premium........................................................ Marketing and advertising ...................................................... Loss on mortgage loan sales ................................................... Other expenses ........................................................................ Total Noninterest Expense 2000 15,769 2,306 2,284 1,475 219 0 22,053 8,958 879 1,618 11,455 10,598 325 10,273 203 590 (4) 31 198 538 1,556 3,790 364 481 271 45 144 19 1,542 6,656 1999 13,829 2,409 2,426 1,311 136 1 20,112 8,302 516 856 9,674 10,438 325 10,113 127 554 50 0 189 769 1,689 3,741 318 510 279 26 121 47 1,623 6,665 1998 14,330 2,574 2,385 1,032 70 45 20,436 8,627 203 763 9,593 10,843 254 10,589 104 450 13 65 0 766 1,398 3,383 323 565 274 26 160 64 1,811 6,606 INCOME BEFORE PROVISION FOR INCOME TAXES.......... Provision for income taxes...................................................... Net Income Earnings Per Share (1) Weighted Average Number of Shares Outstanding 5,173 1,225 3,948 1.30 3,036,007 $ $ 5,137 1,253 3,884 1.28 3,037,976 5,381 1,516 3,865 1.27 3,037,037 (1) Earnings per share for 1998 has been restated to reflect a 5% stock dividend effective November 22, 1999. The accompanying notes are an integral part of these consolidated financial statements. 7 Mid Penn Bancorp, Inc. Consolidated Statement of Changes in Stockholders' Equity FOR YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Dollars in thousands, except share data) Additional Common Paid-in Capital Stock Accumulated Other Retained Comprehensive Treasury Earnings (Loss) Income Stock Total Balance, December 31, 1997 ................................................ $ 2,775 14,072 13,104 318 (539) 29,730 Comprehensive income: Net income ..................................................................... Change in net unrealized gain on securities available for sale, net of reclassification adjustment and tax effects............................................................. Total comprehensive income Cash dividends ($.76 per share, historical)....................... 5% stock dividend (additional 137,409 shares) ................ Purchase of treasury stock (96 shares).............................. 0 0 0 137 0 0 0 0 3,109 0 3,865 0 (2,083) (3,246) 0 0 26 0 0 0 0 0 0 0 (2) 3,865 26 3,891 (2,083) 0 (2) Balance, December 31, 1998 ................................................ 2,912 17,181 11,640 344 (541) 31,536 Comprehensive income: Net income ..................................................................... Change in net unrealized loss on securities available for sale, net of reclassification adjustment and tax effects............................................................. Total comprehensive income Cash dividends ($2.29 per share, historical)..................... 5% stock dividend (additional 144,234 shares) ................ Purchase of treasury stock (659 shares)............................ 0 0 0 145 0 0 0 3,884 0 0 (2,205) 0 3,187 0 (6,635) (3,332) 0 0 0 0 0 0 0 0 (15) 3,884 (2,205) 1,679 (6,635) 0 (15) Balance, December 31, 1999 ................................................ 3,057 20,368 5,557 (1,861) (556) 26,565 Comprehensive income: Net income ..................................................................... Change in net unrealized loss on securities available for sale, net of reclassification adjustment and tax effects............................................................. Total comprehensive income Cash dividends ($ .80 per share, historical)...................... Sale of treasury stock (939 shares) ................................... 0 0 0 0 0 0 0 0 3,948 0 0 1,517 (2,427) 0 0 0 0 0 0 23 3,948 1,517 5,465 (2,427) 23 Balance, December 31, 2000 ................................................ $ 3,057 20,368 7,078 (344) (533) 29,626 The accompanying notes are an integral part of these consolidated financial statements. 8 Mid Penn Bancorp, Inc. Consolidated Statement of Cash Flows FOR YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (Dollars in thousands) Operating Activities: Net income .......................................................................... Adjustments to reconcile net income to net cash provided by operating activities: 2000 $ 3,948 Provision for loan losses .............................................. Depreciation ................................................................. Increase in cash surrender value of life insurance ....... Investment securities losses (gains), net ...................... Gain on sale of foreclosed assets ................................. Gain on sale of loans.................................................... Deferred income taxes.................................................. Change in accrued interest receivable.......................... Change in other assets.................................................. Change in accrued interest payable.............................. Change in other liabilities ............................................ Other............................................................................. Net Cash Provided By Operating Activities Investing Activities: Net (increase) decrease in interest-bearing balances .......... Decrease in federal funds sold ............................................ Proceeds from the maturity of investment securities .......... Proceeds from the sale of investment securities ................. Purchases of investment securities ...................................... Proceeds from sale of loans ................................................ Net increase in loans ........................................................... Net purchases of bank premises and equipment ................. Proceeds from the sale of foreclosed assets........................ Capitalized additions - foreclosed assets............................. Purchase of cash surrender value of life insurance............. Net Cash Used In Investing Activities Financing Activities: Net (decrease) increase in demand and savings deposits.... Net increase (decrease) in time deposits ............................. Net (decrease) increase in short-term borrowings .............. Long-term borrowings......................................................... Long-term debt repayment .................................................. Cash dividends paid............................................................. Sale (purchase) of treasury stock ........................................ Net Cash Provided By Financing Activities Net (decrease) increase in cash and due from banks ................................................................................. Cash and due from banks at January 1....................................... Cash and due from banks at December 31................................. Supplemental Disclosures of Cash Flow Information: Cash payments of interest expense ..................................... Cash payments of income taxes .......................................... Supplemental Noncash Disclosures: Loan charge-offs.................................................................. Transfers to foreclosed assets held for sale......................... $ $ $ $ $ 325 369 (198) 4 (40) (31) (177) (382) (76) 344 126 0 4,212 (7,806) 0 4,042 3,515 (15,047) 3,622 (15,558) (643) 68 0 0 (27,807) (3,034) 16,602 (1,898) 15,000 (2,159) (2,427) 23 22,107 (1,488) 7,474 5,986 11,111 1,355 74 35 The accompanying notes are an integral part of these consolidated financial statements. 9 1999 3,884 325 404 (189) (50) (229) 0 (105) (213) 238 (38) 359 0 4,386 8,313 0 9,663 3,811 (12,931) 0 (19,434) (213) 523 (10) 0 (10,278) 6,339 (5,301) 12,477 12,000 (11,150) (6,635) (15) 7,715 1,823 5,651 7,474 9,636 1,149 224 0 1998 3,865 254 426 0 (13) (273) (65) (61) (21) 157 (35) (114) 0 4,120 (6,879) 1,000 19,707 5,290 (39,279) 6,174 (4,917) (471) 1,450 0 (3,900) (21,825) 7,074 (7,418) 9,925 10,000 (138) (2,083) (2) 17,358 (347) 5,998 5,651 9,628 1,723 317 169 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements for 2000 Report (1) Basis of Presentation The accompanying consolidated financial statements include the accounts of Mid Penn Bancorp, Inc. and its wholly-owned subsidiaries Mid Penn Bank (“Bank”) and Mid Penn Investment Corporation (collectively, “MPB”). All significant intercompa- ny balances and transactions have been eliminated. On July 13, 1998, Miners Bank of Lykens was merged with and into Mid Penn Bank, and 148,250 shares of MPB’s common stock were issued in exchange for all the outstanding stock of Miners Bank of Lykens. The merger was accounted for as a pool- ing of interests. The separate company financial statements of Miners Bank of Lykens were immaterial in relation to MPB. (2) Nature of Business The Bank engages in a full-service commercial banking and trust business, making available to the community a wide range of financial services, including, but not limited to, installment loans, mortgage and home equity loans, secured and unsecured commercial and consumer loans, lines of credit, construction financing, farm loans, community development loans, loans to non- profit entities and local government loans and various types of time and demand deposits, including but not limited to, checking accounts, savings accounts, clubs, money market deposit accounts, certificates of deposit and IRAs. In addition, the Bank pro- vides a full range of trust services through its Trust Department. Deposits are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent provided by law. The financial services are provided to individuals, partnerships, non-profit organizations and corporations through its eleven offices located in the northern portion of Dauphin County, Swatara Township in the lower portion of Dauphin County, the south- ern portion of Northumberland County, the western portion of Schuylkill County and Hampden Township in Cumberland County. Mid Penn Investment Corporation is engaged in investing activities. (3) Summary of Significant Accounting Policies The accounting and reporting policies of MPB conform to generally accepted accounting principles and to general practice within the banking industry. The following is a description of the more significant accounting policies. (a) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires manage- ment to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contin- gent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired through, or in lieu of, foreclosure in settlement of debt. While management uses available information to recognize losses on loans and foreclosed assets, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an inte- gral part of their examination process, periodically review the bank’s allowances for loan losses and foreclosed assets. Such agencies may require the bank to recognize changes to the allowances based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for loan loss- es may change materially in the near term. (b) Investment Securities Investments are accounted for as follows: Held-to-Maturity Securities - includes debt securities that MPB has the positive intent and ability to hold to maturi- ty. These securities are reported at amortized cost. Available-for-Sale Securities - includes debt and equity securities not classified as held-to-maturity securities. Such securities are reported at fair value, with unrealized holding gains and losses excluded from earnings and reported, net of deferred income taxes, as a separate component of stockholders’ equity. (c) Loans Interest on loans is recognized on a method which approximates a level yield basis over the life of the loans. The accru- al of interest on loans, including impaired loans, is discontinued when principal or interest has consistently been in default for a period of 90 days or more, or because of a deterioration in the financial condition of the borrower, payment in full of principal or interest is not expected. Interest income is subsequently recognized only to the extent cash payments are 10 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont’d) received. The placement of a loan on the nonaccrual basis for revenue recognition does not necessarily imply a potential charge-off of loan principal. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. (d) Allowance for Loan Losses The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses that may become uncollectible. Management's judgment is based upon evaluation of individual loans, risk characteristics of cat- egories 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 straight- line basis. Maintenance and repairs are charged to expense when incurred. Gains and losses on dispositions are reflected in current operations. (f) Foreclosed Assets Held for Sale Foreclosed assets held for sale consist of real estate acquired through, or in lieu of, foreclosure in settlement of debt and are recorded at fair 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 devel- opment and disposition costs. Operating results from assets acquired in satisfaction of debt, including rental income less operating costs and gains or losses on the sale of or the periodic evaluation of foreclosed assets, are recorded in noninterest expense. (g) Income Taxes Certain items of income and expense are recognized in different accounting periods for financial reporting purposes than for income tax purposes. Deferred income tax assets and liabilities are provided in recognition of these timing differences at currently enacted income tax rates. As changes in tax laws or rates are enacted, deferred income tax assets and liabilities are adjusted through the provision for income taxes. (h) Marketing and Advertising Costs Marketing and advertising costs are expensed as incurred and were $144,000, $121,000 and $160,000 in 2000, 1999 and 1998, respectively. (i) Benefit Plans A funded contributory profit-sharing plan is maintained for substantially all employees. The cost of the Bank's profit- sharing plan is charged to current operating expenses and is funded annually. In addition to providing a profit-sharing plan, the Bank provides health care coverage for employees who retire with twenty years or more of full-time service with the Bank, for a period up to five years from the date of retirement under the group plan of the other employees, provided the Bank is providing such health care coverage for other employees. The Bank also provides continued coverage on group life insurance for those employees who retire with twenty years or more of full-time service with the Bank. Substantially all of the Bank's employees may become eligible for those benefits if they continue working for the Bank until retirement age. The Bank currently does not offer post-employment benefits. The Bank also has a defined benefit retirement bonus plan for qualified members of the Board of Directors who either voluntarily retire from service or attain mandatory retirement age (age 70). The benefit is based on years of service and is funded based on the expected future years of service of active participants. (j) Trust Assets and Income Assets held by the Bank in a fiduciary or agency capacity for customers of the Trust Department are not included in the financial statements since such items are not assets of the Bank. Trust income is recognized on the cash basis which is not materially different than if it were reported on the accrual basis. (k) Earnings Per Share Earnings per share is computed by dividing net income by the weighted average number of common shares outstanding 11 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) during each of the years presented giving retroactive effect to stock dividends and stock splits. MPB’s basic and diluted earnings per share are the same since there are no dilutive shares of potential common stock outstanding. (l) Statement of Cash Flows For purposes of the statement of cash flows, MPB considers cash and due from banks to be cash equivalents. (m) Reclassifications Certain prior year amounts have been reclassified to conform to the current year's classifications. (4) Comprehensive Income The components of other comprehensive (loss) income and related tax effects are as follows: (Dollars in thousands) 2000 Unrealized holding gains (losses) on available-for-sale securities............ $ 2,296 Less reclassification adjustment for losses (gains) realized in income .... 4 2,300 Net unrealized gains (losses) .................................................................... (783) Tax effect.................................................................................................... Net-of-tax amount...................................................................................... $ 1,517 Years Ended December 31, 1999 (3,291) (50) (3,341) 1,136 (2,205) 1998 52 (13) 39 (13) 26 (5) Restrictions on Cash and Due from Bank Accounts The Bank is required to maintain reserve balances. The amount of those required reserve balances at December 31, 2000 and 1999 was approximately $1,878,000 and $1,871,000, respectively. (6) Investment Securities At December 31, 2000 and 1999, amortized cost, fair value, and gross unrealized gains and losses on investment securities are as follows: (Dollars in thousands) December 31, 2000 Available for sale securities: U.S. Treasury and U.S. Gross Amortized Unrealized Unrealized Gains Losses Gross Cost Fair Value government agencies ................................. $ 34,750 Mortgage-backed U.S. government agencies .................................. 2,402 State and political subdivision obligations ............................... Restricted equity securities............................. 33,972 3,281 $ 74,405 77 1 418 0 496 476 34,351 2 2,401 538 0 1,016 33,852 3,281 73,885 December 31, 1999 Available for sale securities: U.S. Treasury and U.S. Gross Amortized Unrealized Unrealized Gains Losses Gross Cost Fair Value government agencies ................................. $ 33,778 Mortgage-backed U.S. government agencies .................................. 1,799 State and political subdivision obligations ............................... Restricted equity securities............................. 28,061 3,281 $ 66,919 57 0 144 0 201 1,851 31,984 35 1,764 1,135 0 3,021 27,070 3,281 64,099 Estimated fair values of debt securities are based on quoted market prices, where applicable. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments, adjusted for differences between the quoted instruments and the instruments being valued. 12 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) Restricted equity securities consist of stock in the Federal Home Loan Bank of Pittsburgh and Atlantic Central Bankers Bank and do not have a readily determinable fair value for purposes of SFAS No. 115, because their ownership is restricted and they lack a market. Therefore, these securities are classified as restricted investment securities, carried at cost, and evaluated for impairment. Investment securities and interest bearing balances having a fair value of $49,108,000 at December 31, 2000, were pledged to secure public and trust deposits and other borrowings. Proceeds from the sale of investment securities in 2000 amounted to $3,515,000 and gross losses from such sales of invest- ment securities, as determined on the basis of specific identification of the adjusted cost of each security sold, amounted to $4,000. Gross gains of $50,000 and $13,000 were realized on the sale of investment securities amounting to $3,811,000 and $5,290,000 in 1999 and 1998, respectively. The following is a schedule of the maturity distribution of investment securities at amortized cost and fair value as of December 31, 2000 and 1999: (Dollars in thousands) Due in 1 year or less........................................................................ Due after 1 year but within 5 years................................................. Due after 5 years but within 10 years ............................................. Due after 10 years ........................................................................... $ December 31, 2000 Fair Amortized Value Cost 2,390 2,389 13,084 13,061 20,678 20,737 32,051 32,535 68,203 68,722 December 31, 1999 Fair Amortized Value Cost 1,681 1,680 8,563 8,674 22,542 23,243 26,268 28,242 59,054 61,839 Mortgage-backed securities............................................................. Restricted equity securities.............................................................. 2,402 3,281 $ 74,405 2,401 3,281 73,885 1,799 3,281 66,919 1,764 3,281 64,099 (7) Loans A summary of loans at December 31, 2000 and 1999 is as follows: (Dollars in thousands) Commercial real estate, construction and land development.......... Commercial, industrial and agricultural.......................................... Real estate - residential ................................................................... Consumer......................................................................................... 2000 $ 110,947 26,274 35,610 14,110 $ 186,941 1999 105,328 20,118 32,586 16,780 174,812 Net unamortized loan fees of $417,000 were deducted from loans in both years. Loans to Bank executive officers, directors, and corporations in which such executive officers and directors are beneficially interested as stockholders, executive officers, or directors aggregated approximately $1,418,000 and $1,353,000 at December 31, 2000 and 1999, respectively. New loans extended were $66,000 and $277,000 during 2000 and 1999, respectively. Net repay- ments in 2000 amounted to $1,000. Draws exceeded repayments on these loans by $153,000 during 1999. These loans were made on substantially the same basis, including interest rates and collateral as those prevailing for comparable transactions with other borrowers at the same time. 13 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) (8) Allowance for Loan Losses Changes in the allowance for loan losses for the years 2000, 1999, and 1998 are summarized as follows: (Dollars in thousands) Balance, January 1........................................................................... Provision charged to operations ...................................................... Loans charged off ............................................................................ Recoveries on loans charged off ..................................................... Balance, December 31..................................................................... 2000 2,505 325 (74) 59 2,815 $ $ 1999 2,313 325 (224) 91 2,505 1998 2,281 254 (317) 95 2,313 The recorded investment in loans that are considered impaired amounted to $448,000 and $890,000 (all in nonaccrual) on December 31, 2000 and December 31, 1999, respectively. By definition, impairment of a loan is considered when, based on cur- rent information and events, it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. The allowance for loan losses related to loans classified as impaired amounted to approximately $169,000 at December 31, 2000 and $235,000 at December 31, 1999. The average balances of these loans amounted to approximately $752,000, $873,000 and $861,000 for the years 2000, 1999 and 1998, respectively. The Bank recognizes interest income on impaired loans on a cash basis. The following is a summary of cash receipts on these loans and how they were applied in 2000, 1999 and 1998. (Dollars in thousands) Cash receipts applied to reduce principal balance .......................... Cash receipts recognized as interest income................................... Total cash receipts ........................................................................... 2000 520 36 556 $ $ 1999 63 28 91 1998 0 27 27 In addition, at December 31, 2000 and 1999, the Bank had other nonaccrual loans of approximately $668,000 and $15,000, for which impairment had not been recognized. Loans which were past due 90 days or more for which interest continued to be accrued as of December 31, 2000 and 1999, amounted to approximately $504,000 and $386,000, respectively. The Bank has no commitments to loan additional funds to borrowers with impaired or nonaccrual loans. (9) Bank Premises and Equipment At December 31, 2000 and 1999, bank premises and equipment are as follows: (Dollars in thousands) Land................................................................................................. Buildings.......................................................................................... Furniture and fixtures ...................................................................... Less accumulated depreciation........................................................ 2000 818 3,926 3,383 8,127 4,546 3,581 $ $ 1999 626 3,645 3,213 7,484 4,177 3,307 (10) Deposits At December 31, 2000 and 1999, time deposits in denominations of $100,000 or more amounted to $23,342,000 and $16,216,000, respectively. Interest expense on such certificates of deposit amounted to approximately $1,211,000, $1,103,000 and $1,102,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Time deposits at December 31, 2000, mature as follows: (in thousands) 2001, $68,417; 2002, $34,178; 2003, $21,009; 2004, $4,192; 2005, $5,289; thereafter, $3,350. Deposits and other funds from related parties held by the Corporation at December 31, 2000 amounted to $2,070,000. 14 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) (11) Short-term Borrowings Short-term borrowings as of December 31, 2000 and 1999 consisted of: (Dollars in thousands) Discount window borrowings.......................................................... $ Federal funds purchased.................................................................. Repurchase agreements .................................................................. Treasury, tax and loan note ............................................................ $ 2000 1,500 19,300 1,459 479 22,738 1999 0 22,300 1,313 1,023 24,636 Discount window borrowings and federal funds purchased represent overnight funds. Securities sold under repurchase agree- ments generally mature between one day and one year. Treasury, tax and loan notes are open-ended interest bearing notes payable to the U.S. Treasury upon call. All tax deposits accepted by the Bank are placed in the Treasury note option account. The Bank also has unused lines of credit with several banks amounting to $20 million dollars at December 31, 2000. (12) Long-term Debt The Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB) and through its membership, the Bank can access a number of credit products which are utilized to provide various forms of liquidity. As of December 31, 2000, the Bank had long-term debt in the amount of $29,241,000 outstanding to the FHLB consisting of a $1,500,000 5 year fixed advance at 6.67% due September 4, 2001; a $5,000,000 bullet loan at 6.61% which will mature on November 24, 2003; a $639,000 10 year amortizing advance at 7.30% which will mature April 5, 2004; a $5,000,000 7 year fixed rate advance at 6.21% convertible at FHLB’s option to a LIBOR adjustable rate after 3 years which will mature November 30, 2006; a $5,000,000 10 year fixed rate advance at 6.42% convertible at FHLB’s option to a LIBOR adjustable rate after 5 years which matures December 3, 2009; a $1,000,000 10 year fixed rate advance with an interest rate of 7.06% maturing on December 9, 2009; a $1,000,000 10 year fixed rate advance with an interest rate of 7.24% which matures December 17, 2009; a $5,000,000 10 year fixed rate advance at 6.28% convertible at FHLB’s option to a LIBOR adjustable rate after 2 years which is due January 14, 2010; a $5,000,000 10 year fixed rate advance at 6.71% convertible at FHLB’s option to a LIBOR adjustable rate after 3 years which is due February 22, 2010; and a $102,000 amortizing loan at a rate of 6.71% which matures February 22, 2027. The aggregate amounts of maturities of long-term debt subsequent to December 31, 2000 are $1,672,000 (2001), $185,000 (2002), $5,199,000 (2003), $88,000 (2004), $2,000 (2005), $22,095,000 thereafter. Most of the Bank’s investments and mortgage loans are pledged to secure FHLB borrowings. (13) Lease Commitments The Bank leases certain premises under long-term lease agreements which are classified as operating leases. Commitments under these agreements are not material. Rental expense for 2000, 1999 and 1998 was approximately $34,000, $42,000 and $49,000, respectively. (14) Benefit Plans (a) Profit-Sharing The Bank has a funded contributory profit-sharing plan covering substantially all employees. The Bank's contribution to the plan for 2000, 1999 and 1998 was $361,000, $310,000 and $281,000, respectively. (b) Health Insurance For full-time employees who retire after at least 20 years of service, the Bank will pay premiums for major medical insur- ance (as provided to active employees) for a period ending on the earlier of the date the participant obtains other employ- ment where major medical coverage is available or the date of the participant's death; however, payment of medical premi- ums by the Bank will cease after five years. If the retiree becomes eligible for Medicare within the five year period begin- ning on his/her retirement date, the Bank will pay, at its discretion, premiums for 65 Special coverage or a similar supple- mental coverage. After the five year period has expired, all employer-paid benefits will cease; however, the employee may continue coverage through the employer at his/her own expense. 15 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) (c) Life Insurance For full-time employees who retire after at least 20 years of service, the Bank will provide term life insurance. The amount of coverage prior to age 65 will be the lesser of three times the participant's annual salary at retirement or $50,000. After age 65, the insurance amount will decrease by 10% of the age 65 amount per year, subject to a minimum amount of $2,000. The following tables provide a reconciliation of the changes in the plans’ health and life insurance benefit obligations and fair value of plan assets for the years ended December 31, 2000 and 1999 and a statement of the funded status at December 31, 2000 and 1999: (Dollars in thousands) Change in post-retirement benefit obligations: Benefit obligations, January 1 ..................................................................... $ Service cost.............................................................................................. Interest cost.............................................................................................. Actuarial loss (gain) ................................................................................ Benefit payments ..................................................................................... Benefit obligations, December 31 ............................................................... $ 2000 329 18 22 0 (15) 354 Change in fair value of plan assets: Fair value of plan assets, January 1............................................................. $ Employer contributions ........................................................................... Benefit payments ..................................................................................... Fair value of plan assets, December 31....................................................... $ 0 15 (15) 0 1999 404 20 23 (104) (14) 329 0 14 (14) 0 December 31, Funded status: Excess of the benefit obligation over the value of plan assests .............. $ Unrecognized transition obligation ......................................................... Unrecognized gain................................................................................... Net amount recognized............................................................................ $ 2000 (354) 177 (154) (331) Amount recognized in the balance sheet at December 31, 2000 and 1999 is as follows: (Dollars in thousands) 2000 Accrued benefit liability.......................................................................... $ (331) 1999 (329) 192 (162) (299) 1999 (299) The components of net periodic post-retirement benefit cost for 2000, 1999 and 1998 are as follows: (Dollars in thousands) Service cost.............................................................................................. $ Interest cost.............................................................................................. Amortization of transition obligation...................................................... Amortization of net gain ......................................................................... Net periodic post-retirement benefit cost ................................................ $ 2000 18 22 15 (8) 47 1999 20 23 15 (4) 54 1998 24 20 15 (5) 54 Assumed health care cost trend rates have a significant effect on the amounts reported for the post retirement medical benefits plan. A one-percentage-point change in assumed health care cost trend rates would have the following effect: (Dollars in thousands) Effect on total of service and interest cost components.............. Effect on post retirement benefit obligation................................ $ $ 16 One-Percentage Point Increase 6 39 5 32 Decrease Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) Assumptions used in the measurement of MPB’s benefit obligations at December 31, 2000 and 1999 are as follows: Weighted-average assumptions: Discount rate............................................................................ Rate of compensation increase................................................ 7.0% 5.0% For measurement purposes, a one percent annual decrease in the per capita cost of covered health care benefits was assumed for 2001. The rate was assumed to be 6 percent for 2001 and remain at that level thereafter. (d) Retirement Plan The Bank has an unfunded defined benefit retirement plan for directors with benefits based on years of service. The adoption of this plan generated unrecognized prior service cost of $274,000 which is being amortized based on the expect- ed future years of service of active participants. The following tables provide a reconciliation of the changes in the plan’s benefit obligations and fair value of plan assets for the years ended December 31, 2000 and 1999 and a statement of the funded status at December 31, 2000 and 1999: (Dollars in thousands) Change in benefit obligations: Benefit obligations, January 1 ..................................................... Service cost.............................................................................. Interest cost.............................................................................. Actuarial loss (gain) ................................................................ Benefit payments ..................................................................... Benefit obligations, December 31 ............................................... Change in fair value of plan assets: Fair value of plan assets, January 1............................................. Employer contributions ........................................................... Benefit payments ..................................................................... Fair value of plan assets, December 31 Funded status: Excess of the benefit obligation over the value of plan assets.... Unrecognized prior-service cost.................................................. Unrecognized gain....................................................................... Net amount recognized................................................................ $ $ $ $ $ $ 2000 1999 414 20 28 1 (8) 455 0 8 (8) 0 405 20 26 (29) (8) 414 0 8 (8) 0 December 31, 2000 (455) 130 (14) (339) Amounts recognized in the balance sheet at December 31, 2000 and 1999 are as follows: (Dollars in thousands) Accrued benefit liability.............................................................. Intangible asset ............................................................................ Net amount recognized................................................................ 2000 (376) 37 (339) $ $ The components of net periodic pension cost for 2000, 1999 and 1998 are as follows: (Dollars in thousands) Service cost.................................................................................. Interest cost.................................................................................. Amortization of prior-service cost .............................................. Net periodic pension cost ............................................................ 2000 20 28 26 74 $ $ 17 1999 (414) 156 (14) (272) 1999 (334) 62 (272) 1999 20 26 26 72 1998 17 24 26 67 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) Assumptions used in the measurement of MPB’s benefit obligations at December 31, 2000 and 1999 are as follows: Weighted-average assumptions: Discount rate................................................................................ 7.0% The Bank is the owner and beneficiary of insurance policies on the lives of the executive officers and directors which infor- mally fund the benefit obligations. The aggregate cash surrender value of these policies was approximately $1,512,000 and $1,444,000 at December 31, 2000 and 1999, respectively. (e) Deferred Compensation Plans During 1999, the Bank adopted an executive deferred compensation plan which allows an executive officer to defer bonus compensation for a specified period in order to provide future retirement income. At December 31, 2000 and 1999, the Bank has accrued a liability of approximately $20,000 and $10,000, respectively, for this plan. During 1999, the Bank adopted a director’s deferred compensation plan which allows directors to defer receipt of month- ly director’s fees for a specified period in order to provide future retirement income. At December 31, 2000 and 1999, the Bank has accrued a liability of approximately $64,000 and $36,000, respectively, for this plan. The Bank is the owner and beneficiary of insurance policies on the lives of the participating executive officer and direc- tors which informally fund the benefit obligations. The aggregate cash surrender value of these policies was approximate- ly $1,232,000 and $1,174,000 at December 31, 2000 and 1999, respectively. (f) Salary Continuation Plan During 1999, the Board of Directors adopted a Salary Continuation Agreement for an executive officer. The Salary Continuation Agreement provides the executive officer with a fixed annual benefit. The benefit is payable beginning at age 65 for a period of 15 years. If the executive officer terminates employment before the normal retirement date for reasons other than death, the annual benefit payable will be based on the vesting schedule as defined in the Agreement. Upon death or a change of control of the Bank, the executive officer or his beneficiary is entitled to the full fixed annual benefit. At December 31, 2000 and 1999, the Bank has accrued a liability of approximately $46,000 and $22,000, respectively, for this plan. The Bank is the owner and beneficiary of an insurance policy on the life of the participating executive officer which infor- mally funds the benefit obligation. The aggregate cash surrender value of this policy was approximately $723,000 and $688,000 at December 31, 2000 and 1999, respectively. (g) Employee Stock Ownership Plan The Bank has an Employee Stock Ownership Plan (ESOP) covering substantially all employees. Contributions to the plan are made at the discretion of the Board of Directors. Total expense related to the Bank’s contribution to the plan for 2000, 1999 and 1998 was $118,000, $103,000 and $87,000, respectively. The ESOP held 8,932 and 3,732 shares of MPB stock as of December 31, 2000 and December 31, 1999, respectively, all of which were allocated to plan participants. Shares held by the ESOP are considered outstanding for purposes of calculating earnings per share. (h) Other At December 31, 2000 and 1999, the Bank had a Split Dollar Life Insurance Plan for two executives for which the aggre- gate cash surrender value is approximately $822,000 and $783,000, respectively. 18 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) (15) Federal Income Taxes The following temporary differences gave rise to the deferred tax asset at December 31, 2000 and 1999: (Dollars in thousands) Deferred tax assets: Allowance for loan losses........................................................ Benefit plans............................................................................ Nonaccrual interest.................................................................. Deferred income ...................................................................... Unrealized losses on securities................................................ Total Deferred tax liabilities: Depreciation ............................................................................ Loan fees ................................................................................. Bond accretion......................................................................... Total Deferred tax asset, net ................................................................. The provision for income taxes consists of the following: (Dollars in thousands) Current provision......................................................................... Deferred provision....................................................................... Provision for income taxes .......................................................... 2000 803 308 16 7 177 1,311 (92) (120) (30) 242 1,069 2000 1,401 (176) 1,225 $ $ $ $ $ $ $ A reconciliation of income tax at the statutory rate to MPB's effective rate is as follows: (Dollars in thousands) Provision at the expected statutory rate ...................................... Effect of tax-exempt income ....................................................... Nondeductible interest................................................................. Other items .................................................................................. Provision for income taxes .......................................................... $ $ 2000 1,759 (633) 69 30 1,225 1999 697 218 26 8 959 1,908 (103) (98) (32) (233) 1,676 1999 1,358 (105) 1,253 1999 1,747 (536) 50 (8) 1,253 1998 1,577 (61) 1,516 1998 1,829 (380) 43 24 1,516 (16) Regulatory Matters The Bank is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. The regulations require the Bank to meet specific capital adequacy guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-bal- ance-sheet items as calculated under regulatory accounting practices. The Bank’s capital classification is also subject to qualita- tive 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 capi- talized (as defined) under the regulatory framework for prompt corrective action, the Bank must maintain minimum Tier I lever- age, Tier I risk-based and total risk-based ratios as set forth in the table. The Bank’s actual capital amounts and ratios are also presented in the table. 19 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) (Dollars in thousands) As of December 31, 2000: Capital Adequacy Actual Amount (Ratio) (7.0%) Tier I Capital (to Average Assets) .................... $ 20,523 20,523 Tier I Capital (to Risk Weighted Assets).......... (9.9%) 23,118 (11.2%) Total Capital (to Risk Weighted Assets) .......... Required Amount (Ratio) 11,790 (4.0%) 8,296 (4.0%) 16,592 (8.0%) To Be Well Capitalized Under Prompt Corrective Action Provisions: Amount (Ratio) (5.0%) 14,737 12,444 (6.0%) 20,740 (10.0%) As of December 31, 1999: (7.1%) Tier I Capital (to Average Assets) .................... $ 19,307 19,307 Tier I Capital (to Risk Weighted Assets).......... (9.9%) 21,736 (11.2%) Total Capital (to Risk Weighted Assets) .......... 10,812 (4.0%) 7,768 (4.0%) 15,537 (8.0%) (5.0%) 13,515 11,653 (6.0%) 19,421 (10.0%) As of December 31, 2000, the Bank’s capital ratios are well in excess of the minimum and well-capitalized guidelines and MPB’s capital ratios are in excess of the Bank’s capital ratios. (17) Concentration of Risk and Off-Balance Sheet Risk The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financ- ing 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 con- solidated balance sheet. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial prop- erties. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for com- mitments 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 instru- ments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition estab- lished in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The term of these standby letters of credit is generally one year or less. As of December 31, 2000, commitments to extend credit amounted to $30,325,000 and standby letters of credit amounted to $2,921,000. Significant concentration of credit risk may occur when the obligations of the same or affiliated parties engaged in similar activities or having similar economic characteristics causing those parties to be similarly affected by changes in economic or other conditions occur. In analyzing the Bank's exposure to significant concentration of credit risk, management set a parameter of 10% or more of the Bank's total net loans outstanding as the threshold in determining whether the obligations of the same or affiliated parties would be classified as significant concentration of credit risk. Concentrations by industry, product line, type of collateral, etc., were also considered. U.S. Treasury securities, obligations of U.S. government agencies and corporations, and any assets col- lateralized by the same were excluded. As of December 31, 2000, commercial real estate financing was the only similar activity that met the requirements to be clas- sified as significant concentration of credit risk. However, there is a geographical concentration in that most of the Bank's busi- ness activity is with customers located in Central Pennsylvania, specifically within the Bank's trading area made up of Dauphin County, lower Northumberland County, western Schuylkill County and Hampden Township in Cumberland County. 20 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) The Bank's highest concentrations of credit are in the areas of mobile home park land and commercial real estate office financ- ing. Outstanding credit to these sectors amounted to $15,229,000 or 8.4% and $20,975,000 or 11.6% of net loans outstanding as of December 31, 2000. (18) Commitments and Contingencies In the ordinary course of business, MPB has various outstanding commitments and contingent liabilities that are not reflect- ed in the accompanying consolidated financial statements. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial condition of MPB. (19) Parent Company Statements The condensed balance sheet, statement of income and statement of cash flows for Mid Penn Bancorp, Inc., parent only, are presented below: CONDENSED BALANCE SHEET As of December 31, 2000, 1999 and 1998 (Dollars in thousands) ASSETS Cash ............................................................................................. Investment in Subsidiaries........................................................... Total Assets LIABILITIES AND STOCKHOLDERS' EQUITY Stockholders' Equity ................................................................... Less Treasury Stock .................................................................... Total Liabilities and Equity CONDENSED STATEMENT OF INCOME For the Years Ended December 31, 2000, 1999 and 1998 (Dollars in thousands) Dividends from Subsidiaries ....................................................... Other Income from Subsidiaries ................................................. Undistributed Earnings of Subsidiaries....................................... Other Expenses............................................................................ Net Income CONDENSED STATEMENT OF CASH FLOWS For the Years Ended December 31, 2000, 1999 and 1998 (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net Income.................................................................................. Undistributed Earnings of Subsidiaries ...................................... Net Cash Provided By Operating Activities CASH FLOWS FROM FINANCING ACTIVITIES Dividends Paid............................................................................. Sale (purchase) of Treasury Stock .............................................. Net Cash Used By Financing Activities Net Increase in Cash.................................................................... Cash at Beginning of Period ....................................................... Cash at End of Period.................................................................. 21 2000 1,199 28,427 29,626 30,159 (533) 29,626 2000 2,795 30 1,212 (89) 3,948 2000 3,948 (1,212) 2,736 (2,427) 23 (2,404) 332 867 1,199 $ $ $ $ $ $ $ 1999 1998 867 25,698 26,565 27,121 (556) 26,565 485 31,051 31,536 32,077 (541) 31,536 1999 1998 7,080 24 (3,148) (72) 3,884 1999 3,884 3,148 7,032 (6,635) (15) (6,650) 382 485 867 2,304 27 1,615 (81) 3,865 1998 3,865 (1,615) 2,250 (2,083) (2) (2,085) 165 320 485 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) (20) Fair Value of Financial Instruments SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate that value. In cases where quoted market values are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets, and in many cases, could not be realized in immediate settlement of the instrument. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of MPB. The following methodologies and assumptions were used to estimate the fair value of MPB’s financial instruments: Cash and due from banks: The carrying value of cash and due from banks was considered to be a reasonable estimate of fair value. Interest bearing balances with other financial institutions: The estimate of fair value was determined by comparing the present value of quoted interest rates on like deposits with the weighted average yield and weighted average maturity of the balances. Investment securities: As indicated in Note 5, estimated fair values of investment securities are based on quoted market prices, where applicable. If quoted market prices are not available, fair values are based on quoted market prices for comparable instruments, adjusted for differences between the quoted instruments and the instruments being valued. Loans: The loan portfolio was segregated into pools of loans with similar economic characteristics and was further segregated into fixed rate and variable rate and each pool was treated as a single loan with the estimated fair value based on the discounted value of expected future cash flows. Fair value of loans with significant collectibility concerns (that is, problem loans and potential problem loans) was determined on an individual basis using an internal rating system and appraised values of each loan. Assumptions regarding problem loans are judgmentally determined using specific borrower information. Deposits: The fair value for demand deposits (e.g., interest and noninterest checking, savings and money market deposit accounts) are by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). Fair value for fixed-rate certificates of deposit was estimated using a discounted cash flow calculation by combining all fixed-rate certificates into a pool with a weighted average yield and a weighted average maturity for the pool and comparing the pool with interest rates currently being offered on a similar maturity. Short-term borrowed funds: Because of time to maturity, the estimated fair value of short-term borrowings approximates the book value. Long-term debt: The estimated fair values of long-term debt was determined using discounted cash flow analysis, based on borrowing rates for similar types of borrowing arrangements. Accrued interest: The carrying amounts of accrued interest approximates their fair values. Off-balance-sheet financial instruments: There are no unearned fees outstanding on off-balance-sheet financial instruments and the fair values are determined to be equal to the carrying values. 22 Mid Penn Bancorp, Inc. Notes to Consolidated Financial Statements (cont'd) The following table summarizes the book or notional value and fair value of financial instruments at December 31, 2000 and 1999. (Dollars in thousands) Financial assets: December 31, 2000 December 31, 1999 Book or Notional Value Fair Value Book or Notional Value Fair Value 7,474 34,570 64,099 172,678 217,107 24,636 16,842 Cash and due from banks ............................................................ Interest bearing balances ............................................................. Investment securities ................................................................... Net loans...................................................................................... $ 5,986 42,376 73,885 181,396 5,986 42,376 73,885 187,750 Financial liabilities: Deposits ....................................................................................... Short-term borrowings................................................................. Long-term debt ............................................................................ $ 231,408 22,738 29,241 232,803 22,738 30,944 Off-balance sheet financial instruments: 7,474 34,570 64,099 169,789 217,840 24,636 16,400 Commitments to extend credit .................................................... Standby letters of credit .............................................................. $ 30,325 2,921 30,325 2,921 29,648 2,336 29,648 2,336 (21) Common Stock MPB has reserved 50,000 of authorized, but unissued shares of its common stock for issuance under a Stock Bonus Plan (the “Plan”). Shares issued under the Plan are at the discretion of the board of directors. In November, 1997, MPB amended and restated its dividend reinvestment plan, (DRIP). Two hundred thousand shares of MPB’s authorized but unissued common stock are reserved for issuance under the DRIP. The DRIP also allows for voluntary cash payments within specified limits, for the purchase of additional shares. (22) Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The statement establishes accounting and reporting standards requiring that every deriva- tive instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Corporation is required to adopt SFAS No. 133 on January 1, 2001 and it cannot be applied retroactively to financial state- ments of prior periods. Management does not expect the initial adoption of SFAS No. 133 to have a material effect on the Corporation’s operations or financial position. In September 2000, the SFAS issued FASB No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This statement supercedes and replaces the guidance in Statement 125. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, although it carries over most of Statement 125’s provisions without reconsideration. The Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending December 15, 2000. This Statement is to be applied prospectively with certain exceptions. Other than those exceptions, earlier or retroactive application of its accounting provisions is not permitted. The Corporation has not yet determined the impact, if any, of this statement on the Corporation’s financial condition, equity, results of operations or disclosure. 23 Mid Penn Bancorp, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations The purpose of this discussion is to further detail the financial condition and results of operations of Mid Penn Bancorp, Inc. (MPB). MPB is not aware of any known trends, events, uncertainties or of any current recommendations by the regulatory authorities which, if they were to be implemented, would have a material effect on MPB’s liquidity, capital resources or opera- tions. This discussion should be read along with the financial statements also appearing in this report. Per share data has been restated to reflect the effect of stock dividends and splits. The prior financial data has been restated to reflect the 1998 merger of Miners Bank of Lykens as if the two banks had always been one. Financial Summary The consolidated earnings of MPB are derived primarily from the operations of its wholly-owned subsidiary, Mid Penn Bank. MPB earned net income of $3,948,000 for the year 2000, compared to $3,884,000 in 1999, which was an increase of $64,000 or 1.7%. This represents net income in 2000 of $1.30 per share compared to $1.28 per share in 1999 and $1.27 per share in 1998. Total assets of MPB continued to grow in 2000, reaching the level of $315,584,000, an increase of $28,042,000 or 9.75% over $287,542,000 at year end 1999. Approximately ten million of the asset growth during 2000 resulted in the purchase of interest bearing balances and municipal securities, which were funded by borrowings resulting in incremental income to MPB going for- ward. MPB continued to achieve an excellent return on average shareholders’ equity, (ROE), a widely recognized performance indi- cator in the financial industry. The ROE was 14.64% in 2000, 14.68% in 1999 and 12.81% in 1998. Return on average assets (ROA), another performance indicator, was 1.34% in 2000, 1.40% in 1999 and 1.45% in 1998. During the first quarter of 1999 our Board of Directors declared a special cash dividend of $1.50 per share. This special div- idend is not expected to affect regular dividends in the future. The special dividend was declared to reduce the capital levels of Mid Penn Bancorp, Inc., increase ROE, and enhance shareholder value. We have enjoyed a very solid capital position due to strong financial performance. In the banking industry, there has been a general shift from ROA to ROE as a measure of finan- cial performance since ROE is a truer measure of a company’s earnings on its shareholders’ ownership. By lowering capital through this special dividend, we would be improving ROE, thus improving this ratio important to bank stock analysis. Even after the payment of this special dividend, Mid Penn Bank has maintained capital levels well above regulatory require- ments. Tier one capital (to risk weighted assets) of $20,523,000 or 9.9% and total capital (to risk weighted assets) of $23,118,000 or 11.2% at December 31, 2000, are well above the December 31, 2000 requirement, which is 4% for tier one capital and 8% for total capital. Tier one capital consists primarily of stockholders' equity. Total capital includes qualifying subordinated debt, if any, and the allowance for loan losses, within permitted limits. Risk-weighted assets are determined by assigning various levels of risk to different categories of assets and off-balance-sheet activities. Net Interest Income Net interest income, MPB's primary source of revenue, represents the difference between interest income and interest expense. Net interest income is affected by changes in interest rates and changes in average balances (volume) in the various interest-sen- sitive assets and liabilities. During 2000 net interest income increased $160,000 or 1.53% as compared to a decrease of $405,000 or 3.74% in 1999. The 1999 decrease was caused primarily by the lower yield on loans during the year due to the decrease in average prime rate and pressure in the competitive environment to reprice existing loans. The average balances, effective interest differential and inter- est yields for the years ended December 31, 2000, 1999 and 1998, the components of net interest rate growth, are presented in Table 1. A comparative presentation of the changes in net interest income for 2000 compared to 1999, and 1999 compared to 1998, is given in Table 2. This analysis indicates the changes in interest income and interest expense caused by the volume and rate components of interest earning assets and interest bearing liabilities. 24 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) The yield on earning assets increased to 8.33% in 2000 from 7.91% in 1999. The yield on earning assets for 1998 was also 8.33%. The change in the yield on earning assets was due primarily to the repricing of commercial loans in a very competitive rate environment, the $3,900,000 purchase of life insurance, which yields income but not interest income, and changes in the “prime rate.” The average “prime rate” for 2000 was 9.20% as compared to 7.98% for 1999 and 8.38% for 1998. Interest expense increased by $1,781,000 or 18.41% in 2000 as compared to $81,000 or .84% in 1999. The increase in inter- est expense is due primarily to the increase in the total of interest bearing liabilities including the greater reliance on borrowings from the Federal Home Loan Bank of Pittsburgh particularly in light of the short-term interest rate increases during 2000. Primarily resulting from the fluctuations in interest rates, the net interest margin, on a tax equivalent basis, in 2000 was 4.25% compared to 4.24% in 1999 and 4.52% in 1998. Management continues to closely monitor the net interest margin. TABLE 1: AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS INCOME AND RATES ON A TAXABLE EQUIVALENT BASIS FOR YEAR ENDED DECEMBER 31, 2000 Average Balance Interest Income/Expense Average Rates Earned/Paid $ 36,234 (Dollars in thousands) ASSETS: Interest Bearing Balances ..................... Investment Securities: Taxable.............................................. Tax-Exempt....................................... Total Investment Securities Federal Funds Sold ............................... Loans, Net............................................. Total Earning Assets............................. Cash and Due from Banks.................... Other Assets.......................................... Total Assets $ LIABILITIES & STOCKHOLDERS' EQUITY: Interest Bearing Deposits: NOW ................................................ Money Market .................................. Savings.............................................. Time .................................................. Short-term Borrowings ......................... Long-term Debt .................................... Total Interest Bearing Liabilities .......... Demand Deposits.................................. Other Liabilities.................................... Stockholders' Equity ............................. Total Liabilities and Stockholders' Equity Net Interest Income.................................... Net Yield on Interest Earning Assets: Total Yield on Earning Assets .............. Rate on Supporting Liabilities.............. Net Interest Margin............................... $ $ $ 39,224 29,251 68,475 7 175,802 280,518 5,212 9,015 294,745 28,518 18,568 25,744 130,342 14,362 24,378 241,912 23,511 2,358 26,964 294,745 25 2,306 2,503 2,235 0 16,310 23,354 391 659 570 7,338 879 1,618 11,455 11,899 6.36 6.38 7.64 6.00 9.28 8.33 1.37 3.55 2.21 5.63 6.12 6.64 4.74 8.33% 4.08% 4.25% Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) TABLE 1: AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS (cont’d) INCOME AND RATES ON A TAXABLE EQUIVALENT BASIS FOR YEAR ENDED DECEMBER 31, 1999 (Dollars in thousands) Average Balance Interest Income/Expense Average Rates Earned/Paid 2,409 2,562 1,988 1 13,884 20,844 380 705 586 6,631 517 855 9,674 11,170 6.07% 6.30% 7.47% 5.00% 8.87% 7.91% 1.37% 3.40% 2.23% 5.27% 4.84% 5.92% 4.29% 7.91% 3.67% 4.24% ASSETS: Interest Bearing Balances ..................... Investment Securities: Taxable.............................................. Tax-Exempt....................................... Total Investment Securities................... $ 39,671 Federal Funds Sold ............................... Loans, Net............................................. Total Earning Assets............................. Cash and Due from Banks.................... Other Assets.......................................... Total Assets $ LIABILITIES & STOCKHOLDERS' EQUITY: Interest Bearing Deposits: NOW ................................................ Money Market .................................. Savings.............................................. Time .................................................. Short-term Borrowings ......................... Long-term Debt .................................... Total Interest Bearing Liabilities .......... Demand Deposits.................................. Other Liabilities.................................... Stockholders' Equity ............................. Total Liabilities and Stockholders' Equity Net Interest Income.................................... Net Yield on Interest Earning Assets: Total Yield on Earning Assets .............. Rate on Supporting Liabilities.............. Net Interest Margin............................... $ $ $ 40,672 26,609 67,281 12 156,518 263,482 5,174 9,646 278,302 27,669 20,734 26,259 125,782 10,683 14,453 225,580 23,338 2,934 26,450 278,302 26 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) TABLE 1: AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS (cont'd) INCOME AND RATES ON A TAXABLE EQUIVALENT BASIS FOR YEAR ENDED DECEMBER 31, 1998 (Dollars in thousands) Average Balance Interest Income/Expense Average Rates Earned/Paid ASSETS: Interest Bearing Balances ..................... Investment Securities: Taxable.............................................. Tax-Exempt....................................... Total Investment Securities Federal Funds Sold ............................... Loans, Net............................................. Total Earning Assets............................. Cash and Due from Banks.................... Other Assets.......................................... Total Assets LIABILITIES & STOCKHOLDERS' EQUITY: Interest Bearing Deposits: NOW ................................................ Money Market .................................. Savings.............................................. Time .................................................. Short-term Borrowings ......................... Long-term Debt .................................... Total Interest Bearing Liabilities .......... Demand Deposits.................................. Other Liabilities.................................... Stockholders' Equity ............................. Total Liabilities and Stockholders' Equity Net Interest Income.................................... Net Yield on Interest Earning Assets: Total Yield on Earning Assets .............. Rate on Supporting Liabilities.............. Net Interest Margin............................... $ 40,056 37,832 19,868 57,700 819 153,344 251,919 5,806 7,945 265,670 27,649 14,882 25,112 126,123 3,801 13,573 211,140 21,024 3,328 30,178 265,670 $ $ $ $ 2,574 2,455 1,564 45 14,357 20,995 500 449 622 7,056 203 763 9,593 11,402 6.43% 6.49% 7.87% 5.50% 9.36% 8.33% 1.81% 3.02% 2.48% 5.59% 5.34% 5.62% 4.54% 8.33% 3.81% 4.52% Interest and average rates are presented on a fully taxable equivalent basis, using an effective tax rate of 34%. For purposes of calculating loan yields, average loan balances include nonaccrual loans. Loan fees of $203,000, $258,000 and $275,000 are included with interest income in Table 1 for the years 2000, 1999 and 1998, respectively. 27 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) TABLE 2: VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME (Dollars in thousands) 2000 Compared to 1999 Increase (Decrease) Due to Change In: 1999 Compared to 1998 Increase (Decrease) Due to Change In: Volume Rate Net Volume Rate Net (209) 106 (103) (25) (140) (165) Taxable Equivalent Basis INTEREST INCOME: Interest Bearing Balances ............. $ Investment Securities: Taxable .......................................... Tax-Exempt ................................... Total Investment Securities (91) 197 106 Federal Funds Sold ....................... Loans, Net ..................................... (1) 1,710 Total Interest Income $ 1,606 INTEREST EXPENSE: Interest Bearing Deposits: NOW ........................................ $ Money Market........................... Savings ...................................... Time .......................................... Total Interest Bearing Deposits Short-term Borrowings ................. Long-term Debt............................. Total Interest Expense $ 11 (74) (11) 240 166 178 588 932 32 50 82 0 716 904 0 28 (5) 467 490 184 175 849 (59) 247 188 (1) 2,426 2,510 11 (46) (16) 707 656 362 763 1,781 184 531 715 (44) 297 943 0 177 28 (19) 186 367 49 602 341 (77) (107) (184) 0 (770) (1,094) (120) 79 (64) (406) (511) (53) 43 (521) 107 424 531 (44) (473) (151) (120) 256 (36) (425) (325) 314 92 81 (573) (232) NET INTEREST INCOME: $ 674 55 729 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 sub- stantial involvement in commercial loans and the record number of nationwide consumer bankruptcies, management thought it prudent to make a $325,000 allocation in 2000 as well as a provision of $325,000 during 1999. The 1998 provision included a specific allocation of $150,000 related to one impaired commercial loan. The allowance for loan losses as a percentage of aver- age total loans was 1.58% at December 31, 2000, compared to 1.58% and 1.47% for the years ended December 31, 1999 and 1998, which continues to be higher than that of peer financial institutions due to higher level of loans to finance commercial real estate. A summary of charge-offs and recoveries of loans is presented in Table 3. 28 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) TABLE 3: ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES (Dollars in thousands) Balance beginning of period ......................... Loans charged-off: Commercial real estate, construction and land development ........................... Commercial, industrial and agricultural ... Real estate-residential ............................... Consumer .................................................. Total loans charged off Recoveries on loans previously charged-off: Commercial real estate, construction and land development ........................... Commercial, industrial and agricultural ... Real estate-residential ............................... Consumer .................................................. Total recoveries Net charge-offs.............................................. Current period provision for 2000 2,505 $ Years ended December 31, 1998 1999 2,281 2,313 1997 2,278 1996* 2,457 1 12 0 61 74 28 5 0 26 59 15 0 146 0 78 224 55 1 0 35 91 40 200 40 37 317 10 56 0 29 95 133 222 4 32 20 197 253 4 107 3 33 147 106 25 213 4 234 476 39 105 38 63 245 231 loan losses ................................................. Balance end of period ................................... 325 2,815 $ 325 2,505 254 2,313 109 2,281 52 2,278 Ratio of net charge-offs during the period to average loans outstanding during the period, net of unearned discount............... *Mid Penn Bank only, Miners Bank of Lykens information not readily available Allowance for loan losses as a percentage .01% .08 0.14 0.07 0.16 of average total loans ................................ 1.58% 1.58 1.47 1.46 - Noninterest Income During 2000, MPB earned $1,556,000 in noninterest income, compared to $1,689,000 earned in 1999, and $1,398,000 earned in 1998. Noninterest income in 1999 included nonrecurring gains of $336,000 from the sale of other real estate. Trust department income for 2000 was $203,000, a $76,000 or 59.84% increase over $127,000 in 1999, which was $23,000 or 22.12% more than the $104,000 earned in 1998. The Trust Department adopted a new fee schedule during 2000, which will result in increased trust fees earned. Trust Department income fluctuates from year to year, also due to the number of estates being settled during the year. Service charges on deposit accounts amounted to $590,000 for 2000, an increase of $36,000 over $554,000 for 1999, which showed a 23.11% increase over 1998. The majority of this increase resulted from the increasing revenues from NSF charges. On December 31, 1998, MPB purchased cash surrender value life insurance policies that provide funding for director retire- ment and salary continuation plans. The income on these policies amounted to $198,000 during the year 2000. MPB also earned $70,000 in fees from Invest, the third-party provider of investments whose services the Bank has contract- ed. Other operating income amounted to $496,000 (net of gains on other real estate) in 2000, $481,000 and $443,000 in 1999 and 1998, respectively. 29 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) Noninterest Expense A summary of the major components of noninterest expense for the years ended December 31, 2000, 1999 and 1998 is reflect- ed in Table 4. Noninterest expense decreased to $6,656,000 in 2000 from $6,665,000 in 1999 and $6,606,000 in 1998. The major component of noninterest expense is salaries and employee benefits. Noninterest expense in 2000 changed less than 1% com- pared to that of 1999. Noninterest expense of $6,665,000 in 1999 increased less than 1% over that of 1998. This expense in 1999 includes approx- imately $126,000 of supplemental employee bonuses for the year 1998. TABLE 4: NONINTEREST EXPENSE (Dollars in thousands) Years ended December 31, Salaries and employee benefits ........................................ Occupancy, net ................................................................. Equipment ........................................................................ Postage and supplies ........................................................ FDIC assessments ............................................................ Marketing and advertising................................................ Other real estate, net......................................................... Pennsylvania bank shares tax........................................... Professional services ........................................................ Telephone ......................................................................... Loss on mortgage sales .................................................... Other................................................................................. Total Noninterest Expense 2000 3,790 364 481 291 45 144 0 271 104 72 19 1,075 6,656 $ $ Investments 1999 3,741 318 510 275 26 121 0 279 124 74 47 1,150 6,665 1998 3,383 323 565 356 26 160 0 274 126 70 64 1,259 6,606 MPB investment portfolio is utilized to improve earnings through investments of funds in high-yielding assets which provide the necessary balance sheet liquidity for MPB. MPB’s entire portfolio of investment securities is considered available for sale. As such, the investments are recorded on our Balance Sheet at market value. Our investments: US Treasury, Agency and Municipal securities are given a market price rela- tive to investments of the same type with similar maturity dates. As the interest rate environment of these securities changes, our existing securities are valued differently in comparison. This difference in value, or unrealized loss, amounted to $344,000, net of tax, as of the end of the year. However, the investments are all high quality United States and municipal securities that if held to maturity are expected to yield no loss to the bank. At December 31, 2000, SFAS No. 115 resulted in a decrease of shareholders’ equity of $344,000 (unrealized loss on securi- ties of $522,000 less estimated income tax effect of $178,000). As of December 31, 1999, SFAS No. 115 resulted in an decrease in shareholders’ equity of $1,861,000 (unrealized loss on securities of $2,820,000, less estimated income tax effect of $959,000), compared to in an increase in stockholders’ equity of $344,000 (unrealized gain on securities of $521,000, less estimated income tax effect of $177,000) as of December 31, 1998. MPB does not have any significant concentrations of investment securities. Table 5 provides a history of the amortized cost of investment securities at December 31, for each of the past three years. The gross unrealized gains and losses on investment securities are outlined in Note 6 to the Consolidated Financial Statements. 30 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) TABLE 5: AMORTIZED COST OF INVESTMENT SECURITIES (Dollars in thousands) U. S. Treasury and U.S. government agencies .................... Mortgage backed U.S. government agencies....................... State and political subdivision obligations........................... Restricted equity securities .................................................. Total 2000 $ 34,750 2,402 33,972 3,281 $ 74,405 December 31, 1999 33,778 1,799 28,061 3,281 66,919 1998 36,922 2,285 26,020 2,185 67,412 Loans At December 31, 2000, net loans totaled $181,396,000, a $11,607,000 or 6.84% increase from December 31, 1999. During 2000, MPB experienced an increase in commercial real estate and commercial/industrial loans of approximately $5,619,000, the majority of which was generated in the greater Harrisburg region. The current environment in lending is extremely competitive with financial institutions aggressively pursuing potential bor- rowers. At December 31, 2000, loans, net of unearned income, represented 62.7% of earning assets as compared to 63.2% on December 31, 1999 and 57.6% on December 31, 1998. The Bank's loan portfolio is diversified among individuals, farmers, and small and medium-sized businesses generally locat- ed within the Bank's trading area of Dauphin County, lower Northumberland County, western Schuylkill County and eastern Cumberland County. Commercial real estate, construction and land development loans are collateralized mainly by mortgages on the income-producing real estate or land involved. Commercial, financial and agricultural loans are made to business entities and may be secured by business assets, including commercial real estate, or may be unsecured. Residential real estate loans are secured by liens on the residential property. Consumer loans include installment, lines of credit and home equity loans. A distribution of the Bank's loan portfolio according to major loan classification is shown in Table 6. TABLE 6: LOAN PORTFOLIO (Dollars in thousands) 2000 December 31, 1998 1999 1997 1996 Commercial real estate, construction Commercial, industrial and agricultural ....... Real estate-residential mortgage ................... Consumer ...................................................... Lease financing ............................................. Total Loans Unearned income .......................................... Loans net of unearned discount .................... Allowance for loan losses ............................. and land development ............................... $ 110,947 26,274 35,610 14,110 0 186,941 (2,730) 184,211 (2,815) Net Loans $ 181,396 105,328 20,118 32,586 16,780 0 174,812 (2,518) 172,294 (2,505) 169,789 88,263 20,401 30,325 16,034 1 155,024 (2,031) 152,993 (2,313) 150,680 81,191 20,107 34,195 21,018 8 156,519 (1,943) 154,576 (2,281) 152,295 75,200 19,925 34,391 27,420 13 156,949 (1,879) 155,070 (2,278) 152,792 Allowance for Loan Losses The allowance for loan losses is maintained at a level believed adequate by Management to absorb potential loan losses in the loan portfolio. MPB has a loan review department that is charged with establishing a "watch list" of potential unsound loans, identifying unsound credit practices and suggesting corrective actions. A quarterly review and reporting process is in place for monitoring those loans that are on the "watch list." Each credit on the "watch list" is evaluated to estimate potential losses. In addition, estimates for each category of credit are provided based on Management's judgment which considers past experi- ence, current economic conditions and other factors. For installment and real estate mortgages, specific allocations are based on past loss experience adjusted for recent portfolio growth and economic trends. The total of reserves resulting from this analysis are "allocated" reserves. The amounts not specifically provided for individual classes of loans are considered "unallocated." This unallocated amount is determined and based on judgments regarding economic conditions, trends and other factors. 31 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) The allocation of the allowance for loan losses among the major classifications is shown in Table 7 as of December 31 of each of the past five years. The allowance for loan losses at December 31, 2000, was $2,815,000 or 1.53% of total loans less unearned discount as compared to $2,505,000 or 1.45% at December 31, 1999, and $2,313,000 or 1.51% at December 31, 1998. TABLE 7: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (Dollars in thousands) December 31, 2000 1999 1998 1997 1996 Percent Amount of Loans Amount of Loans Amount of Loans Amount of Loans Amount of Loans Percent Percent Percent Percent Commercial real estate, construction and land development ........................ $ 1,318 Commercial, industrial and 59.3% 927 60.3% 861 56.8% 596 50.6% 666 47.9% agricultural .......................... 1,008 14.1% 782 11.5% 693 13.5% 369 14.0% 381 12.7% Real estate-residential mortgage.............................. Consumer ................................ Unallocated ............................. 209 93 187 Total loans $ 2,815 19.0% 7.6% - 198 114 484 18.6% 9.6% - 100% 2,505 100% 219 127 413 2,313 19.4% 207 10.3% 146 963 100.0% 2,281 - 21.9% 13.5% - 184 309 738 100.0% 2,278 21.9% 17.5% - 100.0% Nonperforming Assets Nonperforming assets, other than consumer loans and 1-4 family residential mortgages, include impaired and nonaccrual loans, loans past due 90 days or more, restructured loans and other real estate (including residential property). Nonaccrual loans are loans on which we no longer recognize daily interest income. A loan is generally classified as nonaccrual when principal or interest has consistently been in default for a period of 90 days or more, or because of a deterioration in the financial condition of the borrower, payment in full of principal or interest is not expected. Loans past due 90 days or more and still accruing inter- est are loans that are generally well-secured and in the process of collection or repayment. Restructured loans are those loans whose terms have been modified to lower interest or principal payments because of borrower financial difficulties. Foreclosed assets held for sale include those assets that have been acquired through foreclosure for debts previously contracted, in settlement of debt. Consumer loans are generally recommended for charge-off when they become 150 days delinquent. All 1-4 family residen- tial mortgages 90 days or more past due are reviewed quarterly by Management, and collection decisions are made in light of the analysis of each individual loan. The amount of consumer and residential mortgage loans past due 90 days or more at year-end was $222,000, $266,000 and $66,000 in 2000, 1999, and 1998, respectively. A presentation of nonperforming assets as of December 31, for each of the past five years is given in Table 8. Nonperforming assets at December 31, 2000, totaled $2,312,000 or 0.73% of total assets compared to $2,217,000 or 0.77% of total assets in 1999, and $3,064,000 or 1.10% of total assets in 1998. The foreclosed assets held for sale at December 31, 2000, consist of one piece of commercial real estate and residential building lots that MPB has available for sale. Nonperforming assets are taken into consideration by Management when assessing the adequacy of the Allowance for Loan Losses. 32 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) TABLE 8: NONPERFORMING ASSETS (Dollars in thousands) December 31, Nonaccrual loans........................................... Past due 90 days or more .............................. Restructured loans......................................... Total nonperforming loans Foreclosed assets held for sale...................... $ Total nonperforming assets $ 2000 1,116 504 622 2,242 70 2,312 1999 890 386 878 2,154 63 2,217 1998 376 844 1,497 2,717 347 3,064 1997 333 212 212 757 1,355 2,112 1996 1,183 544 145 1,872 548 2,420 Percent of total loans outstanding................. Percent of total assets.................................... 1.26% .73% 1.29% 0.77% 2.00% 1.10% 1.38% 0.82% 1.54% 1.02% There are no loans classified for regulatory purposes that have not been included in Table 8. There are no trends or uncer- tainties which management expects will materially impact future operating results, liquidity or capital resources, or no other material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with loan repayment terms. Deposits and Other Funding Sources MPB's primary source of funds is its deposits. Deposits at December 31, 2000, increased by $13,568,000 or 6.23% from December 31, 1999, which also increased slightly by $1,038,000 or 0.48% from December 31, 1998. The majority of deposit growth in 2000 came during a three-year, 7% APY certificate of deposit promotion offered in the Spring of the year. Average balances and average interest rates applicable to the major classifications of deposits for the years ended December 31, 2000, 1999, and 1998 are presented in Table 9. Average short-term borrowings for 2000 were $14,362,000 as compared to $10,683,000 in 1999. These borrowings included customer repurchase agreements, treasury tax and loan option borrowings and federal funds purchased. TABLE 9: DEPOSITS BY MAJOR CLASSIFICATION (Dollars in thousands) Noninterest bearing demand deposits .... $ Interest bearing demand deposits........... Money market ........................................ Savings ................................................... Time ....................................................... Total $ 2000 Years ended December 31, 1999 1998 Average Balance 23,511 28,518 18,568 25,744 130,342 226,683 Average Rate 0.00% 1.37% 3.55% 2.21% 5.63% 3.95% Average Balance 23,338 27,669 20,734 26,259 125,782 223,782 Average Rate 0.00% 1.37% 3.40% 2.23% 5.27% 3.71% Average Balance 21,024 27,649 14,882 25,112 126,123 214,790 Average Rate 0.00% 1.81% 3.02% 2.48% 5.59% 4.02% Capital Resources Stockholders' equity, or capital, is evaluated in relation to total assets and the risk associated with those assets. The greater the capital resources, the more likely a corporation is to meet its cash obligations and absorb unforeseen losses. Too much cap- ital, however, indicates that not enough of the company’s earnings have been paid to shareholders and the buildup makes it dif- ficult for a company to offer a competitive return on the shareholders’ capital going forward. For these reasons capital adequa- cy has been, and will continue to be, of paramount importance. In 2000, capital was increased by $3,061,000 or 11.52%. In 1999, capital was decreased by $4,971,000 or 15.8% compared to 1998. Capital growth is achieved by retaining more in earnings than we pay out to our shareholders. MPB’s normal dividend payout allows for quarterly cash returns to its stockholders and provides earnings retention at a level sufficient to finance future Corporation growth. The dividend payout ratio, which represents the percentage of annual net income returned to the stockholders in the form of cash dividends, was 62% for 2000 compared to 171% for 1999 and 54% for 1998. 33 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) The reason for the special dividend payout in 1999, as outlined in the first section of this discussion, was to increase ROE and enhance shareholder value. MPB has been approved by the Internal Revenue Service to offer an employee stock ownership plan. At December 31, 2000, 19,057 shares of MPB’s common stock have been purchased back by MPB, held as treasury stock, and are available for issuance under the dividend reinvestment plan or the stock bonus plan. The treasury stock may also be used for the employee stock ownership plan. Federal Income Taxes Federal income tax expense for 2000 was $1,255,000 compared to $1,253,000 and $1,516,000 in 1999 and 1998, respective- ly. The effective tax rate was 24% for 2000, 24% for 1999 and 28% for 1998. Liquidity MPB's asset-liability management policy addresses the management of MPB's liquidity position and its ability to raise suffi- cient funds to meet deposit withdrawals, fund loan growth and meet other operational needs. MPB utilizes its investment port- folio 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 pri- marily through investments and interest bearing balances with maturities of one year or less. Funds are available to MPB through loans from the Federal Home Loan Bank and established federal funds (overnight) lines of credit. MPB's major source of funds is its core deposit base as well as its capital resources. During 2000, the major sources of cash came from operations and a net increase in deposits of $13,568,000. The majority of this deposit increase came in the form of three-year certificates of deposit issued at a yield of 7%. In order to meet our funding needs over and above the funds generated by growth in deposits, MPB turned to the FHLB for borrowings. MBP borrowed $5,000,000 in a 10-year/2-year putable advance, $5,000,000 in a 10-year/3-year putable advance and $5,000,000 in a three year bullet borrowing. The major uses of funds during the year included the net increase in loans of $15,558,000, and the increase in both invest- ments and interest-bearing balances. Short-term borrowings were used during December to purchase interest-bearing balances, which increased by $7,806,000 from year end 1999, to December 31, 2000, and to purchase other investment securities in advance of declining interest rates. The major sources of cash in 1999 came from operations, increased short-term borrowings of $12,477,000, and the net decrease of $8,313,000 in interest-bearing balances. Net deposits increased by $1,038,000 contributing another source of cash. The major area of deposit increase was in a high-balance money market account known as the Prime Investment account, while certificate of deposit balances decreased during the year in the face of a very competitive price environment. The sources of cash were used primarily to fund loan growth. Net loan funding in 1999 used $19,434,000 of cash. While loan growth was very sluggish during the first half of the year, MPB experienced substantial loan growth with the portfolio grow- ing more than 12% by year end. The majority of the loan growth was in loans to fund commercial real estate in the Greater Harrisburg area. Other uses of cash for the year included the $6,635,000 paid to shareholders in dividends, and the increase in cash balances of $1,823,000 related to our preparedness for increased cash needs in light of Y2K concerns. Market Risk - Asset-Liability Management and Interest Rate Sensitivity Interest rate sensitivity is a function of the repricing characteristics of MPB's portfolio of assets and liabilities. Each asset and liability reprices either at maturity or during the life of the instrument. Interest rate sensitivity is measured as the difference between the volume of assets and liabilities that are subject to repricing in a future period of time. These differences are known as interest sensitivity gaps. MPB manages the interest rate sensitivity of its assets and liabilities. The principal purpose of asset-liability management is to maximize net interest income while avoiding significant fluctuations in the net interest margin and maintaining adequate liq- uidity. Net interest income is increased by increasing the net interest margin and by increasing earning assets. 34 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) MPB utilizes asset-liability management models to measure the impact of interest rate movements on its interest rate sensi- tivity position. The traditional maturity gap analysis is also reviewed regularly by MPB's management. MPB does not attempt to achieve an exact match between interest sensitive assets and liabilities because it believes that a controlled amount of interest rate risk is desirable. The maturity distribution and weighted average yields of investments is presented in Table 10. The maturity distribution and repricing characteristics of MPB's loan portfolio is shown in Table 11. Table 12 provides expected maturity information about MPB’s financial instruments that are sensitive to changes in interest rates. Except for the effects of prepayments on mortgage related assets, the table presents principal cash flows and related average interest rates on interest bearing assets by contractual maturity. Residential loans are assumed to have annual payment rates between 12% and 18% of the portfolio. Loan and mort- gage backed securities balances are not adjusted for unearned discounts, premiums, and deferred loan fees. MPB assumes that 75% of savings and NOW accounts are core deposits and are, therefore, expected to roll-off after 5 years. Transaction accounts, excluding money market accounts, are assumed to roll-off after five years. Money market accounts are assumed to be variable accounts and are reported as maturing within the first twelve months. No roll-off is applied to certificates of deposit. Fixed matu- rity 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) One Year and Less U.S. Treasury and U.S.government agencies ..... $ 2,001 388 State and political subdivision obligations ......... 0 Mortgage-backed U.S. government agencies ..... 0 Equity securities.................................................. $ 2,389 Total Weighted Average Yields U.S. Treasury and U.S. government agencies .... State and political subdivision obligations ......... Mortgage-backed U.S. government agencies.......................................................... Equity securities.................................................. Total One Year and Less 5.79 9.08 0 0 6.32 December 31, 2000 After Five Years thru Ten Years 10,999 9,739 994 0 21,732 After One Year thru Five Years 10,238 2,823 749 0 13,810 After Ten Years 11,512 21,022 659 3,281 36,474 Total 34,750 33,972 2,402 3,281 74,405 December 31, 2000 After Five Years thru Ten Years After One Year thru Five Years After Ten Years 6.36 7.48 6.28 0 6.58 6.51 7.24 6.20 0 6.82 6.53 7.03 6.60 6.49 6.81 Total 6.43 7.15 6.34 6.49 6.76 TABLE 11: LOAN MATURITY AND INTEREST SENSITIVITY (Dollars in thousands) December 31, 2000 One Year and Less After One Year thru Five Years Commercial, real estate, construction and land development ............................. Commercial, industrial and agricultural ..... Real estate- residential mortgages .............. Consumer.................................................... Total Loans $ 28,381 12,981 8,320 2,626 $ 52,308 64,377 11,772 12,554 7,931 96,634 After Five Years 18,189 1,521 14,736 823 35,269 Total 110,947 26,274 35,610 11,380 184,211 35 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) TABLE 11: LOAN MATURITY AND INTEREST SENSITIVITY (cont’d) Rate Sensitivity Predetermined rate...................................... Floating or adjustable rate .......................... Total One Year and Less $ 6,912 45,396 $ 52,308 After One Year thru Five Years 28,557 68,077 96,634 After Five Years 33,039 2,230 35,269 Total 68,508 115,703 184,211 TABLE 12: INTEREST RATE SENSITIVITY GAP (Dollars in thousands) (As of December 31, 2000) Assets: Expected Maturity Year Ended December 31, 2001 2002 2003 2004 2005 Thereafter Total Fair Value Average interest rate..................... Average interest rate..................... Interest bearing balances .................. $ 22,479 6.45 Debt securities .................................. $ 2,389 6.32 Adjustable rate loans ........................ $ 46,093 9.18 Fixed rate loans ................................ $ 9,286 8.90 0 $ 80,247 Average interest rate..................... Federal funds sold ............................ $ Average interest rate..................... Total Interest liabilities: Variable rate savings and transaction accounts ....................... $ 33,276 2.97 Average interest rate..................... Certificates of deposit and IRAs ...... $ 66,186 Average interest rate......................... 5.69 Short term borrowings...................... $ 22,738 6.40 Long term fixed rate borrowings...... $ 1,671 6.67 $123,871 Average interest rate..................... Average interest rate Total 12,470 7.07 1,810 6.50 16,805 8.49 7,799 9.32 0 38,884 0 - 34,178 6.06 0 - 184 7.30 34,362 5,745 7.32 3,599 6.59 17,988 8.70 9,974 9.08 0 37,306 0 - 21,009 6.36 0 - 5,197 6.61 26,206 495 7.30 2,603 6.67 17,928 7.99 8,179 8.72 0 29,205 0 - 4,192 5.36 0 - 87 7.30 4,279 1,188 7.47 5,798 6.56 16,343 8.08 10,077 9.06 0 33,406 0 - 5,289 6.07 0 - 0 - 5,289 0 - 54,935 6.83 546 8.01 23,193 8.39 0 78,674 65,127 1.10 3,350 5.58 0 - 22,102 6.47 90,579 42,377 6.79 71,134 6.77 115,703 8.65 68,508 8.61 0 297,722 42,377 70,604 115,703 72,047 0 300,731 98,403 1.73 134,204 5.89 22,738 6.40 29,241 6.52 284,586 98,403 134,400 22,738 30,944 286,485 Rate sensitive gap: Periodic gap...................................... $(43,624) 4,522 Cumulative gap................................. $(43,624) (39,102) 11,100 (28,002) 24,926 (3,076) 28,117 25,041 (11,905) 13,136 Cumulative gap as a percentage of total assets .................................... -13.8% -12.4% -8.9% -1.0% +7.9% +4.2% 36 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) (Dollars in thousands) (As of December 31, 1999) Assets: Expected Maturity Year Ended December 31, 2000 2001 2002 2003 2004 Thereafter Total Fair Value Average interest rate..................... Average interest rate..................... Interest bearing balances .................. $ 19,315 6.19 Debt securities .................................. $ 1,681 7.00 Adjustable rate loans ........................ $ 34,019 8.75 Fixed rate loans ................................ $ 6,495 8.55 Total $ 61,510 Average interest rate..................... Average interest rate..................... Interest liabilities: Variable rate savings and transaction accounts ....................... $ 38,464 2.87 Average interest rate..................... Certificates of deposit and IRAs ...... $ 54,239 Average interest rate......................... 5.07 Short term borrowings...................... $ 24,636 5.79 200 7.29 Total $117,539 Average interest rate..................... Long term fixed rate borrowings...... $ Average interest rate 13,271 5.84 2,645 6.46 17,839 8.69 8,317 8.94 42,072 0 - 29,882 5.63 0 - 1,700 6.74 31,582 1,587 5.74 1,589 7.43 18,870 8.52 8,943 9.15 30,989 0 - 12,691 5.54 0 - 7,200 6.20 19,891 298 6.25 995 5.87 13,506 8.48 8,813 8.67 23,612 0 - 7,804 5.63 0 - 200 7.29 8,004 99 7.00 3,233 6.83 19,175 8.00 7,576 8.38 30,083 0 - 5,519 5.35 0 - 5,017 6.42 10,536 0 - 50,675 6.71 3,750 8.35 24,991 8.31 79,416 61,914 1.13 7,327 5.94 0 - 2,083 7.13 71,324 34,570 6.04 60,818 6.72 107,159 8.51 65,135 8.52 267,682 34,570 60,818 107,159 68,024 270,571 100,378 1.79 117,462 5.36 24,636 5.79 16,400 6.47 258,876 100,378 116,729 24,636 16,842 258,585 Rate sensitive gap: Periodic gap...................................... $(56,029) 10,490 Cumulative gap................................. $(56,029) (45,539) 11,098 15,608 (34,441) (18,823) 19,547 714 8,115 8,806 Cumulative gap as a percentage of total assets .................................... -19.5% -15.8% -12.0% -6.5% -0.2% +3.1% In the last quarter of 2000, management analyzed interest rate risk using the Vining Sparks Asset-Liability Management Model. Using the computerized model, management reviews interest rate risk on a monthly basis. This analysis includes an earnings scenario whereby interest rates are increased by 200 basis points and another whereby they are decreased by 200 basis points. These scenarios indicate that there would not be a significant variance in net interest income at the one-year time frame due to interest rate changes; however, actual results could vary significantly from the calculations prepared by management. At December 31, 2000, all interest rate risk levels according to our model were within the tolerance guidelines set by manage- ment. 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) Three months or less ........................................................ Over three months to twelve months ............................... Over twelve months ......................................................... Total $ 2000 5,431 8,534 9,377 $ 23,342 December 31, 1999 3,525 4,960 7,731 16,216 1998 4,933 5,921 5,882 16,736 37 Mid Penn Bancorp, Inc. Management's Discussion and Analysis (cont'd) Effects of Inflation A bank's asset and liability structure is substantially different from that of an industrial company in that virtually all assets and liabilities of a bank are monetary in nature. Management believes the impact of inflation on its financial results depends princi- pally upon MPB's ability to react to changes in interest rates and, by such reaction, reduce the inflationary impact on performance. Interest rates do not necessarily move in the same direction or at the same magnitude as the prices of other goods and services. As discussed previously, Management seeks to manage the relationship between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation. Information shown elsewhere in this Annual Report will assist in the understanding of how MPB is positioned to react to changing interest rates and inflationary trends. In particular, the summary of net liabilities, the composition of loans, investments and deposits should be considered. Off-Balance-Sheet Items MPB makes contractual commitments to extend credit and extends lines of credit which are subject to MPB's credit approval and monitoring procedures. As of December 31, 2000, commitments to extend credit amounted to $30,325,000 as compared to $29,648,000 as of December 31, 1999. MPB also issues standby letters of credit to its customers. The risk associated with standby letters of credit is essentially the same as the credit risk involved in loan extensions to customers. Standby letters of credit increased to $2,921,000 at December 31, 2000, from $2,336,000 at December 31, 1999. Comprehensive Income Comprehensive Income is a measure of all changes in equity of a corporation, excluding transactions with owners in their capacity as owners (such as proceeds from issuances of stock and dividends). The difference between Net Income and Comprehensive Income is termed “Other Comprehensive Income.” For MPB, Other Comprehensive Income consists of unreal- ized gains and losses on available-for-sale securities, net of deferred income tax. Comprehensive Income should not be construed to be a measure of net income. The effect of Other Comprehensive Income would only be reflected in the income statement if the entire portfolio of available-for-sale securities were sold on the statement date. The amount of unrealized gains or losses reflected in Comprehensive Income may vary widely at statement dates depending on the markets as a whole and how the port- folio of available-for-sale securities is affected by interest rate movements. Other Comprehensive Income (Loss) for the periods ended December 31, 2000, 1999 and 1998 was 1,517,000, ($2,205,000) and $26,000, respectively. 38 Mid Penn Bancorp, Inc. Summary of Selected Financial Data (Dollars in thousands, except per share data) 2000 1999 1998 1997 1996 INCOME: Total Interest Income ................................ Total Interest Expense............................... Net Interest Income................................... Provision for Possible Loan Losses .......... Non-Interest Income ................................. Non-Interest Expense................................ Income Before Income Taxes ................... Income Tax Expense ................................. Extraordinary Income, Net of Tax ............ Net Income................................................ $ 22,053 11,455 10,598 325 1,556 6,656 5,203 1,255 0 3,948 COMMON STOCK DATA PER SHARE:* Earnings Per Share.................................... Cash Dividends Declared.......................... Stockholders' Equity ................................. 1.30 .80 9.76 $ 20,112 9,674 10,438 325 1,689 6,665 5,137 1,253 0 3,884 1.28 2.18 8.74 20,436 9,593 10,843 254 1,398 6,606 5,381 1,516 0 3,865 1.27 .69 10.90 19,312 8,853 10,459 109 1,772 6,232 5,890 1,721 0 4,169 1.37 .66 10.27 18,171 8,428 9,743 52 841 5,658 4,874 1,397 0 3,477 1.14 .42 9.48 AVERAGE SHARES OUTSTANDING ...... 3,036,007 3,037,976 2,892,416 2,895,417 2,895,430 AT YEAR-END: Investments................................................ Loans, Net of Unearned Discount ............ Allowance for Loan Losses ...................... Total Assets ............................................... Total Deposits ........................................... Short-term Borrowings ............................. Long-term Debt......................................... Stockholders' Equity ................................. $ 73,885 184,211 2,815 315,584 231,408 22,738 29,241 $ 29,626 64,099 172,294 2,505 287,542 217,840 24,636 16,400 26,565 67,933 152,993 2,313 277,827 216,802 12,159 15,550 31,536 RATIOS: Return on Average Assets......................... Return on Average Stockholders' Equity .. Cash Dividend Payout Ratio..................... Allowance for Loan Losses to Loans ....... Average Stockholders' Equity to Average Assets .......................................... 1.34 14.64 61.54 1.53 1.40 14.68 170.91 1.45 1.45 12.81 53.73 1.51 9.15 9.50 11.36 53,599 154,576 2,281 256,728 217,146 2,234 5,688 29,730 1.71 14.76 47.92 1.48 11.56 42,740 155,070 2,278 238,103 199,673 4,512 4,710 27,438 1.52 13.37 36.67 1.47 11.34 * Per share figures are based on weighted average shares outstanding for the respec- tive years as restated after giving effect to stock dividends and splits. 39 Mid Penn Bancorp, Inc. Directors and Officers / Mid Penn Bank Senior Management DIRECTORS Mid Penn Bancorp, Inc. Mid Penn Bank Jere M. Coxon Executive Vice President Penn Wood Products, Inc. Alan W. Dakey President and CEO Mid Penn Bank Earl R. Etzweiler Owner Etzweiler & Associates, Attorneys Gregory M. Kerwin Senior Partner Kerwin & Kerwin, Attorneys Charles F. Lebo Retired Educator PA Dept. of Education Warren A. Miller Retired Assistant Vice President Mid Penn Bank William G. Nelson President Hess Trucking Co., Inc. Donald L. Sauve Consultant Don’s Food Market, Inc. Edwin D. Schlegel Retired Superintendent Millersburg Area School District Eugene F. Shaffer Chairman Mid Penn Bank Guy J. Snyder, Jr. President Snyder Fuels, Inc. DIRECTORS EMERITI Bruce C. Adams Guy F. Bucher Harvey J. Hummel Charles R. Phillips Anna C. Woodside EXECUTIVE OFFICERS Mid Penn Bancorp, Inc. Eugene F. Shaffer Chairman Earl R. Etzweiler Vice Chairman Alan W. Dakey President and CEO Kevin W. Laudenslager Treasurer Cindy L. Wetzel Secretary SENIOR MANAGEMENT Mid Penn Bank Eugene F. Shaffer Chairman 44 Years Banking Experience Alan W. Dakey President and CEO 27 Years Banking Experience Robert M. Garst Senior Vice President and Senior Loan Officer 21 Years Banking Experience Norman L. Houser Senior Vice President and Business Development Officer 41 Years Banking Experience Randall L. Klinger Senior Vice President and Senior Credit Officer 27 Years Banking Experience Allen J. Trawitz Executive Vice President 32 Years Banking Experience Nelson E. Carr Vice President and Business Development Officer, Harrisburg Office 40 Years Banking Experience Kevin W. Laudenslager Vice President and Comptroller 16 Years Banking Experience 40 Larry L. Novinger Vice President and Operations Officer 16 Years Banking Experience Steven S. Shuey Vice President and Loan Review Officer 27 Years Banking Experience Linda M. Sitlinger Vice President and Sales Manager/Branch Administrator 21 Years Banking Experience Dennis E. Spotts Vice President and EDP Manager 28 Years Banking Experience Allen R. Spring Senior Vice President and Senior Trust Officer 42 Years Banking Experience Cindy L. Wetzel Corporate Secretary and Secretary to the Board 22 Years Banking Experience CAPITAL AREA ADVISORY BOARD Mid Penn Bank Norman K. A. Hoffer Theodore W. Mowery Robert M. Newbury David J. Remmel Ronald H. Smith MINERS-LYKENS ADVISORY BOARD Mid Penn Bank Franklin W. Ruth Jr. Raymond C. Donley Harold G. Jury Gregory M. Kerwin Terrence J. Kerwin Richard E. Klinger Donald E. Sauve Allen J. Trawitz Mid Penn Bancorp, Inc. Office Locations NEW LOCATION IN HARRISBURG 2615 North Front Street Harrisburg PA 17110 (717) 233-7380 MILLERSBURG 349 Union Street Millersburg PA 17061 (717) 692-2133 (717) 896-3140 HARRISBURG 4098 Derry Street Harrisburg PA 17111 (717) 558-2144 ELIZABETHVILLE 2 East Main Street Elizabethville PA 17023 (717) 362-8147 DALMATIA School House Road Dalmatia PA 17017 (570) 758-2711 CARLISLE PIKE 4622 Carlisle Pike Mechanicsburg PA 17055 (717) 761-2480 TOWER CITY 545 East Grand Avenue Tower City PA 17980 (717) 647-2157 DAUPHIN 1001 Peters Mountain Road Dauphin PA 17018 (717) 921-8899 TREMONT 7 - 9 East Main Street Tremont PA 17981 (570) 695-3358 HALIFAX Halifax Shopping Center 3763 Peters Mountain Road Halifax PA 17032 (717) 896-8258 MINERS-LYKENS 550 Main Street Lykens PA 17048 (717) 453-7185 Member FDIC w w w . m i d p e n n b a n k . c o m 7 1 7 - 6 9 2 - 4 0 0 0