Mid Penn Bancorp, Inc.
Shareholder Letter
Dear Shareholder:
The year 2002 was another challenging year in terms of the
economy, interest rates, corporate governance issues, a sputter-
ing stock market and global unrest. In spite of all these chal-
lenges, I am pleased to present a very favorable 2002 financial
report for Mid Penn Bancorp, Inc.
Net income for the year 2002 totaled $4,495,000, an increase
of 6.3% over the net income of $4,230,000 for the year 2001.
Earnings per share for 2002 were $1.48 compared to $1.39 for
the year 2001. Primary contributors to increased profits were
higher net interest income resulting from an increase in earning
assets and improved noninterest income, particularly service
charges on deposits. Your Bank continues to manage costs and
overhead resulting in an efficiency ratio of 54% which is very
strong when compared to peer banks.
The appreciation in your stock price of $3.80 or 20.9% in 2002,
combined with an annual dividend of $.80 per share provided a
very favorable return in 2002, considering the S&P 500
declined by 22.1% during this same period. Now that divi-
dends are again a consideration in the market, our dividend
yield of 3.64% as of December 31, 2002, provides a very
favorable return.
I would like to recognize Warren Miller, who will be retiring
from our Board of Directors in April 2003. Warren began his
career in banking in August of 1951 as an employee of Tower
City National Bank and joined Mid Penn Bank in January of
1985, when Tower City National Bank joined Mid Penn Bank.
Warren has been a dedicated employee and Board member who
has made a substantial contribution to our organization.
I remain optimistic about our future growth and opportuni-
ties. Mergers and changes in the banking community continue
to create opportunities for community banks like your Bank
that provide local service, local decision making and support
for the communities they serve.
Thank you for your support and confidence. Please contact
me at (717) 692-2133 or e-mail me at
adakey@midpennbank.com if you have any questions, sugges-
tions or concerns.
Sincerely,
Alan W. Dakey
President and CEO
Total assets of $363,284,000 increased by 9.9% over the
prior year. A significant contributor to growth in assets was
growth in the loan portfolio, which ended the year at
$223,203,000, an increase of $18,102,000, or 8.8%. We also
experienced growth in the investment portfolio, particularly
interest-bearing balances with financial institutions.
Our asset growth was primarily funded by growth in
deposits. Total deposits at year end were $274,703,000 com-
pared to $254,105,000 the prior year, an increase of 8.1%. The
primary deposit growth category was money market accounts
where growth has been fueled by an uncertain economy, poor
performance in the stock market and uncertainty about interest
rates.
Your Bank remains very strongly capitalized with stockhold-
er equity of $35,204,000 at year end, an increase of
$3,488,000, or 11%. The increase in equity is due to strong
earnings and appreciation in the bank's investment portfolio.
Return on average equity (ROE) was 13.60% in 2002 com-
pared to 13.68% the prior year. The decline in ROE was pri-
marily attributable to the growth in average equity, which
increased at a faster pace than earnings. Return on average
assets (ROA) of 1.32% for 2002 increased from 1.31% the
prior year.
Mid Penn Bancorp, Inc. (AMEX - MBP) share price as of
December 31, 2002, was $22.00 compared to $18.20 as of
December 31, 2001, and $15.00 as of December 31, 2000.
1
Mid Penn Bancorp, Inc.
Financial Highlights
AS OF AND FOR YEARS ENDED DECEMBER 31, 2002 AND 2001
(Dollars in thousands, except per share data.)
2002
2001
Total Assets ..................................................................... $ 363,284
274,703
Total Deposits .................................................................
218,302
Net Loans ........................................................................
124,346
Total Investments and Interest Bearing Balances...........
35,204
Stockholders' Equity .......................................................
4,495
Net Income......................................................................
Earnings Per Share..........................................................
1.48
Cash Dividend Per Share Based on Weighted
Average Number of Shares Outstanding ......................
Book Value Per Share .....................................................
.80
11.59
330,635
254,105
199,980
108,390
31,716
4,230
1.39
.80
10.44
Percent
Change
+ 9.9
+ 8.1
+9.2
+14.7
+11.0
+ 6.3
+ 6.5
0
+11.0
Mid Penn Bancorp, Inc.
Stockholders' Information
Market Value Per Share ........................................
$
2002
2001
High
19.00
18.55
19.00
23.70
Low
18.01
17.75
17.75
18.50
High
16.55
19.04
19.25
18.65
Low
14.88
16.50
17.75
18.05
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: Wells Fargo Shareholder Services, P.O. Box 64854, St. Paul, MN 55164-0854. Phone: 1-800-468-9716.
Number of Stockholders: At December 31, 2002, there were 968 stockholders.
Dividends: A dividend of $.20 per share was paid during each quarter of 2002 and 2001. Mid Penn Bancorp, Inc. plans to continue
a quarterly dividend payable in February, May, August and November.
Dividend Reinvestment and Stock Purchases: Stockholders of Mid Penn Bancorp, Inc. may acquire additional shares of common stock
by reinvesting their cash dividends under the Dividend Reinvestment Plan without paying a brokerage fee. Voluntary cash contribu-
tions may also be made under the Plan. For additional information about the Plan, contact the Transfer Agent.
Form 10-K: A Copy of Mid Penn Bancorp, Inc.'s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission,
will be provided to stockholders without charge upon written request to: Secretary, Mid Penn Bancorp, Inc., 349 Union Street,
Millersburg, PA 17061.
Annual Meeting: The Annual Meeting of the Stockholders of Mid Penn Bancorp, Inc. will be held at 10:00 a.m. on Tuesday,
April 22, 2003, at 349 Union Street, Millersburg, Pennsylvania.
2
Mid Penn Bancorp, Inc.
Graphs (unaudited)
363.3
330.6
315.6
287.5
277.8
Total Assets
370
340
320
290
260
230
200
170
140
110
80
50
s
n
o
i
l
l
i
M
n
I
274.7
254.1
231.4
217.8
216.8
Total Deposits
280
260
240
220
200
180
160
140
120
100
80
60
1998
1999
2000
Year
2001
2002
1998
1999
2000
Year
2001
2002
Net Income
3.87
3.88
3.95
4.50
4.23
s
n
o
i
l
l
i
M
n
I
4.5
4.0
3.5
3.0
2.5
2.0
Total Stockholders’ Equity
1998
1999
2000
Year
2001
2002
35.2
Book Value Per Share
s
n
o
i
l
l
i
M
n
I
35
30
25
20
15
10
31.5
29.6
26.6
31.7
10.38
10.44
9.76
8.74
11.59
s
r
a
l
l
o
D
n
I
12
11
10
9
8
7
6
5
4
3
1998
1999
2000
Year
2001
2002
1998
1999
2000
Year
2001
2002
3
Independent Auditors’ Report
The Board of Directors and Stockholders
Mid Penn Bancorp, Inc.
Millersburg, Pennsylvania:
We have audited the accompanying consolidated balance sheet of Mid Penn Bancorp, Inc. and subsidiaries (collectively,
“Corporation”) as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders' equi-
ty and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibili-
ty 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 state-
ments. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as eval-
uating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Mid Penn Bancorp, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the
United States of America.
PARENTE RANDOLPH, PC
Williamsport, Pennsylvania
January 16, 2003
4
Mid Penn Bancorp, Inc.
Consolidated Balance Sheet
DECEMBER 31, 2002 AND 2001
(Dollars in thousands, except share data)
2002
2001
ASSETS
Cash and due from banks ......................................................................
Interest-bearing balances with other financial institutions ...................
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 income (loss) .........................
Treasury stock at cost (18,622 and 19,065 shares in 2002 ...........
and 2001, respectively) .............................................................
Stockholders' Equity, Net
Total Liabilities and Stockholders' Equity
$
$
$
8,095
65,487
58,859
223,203
(1,850)
(3,051)
218,302
3,317
781
2,007
456
4,743
1,237
363,284
28,011
33,645
40,515
26,705
145,827
274,703
18,156
1,187
1,651
32,383
328,080
3,057
20,368
10,944
1,357
(522)
35,204
363,284
$
The accompanying notes are an integral part of these consolidated financial statements.
9,028
53,042
55,348
205,101
(2,265)
(2,856)
199,980
3,395
1,693
2,091
1,037
4,504
517
330,635
29,226
30,795
27,734
26,398
139,952
254,105
9,610
1,292
1,344
32,568
298,919
3,057
20,368
8,880
(56)
(533)
31,716
330,635
5
Mid Penn Bancorp, Inc.
Consolidated Statement of Income
FOR YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(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 gains (losses), 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 real estate expense ........................................................
Other expenses ........................................................................
Total Noninterest Expense
$
2002
15,863
2,703
659
2,001
79
47
21,352
7,807
50
2,069
9,926
11,426
425
11,001
188
1,053
60
51
239
431
2,022
3,978
384
514
259
46
115
79
294
1,589
7,258
2001
16,340
3,092
1,349
1,806
193
84
22,864
9,192
441
2,102
11,735
11,129
500
10,629
158
921
(14)
16
216
548
1,845
4,012
392
461
262
44
127
125
43
1,560
7,026
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
11
1,531
6,656
INCOME BEFORE PROVISION FOR INCOME TAXES ........
Provision for income taxes .....................................................
Net Income
Earnings Per Share
Weighted Average Number of Shares Outstanding
5,765
1,270
4,495
1.48
3,036,508
$
$
5,448
1,218
4,230
1.39
3,038,859
5,173
1,225
3,948
1.30
3,036,007
The accompanying notes are an integral part of these consolidated financial statements.
6
Mid Penn Bancorp, Inc.
Consolidated Statement of Changes in Stockholders' Equity
FOR YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands, except share data)
Additional
Common Paid-in
Capital
Stock
Accumulated
Other
Retained Comprehensive Treasury
Stock
Earnings Income (Loss)
Total
Balance, December 31, 1999 ................................................ $
3,057
20,368
5,557
(1,861)
(556)
26,565
Comprehensive income:
Net income .....................................................................
Change in net unrealized gain (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
Comprehensive income:
Net income .....................................................................
Change in net unrealized gain (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 (8 shares) .......................................
0
0
0
0
0
0
0
0
4,230
0
0
288
(2,428)
0
0
0
0
0
0
0
4,230
288
4,518
(2,428)
0
Balance, December 31, 2001 ................................................
3,057
20,368
8,880
(56)
(533)
31,716
Comprehensive income:
Net income .....................................................................
Change in net unrealized gain (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 (443 shares) ...................................
0
0
0
0
0
0
0
0
4,495
0
0
1,413
(2,431)
0
0
0
0
0
0
11
4,495
1,413
5,908
(2,431)
11
Balance, December 31, 2002 ................................................ $
3,057
20,368
10,944
1,357
(522)
35,204
The accompanying notes are an integral part of these consolidated financial statements.
7
Mid Penn Bancorp, Inc.
Consolidated Statement of Cash Flows
FOR YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands)
Operating Activities:
Net income............................................................................... $
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ..................................................
Depreciation .....................................................................
Increase in cash surrender value of life insurance ...........
Investment securities (gains) losses, net ..........................
Loss (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 ................................................
Net Cash Provided By Operating Activities
Investing Activities:
Net increase in interest-bearing balances ................................
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.................................
Net Cash Used In Investing Activities
Financing Activities:
Net increase in deposits ..........................................................
Net increase (decrease) in short-term borrowings ................
Cash dividends paid................................................................
Long-term debt repayment .....................................................
Sale of treasury stock..............................................................
Long-term borrowings ............................................................
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..................................... $
2002
4,495
425
340
(239)
(60)
54
(51)
(147)
84
(712)
(105)
307
4,391
(12,445)
8,163
3,176
(12,657)
983
(19,969)
(262)
1,311
(163)
(31,863)
20,598
8,546
(2,431)
(185)
11
0
26,539
(933)
9,028
8,095
Supplemental Disclosures of Cash Flow Information:
Interest paid ............................................................................. $
Income taxes paid .................................................................... $
10,031
1,427
Supplemental Noncash Disclosures:
Loan charge-offs ...................................................................... $
Transfers to foreclosed assets held for sale............................. $
302
290
The accompanying notes are an integral part of these consolidated financial statements.
2001
4,230
500
336
(216)
14
(16)
(16)
(116)
411
(86)
(254)
319
5,106
(10,666)
23,455
11,284
(15,780)
1,128
(21,884)
(150)
81
0
(12,532)
22,697
(13,128)
(2,428)
(1,673)
0
5,000
10,468
3,042
5,986
9,028
11,989
1,250
489
1,688
8
2000
3,948
325
369
(198)
4
(40)
(31)
(176)
(382)
(77)
344
126
4,212
(7,806)
4,042
3,515
(15,047)
3,622
(15,558)
(643)
68
0
(27,807)
13,568
(1,898)
(2,427)
(2,159)
23
15,000
22,107
(1,488)
7,474
5,986
11,111
1,355
74
35
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements for 2002 Report
(1) Basis of Presentation
The accompanying consolidated financial statements include the accounts of Mid Penn Bancorp, Inc. and its wholly-owned
subsidiaries Mid Penn Bank (“Bank”), Mid Penn Investment Corporation and Mid Penn Insurance Services, LLC, (collective-
ly, “MPB”). All significant intercompany balances and transactions have been eliminated in consolidation.
(2) Nature of Business
The Bank engages in a full-service commercial banking and trust business, making available to the community a wide range
of financial services, including, but not limited to, installment loans, mortgage and home equity loans, secured and unsecured
commercial and consumer loans, lines of credit, construction financing, farm loans, community development loans, loans to
non-profit entities and local government loans and various types of time and demand deposits, including but not limited to,
checking accounts, savings accounts, clubs, money market deposit accounts, certificates of deposit and IRAs. In addition, the
Bank provides a full range of trust services through its Trust Department. Deposits are insured by the Federal Deposit
Insurance Corporation (FDIC) to the extent provided by law.
The financial services are provided to individuals, partnerships, non-profit organizations and corporations through its eleven
offices located in the northern portion of Dauphin County, Swatara Township in the lower portion of Dauphin County, the
southern portion of Northumberland County, the western portion of Schuylkill County and Hampden Township in Cumberland
County.
Mid Penn Investment Corporation is engaged in investing activities.
Mid Penn Insurance Services, LLC provides a range of personal and investment insurance products.
(3) Summary of Significant Accounting Policies
The accounting and reporting policies of MPB conform with accounting principles generally accepted in the United States
of America and to general practice within the financial industry. The following is a description of the more significant
accounting policies.
(a) Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the report-
ed amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for
loan losses and the valuation of real estate acquired through, or in lieu of, foreclosure in settlement of debt.
While management uses available information to recognize losses on loans and foreclosed assets, future additions to
the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the Bank’s allowances for loan losses and foreclosed assets.
Such agencies may require the Bank to recognize changes to the allowances based on their judgments about information
available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance
for loan losses may change materially in the near term.
(b)
Investment Securities
Investments are accounted for as follows:
Available-for-Sale Securities - includes debt and equity securities. Such securities are reported at fair value, with
unrealized holding gains and losses excluded from earnings and reported, net of deferred income taxes, as a com-
ponent of other accumulated income (loss) within stockholders’ equity.
(c) Loans
Interest on loans is recognized on a method which approximates a level yield basis over the life of the loans. The
accrual of interest on loans, including impaired loans, is discontinued when principal or interest has consistently been in
default for a period of 90 days or more, or because of a deterioration in the financial condition of the borrower, payment
in full of principal or interest is not expected. Interest income is subsequently recognized only to the extent cash pay-
ments are received. The placement of a loan on the nonaccrual basis for revenue recognition does not necessarily imply a
9
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont’d)
potential charge-off of loan principal. Loan origination fees and certain direct origination costs are capitalized and recog-
nized as an adjustment of the yield of the related loan.
(d) Allowance for Loan Losses
The Bank's methodology for determining the allowance for loan losses establishes both a specific and a general com-
ponent. The specific portion of the allowance represents the results of analysis of individual "watch list" loans (commer-
cial, residential and consumer loans) as well as pools of consumer loans within the portfolio. The individual commercial
loans are risk rated with specific attention to estimated loss exposure. Historical loan loss rates are applied to "problem"
consumer credits, adjusted to reflect current conditions.
Specific regular reviews of credits exceeding $500,000 are performed to monitor the major portfolio risk. The Bank
analyzes all commercial loans in excess of $10,000 that are rated as watch list credits. Potential credit problems are moni-
tored to determine whether specific loans are impaired, with impairment normally measured by reference to borrowers'
collateral values and cash flows.
The general portion of the allowance for loan losses represents the results of measuring potential losses inherent in the
portfolio that are not identified in the specific allowance analysis. This general portion is analyzed by assessing changes
in the Bank's underwriting criteria, growth and/or changes in the mix of loans originated, industry concentrations and
evaluations, lending management changes, comparisons of certain factors to peer group banks and changes in economic
conditions.
Management believes the allowance for loan losses is adequate. Identification of specific losses is an ongoing process
using available information. Specifically, quarterly management meetings to review "problem" loans are utilized to deter-
mine a plan for collection and, if necessary, a recommendation to the Board for loss. Future additions to the loan loss
reserve via loan loss provisions will be made based on identified changes in the above factors coupled with loss experi-
ence.
Various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance
for loan losses. These agencies may require the Bank to recognize changes to the allowance based on their judgment
about information available to them at the time of their examinations. In addition, the Bank's auditors also review the
Bank's methodology utilized in determining the adequacy of the loan loss reserve.
(e) Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the
straight-line basis. Maintenance and repairs are charged to expense when incurred. Gains and losses on dispositions are
reflected in current operations.
(f) Foreclosed Assets Held for Sale
Foreclosed assets held for sale consist of real estate acquired through, or in lieu of, foreclosure in settlement of debt
and are recorded at fair value at the date of transfer. Any valuation adjustments required at the date of transfer are
charged to the allowance for loan losses. Subsequent to acquisition, foreclosed assets are carried at the lower of cost or
fair value less costs of disposal, based upon periodic evaluations that consider changes in market conditions and develop-
ment 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 noninter-
est 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 dif-
ferences at currently enacted income tax rates. As changes in tax laws or rates are enacted, deferred income tax assets
and liabilities are adjusted through the provision for income taxes.
(h) Marketing and Advertising Costs
Marketing and advertising costs are expensed as incurred and were $115,000 in 2002, $127,000 in 2001 and $144,000
in 2000.
10
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
(i) Benefit Plans
A funded contributory profit-sharing plan is maintained for substantially all employees. The cost of the Bank's profit-
sharing plan is charged to current operating expenses and is funded annually. In addition to providing a profit-sharing
plan, the Bank provides under certain circumstances, postretirement health care and group life insurance coverage.
Substantially all of the Bank's employees may become eligible for those benefits if they continue working for the Bank
until retirement age. The Bank currently does not offer postemployment benefits.
The Bank also has a defined benefit retirement bonus plan for qualified members of the Board of Directors who either
voluntarily retire from service or attain mandatory retirement age (age 70). The benefit is based on years of service of
board membership.
(j) Trust Assets and Income
Assets held by the Bank in a fiduciary or agency capacity for customers of the Trust Department are not included in
the consolidated financial statements since such items are not assets of the Bank. Trust income is recognized on the cash
basis which is not materially different than if it were reported on the accrual basis.
(k) Earnings Per Share
Earnings per share is computed by dividing net income by the weighted average number of common shares outstand-
ing during each of the years presented giving retroactive effect to stock dividends and stock splits. MPB’s basic and
diluted earnings per share are the same since there are no potentially dilutive securities outstanding.
(l) Statement of Cash Flows
For purposes of cash flows, MPB considers cash and due from banks to be cash equivalents.
(m) Reclassifications
Certain prior year amounts have been reclassified to conform to the current year's classifications.
(4) Comprehensive Income
The components of other comprehensive income (loss) and related tax effects are as follows:
(Dollars in thousands)
Unrealized holding gains on available-for-sale securities.................................... $
Less reclassification adjustment for (gains) losses realized in income................
Net unrealized gains .............................................................................................
Income tax expense ..............................................................................................
Net ....................................................................................................................... $
Years Ended December 31,
2002
2,193
(60)
2,133
(720)
1,413
2001
422
14
436
(148)
288
2000
2,296
4
2,300
(783)
1,517
(5) Restrictions on Cash and Due from Bank Accounts
The Bank is required to maintain reserve balances with the Federal Reserve Bank of Philadelphia. The amount of those
required reserve balances were $500,000 at December 31, 2002 and $2,554,000 at December 31, 2001.
(6)
Investment Securities
At December 31, 2002 and 2001, amortized cost, fair value, and unrealized gains and losses on investment securities are as
follows:
(Dollars in Thousands)
December 31, 2002
Available-for-sale securities:
U.S. Treasury and U.S.
government agencies .................................
$
Mortgage-backed U.S.
government agencies ..................................
State and political
subdivision obligations ...............................
Restricted equity securities.............................
$
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
291
134
1,647
0
2,072
0
9
14
0
23
9,829
5,637
41,021
2,372
58,859
9,538
5,512
39,388
2,372
56,810
11
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
(Dollars in Thousands)
December 31, 2001
Available-for-sale securities:
U.S. Treasury and U.S.
Amortized
Cost
Unrealized Unrealized
Gains
Losses
Fair
Value
government agencies .................................
$
Mortgage-backed U.S.
government agencies ..................................
State and political
subdivision obligations ...............................
Restricted equity securities.............................
$
9,028
4,674
39,760
1,970
55,432
102
59
439
0
600
96
0
588
0
684
9,034
4,733
39,611
1,970
55,348
Estimated fair values of debt securities are based on quoted market prices, where applicable. If quoted market prices are
not available, fair values are based on quoted market prices of comparable instruments, adjusted for differences between the
quoted instruments and the instruments being valued.
Restricted equity securities consist of stock in the Federal Home Loan Bank of Pittsburgh and Atlantic Central Bankers
Bank and do not have a readily determinable fair value for purposes of SFAS No. 115, because their ownership is restricted and
they lack a market. Therefore, these securities are classified as restricted investment securities, carried at cost, and evaluated
for impairment.
Investment securities having a fair value of $26,909,000 at December 31, 2002 and $31,381,000 at December 31, 2001,
were pledged to secure public deposits and other borrowings.
Net gains (losses) from such sales of investment securities, as determined on the basis of specific identification of the
adjusted cost of each security sold, amounted to $60,000 in 2002, ($14,000) in 2001 and ($4,000) in 2000. The proceeds from
sales of investment securities were $3,176,000 in 2002, $11,284,000 in 2001 and $3,515,000 in 2000.
The following is a schedule of the maturity distribution of investment securities at amortized cost and fair value at
December 31, 2002 and 2001:
(Dollars in thousands)
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, 2002
Fair
Amortized
Value
Cost
3,280
3,264
10,269
9,802
10,453
9,978
26,848
25,882
50,850
48,926
December 31, 2001
Fair
Amortized
Value
Cost
415
407
8,384
8,201
9,833
9,727
30,013
30,453
48,645
48,788
Mortgage-backed securities.............................................................
Restricted equity securities..............................................................
5,512
2,372
$ 56,810
5,637
2,372
58,859
4,674
1,970
55,432
4,733
1,970
55,348
(7) Loans
A summary of loans at December 31, 2002 and 2001 is as follows:
(Dollars in thousands)
Commercial real estate, construction and land development..........
Commercial, industrial and agricultural..........................................
Real estate - residential ...................................................................
Consumer.........................................................................................
2002
$ 146,325
22,398
41,502
12,978
$ 223,203
2001
130,913
23,107
38,349
12,732
205,101
Net unamortized loan fees of $443,000 in 2002 and $398,000 in 2001 were deducted from loans.
12
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
Loans to Bank executive officers, directors, and corporations in which such executive officers and directors have beneficial
interests as stockholders, executive officers, or directors aggregated approximately $1,935,000 at December 31, 2002 and
$1,580,000 at December 31, 2001. New loans extended were $177,000 in 2002 and $497,000 in 2001. Net draws on these
loans exceeded repayments by $178,000 in 2002 and $335,000 in 2001. These loans were made on substantially the same
basis, including interest rates and collateral as those prevailing for comparable transactions with other borrowers at the same
time.
(8) Allowance for Loan Losses
Changes in the allowance for loan losses for the years 2002, 2001, and 2000 are summarized as follows:
(Dollars in thousands)
Balance, January 1...........................................................................
Provision for loan losses .................................................................
Loans charged off ............................................................................
Recoveries on loans charged off .....................................................
Balance, December 31.....................................................................
2002
2,856
425
(302)
72
3,051
$
$
2001
2,815
500
(489)
30
2,856
2000
2,505
325
(74)
59
2,815
The recorded investment in loans that are considered impaired amounted to $1,077,000 and $1,686,000 (all in nonaccrual)
on December 31, 2002 and December 31, 2001, respectively. By definition, impairment of a loan is considered when, based
on current information and events, it is probable that all amounts due will not be collected according to the contractual terms
of the loan agreement. The allowance for loan losses related to loans classified as impaired amounted to approximately
$425,000 at December 31, 2002 and $125,000 at December 31, 2001. Impaired loans of approximately $743,000 at December
31, 2001 have no related allowance. The average balances of these loans amounted to approximately $1,361,000, $1,293,000
and $752,000 for the years 2002, 2001 and 2000, respectively. The Bank recognizes interest income on impaired loans on a
cash basis. The following is a summary of cash receipts on these loans and how they were applied in 2002, 2001 and 2000.
(Dollars in thousands)
Cash receipts applied to reduce principal balance ..........................
Cash receipts recognized as interest income...................................
Total cash receipts ...........................................................................
2002
122
1
123
$
$
2001
238
31
269
2000
520
36
556
Loans which were past due 90 days or more for which interest continued to be accrued amounted to approximately
$350,000 at December 31, 2002 and $828,000 at December 31, 2001. The Bank has no commitments to loan additional funds
to borrowers with impaired or nonaccrual loans.
(9) Bank Premises and Equipment
At December 31, 2002 and 2001, bank premises and equipment are as follows:
(Dollars in thousands)
Land.................................................................................................
Buildings..........................................................................................
Furniture and fixtures ......................................................................
Less accumulated depreciation........................................................
2002
838
3,976
3,716
8,530
5,213
3,317
$
$
2001
822
3,938
3,517
8,277
4,882
3,395
Depreciation expense was $340,000 in 2002, $336,000 in 2001 and $369,000 in 2000.
(10) Deposits
At December 31, 2002 and 2001, time deposits in denominations of $100,000 or more amounted to $24,831,000 and
$24,341,000 respectively. Interest expense on such certificates of deposit amounted to approximately $1,112,000, $1,454,000
and $1,211,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Time deposits at December 31, 2002,
mature as follows: (in thousands) 2003, $62,026; 2004, $32,484; 2005, $25,288; 2006, $6,106; 2007, $3,537; thereafter,
$16,386. Deposits and other funds from related parties held by MPB at December 31, 2002 and 2001 amounted to approxi-
mately $5,807,000 and $4,307,000, respectively.
13
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
(11) Short-term Borrowings
Short-term borrowings as of December 31, 2002 and 2001 consisted of:
(Dollars in thousands)
Federal funds purchased.................................................................. $
Repurchase agreements ..................................................................
Treasury, tax and loan note ............................................................
Due to broker ..................................................................................
$
2002
14,200
2,550
1,058
348
18,156
2001
5,800
2,666
196
948
9,610
Federal funds purchased represent overnight funds. Securities sold under repurchase agreements generally mature between
one day and one year. Treasury, tax and loan notes are open-ended interest bearing notes payable to the U.S. Treasury upon
call. All tax deposits accepted by the Bank are placed in the Treasury note option account. The due to broker balance repre-
sents previous day balances transferred from deposit accounts under a sweep account agreement. The Bank also has unused
lines of credit with several banks amounting to $1 million dollars at December 31, 2002.
(12) Long-term Debt
The Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB) and through its membership, the Bank can
access a number of credit products which are utilized to provide various forms of liquidity. As of December 31, 2002, the
Bank had long-term debt in the amount of $32,383,000 outstanding to the FHLB consisting of a $5,000,000 3 year fixed rate
advance at 5.20% which will mature on March 12, 2004; a $5,000,000 bullet loan at 6.55% which will mature on November
24, 2003; a $283,000 10 year amortizing advance at 7.30% which will mature April 5, 2004; a $5,000,000 7 year fixed rate
advance at 6.21% convertible at FHLB’s option to a LIBOR adjustable rate after 3 years which will mature November 30,
2006; a $5,000,000 10 year fixed rate advance at 6.42% convertible at FHLB’s option to a LIBOR adjustable rate after 5 years
which matures December 3, 2009; a $1,000,000 10 year fixed rate advance with an interest rate of 7.06% maturing on
December 9, 2009; a $1,000,000 10 year fixed rate advance with an interest rate of 7.24% which matures December 17, 2009;
a $5,000,000 10 year fixed rate advance at 6.28% convertible at FHLB’s option to a LIBOR adjustable rate after 2 years which
is due January 14, 2010; a $5,000,000 10 year fixed rate advance at 6.71% convertible at FHLB’s option to a LIBOR
adjustable rate after 3 years which is due February 22, 2010; and a $100,000 amortizing loan at a rate of 6.71% which matures
February 22, 2027. The aggregate amounts of maturities of long-term debt subsequent to December 31, 2002 are $5,199,000
(2003), $5,088,000 (2004), $2,000 (2005), $5,002,000 (2006), $17,092,000 thereafter.
Most of the Bank’s investments and mortgage loans are pledged to secure FHLB borrowings.
(13) Benefit Plans
(a) Profit-Sharing
The Bank has a funded contributory profit-sharing plan covering substantially all employees. The Bank's contribution
to the plan was $353,000 for 2002, $362,000 for 2001 and $361,000 for 2000.
(b) Health Insurance
For full-time employees who retire after at least 20 years of service, the Bank will pay premiums for major medical
insurance (as provided to active employees) for a period ending on the earlier of the date the participant obtains other
employment where major medical coverage is available or the date of the participant's death; however, payment of med-
ical premiums by the Bank will cease after five years. If the retiree becomes eligible for Medicare within the five year
period beginning on his/her retirement date, the Bank may pay, at its discretion, premiums for 65 Special coverage or a
similar supplemental coverage. After the five year period has expired, all Bank-paid benefits cease; however, the retiree
may continue coverage through the Bank at his/her own expense.
(c) Life Insurance
For full-time employees who retire after at least 20 years of service, the Bank will provide term life insurance. The
amount of coverage prior to age 65 will be three times the participant's annual salary at retirement or $50,000, whichever
is less. After age 65, the life insurance coverage amount will decrease by 10% per year, subject to a minimum amount of
$2,000.
14
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
The following tables provide a reconciliation of the changes in the plans’ health and life insurance benefit obligations
and fair value of plan assets for the years ended December 31, 2002 and 2001 and a statement of the funded status at
December 31, 2002 and 2001:
(Dollars in thousands)
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 ...................................................... $
2002
377
24
28
45
(24)
450
0
24
(24)
0
2001
354
20
24
(3)
(18)
377
0
18
(18)
0
Funded status:
Excess of the benefit obligation over the value of plan assets ............... $
Unrecognized transition obligation .........................................................
Unrecognized gain...................................................................................
Net amount recognized............................................................................ $
December 31,
2002
(450)
147
(101)
(404)
2001
(377)
162
(150)
(365)
Amount recognized in the consolidated balance sheet at December 31, 2002 and 2001 is as follows:
(Dollars in thousands)
Accrued benefit liability.......................................................................... $
2002
(404)
2001
(365)
The components of net periodic postretirement benefit cost for 2002, 2001 and 2000 are as follows:
(Dollars in thousands)
Service cost.............................................................................................. $
Interest cost..............................................................................................
Amortization of transition obligation......................................................
Amortization of net gain .........................................................................
Net periodic postretirement benefit cost ................................................. $
2002
24
28
15
(4)
63
2001
20
24
15
(7)
52
2000
18
22
15
(8)
47
Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement medical bene-
fits 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 postretirement benefit obligation.................................
$
$
One-Percentage Point
Increase
7
50
6
42
Decrease
Assumptions used in the measurement of MPB’s benefit obligations at December 31, 2002 and 2001 are as follows:
Weighted-average assumptions:
Discount rate............................................................................
Rate of compensation increase................................................
6.75%
5.00%
15
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
For measurement purposes, no change in the per capita cost of covered health care benefits was assumed for 2003. The rate
was assumed to be 6 percent for 2003 and remain at that level thereafter.
(d) Retirement Plan
The Bank has an unfunded defined benefit retirement plan for directors with benefits based on years of service. The
adoption of this plan generated unrecognized prior service cost of $274,000 which is being amortized based on the
expected future years of service of active directors.
The following tables provide a reconciliation of the changes in the plan’s benefit obligations and fair value of plan
assets for the years ended December 31, 2002 and 2001 and a statement of the funded status at December 31, 2002 and
2001:
(Dollars in thousands)
Change in benefit obligations:
December 31,
2002
2001
Benefit obligations, January 1 ................................................................
Service cost.........................................................................................
Interest cost.........................................................................................
Actuarial (gain) loss ...........................................................................
Change in assumptions .......................................................................
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 loss (gain) ........................................................................
Net amount recognized...........................................................................
$
$
$
$
$
$
502
23
35
(1)
13
(9)
563
0
9
(9)
0
(563)
79
1
(483)
455
21
32
3
0
(9)
502
0
9
(9)
0
(502)
104
(11)
(409)
Amounts recognized in the consolidated balance sheet at December 31, 2002 and 2001 are as follows:
(Dollars in thousands)
Accrued benefit liability .........................................................................
Intangible asset .......................................................................................
Net amount recognized...........................................................................
$
$
2002
(489)
6
(483)
The components of net periodic pension cost for 2002, 2001 and 2000 are as follows:
(Dollars in thousands)
Service cost.............................................................................................
Interest cost.............................................................................................
Amortization of prior-service cost..........................................................
Net periodic pension cost .......................................................................
$
$
2002
23
35
26
84
2001
(426)
17
(409)
2001
21
32
26
79
2000
20
28
26
74
Assumptions used in the measurement of MPB’s benefit obligations at December 31, 2002 and 2001 are as follows:
Weighted-average assumptions:
Discount rate............................................................................
Change in consumer price index .............................................
6.75%
4.00%
16
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
The Bank is the owner and beneficiary of insurance policies on the lives of the executive officers and directors which infor-
mally fund certain benefit obligations. The aggregate cash surrender value of these policies was approximately $1,670,000 and
$1,585,000 at December 31, 2002 and 2001, respectively.
(e) Deferred Compensation Plans
The Bank has an executive deferred compensation plan which allows an executive officer to defer bonus compensation
for a specified period in order to provide future retirement income. At December 31, 2002 and 2001, the Bank has
accrued a liability of approximately $56,000 and $33,000, respectively, for this plan.
The Bank also has a directors’ deferred compensation plan which allows directors to defer receipt of monthly fees for a
specified period in order to provide future retirement income. At December 31, 2002 and 2001, the Bank has accrued a
liability of approximately $117,000 and $92,000, respectively, for this plan.
The Bank is the owner and beneficiary of insurance policies on the lives of the participating executive officer and
directors which informally fund the benefit obligations. The aggregate cash surrender value of these policies was approx-
imately $1,362,000 and $1,296,000 at December 31, 2002 and 2001, respectively.
(f) Salary Continuation Agreement
The Bank maintains a Salary Continuation Agreement (Agreement) for an executive officer. The Agreement provides
the executive officer with a fixed annual benefit. The benefit is payable beginning at age 65 for a period of 15 years. If
the executive officer terminates employment before the normal retirement date for reasons other than death, the annual
benefit payable will be based on the vesting schedule as defined in the Agreement. Upon death or a change in control of
the Bank, the executive officer or his beneficiary is entitled to the full fixed annual benefit. At December 31, 2002 and
2001, the Bank has accrued a liability of approximately $100,000 and $72,000, respectively, for the Agreement. The
expense related to the Agreement was $28,000 for 2002, $26,000 for 2001 and $24,000 for 2000.
The Bank is the owner and beneficiary of an insurance policy on the life of the participating executive officer which
informally funds the benefit obligation. The aggregate cash surrender value of this policy was approximately $802,000
and $760,000 at December 31, 2002 and 2001, respectively.
(g) Employee Stock Ownership Plan
The Bank has an Employee Stock Ownership Plan (ESOP) covering substantially all employees. Contributions to the
ESOP are made at the discretion of the Board of Directors. Total expense related to the Bank’s contribution to the ESOP
for 2002, 2001 and 2000 was $118,000, $121,000 and $118,000, respectively. The ESOP held 21,496 and 15,889 shares
of MPB stock as of December 31, 2002 and December 31, 2001, respectively, all of which were allocated to plan partici-
pants. Shares held by the ESOP are considered outstanding for purposes of calculating earnings per share. Dividends paid
on shares held by the ESOP are charged to retained earnings.
(h) Other
At December 31, 2002 and 2001, the Bank had a Split Dollar Life Insurance arrangement with two executives for
which the aggregate cash surrender value is approximately $909,000 and $863,000, respectively.
(14) Federal Income Taxes
The following temporary differences gave rise to the deferred tax asset at December 31, 2002 and 2001:
(Dollars in thousands)
Deferred tax assets:
Allowance for loan losses .......................................................
Benefit plans............................................................................
Nonaccrual interest..................................................................
Other items ..............................................................................
Unrealized losses on securities................................................
Total
$
$
2002
883
390
75
63
-
1,411
2001
817
328
42
61
29
1,277
17
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
(Dollars in thousands)
2002
2001
Deferred tax liabilities:
Depreciation ............................................................................
Loan fees .................................................................................
Bond accretion.........................................................................
Unrealized gain on securities ..................................................
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..........................................................
$
$
$
$
$
(93)
(132)
(31)
(699)
(955)
456
2002
1,417
(147)
1,270
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..........................................................
2002
1,960
(824)
73
61
1,270
$
$
(90)
(128)
(22)
-
(240)
1,037
2001
1,334
(116)
1,218
2001
1,852
(753)
83
36
1,218
2000
1,401
(176)
1,225
2000
1,759
(633)
69
30
1,225
(15) Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by the federal and state banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. The regulations require
the Bank to meet specific capital adequacy guidelines that involve quantitative measures of the Bank’s assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital classification is also
subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts
and ratios (set forth in the table below) of Tier I capital (as defined in the regulations) to total average assets (as defined), and
minimum ratios of Tier I and total capital (as defined) to risk-weighted assets (as defined). To be considered adequately capi-
talized (as defined) under the regulatory framework for prompt corrective action, the Bank must maintain minimum Tier I
leverage, Tier I risk-based and total risk-based ratios as set forth in the table. The Bank’s actual capital amounts and ratios are
also presented in the table.
(Dollars in thousands)
As of December 31, 2002:
Capital Adequacy
Tier I Capital (to Average Assets) .................... $ 25,235
25,235
Tier I Capital (to Risk Weighted Assets)..........
28,283
Total Capital (to Risk Weighted Assets)...........
Actual
Amount Ratio
7.4%
10.4%
11.6%
Required
Amount Ratio
4.0%
13,712
4.0%
9,754
8.0%
19,507
To Be Well Capitalized
Under Prompt Corrective
Action Provisions:
Amount Ratio
5.0%
6.0%
10.0%
17,140
14,630
24,384
As of December 31, 2001:
Tier I Capital (to Average Assets) .................... $ 23,246
23,246
Tier I Capital (to Risk Weighted Assets)..........
26,050
Total Capital (to Risk Weighted Assets)...........
7.4%
10.4%
11.6%
12,650
8,971
17,942
4.0%
4.0%
8.0%
15,812
13,457
22,428
5.0%
6.0%
10.0%
As of December 31, 2002, the Bank’s capital ratios are well in excess of the minimum and well-capitalized guide
lines and MPB’s capital ratios are in excess of the Bank’s capital ratios.
18
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
(16) Concentration of Risk and Off-Balance Sheet Risk
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financ-
ing needs of its customers. These financial instruments include commitments to extend credit and financial standby letters of
credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recog-
nized in the consolidated balance sheet.
The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held
varies but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial
properties. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit and financial standby letters of credit written is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for direct,
funded loans.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition estab-
lished in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require pay-
ment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
Financial standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a cus-
tomer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. The term of these financial standby letters of credit is generally one year or less.
As of December 31, 2002, commitments to extend credit amounted to $42,261,000 and financial standby letters of credit
amounted to $4,579,000.
Significant concentration of credit risk may occur when obligations of the same parties engaged in similar activities occur
and accumulate in significant amounts.
In analyzing the Bank's exposure to significant concentration of credit risk, management set a parameter of 10% or more of
the Bank's total net loans outstanding as the threshold in determining whether the obligations of the same or affiliated parties
would be classified as significant concentration of credit risk. Concentrations by industry, product line, type of collateral, etc.,
are also considered. U.S. Treasury securities, obligations of U.S. government agencies and corporations, and any assets collat-
eralized by the same were excluded.
As of December 31, 2002, commercial real estate financing was the only similar activity that met the requirements to be
classified as a significant concentration of credit risk. However, there is a geographical concentration in that most of the
Bank's business activity is with customers located in Central Pennsylvania, specifically within the Bank's trading area made up
of Dauphin County, lower Northumberland County, western Schuylkill County and Hampden Township in Cumberland
County.
The Bank's highest concentrations of credit are in the areas of commercial real estate office financings and mobile home
park land. Outstanding credit to these sectors amounted to $23,985,000 or 11.0% and $17,368,000 or 7.9% of net loans out-
standing as of December 31, 2002.
(17) Commitments and Contingencies
Capital Purchases
The Bank has committed to the purchase of equipment in the amount of approximately $755,000. Deposits of approximate-
ly $443,000, which are included in other assets in the consolidated balance sheet, have been made at December 31, 2002. The
balance of approximately $312,000 is expected to be funded through operating cash flows.
Litigation
MPB is subject to lawsuits and claims arising out of its business. In the opinion of management, after consultation with
legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated
financial condition of MPB.
19
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
(18) Parent Company Statements
The condensed balance sheet, statement of income and statement of cash flows for Mid Penn Bancorp, Inc., parent only,
are presented below:
CONDENSED BALANCE SHEET
December 31, 2002 and 2001
(Dollars in thousands)
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 Years Ended December 31, 2002, 2001 and 2000
(Dollars in thousands)
Dividends from Subsidiaries .......................................................
Other Income from Subsidiaries .................................................
Undistributed Earnings of Subsidiaries.......................................
Other Expenses............................................................................
Net Income
CONDENSED STATEMENT OF CASH FLOWS
For Years Ended December 31, 2002, 2001 and 2002
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income..................................................................................
Undistributed Earnings of Subsidiaries ......................................
Net Cash Provided By Operating Activities
CASH FLOWS USED BY INVESTING ACTIVITIES
Funds used to capitalize Mid Penn Insurance ............................
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends Paid ............................................................................
Sale of Treasury Stock ................................................................
Net Cash Used By Financing Activities
Net Increase (Decrease) in Cash .................................................
Cash at Beginning of Period .......................................................
Cash at End of Period..................................................................
2002
277
34,927
35,204
35,726
(522)
35,204
2002
2,496
27
2,051
(79)
4,495
2001
253
31,463
31,716
32,249
(533)
31,716
2001
1,544
25
2,733
(72)
4,230
2000
2,795
30
1,212
(89)
3,948
2002
2001
2000
4,495
(2,051)
2,444
4,230
(2,733)
1,497
3,948
(1,212)
2,736
0
(15)
0
(2,431)
11
(2,420)
24
253
277
(2,428)
0
(2,428)
(946)
1,199
253
(2,427)
23
(2,404)
332
867
1,199
$
$
$
$
$
$
$
(19) Fair Value of Financial Instruments
SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosures of fair value information about
financial instruments, whether or not recognized in the consolidated balance sheet, for which it is practical to estimate that
value. In cases where quoted market values are not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and esti-
mates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to indepen-
dent markets, and in many cases, could not be realized in immediate settlement of the instrument. Accordingly, the aggregate
fair value amounts presented do not represent the underlying value of MPB.
20
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
The following methodologies and assumptions were used to estimate the fair value of MPB’s financial instruments:
Cash and due from banks:
The carrying value of cash and due from banks is considered to be a reasonable estimate of fair value.
Interest-bearing balances with other financial institutions:
The estimate of fair value was determined by comparing the present value of quoted interest rates on like deposits with the
weighted average yield and weighted average maturity of the balances.
Investment securities:
As indicated in Note 6, estimated fair values of investment securities are based on quoted market prices, where applicable.
If quoted market prices are not available, fair values are based on quoted market prices for comparable instruments, adjusted
for differences between the quoted instruments and the instruments being valued.
Loans:
The loan portfolio was segregated into pools of loans with similar economic characteristics and was further segregated into
fixed rate and variable rate and each pool was treated as a single loan with the estimated fair value based on the discounted
value of expected future cash flows. Fair value of loans with significant collectibility concerns (that is, problem loans and
potential problem loans) was determined on an individual basis using an internal rating system and appraised values of each
loan. Assumptions regarding problem loans are judgmentally determined using specific borrower information.
Deposits:
The fair value for demand deposits (e.g., interest and noninterest checking, savings and money market deposit accounts) are
by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). Fair value for fixed-
rate certificates of deposit was estimated using a discounted cash flow calculation by combining all fixed-rate certificates into
a pool with a weighted average yield and a weighted average maturity for the pool and comparing the pool with interest rates
currently being offered on a similar maturity.
Short-term borrowings:
Because of time to maturity, the estimated fair value of short-term borrowings approximates the book value.
Long-term debt:
The estimated fair values of long-term debt was determined using discounted cash flow analysis, based on borrowing rates
for similar types of borrowing arrangements.
Accrued interest:
The carrying amounts of accrued interest approximates their fair values.
Off-balance sheet financial instruments:
There are no unearned fees outstanding on off-balance sheet financial instruments and the fair values are determined to be
equal to the carrying values.
The following table summarizes the book value and fair value of financial instruments at December 31, 2002 and 2001.
(Dollars in thousands)
Financial assets:
Cash and due from banks ............................................................
Interest-bearing balances .............................................................
Investment securities ...................................................................
Net loans......................................................................................
$
December 31, 2002
Fair
Value
8,095
65,487
58,859
234,783
Book
Value
8,095
65,487
58,859
218,302
December 31, 2001
Fair
Value
9,028
53,042
55,348
211,170
Book
Value
9,028
53,042
55,348
199,980
21
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
(Dollars in thousands)
Financial liabilities:
Deposits .......................................................................................
Short-term borrowings ................................................................
Long-term debt ............................................................................
Off-balance sheet financial instruments:
December 31, 2002
December 31, 2001
Book
Value
$ 274,703
18,156
32,383
Fair
Value
280,514
18,156
35,724
Book
Value
254,105
9,610
32,568
Fair
Value
258,305
9,610
34,673
Commitments to extend credit ....................................................
Financial standby letters of credit ...............................................
$
42,261
4,579
42,261
4,579
37,674
4,009
37,674
4,009
(20) Common Stock:
MPB has reserved 50,000 of authorized, but unissued shares of its common stock for issuance under a Stock Bonus Plan
(the “Plan”). Shares issued under the Plan are at the discretion of the board of directors.
Under MPB’s amended and restated dividend reinvestment plan, (DRIP), two hundred thousand shares of MPB’s autho-
rized but unissued common stock are reserved for issuance. The DRIP also allows for voluntary cash payments within speci-
fied limits, for the purchase of additional shares.
(21) Summary of Quarterly Consolidated Financial Data (Unaudited):
The following table presents summarized quarterly financial data for 2002, 2001 and 2000.
(Dollars in Thousands, Except Per Share Data)
Interest Income ................................................................................
Interest Expense ..............................................................................
Net Interest Income .........................................................................
Provision for Loan Losses...............................................................
Net Interest Income After Provision for Loan Losses ....................
Other Income...................................................................................
Securities Gains...............................................................................
Gain on Sale of Loans .....................................................................
Other Expenses................................................................................
Income Before Income Tax Provision.............................................
Income Tax Provision......................................................................
Net Income ......................................................................................
Earnings Per Share ..........................................................................
Interest Income ................................................................................
Interest Expense ..............................................................................
Net Interest Income .........................................................................
Provision for Loan Losses...............................................................
Net Interest Income After Provision for Loan Losses ....................
Other Income...................................................................................
Securities Gains (Losses) ................................................................
Other Expenses................................................................................
Income Before Income Tax Provision.............................................
Income Tax Provision......................................................................
Net Income ......................................................................................
Earnings Per Share ..........................................................................
Mar. 31
5,420
2,511
2,909
100
2,809
462
5
0
1,843
1,433
327
1,106
.36
Mar. 31
5,783
3,147
2,636
75
2,561
449
(11)
1,737
1,262
291
971
0.32
$
$
$
$
2002 Quarter Ended
Sept. 30
June 30
5,379
5,274
2,550
2,483
2,829
2,791
100
100
2,729
2,691
498
454
55
0
0
0
1,807
1,910
1,475
1,235
330
259
1,145
976
.38
.32
2001 Quarter Ended
Sept. 30
June 30
5,671
5,840
2,885
3,021
2,786
2,819
100
75
2,686
2,744
475
444
4
(7)
1,798
1,852
1,367
1,329
303
312
1,064
1,017
0.35
0.33
Dec. 31
5,279
2,382
2,897
125
2,772
497
0
51
1,698
1,622
354
1,268
.42
Dec. 31
5,570
2,682
2,888
250
2,638
491
0
1,639
1,490
312
1,178
0.39
22
Mid Penn Bancorp, Inc.
Notes to Consolidated Financial Statements (cont'd)
(Dollars in Thousands, Except Per Share Data)
Interest Income ................................................................................
Interest Expense ..............................................................................
Net Interest Income .........................................................................
Provision for Loan Losses...............................................................
Net Interest Income After Provision for Loan Losses ....................
Other Income...................................................................................
Securities Losses .............................................................................
Other Expenses................................................................................
Income Before Income Tax Provision.............................................
Income Tax Provision......................................................................
Net Income ......................................................................................
Earnings Per Share ..........................................................................
$
$
Mar. 31
5,230
2,652
2,578
75
2,503
414
0
1,653
1,264
316
948
0.31
2000 Quarter Ended
Sept. 30
June 30
5,564
5,407
2,930
2,743
2,634
2,664
75
100
2,559
2,564
374
401
0
(4)
1,706
1,684
1,227
1,277
280
308
947
969
0.31
0.32
Dec. 31
5,852
3,130
2,722
75
2,647
371
0
1,613
1,405
321
1,084
0.36
(22) Recent Accounting Pronouncements:
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." It is effective for financial statements issued for fiscal years beginning after June 15, 2002. Earlier application
is encouraged. The adoption of this SFAS on January 1, 2003 is not expected to have an impact on MPB's earnings, financial
condition or equity.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The
provisions of this SFAS are effective for financial statements issued for fiscal years beginning after December 15, 2001, inter-
im periods within those fiscal years, with earlier application encouraged. The provisions of this SFAS generally are to be
applied prospectively. The adoption of this SFAS on January 1, 2002 did not have an impact on MPB's earnings, financial
condition or equity.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." The provisions of this SFAS related to the rescission of SFAS No. 4 are to be
applied in fiscal years beginning after May 15, 2002. Early application of the provisions of this SFAS related to SFAS No. 13
shall be effective for transactions occurring after May 15, 2002. All other provisions of the SFAS shall be effective for finan-
cial statements issued on or after May 15, 2002. Early application of the SFAS is encouraged. The adoption of the effective
portions of the SFAS did not have an impact on MPB's earnings, financial condition or equity. The adoption of the remaining
portions of this SFAS is not expected to have an impact on MPB's earnings, financial condition or equity.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The
provisions of this SFAS are effective for exit or disposal activities that are initiated after December 31, 2002, with early appli-
cation encouraged. MPB does not expect the adoption of this Statement to have an impact on its earnings, financial condition
or equity.
On October 1, 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions," effective for all busi-
ness combinations initiated after October 1, 2002. This Statement addresses the financial accounting and reporting for the
acquisition of all or part of a financial institution, except for a transaction between two or more mutual enterprises. Under this
SFAS, acquisition of all or part of a financial institution that meets the definition of a business combination shall be accounted
for by the purchase method in accordance with SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." This SFAS also provides guidance on the accounting for the impairment or disposal of acquired
long-term customer-relationship intangible assets (such as depositor- and borrower-relationship intangible assets and credit
cardholder intangible assets), including those acquired in transactions between two or more mutual enterprises. The adoption
of this SFAS did not have an impact on MPB's earnings, financial condition or equity.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of the Indebtedness of Others." This Interpretation clarifies the requirements for a
guarantor's accounting for and disclosures of certain guarantees issued and outstanding. This Interpretation requires a guaran-
tor to recognize a liability for the fair value of the obligation it assumes under that guarantee. The initial recognition and ini-
tial measurement provisions of the Interpretation are applied on a prospective basis to guarantees issued or modified after
December 31, 2002. The Interpretation's disclosure requirements were implemented during the year ended December 31,
2002. The adoption of the recognition and measurement provisions of this Interpretation are not expected to have a significant
impact on MPB's earnings, financial condition or equity.
23
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The purpose of this discussion is to further detail the financial condition and results of operations of Mid Penn Bancorp,
Inc. (MPB). MPB is not aware of any known trends, events, uncertainties or of any current recommendations by the regulato-
ry authorities which, if they were to be implemented, would have a material effect on MPB’s liquidity, capital resources or
operations. This discussion should be read along with the consolidated financial statements also appearing in this report.
Financial Summary
The consolidated earnings of MPB are derived primarily from the operations of its wholly-owned subsidiary, Mid Penn
Bank.
MPB earned net income of $4,495,000 for the year 2002, compared to $4,230,000 in 2001, which was an increase of
$265,000 or 6.3%. This represents net income in 2002 of $1.48 per share compared to $1.39 per share in 2001 and $1.30 per
share in 2000.
Total assets of MPB continued to grow in 2002, reaching the level of $363,284,000, an increase of $32,649,000 or 9.9%
over $330,635,000 at year end 2001. The majority of growth came from increases in commercial real estate loans, and an
increase in our portfolio of investment certificates of deposit. These increases were funded primarily through retained earnings
of the Bank as well as short-term borrowings.
MPB continued to achieve an excellent return on average shareholders’ equity, (ROE), a widely recognized performance
indicator in the financial industry. The ROE was 13.60% in 2002, 13.68% in 2001 and 14.64% in 2000. Return on average
assets (ROA), another performance indicator, was 1.32% in 2002, 1.31% in 2001 and 1.34% in 2000.
Tier one capital (to risk weighted assets) of $25,235,000 or 10.4% and total capital (to risk weighted assets) of $28,283,000
or 11.6% at December 31, 2002, are well above the December 31, 2002 requirement, which is 4% for tier one capital and 8%
for total capital. Tier one capital consists primarily of stockholders' equity. Total capital includes qualifying subordinated debt,
if any, and the allowance for loan losses, within permitted limits. Risk-weighted assets are determined by assigning various
levels of risk to different categories of assets and off-balance sheet activities.
Net Interest Income
Net interest income, MPB's primary source of revenue, represents the difference between interest income and interest
expense. Net interest income is affected by changes in interest rates and changes in average balances (volume) in the various
interest-sensitive assets and liabilities.
During 2002 net interest income increased $297,000 or 2.7% as compared to an increase of $531,000 or 5.0% in 2001. The
average balances, effective interest differential and interest yields for the years ended December 31, 2002, 2001 and 2000 and
the components of net interest rate growth, are presented in Table 1. A comparative presentation of the changes in net interest
income for 2002 compared to 2001, and 2001 compared to 2000, is given in Table 2. This analysis indicates the changes in
interest income and interest expense caused by the volume and rate components of interest earning assets and interest bearing
liabilities.
24
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
The yield on earning assets decreased to 7.00% in 2002 from 7.93% in 2001. The yield on earning assets for 2000 was
8.33%. The change in the yield on earning assets was due primarily to the repricing of commercial loans in a very competitive
rate environment and changes in the “prime rate.” The average “prime rate” for 2002 was 4.67% as compared to 6.91% for
2001 and 9.23% for 2000.
Interest expense decreased by $1,809,000 or 15.4% in 2002 as compared to an increase of $280,000 or 2.44% in 2001. In
order to maintain the spread between interest earning assets and interest bearing liabilities, management was forced to aggres-
sively decrease the expense on deposits.
Primarily resulting from the fluctuations in interest rates, the net interest margin, on a tax equivalent basis, in 2002 was
3.91% compared to 4.04% in 2001 and 4.25% in 2000. Management continues to closely monitor the net interest margin.
TABLE 1: AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS
INCOME AND RATES ON A TAXABLE EQUIVALENT BASIS
FOR YEAR ENDED DECEMBER 31, 2002
Average
Balance
Interest
Income/Expense
Average Rates
Earned/Paid
$
57,454
(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...............................
$
$
$
14,460
39,937
54,397
2,786
207,028
321,665
6,350
13,745
341,760
32,480
36,390
26,662
144,353
4,821
32,469
277,175
28,069
3,475
33,041
341,760
25
2,703
738
3,032
47
15,983
22,503
168
801
355
6,483
50
2,069
9,926
12,577
4.70%
5.10%
7.59%
1.69%
7.72%
7.00%
0.52%
2.20%
1.33%
4.49%
1.04%
6.37%
3.58%
7.00%
3.09%
3.91%
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 1: AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS (cont’d)
INCOME AND RATES ON A TAXABLE EQUIVALENT BASIS
FOR YEAR ENDED DECEMBER 31, 2001
(Dollars in thousands)
Average
Balance
Interest
Income/Expense
Average Rates
Earned/Paid
3,092
1,542
2,736
84
16,460
23,914
246
739
456
7,751
441
2,102
11,735
12,179
6.31%
6.50%
7.62%
3.45%
8.64%
7.93%
0.84%
3.17%
1.78%
5.54%
4.49%
6.43%
4.50%
7.93%
3.89%
4.04%
ASSETS:
Interest Bearing Balances .....................
Investment Securities:
Taxable..............................................
Tax-Exempt.......................................
Total Investment Securities
$
49,013
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...............................
$
$
$
23,706
35,929
59,635
2,435
190,558
301,641
6,044
12,263
319,948
29,427
23,342
25,661
139,928
9,822
32,704
260,884
25,709
2,431
30,924
319,948
26
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 1: AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS (cont'd)
INCOME AND RATES ON A TAXABLE EQUIVALENT BASIS
FOR YEAR ENDED DECEMBER 31, 2000
(Dollars in thousands)
Average
Balance
Interest
Income/Expense
Average Rates
Earned/Paid
ASSETS:
Interest Bearing Balances .....................
Investment Securities:
Taxable..............................................
Tax-Exempt.......................................
Total Investment Securities
$
36,234
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
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...............................
$
$
$
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%
Interest and average rates are presented on a fully taxable equivalent basis, using an effective tax rate of 34%. For purposes
of calculating loan yields, average loan balances include nonaccrual loans.
Loan fees of $550,000, $387,000 and $203,000 are included with interest income in Table 1 for the years 2002, 2001 and 2000,
respectively.
27
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 2: VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Dollars in thousands)
2002 Compared to 2001
Increase (Decrease) Due to Change In:
2001 Compared to 2000
Increase (Decrease) Due to Change In:
Taxable Equivalent Basis
INTEREST INCOME:
Interest Bearing Balances.................. $
Investment Securities:
Taxable ..............................................
Tax-Exempt .......................................
Total Investment Securities
(601)
305
(296)
(203)
(9)
(212)
(804)
296
(508)
Volume
Rate
Net
Volume
Rate
Net
533
(922)
(389)
813
(27)
786
Federal Funds Sold ...........................
Loans, Net .........................................
Total Interest Income
12
1,423
1,672
(49)
(1,900)
(3,083)
(37)
(477)
(1,411)
INTEREST EXPENSE:
Interest Bearing Deposits:
NOW ............................................
Money Market...............................
Savings ..........................................
Time ..............................................
Total Interest Bearing Deposits
Short-term Borrowings .....................
Long-term Debt.................................
Total Interest Expense
256
414
18
245
933
(225)
(15)
693
(334)
(352)
(119)
(1,513)
(2,318)
(166)
(18)
(2,502)
(78)
62
(101)
(1,268)
(1,385)
(391)
(33)
(1,809)
(990)
510
(480)
146
1,369
1,848
12
169
(2)
540
719
(278)
553
994
29
(9)
20
(62)
(1,219)
(1,288)
(157)
(89)
(112)
(127)
(485)
(160)
(69)
(714)
(961)
501
(460)
84
150
560
(145)
80
(114)
413
234
(438)
484
280
NET INTEREST INCOME .................. $
979
(581)
398
854
(574)
280
The effect of changing volume and rate has been allocated entirely to the rate column. Tax-exempt income is shown on a
tax equivalent basis assuming a federal income tax rate of 34%.
Provision for Loan Losses
The provision for loan losses charged to operating expense represents the amount deemed appropriate by management to
maintain an adequate allowance for possible loan losses. Due to the cyclical nature of the economy coupled with the Bank’s
substantial involvement in commercial loans and the record number of nationwide consumer bankruptcies, management
thought it prudent to make a $425,000 allocation in 2002 as well as a provision of $500,000 in 2001 and $325,000 in 2000.
The allowance for loan losses as a percentage of average total loans was 1.45% at December 31, 2002, compared to 1.48% at
December 31, 2001 and 1.58% at December 31, 2000, which continues to be higher than that of peer financial institutions due
to MPB’s higher level of loans to finance commercial real estate. A summary of charge-offs and recoveries of loans is present-
ed in Table 3.
28
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 3: ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
2002
2,856
$
Years ended December 31,
2000
2001
2,505
2,815
1999
2,313
(Dollars in thousands)
Balance, beginning of year ...........................
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
41
113
0
148
302
17
0
0
55
72
249
118
0
122
489
0
1
0
29
30
1
12
0
61
74
28
5
0
26
59
1998
2,281
40
200
40
37
317
10
56
0
29
95
222
254
2,313
0
146
0
78
224
55
1
0
35
91
133
325
2,505
Net charge-offs..............................................
Provision for loan losses ..............................
Balance, end of year......................................
230
425
3,051
$
459
500
2,856
15
325
2,815
Ratio of net charge-offs during the year
to average loans outstanding during the
year, net of unearned discount ..................
Allowance for loan losses as a percentage
.11%
.24
.01
.08
.14
of average total loans ................................
1.45%
1.48
1.58
1.58
1.47
Noninterest Income
During 2002, MPB earned $2,022,000 in noninterest income, compared to $1,845,000 earned in 2001, and $1,556,000
earned in 2000.
Service charges on deposit accounts amounted to $1,053,000 for 2002, an increase of $132,000 or 14.33% over $921,000
for 2001, which showed an increase of $331,000 over 2000. The majority of this increase resulted from the increasing rev-
enues from NSF charges. In 2001, MPB initiated a program which allows approved customers to overdraw their checking
accounts and have the checks paid, up to an approved limit not to exceed $300. This program, coupled with a more restrictive
policy on fee waivers, and an increase in demand accounts, has contributed to this substantial increase in fee income with a
very controllable level of associated loss.
MPB owns cash surrender value life insurance policies that provide funding for director retirement and salary continuation
plans. The income on these policies amounted to $239,000 during the year 2002.
Trust department income for 2002 was $188,000, a $30,000 or 19.0% increase from the $158,000 in 2001, which was
$45,000 or 22.2% decrease from the $203,000 earned in 2000. The Trust Department adopted a new fee schedule during 2000,
which has resulted in increased trust fees earned. Trust Department income fluctuates from year to year, due to the number of
estates being settled during the year.
MPB also earned $64,000 in 2002 and $75,000 in 2001 in fees from Invest, the third-party provider of investments whose
services the Bank has contracted. Other income amounted to $431,000 in 2002, $612,000 in 2001 and $496,000 in 2000, net
of gains on other real estate.
29
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
Noninterest Expense
A summary of the major components of noninterest expense for the years ended December 31, 2002, 2001 and 2000 is
reflected in Table 4. Noninterest expense increased to $7,258,000 in 2002 from $7,026,000 in 2001 and $6,656,000 in 2000.
The major component of noninterest expense is salaries and employee benefits. The number of full-time equivalent employees
increased from 109 to 110 during 2002. Increases in the 2002 workforce also included the addition of two experienced com-
mercial loan officers. A major increase in noninterest expense was the increase in expenses associated with maintaining other
real estate and moving these parcels toward sale. Most of the 2002 increase dealt with one commercial parcel, over $1 million
in value, that was completed for sale and sold during the year.
TABLE 4: NONINTEREST EXPENSE
(Dollars in thousands)
Years ended December 31,
Salaries and employee benefits ........................................
Occupancy, net .................................................................
Equipment ........................................................................
Postage and supplies ........................................................
FDIC insurance premium .................................................
Marketing and advertising ...............................................
Other real estate, net.........................................................
Pennsylvania bank shares tax...........................................
Professional services ........................................................
Telephone .........................................................................
Loss on mortgage sales ....................................................
Other.................................................................................
Total Noninterest Expense
2002
3,978
384
514
278
46
115
294
259
160
78
79
1,073
7,258
$
$
Investments
2001
4,012
392
461
280
44
127
43
262
213
78
125
989
7,026
2000
3,790
364
481
291
45
144
11
271
104
72
19
1,064
6,656
MPB’s investment portfolio is utilized to improve earnings through investments of funds in higher-yielding assets, while
maintaining asset quality, which provide the necessary balance sheet liquidity for MPB.
MPB’s entire portfolio of investment securities is considered available for sale. As such, the investments are recorded at
fair value. Our investments: US Treasury, Agency and Municipal securities are given a market price relative to investments of
the same type with similar maturity dates. As the interest rate environment of these securities changes, our existing securities
are valued differently in comparison. This difference in value, or unrealized gain, amounted to $1,357,000, net of tax, as of the
end of the year.
At December 31, 2002, SFAS No. 115 resulted in an increase of shareholders’ equity of $1,357,000 (unrealized gain on
securities of $2,049,000 less estimated income tax expense of $692,000). As of December 31, 2001, SFAS No. 115 resulted
in a decrease in shareholders’ equity of $56,000 (unrealized loss on securities of $84,000, less estimated income tax benefit of
$28,000), compared to a decrease in stockholders’ equity of $344,000 (unrealized loss on securities of $522,000, less estimated
income tax benefit of $178,000) as of December 31, 2000.
MPB does not have any significant concentrations of investment securities.
Table 5 provides a history of the amortized cost of investment securities at December 31, for each of the past three years.
The unrealized gains and losses on investment securities are outlined in Note 6 to the Consolidated Financial Statements.
30
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 5: AMORTIZED COST OF INVESTMENT SECURITIES
(Dollars in thousands)
U. S. Treasury and U.S. government agencies ....................
Mortgage backed U.S. government agencies.......................
State and political subdivision obligations ..........................
Restricted equity securities ..................................................
Total
$
2002
9,538
5,512
39,388
2,372
$ 56,810
December 31,
2001
9,028
4,674
39,760
1,970
55,432
2000
34,750
2,402
33,972
3,281
74,405
Loans
At December 31, 2002, net loans totaled $218,302,000, an $18,584,000 or 9.2% increase from December 31, 2001. During
2002, MPB experienced a net increase in commercial real estate and commercial/industrial loans of approximately
$14,703,000, the majority of which was generated in the greater Harrisburg region.
The current environment in lending is extremely competitive with financial institutions aggressively pursuing potential bor-
rowers. At December 31, 2002, loans, net of unearned income, represented 64.4% of earning assets as compared to 64.6% on
December 31, 2001 and 62.7% on December 31, 2000.
The Bank's loan portfolio is diversified among individuals, farmers, and small and medium-sized businesses generally 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, industrial and agricultural loans are made to business enti-
ties 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)
2002
December 31,
2000
2001
1999
1998
Commercial real estate, construction
Commercial, industrial and agricultural .......
Real estate-residential ...................................
Consumer ......................................................
Lease financing .............................................
Total Loans
Unearned income ..........................................
Loans net of unearned discount ....................
Allowance for loan losses .............................
and land development ............................... $ 146,325
22,398
41,502
12,978
0
223,203
(1,850)
221,353
(3,051)
Net Loans $ 218,302
130,913
23,107
38,349
12,732
0
205,101
(2,265)
202,836
(2,856)
199,980
110,947
26,274
35,610
14,110
0
186,941
(2,730)
184,211
(2,815)
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
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by Management to absorb potential loan losses in the
loan portfolio. MPB has a loan review department that is charged with establishing a "watch list" of potential unsound loans,
identifying unsound credit practices and suggesting corrective actions. A quarterly review and reporting process is in place for
monitoring those loans that are on the "watch list." Each credit on the "watch list" is evaluated to estimate potential losses. In
addition, estimates for each category of credit are provided based on Management's judgment which considers past experience,
current economic conditions and other factors. For installment and real estate mortgages, specific allocations are based on past
loss experience adjusted for recent portfolio growth and economic trends. The total of reserves resulting from this analysis are
"specific" reserves. The amounts not specifically provided for individual classes of loans are considered "general." This amount
is determined and based on judgments regarding economic conditions, trends and other factors.
31
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
The allocation of the allowance for loan losses among the major classifications is shown in Table 7 as of December 31 of
each of the past five years. The allowance for loan losses at December 31, 2002, was $3,051,000 or 1.38% of total loans less
unearned discount as compared to $2,856,000 or 1.41% at December 31, 2001, and $2,815,000 or 1.53% at December 31,
2000.
TABLE 7: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
2002
2001
December 31,
2000
1999
1998
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 ........................ $ 1,898
Commercial, industrial and
agricultural ..........................
Real estate-residential .............
Consumer ................................
General ....................................
922
56
147
28
Total loans $ 3,051
65.6% 1,584
63.8% 1,318
59.3% 927
60.3%
861
56.8%
10.0%
18.6%
5.8%
-
987
73
166
46
11.3% 1,008
209
18.7%
93
6.2%
187
-
2,815
14.1% 782
19.0% 198
7.6% 114
484
-
100% 2,505
11.5%
18.6%
9.6%
-
100%
693
219
127
413
2,313
13.5%
19.4%
10.3%
-
100.0%
100% 2,856 100%
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 prin-
cipal or interest has consistently been in default for a period of 90 days or more, or because of a deterioration in the financial
condition of the borrower, payment in full of principal or interest is not expected. Loans past due 90 days or more and still
accruing interest are loans that are generally well-secured and in the process of collection or repayment. Restructured loans
are those loans whose terms have been modified to lower interest or principal payments because of borrower financial difficul-
ties. Foreclosed assets held for sale include those assets that have been acquired through foreclosure for debts previously con-
tracted, 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 $350,000, $87,000 and $222,000 in 2002, 2001, and 2000, respectively.
A presentation of nonperforming assets as of December 31, for each of the past five years is given in Table 8.
Nonperforming assets at December 31, 2002, totaled $2,753,000 or 0.76% of total assets compared to $4,744,000 or 1.44% of
total assets in 2001, and $2,312,000 or 0.73% of total assets in 2000. The foreclosed assets held for sale at December 31,
2002, consist of two pieces of commercial real estate and residential building lots that MPB has available for sale.
32
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 8: NONPERFORMING ASSETS
(Dollars in thousands)
December 31,
Nonaccrual loans...........................................
Past due 90 days or more..............................
Restructured loans.........................................
Total nonperforming loans
Foreclosed assets held for sale......................
$
Total nonperforming assets $
2002
1,164
808
0
1,972
781
2,753
2001
1,686
828
537
3,051
1,693
4,744
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
Percent of loans outstanding .........................
Percent of total assets....................................
1.23%
0.76%
2.31%
1.44%
1.24%
0.73%
1.27%
0.77%
2.00%
1.10%
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, 2002, increased by $20,598,000 or 8.1% over
December 31, 2001, which also increased by $22,697,000 or 9.8% from December 31, 2000. Average balances and average
interest rates applicable to the major classifications of deposits for the years ended December 31, 2002, 2001, and 2000 are
presented in Table 9.
Average short-term borrowings for 2002 were $4,821,000 as compared to $9,822,000 in 2001. These borrowings included
customer repurchase agreements, treasury tax and loan option borrowings and federal funds purchased.
TABLE 9: DEPOSITS BY MAJOR CLASSIFICATION
(Dollars in thousands)
2002
Years ended December 31,
2001
2000
Average
Balance
Noninterest-bearing demand deposits ......... $
Interest-bearing demand deposits ................
Money market..............................................
Savings.........................................................
Time .............................................................
28,069
32,480
36,390
26,662
144,353
Total $ 267,954
Average
Rate
0.00%
0.52%
2.20%
1.33%
4.49%
2.91%
Average
Balance
25,709
29,427
23,342
25,661
139,928
244,067
Average
Rate
0.00%
0.84%
3.17%
1.78%
5.54%
3.77%
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%
Capital Resources
Stockholders' equity, or capital, is evaluated in relation to total assets and the risk associated with those assets. The greater
the capital resources, the more likely a corporation is to meet its cash obligations and absorb unforeseen losses. Too much
capital, however, indicates that not enough of the company’s earnings have been paid to stockholders and the buildup makes it
difficult for a company to offer a competitive return on the stockholders’ capital going forward. For these reasons capital ade-
quacy has been, and will continue to be, of paramount importance.
In 2002, capital was increased by $3,488,000 or 11.0%. In 2001, capital was increased by $2,090,000 or 7.05%. In 2000,
capital was increased by $3,061,000 or 11.52%. Capital growth is achieved by retaining more in earnings than we pay out to
our stockholders.
MPB’s normal dividend payout allows for quarterly cash returns to its stockholders and provides earnings retention at a
level sufficient to finance future growth. The dividend payout ratio, which represents the percentage of annual net income
returned to the stockholders in the form of cash dividends, was 54% for 2002 compared to 58% for 2001 and 62% for 2000.
33
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
At December 31, 2002, 18,622 shares of MPB’s common stock have been purchased back by MPB, held as treasury stock,
and are available for issuance under the dividend reinvestment plan or the stock bonus plan. The treasury stock may also be
used for the employee stock ownership plan.
Federal income tax expense for 2002 was $1,270,000 compared to $1,218,000 and $1,225,000 in 2001 and 2000, respec-
tively. The effective tax rate was 22% for 2002 and 2001, and 24% for 2000.
Federal Income Taxes
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 borrow-
ings. (See Deposits and Other Funding Sources which appears earlier in this discussion.) Liquidity from investments is pro-
vided primarily through investments and interest bearing balances with maturities of one year or less. Funds are available to
MPB through loans from the Federal Home Loan Bank and established federal funds (overnight) lines of credit. MPB's major
source of funds is its core deposit base as well as its capital resources.
The major sources of cash in 2002 came from operations and the influx of deposit dollars during the year. Demand and
savings balances posted a net increase of $14,723,000 and time deposits increased by a net amount of $5,875,000 as bank cus-
tomers returned to the safety of bank deposits during this time of uncertainty in the equity markets.
The Bank used this cash to fund loans which increased by a net $18,322,000 during the year, as well as investing in short-
term interest-bearing (certificate of deposit) balances in other banks. These jumbo certificates offer a competitive rate of
return with no credit risk and little interest-rate risk due to their short terms.
The major sources of cash in 2001 came from operations and the net decrease of $18,537,000 in investment securities. Net
deposits increased by $22,697,000 contributing another major source of cash. The major area of deposit increase was in a
high-balance money market account known as the Prime Investment account, while certificate of deposit balances decreased
during the year in the face of a very competitive price environment.
The 2001 sources of cash were used primarily to fund loan growth and to pay down short-term borrowings. Net loan fund-
ing used $18,584,000 of cash. While loan growth was very sluggish during the first half of 2001, MPB experienced substan-
tial loan growth with the portfolio growing more than 10% by the end of 2001. The majority of the loan growth was in loans
to fund commercial real estate in the Greater Harrisburg area.
Market Risk - Asset-Liability Management and Interest Rate Sensitivity
Interest rate sensitivity is a function of the repricing characteristics of MPB's portfolio of assets and liabilities. Each asset
and liability reprices either at maturity or during the life of the instrument. Interest rate sensitivity is measured as the differ-
ence 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.
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 inter-
est rate risk is desirable.
The maturity distribution and weighted average yields of investments is presented in Table 10. The maturity distribution
and repricing characteristics of MPB's loan portfolio is shown in Table 11. Table 12 provides expected maturity information
about MPB’s financial instruments that are sensitive to changes in interest rates. Except for the effects of prepayments on
mortgage related assets, the table presents principal cash flows and related average interest rates on interest earning assets by
34
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
contractual maturity. Residential loans are assumed to have annual payment rates between 12% and 18% of the portfolio.
Loan and mortgage backed securities balances are not adjusted for unearned discounts, premiums, and deferred loan fees.
MPB assumes that 75% of savings and NOW accounts are core deposits and are, therefore, expected to roll-off after 5 years.
Transaction accounts, excluding money market accounts, are assumed to roll-off after five years. Money market accounts are
assumed to be variable accounts and are reported as maturing within the first twelve months. No roll-off is applied to certifi-
cates of deposit. Fixed maturity deposits reprice at maturity. The maturity distribution of time deposits of $100,000 or more is
shown in Table 13.
TABLE 10: INVESTMENT MATURITY AND YIELD
(Dollars in thousands)
December 31, 2002
U.S. Treasury and U.S.government agencies ............ $
State and political subdivision obligations................
Mortgage-backed U.S. government agencies............
Equity securities ........................................................
One Year
and Less
2,994
270
61
0
3,325
Total $
After One
Year thru
Five Years
6,544
3,258
1,808
0
11,610
After Five
Years thru
Ten Years
0
9,978
2,105
0
12,083
One Year
and Less
After One
Year thru
Five Years
After Five
Years thru
Ten Years
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
1.91%
7.39
6.10
0
2.43%
3.92
7.38
6.09
0
5.23
TABLE 11: LOAN MATURITY AND INTEREST SENSITIVITY
0
7.18
5.92
0
6.96
(Dollars in thousands)
December 31, 2002
After Ten
Years
0
25,882
1,538
2,372
29,792
After Ten
Years
0
7.07
3.93
3.23
6.60
Total
9,538
39,388
5,512
2,372
56,810
Total
3.29
7.13
5.42
3.23
6.16
One Year
and Less
After One
Year thru
Five Years
After Five
Years
Total
Commercial, real estate, construction
and land development.............................
$
48,755
90,305
7,265
146,325
Commercial, industrial and
agricultural..............................................
Real estate-residential mortgages ...............
Consumer....................................................
Total Loans
Rate Sensitivity
Predetermined rate......................................
Floating or adjustable rate ..........................
Total
12,960
13,165
3,169
78,049
9,104
68,945
78,049
$
$
$
8,281
19,112
7,462
125,160
36,589
88,571
125,160
1,157
9,225
497
18,144
17,660
484
18,144
22,398
41,502
11,128
221,353
63,353
158,000
221,353
35
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 12: INTEREST RATE SENSITIVITY GAP
(Dollars in thousands)
(As of December 31, 2002)
Assets:
Expected Maturity
Year Ended December 31,
2003
2004
2005
2006
2007
Thereafter
Total
Fair Value
Interest bearing balances .................. $ 55,189
3.66
3,325
2.43
68,945
5.47
9,104
7.72
Total $136,563
Average interest rate.....................
Debt securities ..................................
Average interest rate.....................
Adjustable rate loans ........................
Average interest rate.....................
Fixed rate loans ................................
Average interest rate.....................
Interest liabilities:
Variable rate savings and
transaction accounts ....................... $ 55,602
1.44
Average interest rate.....................
62,026
Certificates of deposit and IRAs ......
3.81
Average interest rate.....................
18,156
Short term borrowings .....................
1.40
Average interest rate.....................
5,197
Long term fixed rate borrowings .....
6.61
Average interest rate ....................
Total $140,981
8,615
4.19
1,007
6.95
33,371
7.82
7,710
8.37
50,703
0
-
32,484
4.08
0
-
5,086
5.24
37,570
1,287
7.21
5,368
4.57
22,966
7.40
9,988
8.32
39,609
0
-
25,288
4.51
0
-
0
-
25,288
297
6.68
3,976
5.26
14,242
7.84
8,949
6.38
27,464
0
-
6,106
4.78
0
-
5,000
6.21
11,106
99
5.05
1,261
5.57
17,992
6.94
9,942
7.11
29,294
0
-
16,386
4.53
0
-
0
-
16,386
0
-
39,500
6.91
484
7.76
17,660
7.72
57,644
73,274
.39
2,853
4.73
0
-
17,100
6.55
93,227
65,487
3.82
54,437
6.27
158,000
6.64
63,353
7.64
341,277
65,487
56,486
158,000
79,834
359,807
128,876
.84
145,143
4.13
18,156
1.40
32,383
6.30
324,558
128,876
151,638
18,156
34,673
333,343
Rate sensitive gap:
Periodic gap...................................... $ (4,418)
Cumulative gap ................................ $ (4,418)
13,133
8,715
14,321
23,036
16,358
39,394
12,908
52,302
(35,583)
16,719
Cumulative gap as a percentage
of total assets ....................................
-1.2% +2.4% +6.3% +10.8% +14.4%
+4.6%
(Dollars in thousands)
(As of December 31, 2001)
Assets:
Expected Maturity
Year Ended December 31,
2002
2003
2004
2005
2006
Thereafter
Total
Fair Value
Interest bearing balances .................. $ 35,642
5.45
521
7.63
52,655
6.27
8,952
8.09
Total $ 97,770
Average interest rate.....................
Debt securities ..................................
Average interest rate.....................
Adjustable rate loans ........................
Average interest rate.....................
Fixed rate loans ................................
Average interest rate.....................
13,935
5.93
3,204
5.75
11,238
9.09
7,825
8.99
36,202
1,980
6.63
1,055
6.93
40,103
7.87
9,213
8.76
52,351
1,188
7.47
2,984
5.74
13,448
7.75
9,375
8.98
26,995
297
6.68
3,114
6.69
22,692
8.04
7,695
8.53
33,798
0
-
42,585
6.91
1,015
8.08
18,625
8.29
62,225
53,042
5.67
53,463
6.77
141,151
7.39
61,685
8.49
309,341
53,042
53,377
141,151
72,875
320,445
36
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
TABLE 12: INTEREST RATE SENSITIVITY GAP (cont’d)
(Dollars in thousands)
(As of December 31, 2001)
Interest liabilities:
Variable rate savings and
Expected Maturity
Year Ended December 31,
2002
2003
2004
2005
2006
Thereafter
Total
Fair Value
transaction accounts ....................... $ 42,012
1.88
Average interest rate.....................
79,798
Certificates of deposit and IRAs ......
4.60
Average interest rate.....................
8,662
Short term borrowings .....................
1.50
Average interest rate.....................
184
Long term fixed rate borrowings .....
7.30
Average interest rate.....................
Total $130,656
0
0
0
0
26,037
5.98
0
-
5,197
6.61
31,234
10,852
4.75
0
-
5,087
5.24
15,939
7,689
5.70
0
-
0
-
7,689
5,258
4.86
0
-
5,000
6.21
10,258
72,141
0.61
2,977
5.35
0
-
17,100
6.55
92,218
114,153
1.08
132,611
4.97
8,662
1.50
32,568
6.31
287,994
114,153
136,811
8,662
34,673
294,299
Rate sensitive gap:
Periodic gap...................................... $(32,886)
4,968
Cumulative gap ................................ $(32,886) (27,918)
36,412
8,494
19,306
27,800
23,540
51,340
(29,993)
21,347
Cumulative gap as a percentage
of total assets ....................................
-9.9% -8.4% +2.6% +8.4% +15.5%
+6.5%
Duing 2002, Management analyzed interest rate risk using the Profit Star Asset-Liability Management Model. Using the
computerized model, Management reviews interest rate risk on a monthly basis. This analysis includes an earnings scenario
whereby interest rates are increased by 200 basis points and another whereby they are decreased by 200 basis points. These
scenarios indicate that there would not be a significant variance in net interest income at the one-year time frame due to interest
rate changes; however, actual results could vary significantly from the calculations prepared by Management. At December 31,
2002, all interest rate risk levels according to our model were within the tolerance guidelines set by Management. The model
noted above utilized by Management to create the reports used for Table 12 makes various assumptions and estimates. Actual
results could differ significantly from these estimates which would result in significant differences in cash flows. In addition,
the table does not take into consideration changes which Management would make to realign its portfolio in the event of a
changing rate environment.
TABLE 13: MATURITY OF TIME DEPOSITS $100,000 OR MORE
(Dollars in thousands)
Three months or less ........................................................
Over three months to twelve months ...............................
Over twelve months .........................................................
Total
$
2002
5,757
6,179
12,895
$ 24,831
December 31,
2001
3,925
12,773
7,643
24,341
2000
5,431
8,534
9,377
23,342
Effects of Inflation
A bank's asset and liability structure is substantially different from that of an industrial company in that virtually all assets
and liabilities of a bank are monetary in nature. Management believes the impact of inflation on its financial results depends
principally upon MPB's ability to react to changes in interest rates and, by such reaction, reduce the inflationary impact on per-
formance. 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 lia-
bilities 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, invest-
ments and deposits should be considered.
37
Mid Penn Bancorp, Inc.
Management's Discussion and Analysis (cont'd)
Off-Balance Sheet Items
MPB makes contractual commitments to extend credit and extends lines of credit which are subject to MPB's credit
approval and monitoring procedures.
As of December 31, 2002, commitments to extend credit amounted to $42,261,000 as compared to $37,674,000 as of
December 31, 2001.
MPB also issues financial standby letters of credit to its customers. The risk associated with financial standby letters of
credit is essentially the same as the credit risk involved in loan extensions to customers. Financial standby letters of credit
increased to $4,579,000 at December 31, 2002, from $4,009,000 at December 31, 2001.
Comprehensive Income
Comprehensive Income is a measure of all changes in equity of a corporation, excluding transactions with owners in their
capacity as owners (such as proceeds from issuances of stock and dividends). The difference between Net Income and
Comprehensive Income is termed “Other Comprehensive Income.” For MPB, Other Comprehensive Income consists of unre-
alized gains and losses on available-for-sale securities, net of deferred income tax. Comprehensive Income should not be con-
strued to be a measure of net income. The effect of Other Comprehensive Income would only be reflected in the income state-
ment if the entire portfolio of available-for-sale securities were sold on the statement date. The amount of unrealized gains or
losses reflected in Comprehensive Income may vary widely at statement dates depending on the markets as a whole and how
the portfolio of available-for-sale securities is affected by interest rate movements. Other Comprehensive Income for the years
ended December 31, 2002, 2001 and 2000 was $1,413,000, $288,000 and $1,517,000, respectively.
Critical Accounting Policies
The Bank's methodology for determining the allowance for loan losses establishes both a specific and a general component.
The specific portion of the allowance represents the results of analysis of individual "watch list" loans (commercial, residential
and consumer loans) as well as pools of consumer loans within the portfolio. The individual commercial loans are risk rated
with specific attention to estimated loss exposure. Historical loan loss rates are applied to "problem" consumer credits, adjust-
ed to reflect current conditions.
Specific regular reviews of credits exceeding $500,000 are performed to monitor the major portfolio risk. The Bank ana-
lyzes all commercial loans in excess of $10,000 that are rated as “watch list” credits. Potential credit problems are monitored
to determine whether specific loans are impaired, with impairment normally measured by reference to borrowers' collateral
values and cash flows.
The general portion of the allowance for loan losses represents the results of measuring potential losses inherent in the port-
folio that are not identified in the specific allowance analysis. This general portion is analyzed by assessing changes in the
Bank's underwriting criteria, growth and/or changes in the mix of loans originated, industry concentrations and evaluations,
lending management changes, comparisons of certain factors to peer group banks, and changes in economic conditions.
38
Mid Penn Bancorp, Inc.
Summary of Selected Financial Data
(Dollars in thousands, except per share data)
2002
2001
2000
1999
1998
INCOME:
$
Total Interest Income ................................
Total Interest Expense...............................
Net Interest Income...................................
Provision for Possible Loan Losses..........
Non-Interest Income .................................
Non-Interest Expense................................
Income Before Income Taxes ...................
Provision for Income Taxes ......................
Net Income................................................
21,352
9,926
11,426
425
2,022
7,258
5,765
1,270
4,495
COMMON STOCK DATA PER SHARE:
Earnings Per Share....................................
Cash Dividends Declared..........................
Stockholders' Equity .................................
$
1.48
.80
11.59
22,864
11,735
11,129
500
1,845
7,026
5,448
1,218
4,230
1.39
.80
10.44
22,053
11,455
10,598
325
1,556
6,656
5,203
1,255
3,948
1.30
.80
9.76
20,112
9,674
10,438
325
1,689
6,665
5,137
1,253
3,884
1.28
2.18
8.74
20,436
9,593
10,843
254
1,398
6,606
5,381
1,516
3,865
1.27
.69
10.90
AVERAGE SHARES OUTSTANDING ......
3,036,508 3,038,859
3,036,007
3,037,976
2,892,416
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 .................................
$
$
58,859
221,353
3,051
363,284
274,703
18,156
32,383
35,204
55,348
202,836
2,856
330,635
254,105
9,610
32,568
31,716
RATIOS:
Return on Average Assets .........................
Return on Average Stockholders' Equity ..
Cash Dividend Payout Ratio.....................
Allowance for Loan Losses to Loans .......
Average Stockholders' Equity to
1.32
13.60
54.05
1.38
1.31
13.68
57.55
1.41
73,885
184,211
2,815
315,584
231,408
22,738
29,241
29,626
1.34
14.64
61.54
1.53
64,099
172,294
2,505
287,542
217,840
24,636
16,400
26,565
1.40
14.68
170.91
1.45
Average Assets ......................................
9.67
9.67
9.15
9.50
67,933
152,993
2,313
277,827
216,802
12,159
15,550
31,536
1.45
12.81
53.73
1.51
11.36
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 E. 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
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
46 Years Banking Experience
Alan W. Dakey
President and CEO
29 Years Banking Experience
Randall L. Klinger
Senior Vice President
and Senior Credit Officer
29 Years Banking Experience
Allen J. Trawitz
Executive Vice President
34 Years Banking Experience
Michael T. Lehmer
Vice President and Senior Trust Officer
12 Years Banking Experience
Steven S. Shuey
Vice President
and Loan Review Officer
29 Years Banking Experience
Linda M. Sitlinger
Vice President and
Sales Manager/Branch Administrator
23 Years Banking Experience
Dennis E. Spotts
Vice President and Operations Officer
30 Years Banking Experience
Cindy L. Wetzel
Vice President and Corporate Secretary
24 Years Banking Experience
Eric S. Williams
Vice President and
Senior Commercial Loan Officer
24 Years Banking Experience
CAPITAL AREA ADVISORY BOARD
Mid Penn Bank
Norman K. A. Hoffer
Norman L. Houser
Theodore W. Mowery
Robert M. Newbury
David J. Remmel
Ronald H. Smith
Kathy I. Bordner
Vice President and Marketing Director
18 Years Banking Experience
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
Nelson E. Carr
Vice President and Business
Development Officer
42 Years Banking Experience
Roberta A. Hoffman
Vice President, Human Resources
Officer and Asst. Secretary
27 Years Banking Experience
Kevin W. Laudenslager
Vice President and Chief Financial
Officer
18 Years Banking Experience
40
Mid Penn Bancorp, Inc. Office Locations
Millersburg
349 Union Street
Millersburg, PA 17061
(717) 692-2133
Harrisburg
4098 Derry Street
Harrisburg, PA 17111
(717) 558-2144
Tower City
545 East Grand Avenue
Tower City, PA 17980
(717) 647-2157
Dauphin
1001 Peters Mountain Road
Dauphin, PA 17018
(717) 921-8899
Elizabethville
2 East Main Street
Elizabethville, PA 17023
(717) 362-8147
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
Carlisle Pike
4622 Carlisle Pike
Mechanicsburg, PA 17050
(717) 761-2480
Dalmatia
School Road, PO Box 205
Dalmatia, PA 17017
(570) 758-2711
Harrisburg
2615 North Front Street
Harrisburg, PA 17110
(717) 233-7380
www.midpennbank.com