SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number 0-15040
December 31, 1995
PENNROCK FINANCIAL SERVICES CORP.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2400021
- --------------------------------- ---------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
1060 Main Street, Blue Ball,
Pennsylvania 17506
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(Address of principal executive (Zip code)
offices)
Registrant's telephone number, including area code (717) 354-4541
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $2.50 per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter periods that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of Common Stock held by non-affiliates of the
Registrant at February 27, 1996 was approximately $104,823,420.
As of February 27, 1996, there were 6,076,720 shares of Common Stock, Par Value
$2.50 Per Share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Stockholders Meeting to be held
April 23, 1996 are incorporated by reference into Part III of this report.
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PENNROCK FINANCIAL SERVICES CORP
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 4A. Executive Officers of the Registrant 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 64
PART III
Item 10. Directors and Executive Officers of the Registrant 64
Item 11. Executive Compensation 64
Item 12. Security Ownership of Certain Beneficial Owners and Management 64
Item 13. Certain Relationships and Related Transactions 64
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 65
SIGNATURES 66
EXHIBIT INDEX 67
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PENNROCK FINANCIAL SERVICES CORP.
PART I
Item 1. BUSINESS
PennRock Financial Services Corp. (the Company) is a Pennsylvania business
corporation which was organized on March 5, 1986 and became a bank holding
company when it acquired all of the issued and outstanding common stock of Blue
Ball National Bank (sometimes hereinafter referred to as "the Bank") on August
1, 1986.
PennRock Financial Services Corp. was organized as a financial holding company
which operates through its subsidiary to deliver financial and related services
to its customers. The Company's primary function is to direct the policies and
coordinate the financial resources of its bank subsidiary as well as provide
various advisory services. Dividends paid to stockholders are obtained by the
Company from dividends paid to it by its subsidiary and through funds received
under its dividend reinvestment plan.
The Company is a registered bank holding company under the Bank Holding Company
Act of 1956, as amended, and is subject to regulation by the Federal Reserve
Board and by the Pennsylvania Department of Banking.
Blue Ball National Bank
- -----------------------
Blue Ball National Bank, organized in 1906, provides a full range of general
commercial and retail banking services to its customers, including several types
of checking and savings accounts, certificates of deposit, and commercial,
consumer and mortgage loans. Additionally, the Bank also provides personal and
corporate trust and agency services to individuals, corporations and others,
including trust investment accounts, investment advisory services, estate
planning, and management of pension and profit sharing plans.
On January 27, 1995, the Bank acquired three branch offices of PNC Bank, NA
(PNC). In connection with the transaction, the Bank assumed $38.1 million in
deposits and purchased $6.7 million in assets including consumer loans, vault
cash, furniture and equipment and real estate and improvements. In
consideration for the assumption of the deposit liabilities, the Bank paid PNC a
deposit premium of $1.1 million or 2.8%. With the acquisition of these three
offices, the Bank now operates 12 full service branches in Berks, Chester and
Lancaster Counties.
Business is not considered seasonal, although normal increases in deposit totals
occur following the end of a quarter and near year-end.
Employees
- ---------
The approximate number of persons employed by the Bank is 243. The Company has
no employees.
Competition
- -----------
The banking industry in the Company's service area continues to be extremely
competitive, both among commercial banks and with other financial service
providers such as consumer finance companies, thrifts, investment companies,
mutual funds and credit unions. The increased competition has resulted from a
changing legal and regulatory climate as well as changes in the economy.
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PENNROCK FINANCIAL SERVICES CORP.
Mortgage banking firms, real estate investment trusts, insurance companies
brokerage companies, financial affiliates of commercial companies, and
government agencies also provide additional competition for loans and other
financial services.
The Company is not dependent upon a single customer or a small number of
customers, the loss of which would have a materially adverse effect upon the
Company or the Bank.
Supervision and Regulation
- --------------------------
General
The Company is registered as a bank holding company and is subject to
supervision and regulation by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") under the Bank Holding Act of 1956, as
amended (the "BHCA"). As a bank holding company, the Company's activities and
those of its bank subsidiary are limited to the business of banking and
activities closely related or incidental to banking. Bank holding companies are
required to file periodic reports with and are subject to examination by the
Federal Reserve Board. The Federal Reserve Board has issued regulations under
the BHCA that require a bank holding company to serve as a source of financial
and managerial strength to its subsidiary banks. As a result, the Federal
Reserve Board, pursuant to such regulations may require the Company to stand
ready to use its resources to provide adequate capital funds to its bank
subsidiary during periods of financial stress or adversity.
The BHCA prohibits the Company from acquiring direct or indirect control of more
than 5% of the outstanding shares of any class of voting stock or substantially
all of the assets of any bank or merging or consolidating with another bank
holding company without prior approval of the Federal Reserve Board.
Additionally, the BHCA prohibits the Company from engaging in or from acquiring
ownership or control of more than 5% of the outstanding shares of any class of
voting stock of any company engaged in a non-banking business, unless such
business is determined by the Federal Reserve Board to be so closely related to
banking as to be a proper incident thereto.
As a "bank holding company" for purposes of the Pennsylvania Banking Code, the
Company is also subject to regulation and examination by the Pennsylvania
Department of Banking.
The Bank is a national bank and a member of the Federal Reserve System and its
deposits are insured (up to applicable limits) by the Federal Deposit Insurance
Corporation (the "FDIC"). Accordingly, the Bank is subject to regulation and
examination by the Office of the Comptroller of the Currency (the "OCC"), by the
Federal Reserve Board, and by the FDIC. Although the Bank is subject to
examination by the Federal Reserve Board and by the FDIC, in practice
examinations are only rarely undertaken by these agencies in view of the regular
examination policies of the OCC. The Bank is also subject to requirements and
restrictions under federal and state law, including requirements to maintain
reserves against deposits, restrictions on the types and amounts of loans that
may be granted and the interest that may be charged thereon, and limitations on
the types of investments that may be made and the types of services that may be
offered. Various consumer laws and regulations also affect the operations of
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PENNROCK FINANCIAL SERVICES CORP.
the Bank. In addition to the impact of regulation, commercial banks are
affected significantly by the actions of the Federal Reserve Board as it
attempts to control the money supply and credit availability in order to
influence the economy.
Capital Adequacy Guidelines
Bank holding companies are required to comply with the Federal Reserve Board's
risk-based capital guidelines. The required minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) is 8%. At least half of the total capital is
required to be "Tier 1 capital," consisting principally of common shareholders'
equity, non-cumulative perpetual preferred stock and minority interests in the
equity accounts of consolidated subsidiaries, less certain intangible assets (as
discussed below). The remainder ("Tier 2 capital") may consist of a limited
amount of subordinated debt and intermediate-term preferred stock, certain
hybrid capital instruments and other debt securities, perpetual preferred stock,
and a limited amount of the general allowance for loan loss. In addition to the
risk-based capital guidelines, the Federal Reserve Board requires a bank holding
company to comply with the so-called "leverage ratio" under which a bank holding
company must maintain a minimum level of Tier 1 capital (as determined under the
risk-based capital guidelines) equal to 3% of average total consolidated assets
for those bank holding companies which have the highest regulatory examination
ratings and are not contemplating or experiencing significant growth or
expansion. All other bank holding companies are required to maintain a ratio of
at least 1% to 2% above the stated minimum. The Bank is subject to similar
capital requirements adopted by the OCC.
The risk-based capital guidelines are required to take adequate account of
interest rate risk, concentration of credit risk, and risks of nontraditional
activities. In August of 1995, the Federal banking agencies, including the
Federal Reserve Board and the OCC, issued a rule modifying their existing risk-
based capital standards to provide for consideration of interest rate risk when
assessing the capital adequacy of an institution. This new rule implements the
first step of a two-step process by explicitly including a bank's exposure to
declines in the value of its capital due to changes in interest rates as one
factor that the banking agencies will consider in evaluating a bank's capital
adequacy. The new rule does not establish a measurement framework for assessing
a bank's interest rate risk exposure level. Examiners will use data collected
by the banking agencies to determine the adequacy of an individual bank's
capital in light of interest rate risk. Examiners will also consider historical
financial performance, earnings exposure to interest rate movements and the
adequacy of internal interest rate risk management, among other things. This
case-by-case approach for assessing a bank's capital adequacy for interest rate
risk is transitional. The second step of the banking agencies' interest rate
risk regulation will be to establish an explicit minimum capital charge for
interest rate risk, based on measured levels of interest rate risk exposure.
The banking agencies will implement this second step at some future date. The
Company is unable to predict the form in which these future regulations will
ultimately be adopted or the effect the new or anticipated regulations would
have on the operations and capital adequacy of the Bank.
The federal bank regulators also adopted final rules relating to concentration
of credit risk and risks of non-traditional activities effective on January 17,
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PENNROCK FINANCIAL SERVICES CORP.
1995. The agencies declined to adopt a quantitative test for concentrations of
credit risk and, instead, provided that such risk would be considered in
addition to other risks in assessing an institution's overall capital adequacy.
Institutions with higher concentration of credit risk will be required to
maintain greater levels of capital. Similarly, the federal banking agencies
incorporated the evaluation of the risks of non-traditional activities into the
overall assessment of capital adequacy. The agencies also indicated that rules
regarding specific types of non-traditional activities will be promulgated from
time to time.
Prompt Corrective Action Rule
The Federal banking agencies have issued uniform final regulations defining the
levels at which an insured institution would be considered "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." Under these regulations, a bank is
considered "well capitalized" if it has: (i) a total risk-based capital ratio
of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater,
(iii) a leverage ratio of 5% or greater, and (iv) is not subject to any order or
written directive to meet and maintain a specific capital level. An "adequately
capitalized" bank is defined under the regulations as one that has: (i) a total
risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital
ratio of 4% or greater, (iii) a leverage ratio of 4% or greater (or 3% or
greater in the case of a bank with the highest composite regulatory examination
rating), and (iv) does not meet the definition of a well-capitalized bank. A
bank would be considered (A) "undercapitalized" if it has (i) a total risk-based
capital ratio of less than 8%, (ii) a Tier 1 risk-based capital ratio of less
than 4%, or (iii) a leverage ratio of less than 4% (or 3% in the case of a bank
with the highest regulatory examination rating); (B) "significantly
undercapitalized" if the bank has: (i) a total risk-based capital ratio of less
than 6%, (ii) a Tier 1 risk-based capital ratio of less than 3%, or (iii) a
leverage ratio of less than 3%; and (C) "critically undercapitalized" if the
bank has a ratio of tangible equity to total assets of equal to or less than 2%.
The applicable Federal bank regulator for a depository institution could, under
certain circumstances, reclassify a "well capitalized" institution as
"adequately capitalized" or require an "adequately capitalized" or
"undercapitalized" institution to comply with supervisory actions as if it were
in the next lower category. Such a reclassification could be made if the
regulatory agency determines that the institution is in an unsafe or unsound
condition (which could include unsatisfactory examination ratings). The Company
and the Bank each satisfy the criteria to be classified "well capitalized"
within the meaning of applicable regulations.
Regulatory Restrictions on Dividends
The Bank may not, under the National Bank Act, declare a dividend without
approval of the Comptroller of the Currency, unless the dividend to be declared
by the Bank's Board of Directors does not exceed the total of: (i) the Bank's
net profits (as defined and interpreted by regulation) for the current year to
date, plus (ii) its retained net profits (as defined and interpreted by
regulation) for the preceding two current years, less any required transfers to
surplus. In addition, the Bank can only pay dividends to the extent that its
retained net profits (including the portion transferred to surplus) exceed its
bad debts (as defined by regulation). The Federal Reserve Board, the OCC and
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PENNROCK FINANCIAL SERVICES CORP.
the FDIC have formal and informal policies which provide that insured banks and
bank holding companies should generally pay dividends out of current operating
earnings, with some exceptions. The Prompt Corrective Action Rules, described
above, further limit the ability of banks to pay dividends, because banks which
are not classified as well capitalized or adequately capitalized may not pay
dividends.
Under these policies and subject to the restrictions applicable to the Bank, the
Bank could declare, during 1996, without prior regulatory approval, aggregate
dividends of approximately $13.8 million, plus net profits earned to the date of
such dividend declaration in 1996.
FDIC Insurance Assessments
The FDIC has implemented a risk-related premium schedule for all insured
depository institutions that results in the assessment of premiums based on
capital and supervisory measures. Under the risk-related premium schedule, the
FDIC assigns, on a semiannual basis, each depository institution to one of three
capital groups (well-capitalized, adequately capitalized or undercapitalized)
and further assign such institution to one of three subgroups within a capital
group. The institution's subgroup assignment is based upon the FDIC's judgment
of the institution's strength in light of supervisory evaluation, including
examination reports, statistical analyses and other information relevant to
measuring the risk posed by the institution. Only institutions with a total
capital to risk-adjusted assets ratio of 10% or greater, a Tier 1 capital to
risk-adjusted assets ratio of 6% or greater and a Tier 1 leverage ratio of 5% or
greater, are assigned to the well-capitalized group. As of December 31, 1995,
the Bank was well capitalized for purposes of calculating insurance assessments.
In August, 1995 the FDIC adopted an amendment to the Bank Insurance Fund (the
"BIF") risk-based assessment schedule that lowers the deposit insurance
assessment rate for most (90% or more) commercial banks and other depository
institutions with deposits insured by the BIF to $.04 per $100 of insured
deposits. On November 14, 1995 the FDIC further reduced the BIF assessment
rates to a range of $.00 per $100 of insured deposits (subject to a minimum
annual premium of $2,000) for those institutions with the least risk, to $.27
for every $100 of insured deposits for institutions deemed to have the highest
risk, beginning January 1, 1996. At the same time, the FDIC voted to retain the
existing assessment rates of $.23 for every $100 of insured deposits for the
members of the Savings Association Insurance Fund (the "SAIF"), in the lowest
risk-based premium category and $.31 for every $100 of insured deposits for
members of the SAIF in the highest risk-based premium category. The Bank is a
member of the BIF.
Interstate Banking
Prior to the passage of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), the BHCA prohibited a
bank holding company located in one state from acquiring a bank located in
another state, unless such an acquisition by an out-of-state bank holding
company was specifically authorized by the law of the state where the bank to be
acquired was located. Similarly, interstate branching was generally prohibited
by the McFadden Act. The Interstate Banking Act permits an adequately
capitalized and adequately managed bank holding company to acquire a bank in
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PENNROCK FINANCIAL SERVICES CORP.
another state as of September 29, 1995, whether or not the law of that other
state permits the acquisition, subject to certain deposit concentration caps and
approval by the Federal Reserve Board. In addition, beginning on June 1, 1997,
under the Interstate Banking Act, a bank can engage in interstate expansion by
merging with a bank in another state or acquiring the assets and liabilities of
a bank in another state and also may consolidate the acquired bank into new
branch offices of the acquiring bank, unless the other state affirmatively opts
out of the legislation before that date. A state may also opt into the
legislation earlier than June 1, 1997 if it wishes to do so. The Interstate
Banking Act also permits de novo interstate branching as of June 1, 1997, but
only if a state affirmatively opts in by adopting appropriate legislation. In
July of 1995, Pennsylvania adopted "opt in" legislation which allows such
transactions to take place prior to the June 1, 1997 federal effective date.
Foreign Operations
The Company does not depend on foreign sources for funds, nor does the Company
make foreign loans.
Item 2. PROPERTIES
PennRock Financial Services Corp.
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The Company's headquarters are located at the main office of Blue Ball National
Bank located at 1060 Main Street, Blue Ball, Pennsylvania. The Company owns no
real estate.
Blue Ball National Bank
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The principal executive office and main banking office is located in Blue Ball,
Pennsylvania. This and the other 11 branch offices are owned by Blue Ball
National Bank free and clear of any indebtedness. The land on which two of the
branch offices are located is leased.
Item 3. LEGAL PROCEEDINGS
Various legal actions or proceedings are pending involving the Company or the
Bank. Management believes that the aggregate liability or loss, if any, will
not be material.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1995 to a vote of security
holders, through the solicitation of proxies or otherwise.
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PENNROCK FINANCIAL SERVICES CORP.
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all of the executive officers of the Company as
of March 1, 1996 are listed below, along with the positions with the Company and
the Bank held by each of them during the past five years. Officers are elected
annually by the Board of Directors.
POSITION AND BUSINESS EXPERIENCE
NAME AGE DURING PAST 5 YEARS
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Norman Hahn 59 PennRock Financial Services Corp.:
Chairman of the Board (January 1991 to date)
Blue Ball National Bank:
Chairman of the Board (January 1991 to date)
Vice-Chairman of the Board (April 1988 to
January 1991)
Glenn H. Weaver 61 PennRock Financial Services Corp.:
President (April 1989 to date)
Robert K. Weaver 47 PennRock Financial Services Corp.:
Secretary (March 1986 to date)
Blue Ball National Bank:
Secretary (1977 to date)
Melvin Pankuch 56 PennRock Financial Services Corp.:
Executive Vice President and Chief Executive
Officer (April 1989 to date)
Blue Ball National Bank:
President and Chief Executive Officer (April 1988
to date)
George B. Crisp 48 PennRock Financial Services Corp.:
Vice President and Treasurer (April 1989 to date)
Blue Ball National Bank:
Senior Vice President - Operations (July 1993 to date)
Chief Financial Officer (July 1987 to date)
Joseph C. Spada 45 Blue Ball National Bank:
Senior Vice President - Banking Sales/Service
(July 1993 to date)
Michael H. Peuler 45 Blue Ball National Bank:
Senior Vice President - Trust Sales/Service
(April 1995 to date)
Vice President - Trust Sales/Service
(June 1993 to April 1995)
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PENNROCK FINANCIAL SERVICES CORP.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The price on the Company's common stock ranged from $16 to $25 1/4 in 1995 and
from $16 to $25 1/4 in 1994. The book value per share was $8.52 at December
31, 1995 and $6.64 at December 31, 1994. The prices listed below have been
adjusted to reflect the 3-for-2 stock split on November 27, 1994 and represent
the high, low and quarter ending prices for stock trades as reported on the OTC
Bulletin Board (r) during the quarter.
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Quarter Per Share
High Low End Dividend
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1994
First quarter$17 1/4 $16 $17 1/4 $.09
Second quarter19 1/2 17 1/8 19 1/2 .09
Third quarter 21 5/8 18 3/8 21 1/8 .10
Fourth quarter25 1/4 20 1/8 24 3/8 .10
1995
First quarter 25 1/4 22 1/4 23 5/8 .10
Second quarter 24 19 3/4 20 3/4 .10
Third quarter 20 3/4 18 1/2 18 1/2 .10
Fourth quarter19 1/2 16 16 5/8 .11
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PENNROCK FINANCIAL SERVICES CORP.
Item 6. SELECTED FINANCIAL DATA
In thousands, except per share data
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1995 1994 1993 1992 1991
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FOR THE YEAR
Interest income $38,404 $30,092 $30,738 $31,384 $29,560
Interest expense 19,393 12,782 12,482 14,474 15,719
Net interest income 19,011 17,310 18,256 16,910 13,841
Provision for loan losses 360 352 958 1,195 734
Non-interest income 3,199 3,388 2,791 2,676 1,930
Non-interest expense 13,520 12,242 11,809 10,887 8,903
Net income 6,182 5,840 6,380 5,570 4,566
Per share:
Net income 1.02 .98 1.08 .95 .78
Cash dividends .41 .38 .35 .30 .26
Book value at year-end 8.52 6.64 6.83 5.88 5.09
Market value at year-end 16.63 24.31 16.07 11.03 9.08
AT YEAR END
Securities 196,029 207,982 179,997 162,225 114,791
Loans 298,025 239,928 208,382 208,930 202,652
Earning assets 497,366 449,227 399,374 384,983 327,274
Total assets 532,082 480,092 422,002 405,739 348,841
Deposits 417,929 342,434 341,632 336,884 298,880
Short-term borrowings 47,476 82,077 28,732 23,196 15,698
Long-term debt 9,000 10,500 6,500 6,500
Stockholders' equity 51,674 39,903 40,521 34,587 29,700
Full time equivalent employees 217 183 181 165 146
Number of shares outstanding 6,062,412 6,006,040 5,936,519 5,882,454 5,837,000
SELECTED RATIOS
Return on average assets 1.21% 1.32% 1.55% 1.50% 1.47%
Return on average equity 13.41 13.95 16.74 17.35 16.37
Efficiency ratio 60.45 61.70 54.07 50.80 55.46
Net interest margin (TE) 4.09 4.29 4.85 5.01 4.97
Total capital to assets 10.40 9.04 10.42 9.36 9.30
Total capital to
risk weighted assets 16.97 17.45 17.88 15.90 14.71
Price to earnings 16.30 24.89 14.91 11.61 11.57
Market to book value 1.95 3.66 2.35 1.88 1.78
Allowance for loan losses
to total loans 1.23 1.45 1.66 1.63 1.35
Non-performing loans to loans .41 .44 1.15 1.16 .80
Dividend payout 40.12 39.52 32.24 31.82 32.89
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PENNROCK FINANCIAL SERVICES CORP.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following section presents management's discussion and analysis of the
financial condition and results of operations of PennRock Financial Services
Corp., a bank holding company (the Company), and its wholly owned subsidiary,
Blue Ball National Bank (the Bank) and should be read in conjunction with the
financial statements and other financial data presented elsewhere in this Annual
Report. This discussion and analysis is intended to focus on certain financial
data which might not otherwise be readily apparent.
On September 27, 1994, the Company's Board of Directors declared a 3-for-2 stock
split in the form of a 50% stock dividend, payable on November 22, 1994 to
shareholders of record on October 25, 1994. All per share data have been
restated to reflect the stock split.
Effective January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standard No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities" which requires that securities be
classified in one of three categories: debt securities for which a company has
positive intent and ability to hold to maturity are classified as held-to-
maturity and reported at amortized cost; debt and equity securities that are
purchased and held for the purpose of selling them in the near term are
classified as trading securities and reported at fair value, with unrealized
gains and losses included in earnings; debt and equity securities not classified
as either held-to-maturity or trading securities are classified as available-for
- -sale and reported at fair value with unrealized gains and losses reported as a
separate component of stockholders' equity, net of deferred taxes. Upon
adoption of SFAS 115, all securities were transferred to the available-for-sale
category at fair value. Subsequent to adoption of SFAS 115, certain debt
securities were purchased as investment securities and classified as held-to-
maturity. On November 15, 1995, the Financial Accounting Standards Board (FASB)
issued a Special Report, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities." In this
report, the FASB permitted a one-time reassessment of the appropriateness of the
designations of all securities held at the time of the issuance of the Special
Report. Debt securities transferred from the investment security portfolio to
the available for sale portfolio under the guidance of the Special Report would
not call into question intent to hold other debt securities to maturity.
Accordingly, in the fourth quarter of 1995, the Company transferred all of the
investment security portfolio consisting of debt securities with an amortized
cost of $15.4 million and a net unrealized gain of $302,000 to the available for
sale portfolio. At December 31, 1995, the Company had no investment securities
classified as held to maturity.
On January 27, 1995, the Bank acquired three branch offices of PNC Bank, NA
(PNC). In connection with the transaction, the Bank assumed $38.1 million in
deposits and purchased $6.7 million in assets including consumer loans, vault
cash, furniture and equipment and real estate and improvements. In
consideration for the assumption of the deposit liabilities, the Bank paid PNC a
deposit premium of $1.1 million or 2.8%.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standard No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan"
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PENNROCK FINANCIAL SERVICES CORP.
and Statement of Financial Accounting Standard No. 118 (SFAS 118), "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures."
SFAS 114 addresses the accounting by creditors for impairment of certain loans.
SFAS 114 requires that impaired loans that are within the scope
of the Statement be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, at the loan's market
price or the fair value of the collateral if the loan is collateral dependent.
SFAS 118 amends SFAS 114 to allow a creditor to use existing methods for
recognizing interest income on an impaired loan and to require additional
disclosures on interest income recognition related to impaired loans.
During the first quarter of 1996, the Company formed Atlantic Regional Mortgage
Corporation ("Atlantic"), a Pennsylvania business corporation which was
organized as a wholly-owned subsidiary of the Bank. In accordance with its
business plan, Atlantic has hired experienced mortgage bankers who will be
responsible for the conduct of Atlantic's operations and will open four offices
by year-end in the Baltimore, Washington and Philadelphia metropolitan areas.
Atlantic will operate as a mortgage banker originating and selling residential
mortgage loans, service released. The business plan calls for Atlantic to
increase the Company's level of fee income and diversify its income stream.
Although, there is no assurance that Atlantic will achieve its goal of
profitability, the business is expected to be a generator of fee income and
could contribute significantly to the Company's income Additionally, Atlantic
will incur start-up expenses that may result in a loss for the subsidiary during
1996.
RESULTS OF OPERATIONS
OVERVIEW:
PennRock Financial Services Corp. recorded net income of $6.2 million in 1995,
an increase of 5.9% from the net income of $5.8 million recorded in 1994. Net
income was $6.4 million in 1993. Net income per share was $1.02 in 1995, $.98
in 1994 and $1.08 in 1993.
Return on average total assets was 1.21% in 1995 compared with 1.32% in 1994 and
1.55% in 1993. Return on average equity for 1995 was 13.41% compared with
13.95% in 1994 and 16.74% in 1993.
Average earning assets increased $67.3 million or 16.1% during 1995, while
average interest bearing liabilities grew $62.6 million or 18.1%. The yield on
earning assets increased from 7.35% in 1994 to 8.08% in 1995, while the average
yield on paying liabilities increased from 3.70% in 1994 to 4.75% in 1995. The
Company's net interest income on a fully taxable equivalent basis increased $1.9
million or 10.6% during 1995. The net interest margin declined from 4.29% in
1994 to 4.09% in 1995.
Non-interest income other than gains and losses on security and mortgage loan
transactions increased $199,000 or 8.8% in 1995 compared with a $130,000 or 6.1%
increase in 1994 and a $537,000 or 33.6% increase in 1993. The increase in 1995
is due primarily to increases in fiduciary fees and service charge fee income
while the increase in 1994 was a result of higher mortgage servicing fee income.
13
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
Non-interest expenses increased $1.3 million or 10.4% in 1995. Most of the
increase is related to increased personnel, equipment, and occupancy expenses
due to the expansion of new offices, offset partially by a decrease in FDIC
insurance of $323,000 due to a reduction in the fund assessment rate. Other
overhead increases included costs associated with data processing and normal
increases in other overhead expenses. Non-interest expenses in 1994 increased
$433,000 over 1993 due to increases in personnel, FDIC insurance and data
processing costs.
NET INTEREST INCOME:
Net interest income is the amount by which interest income on loans, investments
and other earning assets exceeds interest paid on deposits and other interest
bearing liabilities. Net interest income is the primary source of revenue for
the Company. The amount of net interest income is affected by changes in
interest rates and the balances of the various types of earning assets and
interest bearing liabilities. For comparative purposes, and throughout this
discussion unless otherwise noted, net interest income and corresponding yields
are shown on a taxable equivalent basis. This adjustment will give effect to
the interest earned on tax-exempt loans and investments by an amount equivalent
to the federal income taxes which would have been paid if the income received on
these assets was taxable at the statutory rate of 34% for 1995, 1994, and 1993.
Net interest income is the product of the volume of average earning assets and
the average rates earned on them, less the volume of average interest bearing
liabilities and the average rates paid on them. Table 1 presents average
balances, taxable equivalent interest income and expense and rates for the
Company's assets and liabilities.
14
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
Table 1 - Average Balances, Rates and Interest Income and Expense Summary
(Taxable equivalent basis)
<TABLE>
<CAPTION>
In thousands 1995 1994 1993
--------------------------- --------------------------- ---------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- -------- ------- --------- -------- ------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Short-term investments $ 723 $ 26 3.60% $ 217 $ 8 3.69% $ 592 $ 22 3.72%
Mortgages held for sale 2,234 217 9.71% 1,710 170 9.94% 11,977 909 7.59%
Securities available for sale (1)
U.S. treasury and agency obligations 172,081 10,287 5.98% 173,684 9,508 5.47% 131,679 7,666 5.82%
State and municipal 15,330 1,523 9.93% 11,381 1,366 12.00% 15,086 1,600 10.61%
Other 5,425 289 5.33% 4,206 223 5.30% 17,590 1,583 9.00%
--------- -------- --------- -------- --------- --------
Total securities available for sale 192,836 12,099 6.27% 189,271 11,097 5.86% 164,355 10,849 6.60%
Investment securities
U.S. treasury and agency obligations 1,148 86 7.49% 847 65 7.67% 414 12 2.90%
State and municipal 12,158 1,025 8.43% 6,643 427 6.43% 2,899 301 10.38%
--------- -------- --------- -------- --------- --------
Total investment securities 13,306 1,111 8.35% 7,490 492 6.57% 3,313 313 9.45%
Loans (2)
Mortgage 152,549 13,939 9.14% 120,826 10,401 8.61% 115,807 11,504 9.93%
Commercial 77,301 7,317 9.47% 68,424 5,896 8.62% 67,720 5,282 7.80%
Consumer (3) 46,110 4,497 9.75% 29,784 2,632 8.84% 25,174 2,451 9.74%
--------- -------- --------- -------- --------- --------
Total loans 275,960 25,755 9.33% 219,034 18,929 8.64% 208,701 19,237 9.22%
--------- -------- --------- -------- --------- --------
Total earning assets 485,059 39,208 8.08% 417,722 30,696 7.35% 388,938 31,330 8.06%
-------- -------- --------
Other assets 27,283 23,551 22,243
--------- --------- ---------
Total assets $512,342 $441,273 $411,181
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits:
Demand deposits $ 65,118 1,880 2.89% $ 58,821 1,348 2.29% $ 64,318 1,517 2.36%
Savings deposits 62,836 1,655 2.63% 68,326 1,890 2.77% 63,083 1,976 3.13%
Time deposits 222,211 12,251 5.51% 166,810 7,009 4.20% 170,148 7,844 4.61%
--------- -------- --------- -------- --------- --------
Total interest bearing deposits 350,165 15,786 4.51% 293,957 10,247 3.49% 297,549 11,337 3.81%
Short-term borrowings 48,947 3,015 6.16% 35,265 1,604 4.55% 25,800 792 3.07%
Long-term debt 9,238 592 6.41% 16,566 931 5.62% 6,500 353 5.43%
--------- -------- --------- -------- --------- --------
Total interest bearing liabilities 408,350 19,393 4.75% 345,788 12,782 3.70% 329,849 12,482 3.78%
-------- -------- -------
Non-interest bearing demand deposits 51,449 47,540 37,065
Other liabilities 6,433 6,071 6,146
Stockholders' equity 46,110 41,874 38,121
--------- --------- ---------
Total liabilities and stockholders' equity $512,342 $441,273 $411,181
========= ========= =========
Net interest income $19,815 $17,914 $18,848
======== ======== ========
Interest rate spread 3.33% 3.65% 4.27%
Effect of non-interest bearing funds .76% .64% .58%
------- ------- -------
Net interest margin 4.09% 4.29% 4.85%
======= ======= ======
(1) Securities available for sale at amortized cost
(2) Interest income on loans includes fees.
(3) Loans outstanding net of unearned income.
</TABLE>
15
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
Table 2 presents the net interest income on a fully taxable equivalent basis for
the three years ended December 31, 1995.
Table 2 - Net Interest Income
<TABLE>
<CAPTION>
In thousands 1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Total interest income $38,404 $30,092 $30,738
Total interest expense 19,393 12,782 12,482
------- ------- -------
Net interest income 19,011 17,310 18,256
Tax equivalent adjustment 804 604 592
------- ------- -------
Net interest income
(fully taxable equivalent) $19,815 $17,914 $18,848
======= ======= =======
</TABLE>
Net interest income on a fully taxable equivalent basis was $19.8 million in
1995, an increase of $1.9 million or 10.6% from the $17.9 million earned in
1994. Net interest income in 1994 decreased 5.0% from $18.8 million in 1993.
The rate and volume components of earning assets and paying liabilities can be
isolated in order to analyze the separate effects of each on changes in interest
income. Table 3 analyzes the changes in the volume and rate components of net
interest income. During 1995, net interest income increased $3.0 million due to
changes in volume and decreased $1.1 million due to changes in interest rates.
In 1994, net interest income increased by $1.4 million due to changes in volume
and declined by $2.3 million due to changes in interest rates. During 1993, net
interest income increased $1.8 million due to changes in volume and declined by
$.6 million due to changes in interest rates.
16
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
Table 3 - Volume and Rate Analysis of Changes in Interest Income
(Taxable equivalent basis)
<TABLE>
<CAPTION>
In thousands 1995 over 1994 1994 over 1993
------------------------ -----------------------
Change due to Change due to
--------------- Total --------------- Total
Volume Rate Change Volume Rate Change
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Short-term investments $ 19($ 1) $ 18 ($ 14) $ 0 ($ 14)
Mortgages held for sale 52 (5) 47 (779) 40 (739)
Securities 553 1,068 1,621 1,937 (1,510) 427
Loans 4,920 1,906 6,826 952 (1,260) (308)
------- ------- ------- ------- ------- -------
Total interest income 5,544 2,968 8,512 2,096 (2,730) (634)
Interest paid on:
Interest bearing demand
deposits 144 388 532 (130) (39) (169)
Savings deposits (152) (83) (235) 164 (250) (86)
Time deposits 2,328 2,914 5,242 (154) (681) (835)
Short-term borrowings 622 789 1,411 291 521 812
Long-term debt (412) 73 (339) 547 31 578
------- ------- ------- ------- ------- -------
Net interest income $3,014($1,113) $1,901 $1,378($2,312) ($934)
======= ======= ======= ======= ======= =======
</TABLE>
The changes in the Company's net interest margin can be understood by analyzing
the interest rate spread and the net interest margin on earning assets. The
interest rate spread as shown in Table 4 is the difference between the average
rate earned on earning assets and the average rate paid on interest bearing
liabilities. The net interest margin takes into account the benefit derived
from assets funded by interest free sources such as non-interest bearing demand
deposits and capital.
17
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
Table 4 - Interest Rate Spread and Net Interest Margin on Earning Assets
(Taxable equivalent basis)
<TABLE>
<CAPTION>
In thousands 1995 1994 1993
-------------- -------------- --------------
Average Average Average
Balance Rate Balance Rate Balance Rate
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Earning assets $485,059 8.08% $417,722 7.35% $388,938 8.05%
======== ======== ========
Interest bearing liabilities $408,350 4.75% $345,788 3.70% $329,849 3.78%
----- ----- -----
Interest rate spread 3.33% 3.65% 4.27%
Interest free sources used to
fund earning assets 76,709 71,934 59,089
-------- -------- --------
Total sources of funds $485,059 3.99% $417,722 3.06% $388,938 3.20%
======== ----- ======== ----- ======== -----
Net interest margin 4.09% 4.29% 4.85%
===== ===== =====
</TABLE>
As indicated in Table 4, average earning assets increased to $485.1 million in
1995 from $417.7 million in 1994 and $388.9 million in 1993. Interest rate
spread was 3.33%, 3.65% and 4.27% in 1995, 1994 and 1993, respectively. Net
interest margins were 4.09% in 1995 compared with 4.29% in 1994 and 4.85% in
1993.
Interest rate spreads declined 32 basis points during 1995. Earning asset
yields increased 73 basis points while funding costs increased 105 basis points.
Loan yields increased 69 basis points from 8.64% in 1994 to 9.33% in 1995 . The
prime rate was 8.5% at both the beginning and end of 1995 but was higher than
8.5% for most of the year. On February 1, 1995, the prime increased 50 basis
points, then dropped 25 basis points on July 7, 1995 and again on December 20,
1995. Yields on securities increased 52 basis points due to higher yields on
adjustable rate securities and due to a larger investment in higher yielding tax
free municipal bonds. Rates on interest bearing deposits rose from 3.49% in
1994 to 4.51% in 1995. Most of this increase is attributable to higher rates on
time deposits which increased 131 basis points from 4.20% in 1994 to 5.51% in
1995. Short-term borrowing costs were 161 basis points higher in 1995 while the
cost of long-term debt increased 79 basis points.
Interest rate spreads declined 62 basis points during 1994. Earning asset
yields dropped 70 basis points while funding costs declined only 8 basis points.
Loan yields declined 58 basis points despite the fact that the prime rate was
increased five times in 1994 from 6.0% to 8.5%. The lower yields were due to
lower fees on mortgages originated as higher rates ended the heavy refinancing
activity experienced in 1992 and 1993. Total fees recognized on mortgage loans
declined $1.8 million or 71.7% from $2.5 million in 1993 to only $700,000 in
1994. Yields on investment securities fell 77 basis points from 1993 as higher
18
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
yielding securities matured and were replaced primarily by lower yielding
adjustable rate mortgage-backed securities. Rates on deposits also declined
during 1994. The average cost of interest bearing deposits dropped 32 basis
points from 3.81% in 1993 to 3.49% in 1994. The cost of borrowings increased in
1994. Short-term borrowing rates increased 148 basis points while the average
cost of long-term debt increased 19 basis points.
PROVISION FOR LOAN LOSSES:
The provision for loan losses charged against earnings was $360,000 in 1995
compared with $352,000 in 1994 and $958,000 in 1993. The amount of the
provision is based, among other factors, on the amount of net credit losses
which totaled $181,000 in 1995, $331,000 in 1994 and $902,000 in 1993. Adequacy
of the allowance will continue to be examined in light of past loan loss
experience, current economic conditions, size and characteristics of the loan
portfolio, volume of non-performing and delinquent loans and other relevant
information.
The ratio of net charge-offs to average loans decreased from .15% in 1994 to
.07% in 1995 while the ratio of net charge-offs to the allowance for loan losses
decreased from 9.51% to 4.94%. Non-performing loans increased slightly from
$1.1 million at the end of 1994 to $1.2 million at the end of 1995 but
decreased as a percentage of total loans from .44% in 1994 to.41% of total loans
in 1995.
NON-INTEREST INCOME:
Total non-interest income declined $189,000 or 5.6% in 1995 compared with a
$597,000 or 21.4% increase in 1994. Excluding security and mortgage
transactions, non-interest income increased $199,000 or 8.8% in 1995 compared
with a $130,000 or 6.1% increase in 1994 and a $537,000 or 33.6% increase in
1993. Income from fiduciary activities increased $113,000 or 23.7% in 1995
compared with an increase of $15,000 or 3.3% in 1994. Table 5 indicates changes
in the major categories of non-interest income.
19
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
Table 5 - Non-interest Income
<TABLE>
<CAPTION>
In thousands 1995/1994 1994/1993
------------------------- --------------------------
Increase Increase
(Decrease) (Decrease)
-------------- -------------
1995 Amount % 1994 Amount % 1993
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts $1,014 $102 11.2% $ 912 $ 13 1.4% $ 899
Other service charges and fees 48 (29) (37.7%) 77 30 63.8% 47
Fiduciary activities 589 113 23.7% 476 15 3.3% 461
Security gains, net 647 (526) (44.8%) 1,173 1,173
Gain (loss) on sale of mortgage loans 90 138 287.5% (48) (859) (105.9%) 811
Provision for losses on mortgages
held for sale 153 (153)
Mortgage servicing fees 542 (5) (.9%) 547 82 17.6% 465
Other 269 18 7.2% 251 (10) (3.8%) 261
------ ----- ------ ------ ------
Total $3,199 ($189) 5.6% $3,388 $ 597 21.4% $2,791
====== ===== ====== ====== ====== ====== ======
</TABLE>
Security gains totaled $647,000 in 1995 and $1,173,000 in 1994. Securities
gains and losses in 1995 and 1994 were attributable to the sale of securities
for the purpose of adding liquidity or to manage interest rate risk. In
addition some gains were realized in 1994 with respect to several pre-refunded
municipal bonds in the Company's available-for-sale portfolio which were
scheduled to be called within one to two years. The Company continuously
monitors its interest rate sensitivity position and periodically restructures
its security portfolio as conditions warrant to hedge changes in funding sources
or projected changes in future interest rates.
The Company realized a net gain of $90,000 on sales of $26.2 million of mortgage
loans in 1995 compared with a loss of $48,000 on sales of $40.4 million of
mortgage loans in 1994. Mortgages held for sale are carried at the lower of
cost or market. Market value for mortgages held for sale is determined on the
basis of open commitments for committed loans. For uncommitted loans, market is
determined on the basis of current delivery prices in the secondary mortgage
market.
Effective January 1, 1996, the Company plans to adopt Statement of Financial
Accounting Standard No. 122, "Accounting for Mortgage Servicing Rights, an
Amendment of FASB Statement No. 65" (SFAS 122). SFAS 122 amended Statement 65
to require an institution to recognize as separate assets the rights to service
mortgage loans for others when a mortgage loan is sold or securitized and
servicing rights retained. When capitalizing originated mortgage servicing
rights ("OMSR's"), an institution allocates the total cost of the mortgage loans
(the recorded investment in the mortgage loans including net deferred fees or
costs and any purchase premium or discount) to the OMSR's and the loans (without
the OMSR's) based on their relative fair values. OMSR's are amortized in
proportion to, and over the period of, estimated net servicing income.
20
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
SFAS 122 also requires that all capitalized mortgage servicing rights be
evaluated for impairment based on the difference between the carrying amount of
the servicing rights and their current fair value. Impairment of OMSR's is
recognized through a valuation allowance. The amount of impairment recognized
is the amount by which the capitalized OMSR's exceed their fair value.
Subsequent to the initial measurement of impairment, the valuation allowance is
adjusted to reflect changes in the measurement of impairment. Fair value in
excess of the amount capitalized as OMSR's (net of amortization) is not
recognized.
Management is currently evaluating the potential impact of the adoption of SFAS
122 on the financial statements. Factors such as volume of mortgage loans which
will be originated in 1996 will have a significant effect on the amount of
OMSR's recognized and consequently the effect on the 1996 financial statements
cannot be determined at this time. The Company has no purchased mortgage
servicing rights.
NON-INTEREST EXPENSE:
Total non-interest expense for 1995 increased $1,278,000 or 10.4% compared with
a $433,000 or 3.7% increase in 1994. Salaries and employee benefits increased
$544,000 or 7.9% in 1995 and $263,000 or 4.0% in 1994. Total full-time
equivalent employees did not change from 1993 to 1994 holding steady at 184 but
increased to 217 in 1995 due primarily to the addition of four new branch
offices. The ratio of average assets (millions) per employee was $2.24 in 1993,
$2.40 in 1994 and $2.36 in 1995. The average salary per employee was $28,000 in
1993, 1994 and 1995.
Other non-interest expenses increased $734,000 or 13.7% in 1995. The higher
overhead is partially attributable to the new branch offices added in 1995 and
to the opening of a new operations center in early 1995. Equipment depreciation
also increased due to a substantial investment in additional furniture and
equipment including the Company's new check imaging system. The Bank Insurance
Fund reached its statutory goal of 1.25% of all insured deposits in the second
quarter of 1995. As a result, the FDIC insurance assessment rate decreased
dramatically for all banks beginning June 1, 1995 through the remainder of the
year. In addition, all insured banks received a FDIC premium rebate in
September 1995. As a result, total deposit insurance costs for the Company
declined by $323,000 or 41.8% in 1995. The FDIC insurance assessment in 1996 is
anticipated to be $2,000 which will have a favorable impact on earnings in 1996.
Increases in other non-interest expenses are the result of normal inflationary
increases or due to additional volume from growth in numbers of accounts
processed. Table 6 summarizes the changes in the major categories of non-
interest expense.
21
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
Table 6 - Non-interest Expense
<TABLE>
<CAPTION>
In thousands 1995/1994 1994/1993
-------------------------- --------------------------
Increase Increase
(Decrease) (Decrease)
--------------- -------------
1995 Amount % 1994 Amount % 1993
------- ------- ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and benefits $ 7,432 $ 544 7.9% $ 6,888 $263 4.0% $ 6,625
Occupancy, net 1,008 216 27.3% 792 (45) (5.4%) 837
Equipment depreciation and service 1,020 168 19.7% 852 138 19.3% 714
Deposit insurance 449 (323) (41.8%) 772 29 3.9% 743
Other 3,611 673 22.9% 2,938 48 1.7% 2,890
------- ------ ------- ------ -------
Total $13,520 $1,278 10.4% $12,242 $433 3.7% $11,809
======= ====== ====== ======= ====== ====== =======
</TABLE>
PROVISION FOR INCOME TAXES:
Income tax expense totaled $2.1 million in 1995 compared with $2.3 million in
1994 and 1993. The statutory federal tax rate was 34% each year. The Company's
effective tax rate was 25.8% in 1995 compared with 27.9% in 1994 and 1993. The
primary reason for the decline in the effective tax rate is due to an increase
in tax exempt income. For a more comprehensive analysis of income tax expense,
refer to Note 12 of the Notes to Consolidated Financial Statements.
In February 1992, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 109 (SFAS 109), "Accounting for
Income Taxes." The Company adopted the provisions of SFAS 109 effective January
1, 1993 (see Note 1 of the Notes to Consolidated Financial Statements). As
permitted under the Statement, the Company has elected not to restate the
financial statements of prior years. There was no effect from the adoption of
SFAS 109 on pretax income from continuing operations. The cumulative effect as
of January 1, 1993 of adopting SFAS 109 increased net income by $410,000 or $.07
per share.
Under SFAS 109, the liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Prior to the adoption of the
Statement, income tax expense was determined using the deferred method.
Deferred tax expense was based on items of income and expense that were reported
in different years in the financial statements and tax returns and were measured
at the tax rate in effect in the year the difference originated.
22
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
FINANCIAL CONDITION
SOURCES AND USES OF FUNDS:
Table 7 examines the Company's financial condition in terms of its sources and
uses of funds. Average funding uses increased $67.3 million or 16.1% in 1995
compared with an increase of $28.8 million or 7.4% in 1994.
Table 7 - Sources and Uses of Funds
<TABLE>
<CAPTION>
In thousands 1995 1994 1993
----------------------------- ----------------------------- -------
Increase (Decrease) Increase (Decrease)
Average ------------------- Average ------------------- Average
Balance Amount % Balance Amount % Balance
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Funding uses:
Short-term investments $ 723 $ 506 233.2% $ 217 ($ 375) (63.3%) $ 592
Mortgages held for sale 2,234 524 30.6% 1,710 (10,267) (85.7%) 11,977
Securities 206,142 9,381 4.8% 196,761 29,093 17.4% 167,668
Loans 275,960 56,926 26.0% 219,034 10,333 5.0% 208,701
-------- -------- -------- -------- --------
Total uses $485,059 $67,337 16.1% $417,722 $28,784 7.4% $388,938
======== ======== ======== ======== ======== ======== ========
Funding sources:
Interest bearing demand deposits $ 65,118 $ 6,297 10.7% $ 58,821 ($5,497) (8.5%) $ 64,318
Savings deposits 62,836 (5,490) (8.0%) 68,326 5,243 8.3% 63,083
Time deposits 222,211 55,401 33.2% 166,810 (3,338) (2.0%) 170,148
Short-term borrowings 48,947 13,682 38.8% 35,265 9,465 36.7% 25,800
Long-term debt 9,238 (7,328) (44.2%) 16,566 10,066 154.9% 6,500
Non-interest bearing funds, net 76,709 4,775 6.6% 71,934 12,845 21.7% 59,089
-------- -------- -------- -------- --------
Total sources $485,059 $67,337 16.1% $417,722 $28,784 7.4% $388,938
======== ======== ======== ======== ======== ======== ========
</TABLE>
SECURITIES AND SHORT-TERM INVESTMENTS:
As of January 1, 1994, with the adoption of SFAS 115, the entire security
portfolio was transferred to the securities available-for-sale (AFS) category on
the balance sheet at fair value to reflect the Company's active management of
the portfolio in response to changes in interest rates, liquidity needs,
expectation of changes in the prepayment speeds on mortgage-backed securities
and the exercise of call options on municipal and agency bonds and other asset-
liability management decisions. As a result, AFS securities increased by $4.4
million to reflect the net unrealized appreciation in the portfolio. The net
unrealized gain, net of tax, of $2.9 million was recorded as a separate
component of Stockholders' Equity. By December 31, 1994, after a rapid rise in
market rates during the year, the fair value of the AFS portfolio had declined
23
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
to a net unrealized loss of $9.1 million. As discussed in Note 3 of the Notes
to Consolidated Financial Statements, the FASB has permitted a one-time
reassessment of the appropriateness of the designations between the AFS and held
- -to-maturity (HTM) portfolios without calling into question the intent to hold
other debt securities to maturity. Accordingly, in the fourth quarter of 1995,
the Company transferred all of the investment security portfolio which had been
classified as HTM consisting of debt securities with an amortized cost of $15.4
million and a net unrealized gain of $302,000 to the AFS portfolio. At December
31, 1995, the Company had no securities classified HTM. The AFS portfolio had a
net unrealized gain of $1.2 million. Table 8 indicates the composition and
maturity of the securities available for sale portfolio at December 31, 1995.
For mortgage-backed securities, maturity is based on expected average lives
rather than contractual maturity.
Table 8 - Analysis of Securities Available for Sale
<TABLE>
<CAPTION>
In thousands Taxable
Within 1-5 6-10 Over 10 Equivalent
One Year Years Years Years Equities Total Yield
-------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and Agencies $3,107 $15,681 $ $ $ $18,788 5.64%
States and political subdivisions 520 300 577 35,894 37,291 8.94%
Mortgage backed securities 15,456 34,895 917 51,268 6.83%
Collateralized mortgage obligations 4,104 63,011 15,170 479 82,764 5.75%
Other securities 30 30 9.00%
Equity securities 4,724 4,724
-------- -------- -------- -------- -------- --------
Total (amortized cost) $7,731 $94,478 $50,642 $37,290 $4,724 $194,865 6.64%
======== ======== ======== ======== ======== ========
Total (fair value) $7,735 $94,063 $50,627 $38,732 $4,872 $196,029
Taxable equivalent yield 6.21% 5.95% 6.52% 8.74%
Percent of portfolio 3.97% 48.48% 25.99% 19.14% 2.42%
Average maturity 7.4 years
</TABLE>
Measured on an amortized cost basis, average securities and short-term
investments in the aggregate, increased $9.9 million or 5.0% during 1995 and by
$28.7 million or 17.1% in 1994. As of December 31, 1995, AFS securities at fair
value totaled $196.0 million compared with $191.9 million at the end of 1994.
Investment securities classified as HTM totaled $16.1 million at the end of
1994. There were no investment securities classified as HTM at the end of 1995.
During 1995, the Company sold $65.0 million in securities and purchased $57.7
million. In addition, $15.3 million was received from maturities of securities
and principal repayments on mortgage-backed securities.
At December 31, 1995, the AFS portfolio had a net unrealized gain of $1.2
million consisting of gross unrealized gains of $2.3 million and gross
unrealized losses of $1.1 million. At December 31, 1994, the total portfolio
had a net unrealized loss of $9.7 million consisting of gross unrealized gains
of $.4 million and gross unrealized losses of $10.1 million. Market values of
24
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
the portfolio increased during 1995 as market interest rates on investments fell
for most of the year. The portfolio has an average life of approximately seven
years. As a reference, treasury yields in the seven-year maturity range
declined 236 basis points from 7.83% at the beginning of 1995 to 5.47% by year
end. This caused the total portfolio market value, which moves in the opposite
direction as interest rates, to increase a total of $10.9 million. Included in
the portfolio are state and municipal securities, mortgage-backed securities
(including adjustable rate mortgage-backed securities) and collateralized
mortgage obligations (CMO's) which may be called, prepaid or reprice before
final maturity. The average life to call or repricing of the portfolio was 3.7
years at December 31, 1995.
At December 31, 1995, the Company had $134.0 million invested in mortgage-backed
pass-through securities and CMO's compared with $154.0 million at December 31,
1994. A mortgage-backed pass-through security depends on an underlying pool of
mortgage loans to provide a cash flow pass-through of principal and interest.
The Company had $51.3 million in mortgage-backed pass-through securities at
December 31, 1995 of which $40.8 million were adjustable rate and $10.5 million
were fixed rate securities. A CMO is a mortgage-backed security that is
comprised of classes of bonds created by prioritizing the cash flows from the
underlying mortgage pool in order to meet different objectives of investors.
The Company had $82.7 million in CMO securities at December 31, 1995 all of
which were fixed rate securities. The CMO securities held by the Company are
shorter-maturity class bonds which have relatively low levels of prepayment
risk. In addition, none of the CMO's in the portfolio were considered "high
risk CMO's" as defined by banking regulations. All CMO's and mortgage-backed
pass-through securities were issued or backed by Federal agencies.
LOANS:
Table 9 presents loans outstanding, by type of loan, for the past five years.
Loans increased from year-end 1994 to year-end 1995 by $58.1 million or 24.2%,
compared with a $31.5 million or 15.1% increase from year-end 1993 to year-end
1994. Most of this growth was realized in commercial real estate loans which
grew $20.5 million or 23.8% and residential mortgage loans, primarily home
equity loans, which grew $18.6 million or 21.8% in 1995. Also during 1995, the
Company originated $27.3 million in salable residential mortgage loans and sold
$26.2 million The Company's policy is to retain servicing on all mortgages
sold.
25
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
Table 9 - Loans Outstanding, Net of Unearned Income
<TABLE>
<CAPTION>
In thousands December 31,
------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural:
Commercial secured by real estate $106,675 $ 86,173 $ 58,312 $ 57,311 $ 51,763
Agricultural 10,268 9,729 9,113 9,001 8,040
Other 52,734 43,354 49,106 50,254 50,991
Real estate - construction 8,761 2,489 6,742 7,742 8,036
Real estate - mortgage 104,211 85,565 73,299 69,368 71,890
Consumer loans 15,376 12,618 11,810 15,254 11,932
-------- -------- -------- -------- --------
Total loans $298,025 $239,928 $208,382 $208,930 $202,652
======== ======== ======== ======== ========
</TABLE>
Table 10 - Loan Maturities and Interest Sensitivity (1)
<TABLE>
<CAPTION>
In thousands December 31, 1995
-------------------------------------------
One year One through Over
or less five years five years Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 3,867 $18,577 $147,233 $169,677
Real estate construction 8,761 8,761
---------- ---------- ---------- ----------
Total $12,628 $18,577 $147,233 $178,438
========== ========== ========== ==========
Loans with predetermined interest rate $ 4,324 $ 7,812 $ 11,344 $ 22,994
Loans with variable interest rate 8,304 10,765 135,889 152,161
---------- ---------- ---------- ----------
Total $12,628 $18,577 $147,233 $178,438
========== ========== ========== ==========
(1) Excludes residential mortgages and consumer loans.
</TABLE>
NON-PERFORMING ASSETS:
Table 11 shows the Company's non-performing loans for the five years ended
December 31, 1995. The Company's policy is to discontinue the accrual of
interest on loans for which the principal or interest is past due 90 days or
more unless the loan is well secured and corrective action has begun or the loan
is in the process of collection. When a loan is placed on non-accrual status,
any unpaid interest is charged against income.
26
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
Table 11 - Non-Performing Assets
<TABLE>
<CAPTION>
In thousands December 31,
----------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 862 $ 624 $1,670 $1,267 $1,252
Loans accruing but 90 days past
due as to principal or interest 375 434 729 1,156 377
------ ------ ------ ------ ------
Total non-performing loans 1,237 1,058 2,399 2,423 1,629
Other real estate owned 276 1,048 816 1,029 1,465
------ ------ ------ ------ ------
Total non-performing assets $1,513 $2,106 $3,215 $3,452 $3,094
====== ====== ====== ====== ======
Ratios:
Non-performing loans to total loans .41% .44% 1.15% 1.16% .80%
Non-performing assets to total loans
and other real estate owned .51% .87% 1.54% 1.64% 1.47%
Allowance for loan losses to
non-performing loans 295.96% 329.11% 144.27% 140.53% 168.08%
</TABLE>
Loans which are not considered non-performing and are current as to payments of
principal and interest but have a somewhat higher than normal risk of becoming
non-performing in the future are estimated to total $4.7 million at December 31,
1995, compared with $6.2 million at December 31, 1994 and $6.9 million at
December 31, 1993.
At December 31, 1994, the Company did not have any loan concentrations exceeding
10% of total loans to any particular economic group or industry. The loan
portfolio is well diversified as to industry and companies within each industry
which helps minimize risk. Loan quality is maintained through diversification
of risk, strict credit control practices and continued monitoring of the loan
portfolio. At December 31, 1995, the Company did not have any loans outstanding
to any foreign entity or government.
Other real estate owned (OREO) amounted to $276,000 at December 31, 1995 and was
included in other assets on the Consolidated Balance Sheets. At December 31,
1994, OREO totaled $1,431,000 with a valuation reserve of $383,000. Valuation
reserves are established for OREO properties whenever estimated current
realizable values fall below the original fair value recorded.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses (Table 12) is based on Management's evaluation of
historical and anticipated loan loss expense, analysis of non-performing and
delinquent loans, prevailing and anticipated economic conditions, and banking
industry standards. The allowance is established at a level considered by
Management to be adequate to absorb potential future losses contained in the
portfolio and is monitored on a continuous basis with independent formal reviews
conducted semiannually. The allowance is increased by provisions charged to
operating expense and reduced by net charge-offs.
27
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
Table 12 - Allowance for Loan Losses
<TABLE>
<CAPTION>
In thousands December 31,
----------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $3,482 $3,461 $3,405 $2,738 $2,588
Provision charged to expense 360 352 958 1,195 734
Loans charged off:
Commercial, financial and agricultural 103 228 882 344 481
Consumer 122 233 170 225 163
-------- -------- -------- -------- --------
Total loans charged off 225 461 1,052 569 644
-------- -------- -------- -------- --------
Recoveries:
Commercial, financial and agricultural 15 95 66 8 45
Consumer 29 35 84 33 15
-------- -------- -------- -------- --------
Total recoveries 44 130 150 41 60
-------- -------- -------- -------- --------
Net charge-offs 181 331 902 528 584
-------- -------- -------- -------- --------
Balance, end of year $3,661 $3,482 $3,461 $3,405 $2,738
======== ======== ======== ======== ========
Total loans:
Average $275,960 $219,034 $208,701 $203,554 $201,201
Year-end $298,025 $239,928 $208,382 $208,930 $202,652
Ratios:
Net charge-offs to:
Average loans .07% .15% .43% .26% .29%
Loans at year-end .06% .14% .43% .25% .29%
Allowance for loan losses 4.94% 9.51% 26.06% 15.51% 21.33%
Provision for loan losses 50.28% 94.03% 94.15% 44.18% 79.56%
Allowance for loan losses to:
Average loans 1.33% 1.59% 1.66% 1.67% 1.36%
Loans at year-end 1.23% 1.45% 1.66% 1.63% 1.35%
</TABLE>
The allowance for loan losses totaled $3.7 million at December 31, 1995, an
increase of 5.1% from 1994. The allowance for loan losses as a percentage of
year-end loans was 1.23% at December 31, 1995 and 1.45% at December 31, 1994.
The provision for loan losses exceeded net charge-offs by $179,000 in 1995, by
$21,000 in 1994 and by $56,000 in 1993. The allowance for loan losses as a
percentage of non-performing loans was 295.96% at December 31, 1995 and 329.11%
at December 31, 1994.
Charge-offs decreased from $1,052,000 in 1993 to $461,000 in 1994 to $225,000 in
1995. Recoveries of loans previously charged-off decreased from $150,000 in
1993 to $130,000 in 1994 to $44,000 in 1995. The ratio of net charge-offs to
average loans decreased from .43% in 1993 to .15% in 1994 to .07% in 1995.
28
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
Table 13 presents the allocation of the allowance for loan losses by major loan
category for the past five years. The specific allocations in any particular
category may prove to be excessive or inadequate to absorb future charge-offs
and may be reallocated in the future to reflect changing conditions.
Accordingly, the entire allowance is considered available to absorb losses in
any category.
Table 13 - Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
In thousands December 31,
------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------
% of % of % of % of % of
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $2,713 56.9% $2,967 58.0% $2,888 55.9% $2,998 55.8% $2,505 54.7%
Real estate- construction - 2.9% - 1.0% - 3.2% - 3.7% - 4.0%
Real estate- mortgage 118 35.0% 133 35.7% 84 35.2% 138 33.2% 40 35.5%
Consumer 313 5.2% 258 5.3% 206 5.7% 245 7.3% 169 5.8%
Unallocated 517 124 283 24 24
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
$3,661 100.0% $3,482 100.0% $3,461 100.0% $3,405 100.0% $2,738 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
In May 1993, the FASB issued Statement of Financial Accounting Standard No. 114
(SFAS 114), "Accounting by Creditors for the Impairment of a Loan." In October
1994, the FASB issued Statement of Financial Accounting Standard No. 118 (SFAS
118) "Accounting by Creditors for the Impairment of a Loan - Income Recognition
and Disclosures" which amended SFAS 114. SFAS 114 and SFAS 118 are effective
for years beginning after December 15, 1994. Accordingly, the Company adopted
the provisions of SFAS 114 and SFAS 118 as of January 1, 1995. These statements
are applicable to all creditors and to all loans, uncollateralized as well as
collateralized, except for large groups of smaller balance homogenous loans that
are collectively evaluated for impairment (e.g., credit card, residential
mortgage and consumer installment loans), loans measured at fair value or at the
lower of cost or fair value, leases and debt securities.
Under SFAS 114, a loan is impaired when it is probable that a creditor will be
unable to collect all amounts due (including interest and principal) according
to the contractual terms of the loan agreement. When a loan is impaired, a
creditor must measure the extent of that impairment by determining the present
value of the expected future cash flows on the loan discounted at the loan's
effective interest rate or by using either the loan's observable market price or
the fair value of the loan's collateral if the loan is collateral dependent. If
the value of the impaired loan, measured in accordance with these methods, is
less than the recorded balance of the loan, a creditor must recognize the
impairment by creating a valuation allowance for the difference and recording a
corresponding bad debt expense.
29
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
As of December 31, 1995, the balance of impaired loans was $758,000 and the
allowance for loan losses on those loans was $217,000.
LIQUIDITY:
The purpose of liquidity management is to ensure that there are sufficient cash
flows available to meet a variety of needs. These include financial commitments
such as satisfying the credit needs of our borrowers and withdrawals by our
depositors, the ability to capitalize on investment and business opportunities
as they occur, and the funding of the Company's own operations. Liquidity is
measured by the Company's ability to convert assets to cash at a reasonable cost
or a minimum loss. Liquidity is provided by maturities and sales of investment
securities (Table 8), loan payments and maturities (Table 10), liquidating money
market investments such as federal funds sold, and the Company's dividend
reinvestment plan. In addition, the Company is a member of the Federal Home
Loan Bank of Pittsburgh which provides a reliable source of long and short-term
funds. However, the Company's primary source of liquidity lies in the Company's
ability to renew, replace and expand its base of core deposits (consisting of
demand, NOW, money market and cash management accounts, savings accounts,
certificates of deposit, and other time deposits less than $100,000).
Total deposits increased $75.5 million or 22.0% in 1995 compared with $.8
million or .2% in 1994. $38.1 million of the increase in 1995 is attributable
to the acquisition of three PNC offices. Table 14 reflects the changes in the
major classifications of deposits by comparing the year-end balances for the
past five years. Table 15 reflects the maturity of large dollar deposits.
Table 14 - Deposits by Major Classification
<TABLE>
<CAPTION>
In thousands December 31,
------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Non-interest bearing deposits $ 57,775 $ 50,405 $ 46,685 $ 39,287 $ 32,317
NOW accounts 39,942 39,038 39,873 36,121 29,039
Money market deposit accounts 31,227 20,152 24,635 27,683 29,260
Savings accounts 60,852 66,247 67,661 54,944 43,023
Time deposits under $100,000 208,022 149,784 142,634 157,684 147,250
-------- -------- -------- -------- --------
Total core deposits 397,818 325,626 321,488 315,719 280,889
Time deposits of $100,000 or more 20,111 16,807 20,143 21,165 17,991
-------- -------- -------- -------- --------
Total deposits $417,929 $342,433 $341,631 $336,884 $298,880
======== ======== ======== ======== ========
</TABLE>
30
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
Table 15 - Maturity of Time Deposits of $100,000 or More
<TABLE>
<CAPTION>
In thousands December 31,
--------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Three months or less $ 7,774 $ 3,230 $ 5,990
Over three months through six months 3,724 1,799 3,571
Over six months through twelve months 4,682 4,734 7,932
Over twelve months 3,931 7,044 2,650
------- ------- -------
Total $20,111 $16,807 $20,143
======= ======= =======
</TABLE>
The Bank maintains lines of credit with various correspondent banks to use as
sources of short-term funds in addition to repurchase agreements with bank
customers. Federal funds purchased and securities sold under agreements to
repurchase increased from $13.0 million at December 31, 1994 to $40.6 million at
December 31, 1995. The Bank also maintains a line of credit with the Federal
Home Loan Bank of Pittsburgh. Advances on this line of credit totaled $39.1
million at December 31, 1994. There were no line advances outstanding at
December 31, 1995. The Bank also had $6.5 million in short-term adjustable rate
borrowings at December 31, 1995. The level of short-term borrowings depends on
loan growth, deposit growth, current market rates and other factors. The
average cost of short-term borrowings increased from 3.07% in 1993 to 4.55% in
1994 to 6.09% in 1995. Table 16 shows the Company's short-term borrowings for
the five years ended December 31, 1995.
Table 16 - Short-Term Borrowings
<TABLE>
<CAPTION>
In thousands December 31,
--------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Federal funds purchased and securities
sold under agreements to repurchase $40,579 $13,046 $19,182 $ 4,635 $10,850
Advances from Federal Home Loan Bank 6,500 67,604 8,050 17,061 3,348
U.S. treasury tax and loan note 397 1,427 1,500 1,500 1,500
------- ------- ------- ------- -------
Total short-term borrowings $47,476 $82,077 $28,732 $23,196 $15,698
======== ======= ======= ======= =======
</TABLE>
The cash proceeds of $30.4 million from the assumption of the deposit
liabilities net of assets acquired and deposit premium paid for the PNC branch
purchase discussed above were applied against short-term borrowings.
31
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
CAPITAL RESOURCES:
Total stockholders' equity increased $11.8 million or 29.5% from 1994. $6.8
million of the increase is attributable to the effect of SFAS 115 on equity. At
December 31, 1994, the unrealized loss on AFS securities net of tax effect
totaled $6.0 million. At December 31, 1995, there was an unrealized gain on AFS
securities, net of tax effect, of $769,000.
On June 27, 1995, the Company announced that the Board of Directors had
authorized the purchase of up to 200,000 shares of its outstanding common stock.
The shares are to be used for general corporate purposes including employee
benefit and executive compensation plans or for the dividend reinvestment plan.
During 1995, the Company repurchased 20,000 shares for $374,000. Of these
shares, 19,421 were reissued in connection with the Company's dividend
reinvestment plan and 579 remained as treasury shares on December 31, 1995 at
the Company's cost.
The ratio of average equity to average assets was 9.00% in 1995, compared with
9.49% in 1994, and 9.26% in 1993. The ratio of average equity to average assets
net of the SFAS 115 adjustment in 1995 was 9.62% and 9.83% in 1994. Internal
capital generation is calculated by multiplying return on average equity by the
percentage of earnings retained. Internal capital generation amounted to 8.03%
in 1995, 8.43% in 1994 and 11.3% in 1993.
Bank and bank holding company minimum regulatory capital requirements have been
revised to make regulatory capital more sensitive to individual differences in
credit risk profiles (including off-balance-sheet risks). Risk based capital is
segregated into two components, Tier 1 capital which includes stockholders'
equity reduced by goodwill, and Tier 2 capital which includes the allowance for
loan losses (subject to limitations) and qualifying debt obligations. In
December 1994, federal banking regulators issued rulings which excluded the net
unrealized holding gains and losses on AFS securities from the calculation of
Tier 1 capital. Net unrealized losses on marketable equity securities will
continue to deducted from Tier 1 capital. The rule has the effect of valuing
AFS securities at amortized cost rather than fair value for purposes of
calculating risk-based and leverage capital ratios. The minimum leverage
capital requirement is 3% and is determined by dividing Tier 1 capital by
average assets. Banking organizations must adjust their assets and off-balance
sheet exposures by assigning risk-weighted percentages depending on regulatory
defined credit risks. Off-balance-sheet assets must be converted to credit
equivalents before being risk weighted. These balances are then added to
determine total risk weighted assets. Table 17 shows the Company's capital
resources for the past three years. The Company and the Bank exceed all minimum
capital guidelines and are considered "well capitalized."
32
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
Table 17 - Capital Resources
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
PennRock Financial Services Corp.
Leverage ratios:
Total capital to total assets 10.40% 9.04% 10.42%
Tier 1 capital to total assets 9.39% 8.31% 9.60%
Risk-based ratios:
Common stockholders' equity to
risk-weighted assets 15.82% 16.22% 16.62%
Tier 1 capital to risk-weighted assets 15.82% 16.22% 16.62%
Total capital to risk weighted assets 16.97% 17.45% 17.88%
</TABLE>
On October 23, 1995, the FASB issued Statement of Financial Accounting Standard
No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." This Statement
provides accounting and reporting standards for stock-based employee
compensation plans and also applies to transactions in which the Company
acquires goods and services from non-employees in exchange for the Company's
equity instruments. SFAS 123 defines a fair value based method of accounting
for an employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all employee stock compensation
plans. Entities electing to remain with the accounting treatment outlined in
APB Opinion No. 25, "Accounting for Stock Issued to Employees" are required to
make pro forma disclosures of net income and earnings per share, as if the fair
value method had been adopted. The accounting and disclosure requirements of
this Statement are effective for transactions entered into in fiscal years
beginning after December 15, 1995. The Company plans to adopt the provisions of
SFAS 123 on January 1, 1996. The adoption of this statement is not expected to
have a material impact on the consolidated financial statements.
INTEREST RATE RISK:
Interest rate risk refers to the Company's degree of exposure to loss of
earnings and market value of equity resulting from changes in market interest
rates. The magnitude of this exposure depends on the severity and timing of the
market rate changes and on Management's ability to adjust.
Effective interest rate risk management protects the Company's earnings and the
market value of equity from large and unexpected interest rate changes.
However, management may sometimes structure the balance sheet to take advantage
of expected interest rate movements. Mismatches of maturities of assets and
liabilities within a specific time frame is referred to as a rate sensitivity
gap. If more assets than liabilities mature or reprice within the time frame,
the Company is asset sensitive. If more liabilities mature or reprice, the
Company is liability sensitive. An asset sensitive gap will benefit the Company
in a period of rising rates while a liability sensitive gap will benefit the
Company during declining rates. Gap analysis has certain limitations because it
does not take into consideration the varying degrees of interest rate
33
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
sensitivity or speed at which different assets and liabilities can reprice.
While management continuously monitors and adjusts the gap position to maximize
profitability, the primary objective is to maintain net interest income and
market value of equity within self-imposed parameters for a wide range of
possible changes in interest rates. Table 18 presents an interest sensitivity
analysis of the Company's assets and liabilities at December 31, 1995. Although
interest bearing demand and savings deposits have been relatively rate
insensitive and have maintained stable balances through several interest rate
cycles, because they are subject to immediate withdrawal, they have been
presented as repricing in the earliest period.
Table 18 - Interest Sensitivity Analysis
<TABLE>
<CAPTION>
December 31, 1995
In thousands -----------------------------------------------
Interest Sensitivity Period
-----------------------------------------------
1 to 90 91 to 180 181 to 365 1 to 5 Over 5
Days Days Days Years Years
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earning assets:
Short-term investments $ 939 $ $ $ $
Mortgages held for sale 2,373
Securities available for sale 23,929 9,870 17,699 102,270 41,097
Loans 93,234 19,226 27,026 111,983 46,556
-------- -------- -------- -------- --------
Total earning assets 120,475 29,096 44,725 214,253 87,653
-------- -------- -------- -------- --------
Interest bearing liabilities:
Interest bearing demand deposits 71,169
Savings deposits 60,852
Time deposits 77,178 51,436 53,509 46,010
Short-term borrowings 47,476
Long-term debt 5,000 4,000
-------- -------- -------- -------- --------
Total interest bearing liabilities 261,675 51,436 53,509 50,010
-------- -------- -------- -------- --------
Interest sensitivity gap ($141,200)($ 22,340)($ 8,784) $164,243 $87,653
======== ======== ======== ======== ========
Interest sensitive assets to interest
sensitive liabilities ratio .46 .57 .83 1.30 -
</TABLE>
34
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements are set forth in this
Annual Report of Form 10-K on the following pages:
PennRock Financial Services Corp. and Subsidiary
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
35
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
PennRock Financial Services Corp.
We have audited the accompanying consolidated balance sheets of PennRock
Financial Services Corp. and subsidiary as of December 31, 1995 and 1994, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
PennRock Financial Services Corp. and subsidiary as of December 31, 1995 and
1994, and the consolidated results of their operations and their consolidated
cash flows for each of the years in the three-year period ended December 31,
1995 in conformity with generally accepted accounting principles.
/S/ SIMON LEVER & COMPANY
January 26, 1996
Lancaster, Pennsylvania
36
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
In thousands December 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 17,888 $ 14,400
Short-term investments 939 75
--------- ---------
Cash and cash equivalents 18,827 14,475
Mortgages held for sale 2,373 1,242
Securities available for sale (At fair value) 196,029 191,887
Investment securities (Market value $15,593) 16,096
Loans:
Loans, net of unearned income
of $128 and $162, respectively 298,025 239,928
Allowance for loan losses (3,661) (3,482)
--------- ---------
Net loans 294,364 236,446
Bank premises and equipment 9,111 6,811
Accrued interest receivable 3,264 2,926
Other assets 8,114 10,209
--------- ---------
Total assets $532,082 $480,092
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 57,775 $ 50,405
Interest bearing 360,154 292,028
--------- ---------
Total deposits 417,929 342,433
Short-term borrowings:
Advances from Federal Home Loan Bank 6,500 67,604
Federal funds purchased and securities sold under
agreements to repurchase 40,579 13,046
U.S. Treasury tax and loan note 397 1,427
--------- ---------
Total short-term borrowings 47,476 82,077
Long-term debt 9,000 10,500
Accrued interest payable 2,494 1,817
Other liabilities 3,509 3,362
--------- ---------
Total liabilities 480,408 440,189
Stockholders' Equity:
Common stock, par value $2.50 per share;
authorized 10,000,000 shares;
issued - 6,062,991 and 6,006,040 shares 15,157 15,015
Surplus 10,905 9,774
Unrealized gains (losses) on securities available
for sale, net of deferred taxes 769 (6,038)
Retained earnings 24,854 21,152
--------- ---------
51,685 39,903
Less treasury stock, at cost - 579 shares (11)
--------- ---------
Total stockholders' equity 51,674 39,903
--------- ---------
Total liabilities and stockholders' equity $532,082 $480,092
========= =========
See notes to consolidated financial statements.
</TABLE>
37
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
In thousands, except per share data Year Ended December 31,
-------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $25,755 $18,890 $19,171
Securities:
Taxable 10,660 9,796 9,277
Tax-exempt 1,746 1,228 1,357
Mortgages held for sale 217 170 909
Other 26 8 24
------- ------- -------
Total interest income 38,404 30,092 30,738
------- ------- -------
Interest expense:
Deposits 15,786 10,246 11,338
Short-term borrowings 3,015 1,605 791
Long-term debt 592 931 353
------- ------- -------
Total interest expense 19,393 12,782 12,482
------- ------- -------
Net interest income 19,011 17,310 18,256
Provision for loan losses 360 352 958
------- ------- -------
Net interest income after provision for loan losses18,651 16,958 17,298
------- ------- -------
Other income:
Service charges on deposit accounts 1,014 912 899
Other service charges and fees 48 77 47
Fiduciary activities 589 476 461
Security gains, net 647 1,173
Gain (loss) on sale of mortgage loans, net 90 (48) 811
Provision for losses on mortgages held for sale (153)
Mortgage servicing fees 542 547 465
Other 269 251 261
------- ------- -------
Total other income 3,199 3,388 2,791
------- ------- -------
Other expenses:
Salaries and benefits 7,432 6,888 6,625
Occupancy, net 1,008 792 837
Equipment depreciation and service 1,020 852 714
Deposit insurance 449 772 743
Other 3,611 2,938 2,890
------- ------- -------
Total other expense 13,520 12,242 11,809
------- ------- -------
Income before income taxes and cumulative
effect of change in accounting for
income taxes 8,330 8,104 8,280
Income taxes 2,148 2,264 2,310
------- ------- -------
Income before cumulative effect of
accounting change 6,182 5,840 5,970
Cumulative effect as of January 1, 1993 of change
in method of accounting for income taxes 410
------- ------- -------
Net income $ 6,182 $ 5,840 $ 6,380
======= ======= =======
Earnings per share:
Income per share before cumulative effect of
accounting change $ 1.02 $ .98 $ 1.01
Cumulative effect of accounting change .07
------- ------- -------
Net income per share $ 1.02 $ .98 $ 1.08
======= ======= =======
Cash dividends declared per share $ .41 $ .38 $ .35
Weighted average number of shares outstanding 6,048,503 5,979,650 5,917,579
See notes to consolidated financial statements.
</TABLE>
38
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses)
on Securities Total
In thousands, except per share data Common Retained Treasury Available Stockholders'
Stock Surplus Earnings Stock for Sale Equity
-------- -------- -------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 $ 6,423 $14,846 $13,318 $ $ $34,587
Net income 6,380 6,380
Shares issued under dividend reinvestment plan 136 1,485 1,621
Three-for-two stock split and cash paid in
lieu of fractional shares 3,278 (3,278) (10) (10)
Cash dividends declared ($.35 per share) (2,057) (2,057)
-------- -------- -------- -------- ----------- ----------
Balance at December 31, 1993 9,837 13,053 17,631 40,521
Net income 5,840 5,840
Net unrealized gain on securities available
for sale as of January 1, 1994, net of tax 2,894 2,894
Change in net unrealized gains and losses
on securities available for sale, net of tax (8,932) (8,932)
Shares issued under dividend reinvestment plan 174 1,725 1,899
Three-for-two stock split and cash paid in
lieu of fractional shares 5,004 (5,004) (11) (11)
Cash dividends declared ($.38 per share) (2,308) (2,308)
-------- -------- -------- -------- ----------- ---------
Balance at December 31, 1994 15,015 9,774 21,152 (6,038) 39,903
Net income 6,182 6,182
Change in net unrealized gains and losses
on securities available for sale, net of tax 6,807 6,807
Acquisition of treasury stock (374) (374)
Sale of treasury stock under dividend
reinvestment plan 1 363 364
Shares issued under dividend reinvestment plan 142 1,130 1,272
Cash dividends declared ($.41 per share) (2,480) (2,480)
-------- -------- -------- -------- ----------- ----------
Balance at December 31, 1995 $15,157 $10,905 $24,854 ($ 11) $ 769 $51,674
======== ======== ======== ======== =========== ==========
See notes to consolidated financial statements.
</TABLE>
39
<PAGE>
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
In thousands Year Ended December 31,
-------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,182 $ 5,840 $ 6,380
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 360 352 958
Depreciation and amortization 861 620 537
Amortization of deposit premium 98
Accretion and amortization of securities 317 495 (81)
Deferred income taxes 18 7 (356)
Security gains, net (647) (1,173)
Proceeds from sales of mortgage loans 26,232 40,409 122,745
Originations of mortgages held for sale (27,273) (30,679)(121,165)
(Gain) loss on sale of mortgage loans, net (90) 48 (811)
Provision for (recovery of) losses
on mortgages held for sale (153) 153
Increase in interest receivable (338) (422) (382)
Increase (decrease) in interest payable 677 582 (446)
Other changes, net (2,900) (3,414) 1,476
------- ------- -------
Net cash provided by operating activities 3,497 12,512 9,008
------- ------ ------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 65,045 26,701 65,705
Purchases of securities available for sale (56,395) (80,095)(118,368)
Purchases of investment securities (1,319) (14,089)
Maturities of securities available for sale 13,266 31,027 34,972
Maturities of investment securities 2,000
Proceeds from sale of other real estate 1,340 1,629 1,142
Decrease in time deposits with other banks 100
Net increase in loans (58,097) (31,877) (200)
Purchases of premises and equipment (3,161) (2,826) (907)
------- ------- -------
Net cash used in investing activities (37,321) (69,532) (17,555)
------- ------- -------
FINANCING ACTIVITIES
Net increase in non-interest bearing deposits 7,370 3,721 7,398
Net increase (decrease) in interest bearing deposits 68,126 (2,919) (2,650)
Net increase (decrease) in short-term borrowings (34,601) 53,345 5,536
Net increase (decrease) in long-term debt (1,500) 4,000
Issuance of common stock and treasury stock 1,635 1,900 1,621
Acquisition of treasury stock (374)
Cash dividends (2,480) (2,308) (2,057)
Cash paid with stock dividend (11) (10)
------- ------- -------
Net cash provided by financing activities 38,176 57,728 9,838
------- ------- -------
Increase in cash and cash equivalents 4,352 708 1,291
Cash and cash equivalents at beginning of year 14,475 13,767 12,476
------- ------- -------
Cash and cash equivalents at end of year $18,827 $14,475 $13,767
======= ======= =======
Supplemental disclosures of cash flow information:
Cash payments for:
Total interest paid $18,716 $12,200 $12,928
Total income taxes paid 2,377 2,120 2,195
See notes to consolidated financial statements.
</TABLE>
40
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PennRock Financial Services Corp. and Subsidiary provide banking services to
domestic markets. The accounting and reporting policies of PennRock Financial
Services Corp. and Subsidiary conform to generally accepted accounting
principles and to general practices within the banking industry. The following
is a description of the more significant of those policies:
Principles of Consolidation:
The consolidated financial statements include the accounts of PennRock Financial
Services Corp. and its subsidiary, Blue Ball National Bank. All significant
intercompany balances and transactions have been eliminated.
Estimates:
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses during the reporting
period. Actual results could differ significantly from those estimates.
Cash Equivalents:
Cash equivalents include amounts due from banks, federal funds sold and other
short-term investments. Generally, federal funds are purchased and sold for one
- -day periods.
Mortgages Held for Sale:
Mortgages held for sale are carried at the lower of aggregate cost or market
value with market determined on the basis of open commitments for committed
loans. For uncommitted loans, market is determined on the basis of current
delivery prices in the secondary mortgage market. Resulting unrealized losses
are included in other income.
Securities:
Securities are classified in one of three categories and are accounted for as
follows:
Investment securities:
Securities classified as held to maturity are those debt securities the Company
has both the intent and ability to hold to maturity regardless of changes in
market conditions, liquidity needs or changes in general economic conditions.
These securities are carried at cost adjusted for amortization of premium and
accretion of discount, computed by the interest method over their contractual
lives.
Securities available for sale:
Securities classified as available for sale are those debt securities that the
Company intends to hold for an indefinite period of time but not necessarily to
maturity and all equity securities. Any decision to sell a security classified
as available for sale would be based on various factors, including significant
movements in interest rates, changes in maturity mix of the Company's assets and
liabilities, liquidity needs, regulatory capital considerations, and other
similar factors. Securities available for sale are carried at fair value.
Unrealized gains or losses are reported as increases or decreases in
stockholders' equity, net of the related deferred tax effect.
41
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
Trading securities:
Trading securities, which are generally held for the short term, usually under
30 days, in anticipation of market gains, are carried at fair value. Realized
and unrealized gains and losses on trading account assets are included in non-
interest income on trading account securities. The Company has no securities
classified as trading securities.
A decline in the market value of any security available for sale or investment
security below cost that is deemed to be other than temporary is charged to
income resulting in the establishment of a new cost basis for the security.
Purchase premiums and discounts on securities are amortized and accreted to
interest income using a method which approximates a level yield over the period
to maturity of the related securities. Purchase premiums and discounts on
mortgage-backed securities are amortized and accreted to interest income using a
method which approximates a level yield over the remaining lives of the
securities, taking into consideration assumed prepayment patterns. Interest and
dividend income are recognized when earned. Realized gains and losses for
securities are included in income and are derived using the specific
identification method for determining the costs of securities sold.
Loans:
Loans are carried at the principal amount outstanding, net of unearned income
reduced by any charge-offs or specific valuation accounts. Interest income is
accounted for on an accrual basis. Loan fees, net of certain origination costs
are deferred and amortized over the lives of the underlying loans using a method
which approximates a level yield. Interest income is generally not accrued
when, in the opinion of management, its full collectibility is doubtful or when
the loan becomes past due 90 days as to principal or interest. When a loan is
designated as non-accrual, any accrued interest receivable is charged against
current earnings.
Allowance for Loan Losses:
As discussed in Note 3 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standard No. 114 (SFAS 114),
"Accounting by Creditors for Impairment of a Loan," as amended by Statement of
Financial Accounting Standard No. 118 (SFAS 118), "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures." Under these
standards, the Company estimates losses on impaired loans based on the present
value of expected cash flows or the fair value of the underlying collateral if
the loan repayment is expected to come from the sale of such collateral. Prior
to 1995, credit losses related to these loans were estimated based on
undiscounted cash flows or the fair value of the underlying collateral. The
adoption of these standards did not have a material impact on the consolidated
financial statements.
The allowance for loan losses is maintained at a level believed adequate by
Management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan loss experience, current domestic economic conditions,
volume, growth and composition of the loan portfolio, and other relevant
factors. This evaluation is inherently subjective as it requires material
estimates, including the amounts and timing of expected future cash flows on
impaired loans, which may be susceptible to significant change. The allowance
42
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
for loan losses on impaired loans pursuant to SFAS 114 is one component of the
methodology for determining the allowance for loan losses. Loan losses are
charged directly against the allowance for loan losses, and recoveries on
previously charged off loans are added to the allowance. The allowance is
increased by provisions for loan losses charged against income.
Other Real Estate Owned:
Other real estate owned represents properties acquired through customers' loan
defaults. When properties are acquired through foreclosure, any excess of the
loan balance at the time of foreclosure over the fair value of the real estate
held as collateral is recognized as a loss and charged to the allowance for loan
losses. After foreclosure, other real estate is reported at the lower of fair
value at acquisition date or fair value less estimated disposal costs. Fair
value is determined on the basis of current appraisals obtained from independent
sources. Subsequent write-downs are charged to an allowance for other real
estate established through provisions for other real estate expenses. Costs of
improvements to other real estate are capitalized while costs associated with
holding other real estate are charged to operations. Other real estate owned is
recorded as other assets in the consolidated balance sheet.
Bank Premises and Equipment:
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on straight line and accelerated methods based on the
estimated useful lives of the assets. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in income for the period.
Maintenance, repairs, and minor improvements are expensed as incurred.
Significant renewals and betterments are capitalized.
Deposit Premium:
The deposit premium is the excess of the value of deposit liabilities assumed
over cash received for the assumption of those liabilities for branch offices
acquired through business combinations that are recorded using the purchase
method of accounting. Included in other assets is $1.0 million of deposit
premiums at December 31, 1995. There was no recorded deposit premiums at
December 31, 1994. The deposit premium is being amortized using the straight-
line method over 10 years.
Trust Assets:
Assets held by the Bank in a fiduciary or agency capacity are not included in
the consolidated financial statements since such assets are not assets of the
Bank. In accordance with banking industry practice, income from fiduciary
activities is generally recognized on a cash basis which is not significantly
different from amounts that would have been recognized on the accrual basis.
Federal Income Taxes:
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes". The
Statement requires a change from the deferred method of accounting for income
taxes of Accounting Principles Board (APB) Opinion 11 to the asset and liability
method in computing income tax expense for financial reporting purposes. Under
the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
43
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The Company adopted Statement No. 109
in 1993 and has applied those provisions as of January 1, 1993.
At December 31, 1995, management has determined the deferred tax assets are
fully realizable due to sufficient income taxes paid in 1993, 1994 and 1995.
Accordingly, no valuation allowance has been established against the deferred
tax assets.
Treasury Stock:
The purchase of Company's treasury stock is recorded at cost. At the date of
subsequent reissue, the treasury stock account is reduced by the cost of such
stock on a first-in, first-out method.
Profit Sharing Plan:
Profit sharing contributions are calculated by a formula approved by the Board
of Directors and is based on the Bank's return on equity. Costs are funded as
accrued.
Net Income per Share:
Net income per share is computed based on the weighted average number of shares
of stock outstanding during the year. Retroactive effect is given to stock
dividends and stock splits.
Mortgage Banking Activities:
Fees for servicing loans for investors are based on the outstanding principal
balance on the loans serviced. Fees are recognized as earned and are included
in the consolidated statements of income under other income.
Reclassifications:
Certain reclassifications have been made to the 1993 consolidated financial
statements to conform with the 1994 presentation. Such reclassifications had no
effect on net income or stockholders' equity.
NOTE 2: ACQUISITIONS
On January 27, 1995, the Bank acquired three branch offices of PNC Bank, NA
(PNC). In connection with the transaction, the Bank assumed $38.1 million in
deposits and purchased $6.7 million in assets including consumer loans, vault
cash, furniture and equipment and real estate and improvements. In
consideration for the assumption of the deposit liabilities, the Bank paid PNC a
deposit premium of $1.1 million or 2.8%.
44
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
NOTE 3: ACCOUNTING CHANGES
The Company adopted the provisions of Statement of Financial Accounting Standard
No. 115 (SFAS 115) effective January 1, 1994. The entire investment portfolio
was transferred to the available for sale category on the balance sheet. As a
result, available for sale securities increased by $4.4 million to reflect the
net unrealized appreciation in the portfolio. The net unrealized gain, net of
tax, of $2.9 million was recorded as a separate component of Stockholders'
Equity.
On November 15, 1995, the Financial Accounting Standards Board (FASB) issued a
Special Report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities." In this report, the FASB
permitted a one-time reassessment of the appropriateness of the designations of
all securities held at the time of the issuance of the Special Report. Debt
securities transferred from the investment security portfolio to the available
for sale portfolio under the guidance of the Special Report would not call into
question intent to hold other debt securities to maturity. Accordingly, in the
fourth quarter of 1995, the Company transferred all of the investment security
portfolio consisting of debt securities with an amortized cost of $15.4 million
and a net unrealized gain of $302,000 to the available for sale portfolio. At
December 31, 1995, the Company had no securities classified as held to maturity.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standard No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan"
and Statement of Financial Accounting Standard No. 118 (SFAS 118),
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." SFAS 114 addresses the accounting by creditors for impairment of
certain loans. SFAS 114 requires that impaired loans that are within the scope
of the Statement be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, at the loan's market
price or the fair value of the collateral if the loan is collateral dependent.
SFAS 118 amends SFAS 114 to allow a creditor to use existing methods for
recognizing interest income on an impaired loan and to require additional
disclosures on interest income recognition related to impaired loans.
All impaired loans have a related allowance for loan losses balance associated
with the loan. The impaired loans consist of loans where it is probable that
the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Interest income for impaired loans
that are on non-accrual status is recognized using the cash basis, while
interest income on impaired loans that are still accruing is recognized using
the accrual method. On December 31, 1995 the balance of impaired loans was
$758,000 and the allowance for loan losses on those loans was $217,000.
NOTE 4: RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain average balances of reserves on deposit with
the Federal Reserve Bank based on deposits outstanding. The average amount of
those required reserve balances at December 31, 1995 was approximately
$4,537,000. Balances maintained at the Federal Reserve Bank are included in
cash and due from banks.
45
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
NOTE 5: SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market value of securities available for sale
are as follows:
<TABLE>
<CAPTION>
In thousands December 31, 1995
------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and other
U.S. government agencies $ 18,788 $ 145 ($ 97) $ 18,836
Obligations of states and political
subdivisions 37,291 1,568 (63) 38,796
U.S. agency mortgage-backed securities 51,268 367 (220) 51,415
Collateralized mortgage obligations 82,764 39 (735) 82,068
Other 30 12 42
--------- --------- --------- ---------
Total debt securities available
for sale 190,141 2,131 (1,115) 191,157
Equity securities 4,724 189 (41) 4,872
--------- --------- --------- ---------
Total securities available for sale $194,865 $2,320 ($1,156) $196,029
========= ========= ========= =========
December 31, 1994
------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- --------- --------- ---------
U.S. Treasury securities and other
U.S. government agencies $ 32,391 $ 5 ($ 867) $ 31,530
Obligations of states and political
subdivisions 7,178 203 (23) 7,358
U.S. agency mortgage-backed securities 56,814 100 (961) 55,953
Collateralized mortgage obligations 97,142 (7,610) 89,532
Other 30 12 42
--------- --------- --------- ---------
Total debt securities available
for sale 193,555 321 (9,461) 184,415
Equity securities 7,481 79 (87) 7,472
--------- --------- --------- ---------
Total securities available for sale $201,036 $399 ($9,548) $191,887
========= ========= ========= =========
</TABLE>
The amortized cost and fair value of debt securities as of December 31, 1995, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because issuers may have the right to call obligations
and mortgages underlying the mortgage-backed securities may be prepaid without
any penalties.
46
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
<TABLE>
<CAPTION>
In thousands December 31, 1995
---------------------
Amortized Fair
Cost Value
-------- --------
<S> <C> <C>
Due in one year or less $ 3,628 $ 3,635
Due after one year through five years 16,011 16,091
Due after five years through ten years 577 596
Due after ten years 35,893 37,352
-------- --------
56,109 57,674
Mortgage-backed securities 51,268 51,415
Collateralized mortgage obligations 82,764 82,068
-------- --------
Total debt securities $190,141 $191,157
======== ========
</TABLE>
Gains and losses from sales of securities available for sale are as follows:
<TABLE>
<CAPTION>
In thousands 1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Debt securities
Gross gains $582 $1,174 $880
Gross losses (80) (61) (928)
------ ------ ------
Total debt securities 502 1,113 (48)
Equity securities, net 145 60 48
------ ------ ------
Total securities gains $647 $1,173 $ -
====== ====== ======
</TABLE>
Proceeds from sales of securities available for sale are as follows:
<TABLE>
<CAPTION>
In thousands 1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Debt securities $64,441 $26,063 $65,235
Equity securities 604 638 470
------- ------- -------
Total proceeds $65,045 $26,701 $65,705
======= ======= =======
</TABLE>
47
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
NOTE 6: INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities are as
follows:
<TABLE>
<CAPTION>
In thousands December 31, 1994
--------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. government agencies $ 2,000 $ ($ 70) $ 1,930
Obligations of states and political
subdivisions 14,096 8 (441) 13,663
--------- --------- --------- ---------
Total investment securities $16,096 $8 ($511) $15,593
========= ========= ========= =========
</TABLE>
There were no securities classified as held to maturity at December 31, 1995.
No securities classified as held to maturity were sold during 1995 or 1994 or
1993.
Investment and available for sale securities with a carrying value of
$23,213,000 and $28,032,000 at December 31, 1995 and 1994 were pledged to secure
public and trust deposits, repurchase agreements as well as other purposes.
NOTE 7: LOANS
The loan portfolio net of unearned income, at December 31, 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
In thousands 1995 1994
-------- --------
<S> <C> <C>
Commercial, financial and agricultural:
Commercial, secured by real estate $106,675 $ 86,174
Agricultural 10,268 9,728
Other 52,734 43,354
Real estate - construction 8,761 2,489
Real estate - mortgage 104,211 85,565
Consumer 15,376 12,618
-------- --------
Total loans $298,025 $239,928
======== ========
</TABLE>
48
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
In the ordinary course of business, the Bank has loan, deposit, and other
transactions with its directors, their affiliated companies, executive
management and their associates (as defined), collectively referred to as
related parties. Such transactions are on substantially the same terms,
including interest rates and collateral (with regard to loans), as those
prevailing at the time for comparable transactions with others. Activity for
the related party loans for the year ended December 31, 1995, was as follows:
<TABLE>
<CAPTION>
In thousands
<S> <C>
Balance, January 1, 1995 $2,988
New loans 3,963
Repayments 1,649
------
Balance, December 31, 1995 $5,302
======
</TABLE>
Included in the loan portfolio are loans on which the Bank has ceased the
accrual of interest. Such loans amounted to $862,000 and $624,000 at December
31, 1995 and December 31, 1994, respectively. If interest income had been
recorded on all non-accrual loans outstanding during the years 1995, 1994 and
1993, interest income would have been increased as shown in the following table:
<TABLE>
<CAPTION>
In thousands 1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Interest income which would have been
recorded under original terms $73 $119 $103
Interest income recorded during the year 7 8 26
----- ----- -----
Net impact on interest income $66 $111 $ 77
===== ===== =====
</TABLE>
NOTE 8: LOAN SERVICING
Mortgage loans serviced for Federal National Mortgage Association and Federal
Home Loan Mortgage Corporation are not included in the accompanying consolidated
balance sheets. The unpaid principal balances of those loans at December 31,
1995 and 1994 were $201.0 million and $205.7 million, respectively.
49
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
NOTE 9: ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
In thousands 1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $3,482 $3,461 $3,405
Provision charged to operations 360 352 958
Recoveries of loans charged off 44 130 150
------- ------- -------
3,886 3,943 4,513
Loans charged off (225) (461) (1,052)
------- ------- -------
Balance at end of year $3,661 $3,482 $3,461
======= ======= =======
</TABLE>
As discussed in Note 3 to the consolidated financial statements, the Company
adopted SFAS 114 as of January 1, 1995. As of December 31, 1995, the Company
had recognized impaired loans with a recorded investment of $758,000 in
conformity with SFAS 114 as amended by SFAS 118. The average recorded investment
in impaired loans during 1995 was $793,000. The total allowance for loan losses
related to these loans was $217,000 at December 31, 1995. Interest income on
impaired loans of $27,000 was recognized for cash payments received in 1995.
NOTE 10: BANK PREMISES AND EQUIPMENT
Details of bank premises and equipment at December 31 are as follows:
<TABLE>
<CAPTION>
In thousands 1995 1994
------- -------
<S> <C> <C>
Land $ 1,350 $ 1,264
Bank premises 6,697 3,383
Furniture and equipment 8,661 7,549
Construction in progress 1,516
------- -------
Total cost 16,708 13,712
Less accumulated depreciation (7,597 (6,901)
------- -------
Net book value $ 9,111 $ 6,811
======= =======
</TABLE>
Depreciation and amortization expense was $861,000 in 1995, $620,000 in 1994 and
$537,000 in 1993.
50
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
At December 31, 1995, the Bank was obligated under non-cancelable leases at two
of its office locations. Future minimum rental payments remaining on these
leases are:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 67,000
1997 69,000
1998 75,000
1999 75,000
2000 75,000
Thereafter $218,000
</TABLE>
Total lease payments were $74,000 in 1995, $108,000 in 1994 and $79,000 in 1993.
NOTE 11: SHORT-TERM BORROWINGS
Federal funds purchased, securities sold under agreements to repurchase and the
treasury tax and loan note generally mature within one to ninety days from the
transaction date. Advances from the Federal Home Loan Bank include short-term
fixed and variable rate advances and advances from an established line of credit
with no specific maturity date. The line of credit is equal to approximately
10% of the Bank's assets. These advances are collateralized by a security
agreement covering qualifying mortgage loans and unpledged treasury, agency and
mortgage-backed securities which at December 31, 1995 had a combined carrying
value of $277 million.
A summary of aggregate short-term borrowings is as follows for the years ended
December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
In thousands 1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Amount outstanding at year-end $47,476 $82,077 $28,732
Average interest rate at year-end 5.62% 5.56% 2.93%
Maximum outstanding at any month-end $62,594 $82,077 $38,318
Average amount outstanding $48,947 $35,265 $25,800
Weighted average interest rate 6.09% 4.55% 3.07%
</TABLE>
NOTE 12: LONG-TERM DEBT
Long-term debt consists of fixed and variable rate term advances from the
Federal Home Loan Bank of Pittsburgh with maturity dates ranging from August,
1996 to January, 1999. All are collateralized by the security agreement
described in Note 11.
51
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
NOTE 13: DIVIDEND RESTRICTIONS AND OTHER CAPITAL TRANSACTIONS
Certain restrictions exist regarding the ability of the bank subsidiary to
transfer funds to the Company in the form of cash dividends. The approval of
the Comptroller of the Currency is required if the total dividends declared by a
national bank in any calendar year exceeds the bank's net profits (as defined)
for that year combined with its retained net profits for the preceding two
calendar years. Under this formula, the Bank can declare dividends in 1996
without approval of the Comptroller of the Currency of approximately $13,834,000
plus an additional amount equal to the Bank's net profit (as defined) for 1996
up to the date of any such dividend declaration.
On September 27, 1994, the Board of Directors declared a 3-for-2 stock split in
the form of a 50% stock dividend which totaled 2,001,659 additional shares
issued on November 22, 1994 to shareholders of record on October 25,1994. A
cash dividend in lieu of additional shares of $10,896 was issued for fractional
shares outstanding. On September 14, 1993, the Board of Directors declared a 3-
for-2 stock split in the form of a 50% stock dividend which totaled 1,311,317
additional shares issued on November 22, 1993 to shareholders of record on
October 25,1993. A cash dividend in lieu of additional shares of $10,069 was
issued for fractional shares outstanding. All per share data have been
retroactively restated to reflect the stock splits in 1994 and 1993.
On June 27, 1995, the Company announced that the Board of Directors had
authorized the purchase of up to 200,000 shares of the outstanding common stock.
The shares are to be used for general corporate purposes including employee
benefit and executive compensation plans or for the dividend reinvestment plan.
During 1995, the Company repurchased 20,000 shares for $374,000. On October 10,
1995, 19,421 of these shares were reissued for the company's dividend
reinvestment plan.
NOTE 14: INCOME TAXES
An analysis of the provision for income taxes included in the Statements of
Income is as follows:
<TABLE>
<CAPTION>
In thousands 1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Current expense $2,130 $2,257 $2,257
Deferred taxes 18 7 53
------ ------ ------
Provision for income taxes $2,148 $2,264 $2,310
====== ====== ======
</TABLE>
52
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
A reconciliation between the provision for income taxes and the amount computed
by applying the statutory federal income tax rate to income before provision for
income taxes are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
Tax exempt income (6.6) (5.1) (5.9)
Other, net (1.6) (1.0) (.2)
----- ----- -----
Effective income tax rate 25.8% 27.9% 27.9%
===== ===== =====
</TABLE>
Deferred taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets as of December 31, 1995 and 1994
are as follows:
<TABLE>
<CAPTION>
In thousands 1995 1994
------ ------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $1,170 $1,109
Net unrealized loss on securities
available for sale 3,111
Other 19
------ ------
Total deferred tax assets 1,189 4,220
------ ------
Deferred tax liabilities:
Depreciation 223 151
Investment security discount 65 75
Net unrealized gain on securities
available for sale 396
------ ------
Total deferred tax liabilities 684 226
------ ------
Net deferred tax asset $ 505 $3,994
====== ======
</TABLE>
Included in the table above is the recognition of unrealized gains and losses on
certain investments in debt and equity securities accounted for under SFAS 115
for which no deferred tax expense or benefit was recognized in the consolidated
statements of income.
53
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
Management believes that it is more likely than not that the net deferred tax
asset of $505,000 will be realized since the Company has a long history of
earnings and has a carryback potential greater than the deferred tax asset and
is unaware of any reason that the Company would not ultimately realize this
asset.
NOTE 15: EMPLOYEE BENEFIT PLAN
The Bank has a noncontributory profit sharing plan covering substantially all
full time employees. Contributions to the plan were $491,000 in 1995, $521,000
in 1994 and $569,000 in 1993.
NOTE 16: STOCK OPTION PLAN
The Company has an Omnibus Stock Option Plan the terms of which permit the
granting of non-qualified stock options, incentive stock options, stock
appreciation rights, performance shares, performance units, and restricted stock
to senior executives of the Company. The Board of Directors have granted the
following incentive stock options at an exercise price equal to the market price
at the date of the grant. Each of the incentive stock options vests and becomes
exercisable one-half after three years and the balance after five years of date
granted. All options have been adjusted to reflect stock splits since the date
of grant.
<TABLE>
<CAPTION>
Shares Price per Share
------- ---------------
<S> <C> <C>
Balance, December 31, 1992 -
Incentive option granted 2,250 $11.67
-------
Balance, December 31, 1993 2,250
Incentive option granted 1,500 $16.92
-------
Balance, December 31, 1994 3,750
Incentive option granted 1,000 $23.25
-------
Balance, December 31, 1995 4,750
=======
</TABLE>
None of these options were exercisable at December 31, 1995. A maximum of 1,125
shares will be exercisable at a share price of $11.67 in 1996.
NOTE 17: COMMITMENTS AND CONTINGENT LIABILITIES AND CONCENTRATIONS OF CREDIT
RISK
The Company's financial statements do not reflect various commitments and
contingent liabilities which arise in the normal course of business and which
involve elements of credit risk, interest rate risk and liquidity risk. These
54
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
financial instruments include commitments to extend credit, standby letters of
credit, guarantees, and liability for assets held in trust, which arise in the
normal course of business. The Company uses the same credit policies in
commitments and conditional obligations as it does for on-balance sheet
instruments.
A summary of the Company's commitments and contingent liabilities at December
31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
In thousands 1995 1994
------- -------
<S> <C> <C>
Commitments to extend credit $54,715 $52,553
Financial and performance standby letters of credit 8,957 6,056
Commitments to purchase securities 3,016 1,317
Commitments to sell residential mortgages - 344
</TABLE>
Commitments to extend credit are agreements to lend to a customer to the extent
that there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not represent
future cash requirements. Management evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained if deemed necessary
by management upon extension of credit is based on a credit evaluation of the
customer. Collateral held varies but may include accounts receivable;
inventory; property, plant and equipment; and income producing commercial
properties.
Stand-by letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The term of the
letters of credit varies from one month to 24 months and may have renewal
features. The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loans to customers. The Company holds
collateral supporting those commitments for which collateral is deemed
necessary.
The Company's exposure to possible loss in the event of non-performance by the
other party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual amount of the
instruments.
Most of the Company's business activity is with customers located within the
Company's defined market area. Investments in state and municipal securities
may also involve government entities within the Company's market area. The
concentrations by loan type are set forth in Note 7. The distribution of
commitments to extend credit approximates the distribution of loans outstanding.
The Bank, as a matter of policy, does not extend credit to any single borrower
or group of related borrowers in excess of 65% of its legal lending limit. At
December 31, 1995, this limit was $4,773,000.
55
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
NOTE 18: FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard No. 107 (SFAS 107), "Disclosures
about Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined with precision.
Changes in assumptions would significantly affect the estimates. Statement 107
excludes certain financial instruments and all non-financial instruments from
its disclosure requirements.
Fair value estimates are based on existing on and off-balance sheet financial
instruments without attempting to estimate the value of future business. The
value of significant sources of income such as trust or mortgage banking
operations have not been estimated. In addition, the tax effect relative to the
recognition of unrealized gains and losses can have a significant impact on fair
value estimates and have not been considered in any of the estimates.
Accordingly, the aggregate fair value amounts do not represent the underlying
value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Cash and cash equivalents:
The carrying amounts reported in the consolidated balance sheets for cash and
short-term investments approximate their fair values.
Mortgages held for sale:
The fair value of mortgages held for sale is estimated using current secondary
market rates.
Securities:
Fair values for securities are based on quoted prices, where available. If
quoted prices are not available, fair values are based on quoted prices of
comparable instruments.
Loans:
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. The fair values of
other loans are determined using estimated future cash flows, discounted at
the interest rates currently being offered for loans with similar terms to
borrowers with similar credit quality. The carrying amount of accrued
interest receivable approximates its fair value.
Off-balance-sheet instruments:
For the Company's off-balance-sheet instruments consisting of commitments to
extend credit and financial and performance standby letters of credit, the
estimated fair value is the same as the instrument's contract or notional
values since they are priced at market at the time of funding.
56
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
Deposit liabilities:
The fair values of deposits with no stated maturities, such as demand
deposits, savings accounts, NOW and money market deposits equal their carrying
amounts which represent the amount payable on demand. Fair values for fixed-
rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time
deposits.
Short-term borrowings:
The carrying amounts of federal funds purchased and securities sold under
agreements to repurchase, advances from the Federal Home Loan Bank and other
short-term borrowings approximate their fair values.
Long-term debt:
The fair values of the Company's long-term debt are estimated using discounted
cash flow analyses, based on the Company's incremental borrowing rates for
similar types of borrowing arrangements.
Accrued interest payable:
The fair value of accrued interest payable is estimated to be the current book
value.
57
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
At December 31, 1995 and 1994, the estimated fair values of financial
instruments based on disclosed assumptions are as follows:
<TABLE>
<CAPTION>
In thousands 1995 1994
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 17,888 $ 17,888 $ 14,400 $ 14,400
Short-term investments 939 939 75 75
Mortgages held for sale 2,373 2,373 1,242 1,242
Securities available for sale 196,029 196,029 191,887 191,887
Investment securities 16,096 15,593
Loans:
Commercial, financial and agricultural 169,677 172,559 139,256 138,387
Real estate - construction 8,761 8,815 2,489 2,462
Real estate - mortgage 104,211 104,784 85,565 84,798
Consumer 15,376 15,418 12,618 12,616
Allowance for loan losses (3,661) (3,482)
-------- -------- -------- --------
Net loans 294,364 301,576 236,446 238,264
Accrued interest receivable 3,264 3,264 2,926 2,926
Financial liabilities:
Deposits:
Non-interest bearing demand 57,775 57,775 50,405 50,405
Interest bearing demand 71,169 71,169 59,190 59,190
Savings 60,852 60,852 66,246 66,246
Time deposits under $100,000 208,022 209,376 149,786 148,732
Time deposits over $100,000 20,111 20,233 16,807 16,692
-------- -------- --------- --------
Total deposits 417,929 419,405 342,434 341,265
Short-term borrowings 47,476 47,476 82,077 82,077
Long-term debt 9,000 8,939 10,500 6,928
Accrued interest payable 2,494 2,494 1,816 1,816
Off-balance sheet financial instruments:
Commitments to extend credit 54,715 54,715 52,553 52,553
Financial and performance standby
letters of credit 8,957 8,957 6,056 6,056
Commitments to purchase securities 3,016 3,016 1,317 1,317
Commitments to sell residential mortgages - - 344 344
</TABLE>
58
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
NOTE 19: PARENT COMPANY ONLY FINANCIAL INFORMATION
The following represents parent only condensed financial information of the
Company:
PennRock Financial Services Corp. (Parent Company Only) Condensed Balance Sheets
<TABLE>
<CAPTION>
In thousands December 31,
------------------
1995 1994
-------- --------
<S> <C> <C>
Assets:
Short-term investments $ 140 $ 75
Securities available for sale 1,872 1,693
Due from subsidiary 712 494
Investment in subsidiary 49,606 38,122
Other assets 72 122
-------- --------
Total assets $52,402 $40,506
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Dividends payable $ 667 $ 601
Accrued expenses and taxes 61 2
-------- --------
Total liabilities 728 603
-------- --------
Stockholders' Equity:
Common stock 15,157 15,015
Surplus 10,905 9,774
Retained earnings 24,854 21,152
Unrealized gain (loss) on securities
available for sale 769 (6,038)
-------- --------
51,685 39,903
Less: Treasury stock - at cost (11)
-------- --------
Total stockholders' equity 51,674 39,903
-------- --------
Total liabilities and stockholders' equity $52,402 $40,506
======== ========
</TABLE>
59
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
PennRock Financial Services Corp. (Parent Company Only)
Condensed Statements of Income
<TABLE>
<CAPTION>
In thousands December 31,
-----------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Income:
Dividends from subsidiary $1,380 $ 225 $ 400
Securities 89 93 109
Net security gains 145 60 48
------ ------ ------
Total income 1,614 378 557
------ ------ ------
Expenses:
General and administrative 240 260 151
------ ------ ------
Income before income taxes and undistributed net
income of subsidiary 1,374 118 406
Income tax benefit (17) (63) (25)
------ ------ ------
Income before equity in undistributed net income
of subsidiary 1,391 181 431
Equity in undistributed net income of subsidiary 4,791 5,659 5,949
------ ------ ------
Net income $6,182 $5,840 $6,380
====== ====== ======
</TABLE>
60
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
PennRock Financial Services Corp. (Parent Company Only) Condensed Statements of
Cash Flows
<TABLE>
<CAPTION>
In thousands December 31,
-----------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Operating activities
Net income $6,182 $5,840 $6,380
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Equity in undistributed net income of subsidiary (4,791) (5,659) (5,949)
Security gains (145) (60) (48)
Increase in due from subsidiary (219) (479) (11)
Other, net 118 (10) 56
------ ------ ------
Net cash provided by (used in) operating activities 1,145 (368) 428
Investing activities
Proceeds from sales of securities available for sale 1,147 637 469
Purchases of securities available for sale (1,009) (544) (421)
------ ------ ------
Net cash provided by investing activities 138 93 48
Financing activities
Issuance of common and treasury stock 1,637 1,900 1,621
Acquisition of treasury stock (375)
Cash dividends paid (2,480) (2,308) (2,057)
Cash paid with stock dividend (11) (10)
Decrease in funds held for dividend reinvestment (2)
------ ------ ------
Net cash used in financing activities (1,218) (419) (448)
------ ------ ------
Increase (decrease) in cash and cash equivalents 65 (694) 28
Cash and cash equivalents at beginning of year 75 769 741
------ ------ ------
Cash and cash equivalents at end of year $ 140 $ 75 $ 769
====== ====== ======
</TABLE>
61
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
NOTE 20: CONSOLIDATED QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
In thousands, except per share data 1995
-------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $9,093 $9,613 $9,825 $9,872
Interest expense 4,561 5,019 5,026 4,786
------- ------- ------- -------
Net interest income 4,532 4,594 4,799 5,086
Provision for loan losses 89 90 110 71
Non-interest income 661 801 822 915
Non-interest expense 3,315 3,348 3,378 3,479
------- ------- ------- -------
Income before income taxes 1,789 1,957 2,133 2,451
Income taxes 470 368 479 831
------- ------- ------- -------
Net income $1,319 $1,589 $1,654 $1,620
======= ======= ======= =======
Net income per share $ .22 $ .26 $ .27 $ .27
======= ======= ======= =======
Dividends declared per share $ .10 $ .10 $ .10 $ .11
======= ======= ======= =======
1994
-------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income $6,903 $7,217 $7,629 $8,343
Interest expense 2,717 2,862 3,242 3,961
------- ------- ------- -------
Net interest income 4,186 4,355 4,387 4,382
Provision for loan losses 116 117 59 60
Non-interest income 1,085 1,058 557 688
Non-interest expense 3,039 3,174 3,050 2,979
------- ------- ------- -------
Income before income taxes 2,116 2,122 1,835 2,031
Income taxes 430 553 449 832
------- ------- ------- -------
Net income $1,686 $1,569 $1,386 $1,199
======= ======= ======= =======
Net income per share $ .29 $ .26 $ .23 $ .20
======= ======= ======= =======
Dividends declared per share $ .09 $ .09 $ .10 $ .10
======= ======= ======= =======
</TABLE>
62
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and nominees for election to the Board of
Directors is incorporated herein by reference to the Registrant's Proxy
Statement for its annual meeting to be held on April 23, 1996 under the caption
"Information about Nominees and Continuing Directors", and information
concerning executive officers is included under Part I, Item 4A, "Executive
Officers of the Registrant" of this report on Form 10-K.
Item 11. EXECUTIVE COMPENSATION
Information concerning director compensation is incorporated herein by reference
to the Registrant's Proxy Statement for its annual meeting to be held on April
23, 1996 under the caption "Compensation of Directors" and concerning executive
compensation under the caption "Executive Compensation and Related Matters,"
except that information appearing under the caption "Board Report on Executive
Compensation" and information appearing under the caption "Stock Performance
Graph" is not incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners is
incorporated herein by reference to the Registrant's Proxy Statement for its
annual meeting to be held on April 23, 1996, under the caption "Voting of Shares
and Principal Holders Thereof" and concerning security ownership of management
under the caption "Information about Nominees and Continuing Directors."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information under the caption "Transactions with Directors and Executive
Officers" is incorporated herein by reference to the Registrant's Proxy
Statement for its annual meeting to be held on April 23, 1996.
63
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The consolidated financial statements listed on the index to Item 8 of
this Annual Report on Form 10-K are filed as a part of this Annual
Report.
(a) 2. Financial Statement Schedules
All schedules applicable to the Registrant are shown in the respective
consolidated financial statements or in the notes thereto included in
this Annual Report.
(a) 3. Exhibits
(3)(a) Article of Incorporation of the Corporation are filed as
Exhibit 3(a) to Registration Statement Number 33-4328 on Form
S-4 dated March 25, 1986 and are incorporated herein by
reference.
(3)(b) Bylaws of the Corporation are incorporated by reference to
Exhibit 3(b) to Form 10-K for the year ended December 31,
1993.
(10)(a) Omnibus Stock Plan is incorporated by reference to Exhibit A
to Form 10-Q for the quarter ended March 31, 1992.
(10)(b) Executive Compensation Bonus Plan is incorporated by reference
to Exhibit 10(a) to Form 10-K for the year ended December 31,
1991.
(10)(c) Executive Incentive Compensation Plan is incorporated by
reference to Exhibit 10(c) to Form 10-K for the year ended
December 31, 1994.
(10)(d) Melvin Pankuch Deferred Compensation Plan Agreement
(21) Subsidiaries of the Registrant
(23) Independent Auditors' Consent
(27) Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed in the fourth quarter of 1995.
64
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PENNROCK FINANCIAL SERVICES CORP.
(Registrant)
Dated: February 27, 1996 By /s/ Glenn H. Weaver
-----------------------------------------
Glenn H. Weaver, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated on the 27th of February, 1996.
Signatures Title
----------- ------
/s/ Norman Hahn Chairman and Director
- -------------------------------
Norman Hahn
/s/ Glenn H. Weaver President and Director
- -------------------------------
Glenn H. Weaver
/s/ Robert K. Weaver Secretary and Director
- -------------------------------
Robert K. Weaver
/s/ Melvin Pankuch Executive Vice President,
- ------------------------------- Chief Executive Officer and Director
Melvin Pankuch
/s/ George B. Crisp Vice President and Treasurer
- ------------------------------- (Principal Financial and Accounting
George B. Crisp Officer)
/s/ Dale M. Weaver Director
- -------------------------------
Dale M. Weaver
/s/ Aaron S. Kurtz Director
- -------------------------------
Aaron S. Kurtz
/s/ Robert L. Spotts Director
- -------------------------------
Robert L. Spotts
/s/ Elton Horning Director
- -------------------------------
Elton Horning
/s/ Lewis M. Good Director
- -------------------------------
Lewis M. Good
65
<PAGE>
PENNROCK FINANCIAL SERVICES CORP.
ANNUAL REPORT ON FORM 10-K
EXHIBIT INDEX
YEAR ENDED DECEMBER 31, 1995
PENNROCK FINANCIAL SERVICES CORP.
BLUE BALL, PENNSYLVANIA
Sequentially
Item Description Numbered Page
----- ----------- -------------
3(a) Articles of Incorporation - filed as exhibit 3(a)
to Registration Statement Number 33-4328 on
Form S-4 dated March 25, 1986, and are
incorporated herein by reference.
3(b) Bylaws - filed as exhibit 3(b) to Form 10-K
dated March 28, 1994, and are incorporated
herein by reference.
10(a) Omnibus Stock Plan - incorporated by reference
to Exhibit A to Form 10-Q for the quarter ended
March 31, 1992
10(b) Executive Compensation Bonus Plan - incorporated by
reference to Exhibit 10(a) to Form 10-K for the year
ended December 31, 1991
10(c) Executive Incentive Compensation Plan - incorporated
by reference to Exhibit 10(c) to Form 10-K for the
year ended December 31, 1994
10(d) Melvin Pankuch Deferred Compensation Plan Agreement 68
21 Subsidiaries of Registrant 80
23 Independent Auditors' Consent 81
27 Financial Data Schedules 82
66
<PAGE>
Exhibit 10(d)
PENNROCK FINANCIAL SERVICES CORP.
MELVIN PANKUCH DEFERRED COMPENSATION PLAN AGREEMENT
THIS AGREEMENT, made and entered into this 12th day of June, 1995, by and
between BLUE BALL NATIONAL BANK, a national banking association with principal
offices and place of business at 1060 Main Street, Post Office Box 580, Blue
Ball, Pennsylvania, 17506 (hereinafter referred to as the "Bank"), and MELVIN
PANKUCH, an adult individual residing at 58 Heister Avenue, New Holland,
Pennsylvania (hereinafter referred to as "Pankuch"),
WITNESSETH:
WHEREAS, Pankuch is employed by the Bank; and
WHEREAS, the Bank recognizes the valuable services heretofore performed for it
by Pankuch and wishes to encourage his continued employment; and
WHEREAS, Pankuch wishes to defer a certain portion of compensation payable to
him; and
WHEREAS, the parties hereto wish to provide the terms and conditions upon
which the Bank shall pay such deferred compensation to Pankuch or his
designated beneficiary; and
WHEREAS, the parties intend that this Agreement be considered an unfunded
arrangement, maintained primarily to provide deferred compensation benefits
for Pankuch, a member of select group of management or highly compensated
employees of the Bank, for purposes of Employee Retirement Income Act of 1974,
as amended;
NOW, THEREFORE, in consideration of the premises and of the mutual promises
herein contained, the parties hereto agree as follows:
1. DEFINITION OF TERMS. Certain words and phrases are defined when first used
in this Agreement. In addition, the following words and phrases when used
herein, unless the context clearly requires otherwise, shall have the
following respective meanings:
(a)Accrued Benefit: The sum of all Deferred Amounts credited to Pankuch's
Retirement Account and due and owing to Pankuch or his beneficiaries
pursuant to this Agreement, together with Additions thereto calculated
as set forth in paragraph 3 hereof, minus any distributions hereunder.
(b)Affiliate: Any corporation, partnership, joint venture, association, or
similar organization or entity, the employees of which would be treated
as employed by the Bank under Section 414(b) and 414(c) of the Code.
(c)Agreement: This Agreement, together with any and all amendments or
supplements thereto.
(d)Code: The Internal Revenue Code of 1986, 26 U.S.C. `101 et seq., as
amended or as it may be amended from time to time.
(e)Compensation: Total salary and commissions of Pankuch paid or accrued
by the Bank, exclusive of Accrued Benefits, stock options, stock
appreciation rights, and any employer contributions or payments to any
other trust, fund, agreement or plan providing retirement, pension,
profit sharing, health, welfare, death, insurance or similar benefits.
(f)Deferred Amount: A portion of the Compensation otherwise payable to
Pankuch, receipt of which Pankuch has elected to defer under the
provisions of paragraphs 2 and 4 hereof.
(g)Effective Date: The date of the execution of this Agreement.
(h)Election of Deferral. A written notice filed by Pankuch with the
Payroll Department of the Bank in substantially the form attached hereto
as Exhibit "A", specifying the amount of Compensation to be deferred.
1
<PAGE>
(i)Fiscal Year. The taxable year of the Bank.
(j)Normal Retirement Date. The date Pankuch attains sixty-five (65) years
of age.
(k)Notice of Discontinuance: A written notice filed by Pankuch with the
Payroll Department of the Bank in substantially the form attached hereto
as Exhibit "B", requesting discontinuance of the deferral of Pankuch's
Compensation.
(l)Retirement Account. Book entries maintained by the Bank reflecting
Deferred Amounts and Additions thereon; provided, however, that the
existence of such book entries and the Retirement Account shall not
create and shall not be deemed to create a trust of any kind, or a
fiduciary relationship between the Bank and Pankuch, his designated
beneficiary, or other beneficiaries under this Agreement.
2. DEFERRED COMPENSATION. Commencing on the Effective Date, and continuing
through the date on which Pankuch's employment terminates because of his
death, normal retirement, disability, or any other cause, Pankuch and the
Bank agree that Pankuch shall be entitled to elect to defer into his
Retirement Account up to the following maximum amounts of the Compensation
that Pankuch would otherwise be entitled to receive from the Bank in each
of the following Fiscal Year of the Bank:
Amount Deferred
---------------
1995 $10,000.00
1996 $11,000.00
1997 $12,100.00
1998 $13,310.00
1999 $14,641.00
2000 $16,105.00
2001 $17,716.00
2002 $19,487.00
2003 $21,436.00
2004 $23,579.00
The contemplated Annual Deferral Sum shall be deferred in substantially
equal bi-weekly amounts during each Fiscal Year or portion thereof during
which this Agreement is in effect. The amount of Compensation actually
deferred in any Fiscal Year, taking into account discontinuance of
deferral pursuant to a Notice of Discontinuance, termination of Pankuch's
employment, the death of Pankuch, or otherwise is hereinafter referred to
as the "Annual Deferred Amount." The portions of Pankuch's Annual
Deferred Amount deferred bi-weekly shall be credited to Pankuch's
Retirement Account bi-weekly, as Deferrals are accrued.
3. ADDITIONS TO DEFERRED AMOUNTS. The Bank hereby agrees that it will credit
Deferred Amounts in Pankuch's Retirement Account with additions thereon
("Additions") from and after the dates Deferred Amounts are credited to the
Retirement Account, subject to the limitations herein set forth. Additions
to Deferred Amounts, calculated at the rate of eight percent (8%) per
annum, compounded annually at the end of each Fiscal Year, shall accrue
commencing on the date the Retirement Account first has a positive balance
and shall continue until the first of the following events to occur:
(a)The date that Death Benefits as described in paragraph 7(b) hereof,
Retirement Benefits, or Disability Benefits, whichever applies, end
hereunder; or
2
<PAGE>
(b)The date on which Death Benefits as described in paragraph 7(a) hereof
commence; or
(c)The date on which a Termination Benefit or an Acquisition Termination
Benefit, as herein defined, is paid.
4. ELECTION TO DEFER COMPENSATION. Pankuch may elect an Annual Deferral Sum
hereunder by filing an Election of Deferral. The initial Election of
Deferral must be filed within thirty (30) days of the Effective Date of
this Agreement. Such initial Election of Deferral, if any, shall be
effective commencing with the first day of the first month after it is
filed. Thereafter, an Election of Deferral must be filed at least thirty
(30) days prior to the beginning of the Fiscal Year to which it pertains
and shall be effective on the first day of the Fiscal Year following the
filing thereof.
5. TERMINATION OF ELECTION. Pankuch's initial Election of Deferral shall
continue in effect, pursuant to the terms of the Election of Deferral,
unless and until Pankuch files with the Bank a Notice of Discontinuance or
a subsequent Election of Deferral specifying a different amount of
deferral. Each Election of Deferral filed subsequent to the initial
Election of Deferral shall similarly continue in effect until Pankuch
files a Notice of Discontinuance or a new Election of Deferral. Any new
Election of Deferral, to be effective, must be filed at least thirty (30)
days prior to the beginning of the Fiscal Year in which deferral is sought.
A Notice of Discontinuance shall be effective if filed at least twenty (20)
days prior to any January 1st, April 1st, July 1st or October 1st. Such
Notice of Discontinuance shall be effective commencing with the January
1st, April 1st, July 1st or October 1st following its filing, whichever
applies, and shall apply only with respect to Pankuch's Compensation and
bonuses attributable to services not yet performed.
6. RETIREMENT BENEFITS.
(a)Retirement Benefit. The Bank agrees that, from and after the retirement
of Pankuch from the service of the Bank upon reaching his Normal
Retirement Date, the Bank shall thereafter pay as a retirement benefit
(herein referred to as the "Retirement Benefit") to Pankuch Pankuch's
entire Accrued Benefit, payable in equal annual installments, due on the
31st day of January of each year commencing on the first such date
following the Normal Retirement Date, for a period of fifteen (15)
years. The amount of each annual installment shall be an amount which,
if paid annually over the remainder of the fifteen (15) year payment
term, would result in payment of the entire Accrued Benefit, together
with interest accrued at the rate of Eight (8%) percent per annum, in
equal annual installments.
(b)Election of Benefits Upon Normal Retirement Date. Pankuch shall have
the option, upon attaining his Normal Retirement Date, to elect to
receive his Retirement Benefit, notwithstanding his continued employment
with the Bank after he has attained his Normal Retirement Date.
Pankuch's election to receive his Retirement Benefit notwithstanding his
continued employment must be made in writing at least ninety (90) days
prior to his Normal Retirement Date. The Retirement Benefit payable
upon election pursuant to this paragraph 6.b shall be the amount that
would have been payable had Pankuch retired from service with the Bank
as of his Normal Retirement Date. Any such election shall be
irrevocable and shall result in the termination of Pankuch's right to
any further deferrals hereunder.
3
<PAGE>
7. DEATH BENEFITS.
(a)Death Benefit Prior to Commencement of Retirement or Disability
Benefits. In the event of Pankuch's death while in the employment of
Bank and prior to commencement of Retirement Benefits or Disability
Benefits, Bank shall pay to Pankuch's designated beneficiary, in
accordance with the last such designation received by the Bank from
Pankuch prior to his death, a benefit in fifteen (15) annual
installments, each in the amount of Forty-four Thousand Five Hundred
Sixty and 00/100 ($44,560.00) . If no such designation has been
received by Bank from Pankuch prior to his death, or if said payments
are otherwise to be made as provided herein, said payments shall be made
to Pankuch's then-living spouse, so long as she shall live, and
thereafter to such person or persons, including her estate, as she may
appoint under her Will, making specific reference hereto; if Pankuch is
not survived by a spouse, or if said spouse shall be then deceased,
having failed to so appoint, then said payments shall be made to the
then-living children of Pankuch, if any, in equal shares, for their
joint and survivor lives; and if none, or after their respective joint
and survivor lives, any balance thereof in one lump sum to the estate of
Pankuch. Payments shall be due on January 31 of each year, commencing
on the first such date occurring after the death of Pankuch. To the
extent that the Accrued Benefit in Pankuch's Retirement Account exceeds
the total of payments required under this section, such excess sums
shall be forfeited.
(b)Death Benefit After Commencement of Benefits. In the event of Pankuch's
death after the commencement of Normal Retirement Benefits, but prior to
the completion of all such payments due and owing hereunder, the Bank
shall continue to make such payments, in equal annual installments, over
the remainder of the period specified in paragraph 6 hereof that would
have been applicable to Pankuch had he survived. Such continuing
payments shall be made to Pankuch's designated beneficiary, in
accordance with the last such designation received by the Bank from
Pankuch prior to his death. If no such designation has been received by
the Bank from Pankuch prior to his death or if said payments are
otherwise to be made as provided herein, said payments shall be made to
Pankuch's then living spouse, so long as she shall live and thereafter
to such person or persons, including her estate, as she may appoint
under her Will, making specific reference hereto; if Pankuch is not
survived by a spouse or if she shall fail to so appoint, then said
payments shall be made to the then living children of Pankuch, if any,
in equal shares, for their joint and survivor lives; and if none, or
after their respective joint and survivor lives, any balance thereof in
one lump sum to the estate of Pankuch. Such continuing payments shall
be payable on January 31 of each year, commencing on the first such date
occurring after the death of Pankuch.
8. DISABILITY BENEFIT. In the event that Pankuch is determined to be
Disabled, as defined in the Blue Ball National Bank Long Term Disability
Plan (which definition is incorporated herein and made a part hereof), then
the date of such determination shall, for purposes of this Agreement, be
deemed to be Pankuch's Normal Retirement Date, and all benefits otherwise
payable to Pankuch following the Normal Retirement Date shall be payable to
Pankuch as a Disability Benefit.
4
<PAGE>
9. TERMINATION BENEFIT. In the event of Pankuch's termination of employment
with the Bank before his Normal Retirement Date for any reason, other than
his death or Disability (as herein defined) or the occurrence of any
Acquisition Termination (as herein defined), the Bank shall pay to Pankuch,
as compensation for services rendered prior to such termination, a single
sum equal to the total Deferred Amounts hereunder, exclusive of Additions
thereto (herein referred to as the "Termination Benefit"). In the event of
the payment of a Termination Benefit, any and all Additions credited to
Pankuch's Retirement Account shall be forfeited to the Bank. The
Termination Benefit shall be payable on the first day of the first month
following the termination of Pankuch's employment with the Bank.
10.ACQUISITION TERMINATION BENEFIT. In the event that Bank or PennRock
Financial Services Corp., of which Bank is a wholly-owned subsidiary,
should at any time prior to Pankuch's Normal Retirement Date be acquired by
any other entity, and in the event that Pankuch's employment with Bank or
its successor is subsequently terminated involuntarily prior to Pankuch's
Normal Retirement Date, then such termination shall be deemed an
Acquisition Termination hereunder. In such event, Bank or its successor
shall pay to Pankuch, as compensation for services rendered prior to
such termination, a single sum equal to the total Deferred Amounts
hereunder, together with all Additions thereto (the "Acquisition
Termination Benefit"). The Acquisition Termination Benefit shall be
payable on the first day of the first month following the termination of
Pankuch's employment with the Bank or its successor.
11.HARDSHIP BENEFIT. In the event Pankuch suffers a financial hardship (as
hereinafter defined), the Bank may, if it deems advisable in its sole and
absolute discretion, distribute to or utilize on behalf of Pankuch as a
hardship benefit (the "Hardship Benefit") any portion of Pankuch's
Retirement Account up to, but not in excess of, the Termination Benefit to
which Pankuch would have been entitled as of the date a Hardship Benefit is
distributed or utilized. Any Hardship Benefit shall be distributed or
utilized at such times as the Bank shall determine, and the Accrued Benefit
in Pankuch's Benefit Account shall be reduced by the amount so
distributed and/or utilized. Financial Hardship shall mean dire
financial need of Pankuch caused by temporary or permanent disability or
incapacity, medical or educational expenses, the purchase or maintenance of
a residence, or a material reduction in family income.
12.OFFSET FOR OBLIGATIONS TO BANK. If, at such time as Pankuch becomes
entitled to benefit payments hereunder, Pankuch has any debt, obligation or
other liability representing an amount owing to the Bank or an Affiliate of
the Bank, and if such debt, obligation, or other liability is due and owing
at the time benefit payments are payable hereunder, the Bank may offset the
amount owing it or an Affiliate against the amount of benefits otherwise
distributable hereunder.
13.BENEFICIARY DESIGNATION. Pankuch shall have the right, at any time, to
submit in substantially the form attached hereto as Exhibit "C", a written
designation of primary and secondary beneficiaries to whom payment under
this Agreement shall be made in the event of his death prior to complete
distribution of the benefits due and payable under the Agreement. Each
beneficiary designation shall become effective only when receipt thereof is
acknowledged in writing by the Bank.
5
<PAGE>
14.NO TRUST CREATED. Nothing created in this Agreement, and no action taken
pursuant to its provisions by either party hereto shall create, or be
construed to create, a trust of any kind, or a fiduciary relationship
between the Bank and Pankuch, his designated beneficiary, other
beneficiaries of Pankuch or any other person.
15.BENEFITS PAYABLE ONLY FROM GENERAL CORPORATE ASSETS; UNSECURED GENERAL
CREDITOR STATUS OF PANKUCH.
(a)The payments to Pankuch or his designated beneficiary or any other
beneficiary hereunder shall be made from assets which shall continue,
for all purposes, to be a part of the general, unrestricted assets of
the Bank; no person shall have any interest in any such assets by virtue
of the provisions of this Agreement. The Bank's obligation hereunder
shall be an unfunded and unsecured promise to pay money in the future.
To the extent that any person acquires a right to receive payments from
the Bank under the provisions hereof, such right shall be no greater
than the right of any unsecured creditor of the Bank, no such person
shall have nor require any legal or equitable right, interest or claim
in or to any property or assets of the Bank.
(b)This promise of future payment by Bank to Pankuch shall be unfunded and
unsecured and shall not be construed as a transfer of any present right
to receive payment. Pankuch shall derive no present economic benefit
from this Agreement. In the event that, in its discretion, the Bank
purchases an insurance policy or policies insuring the life of Pankuch
(or any other property), to allow the Bank to recover the cost of
providing benefits, in whole or in part, hereunder, neither Pankuch, his
designated beneficiary nor any other beneficiary shall have any rights
whatsoever therein or in the proceeds therefrom. The Bank shall be the
sole owner and beneficiary of any such insurance policy and shall
possess and may exercise all incidents of ownership therein. No such
policy, policies or other property shall be held in any trust for
Pankuch or any other person nor as collateral security for any
obligation of the Bank hereunder.
16.NO CONTRACT OF EMPLOYMENT. Nothing contained herein shall be construed to
be a contract of employment for any term of years, nor as conferring upon
Pankuch the right to continue to be employed by the Bank in his present
capacity, or in any capacity. It is expressly understood by the parties
hereto that this Agreement relates to the payment of deferred compensation
for Pankuch's services, payable after termination of his employment with
the Bank, and is not intended to be an employment contract.
17.BENEFITS NOT TRANSFERABLE. Neither Pankuch, his designated beneficiary,
nor any other beneficiary under this Agreement shall have any power or
right to transfer, assign, anticipate, hypothecate or otherwise encumber
any part or all of the amounts payable hereunder. No such amounts shall be
subject to seizure by any creditor of any such beneficiary, by a proceeding
at law or in equity, nor shall such amounts be transferable by operation of
law in the event of bankruptcy, insolvency or death of Pankuch, his
designated beneficiary, or any other beneficiary hereunder. Any such
attempted assignment or transfer shall be void.
6
<PAGE>
18.DETERMINATION OF BENEFITS.
(a)Claim.
A person who believes that he is being denied a benefit to which he is
entitled under the Plan (hereinafter referred to as a "Claimant") may
file a written request for such benefit with the Bank, setting forth his
claim. The request must be addressed to any Senior Vice President of
the Bank at its then principal place of business.
(b)Claim Decision.
Upon receipt of a claim, the Bank shall advise the Claimant that a reply
will be forthcoming within ninety (90) days and shall, in fact, deliver
such reply within such period. The Bank may, however, extend the reply
period for an additional ninety (90) days for reasonable cause.
If the claim is denied in whole or in part, the Bank shall adopt a
written opinion, using language calculated to be understood by the
Claimant, setting forth:
(i) The specific reason or reasons for such denial;
(ii)The specific reference to pertinent provisions of this Agreement on
which such denial is based;
(iii)A description of any additional material or information necessary
for the Claimant to perfect his claim and an explanation why such
material or such information is necessary;
(iv)Appropriate information as to the steps to be taken if the Claimant
wishes to submit the claim for review; and
(v) The time limits for requesting a review under subsection c. and for
review under subsection d. hereof.
(c)Request for Review.
Within sixty (60) days after the receipt by the Claimant of the written
opinion described above, the Claimant may request in writing that the
Secretary of the Bank review the determination of the Bank. Such
request must be addressed to the Secretary of the Bank, at its then
principal place of business. The Claimant or his duly authorized
representative may, but need not, review the pertinent documents and
submit issues and comments in writing for consideration by the Bank. If
the Claimant does not request a review of the Bank's determination by
the Secretary of the Bank within such sixty (60) day period, he shall be
barred and estopped from challenging the Bank's determination.
(d)Review of Decision.
Within sixty (60) days after the Secretary's receipt of a request for
review, he will review the Bank's determination. After considering all
materials presented by the Claimant, the Secretary will render a written
opinion, written in a manner calculated to be understood by the
Claimant, setting forth the specific reasons for the decision and
containing specific references to the pertinent provisions of this
Agreement on which the decision is based. If special circumstances
require that the sixty (60) day time period be extended, the Secretary
will so notify the Claimant and will render the decision as soon as
possible, but no later than one hundred twenty (120) days after receipt
of the request for review.
19.AMENDMENT. This Agreement may not be amended, altered or modified, except
by a written instrument signed by the parties hereto, or their respective
successors, and may not be otherwise terminated except as provided herein.
20.INUREMENT. This Agreement shall be binding upon and inure to the benefit
of the Bank and its successors and assigns, and Pankuch, his successors,
heirs, executors, administrators and beneficiaries.
7
<PAGE>
21.NOTICE. Any notice, consent or demand required or permitted to be given
under the provisions of this Agreement shall be in writing, and shall be
signed by the party giving or making the same. If such notice, consent or
demand is mailed to a party hereto, it shall be sent by United States
certified mail, postage prepaid, addressed to such party's last known
address as shown on the records of the Bank. The date of such mailing
shall be deemed the date of notice, consent or demand. Either party may
change the address to which notice is to be sent by giving notice of the
change of address in the manner aforesaid.
22.GOVERNING LAW. This Agreement, and the rights of the parties hereunder,
shall be governed by and construed in accordance with the laws of the
United States of America and of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties have executed this Agreement, in duplicate, as
of the day and year first above written.
ATTEST: BLUE BALL NATIONAL BANK
By:
- --------------------------- --------------------------------
ROBERT K. WEAVER, Secretary JOSEPH SPADA, Sr. Vice President
(SEAL)
---------------------------
MELVIN PANKUCH
8
<PAGE>
Exhibit A
ELECTION OF DEFERRAL
TO: BLUE BALL NATIONAL BANK
Attention: Payroll Department
I hereby elect to defer a portion of my annual compensation under the following
Schedule:
<TABLE>
<CAPTION>
Amount Deferred
<S> <C>
1995 $10,000.00
1996 $11,000.00
1997 $12,100.00
1998 $13,310.00
1999 $14,641.00
2000 $16,105.00
2001 $17,716.00
2002 $19,487.00
2003 $21,436.00
2004 $23,579.00
</TABLE>
I further authorize Blue Ball National Bank to credit all amounts so deferred to
the Retirement Account established pursuant to that certain Melvin Pankuch
Deferred Compensation Plan Agreement, by and between the undersigned and Blue
Ball National Bank, dated the 12th day of July, 1995.
I understand that this authorization shall remain in effect until revoked or
amended. I understand that I may revoke deferral upon at least 20 days' prior
written notice, effective on any January 1st, April 1st, July 1st or October
1st. I further understand that I may file an amended Election of Deferral at
least 30 days prior to the beginning of a Fiscal Year of the
Bank, effective on the first day of such Fiscal Year.
Date:
Melvin Pankuch
9
<PAGE>
Exhibit B
NOTICE OF DISCONTINUANCE
TO: BLUE BALL NATIONAL BANK
Attention: Payroll Department
I hereby give notice of my election to discontinue deferral of my Compensation
under that certain Melvin Pankuch Deferred Compensation Plan Agreement, by and
between Blue Ball National Bank and the undersigned, dated the ------------ day
of -----------------, 1995. This notice is submitted at least twenty (20) days
prior to January 1st, April 1st, July 1st, or October 1st, and shall be
effective as of such date, as specified below.
Discontinue deferral as of January 1st, 19
(mark one) April 1st, 19
July 1st, 19
October 1st, 19
---------------------------------
Melvin Pankuch
Dated:----------------------------
10
<PAGE>
Exhibit C
DESIGNATION OF BENEFICIARY
UNDER THE
MELVIN PANKUCH
DEFERRED COMPENSATION PLAN AGREEMENT
I. Employee: Melvin Pankuch
II.The above-named Employee's Revocable Beneficiary under the Melvin Pankuch
Deferred Compensation Plan Agreement is set forth below (CHECK BOX TO LEFT
OF APPLICABLE NUMBERED SUBPARAGRAPH AND FILL IN THE BLANK(S); CHECK AND
COMPLETE ONLY ONE NUMBERED SUBPARAGRAPH):
/ / 1.Employee's spouse, Ruth A. Pankuch, if living at the Employee's death; if
not, such of the children of the marriage of the Employee and said spouse
as shall be then living, equally, or the issue of any deceased child per
stirpes.
/ / 2.Employee's spouse, ---------------------------, if living at the
Employee's death, if not, such of the Employee's children as shall be
then living, equally.
/ / 3.Such of the following children of the Employee as shall be living at the
Employee's death, equally: ----------------, ----------------,
----------------.
/ / If this box is checked, and if paragraph 1, 2 or 3 is checked, then the
living children of any deceased child designated shall take the share,
divided equally, which such child would have taken, if living.
/ / 4.Employee's ---------------------------, if living at the Employee's
death, if not, Employee's ----------------------------, if then living,
if not, Employee's ---------------------------, if then living.
(Insert relationship to Employee and name).
/ / 5.Such of the following as shall be living at the Employee's death,
equally: Employee's -----------------------------------------------------
-----------------------------------------------------------------------.
(Insert relationship to Employee and name).
/ / 6.Employee's ------------------------------, if living at the Employee's
death, if not, such of the following as shall be then living, equally:
-----------------------------------------------------------------------
-----------------------------------------------------------------------.
(Insert relationship to Employee and name.)
/ / 7.Employee's -------------------------------------------------------------
--------------------------------------------------------------------.
(Insert relationship to Employee and name.
/ / 8.---------------------------------------------------------------------,as
trustee(s) or the successor trustee(s) under an Agreement dated
---------------------, 19-----, made by and between Melvin Pankuch and
said trustee(s), as now existing or hereafter amended, or if said trust
is not in existence at the Employee's death, the executor(s) or
administrator(s) of the Employee.
11
<PAGE>
/ / 9.The trustee(s) or successor trustee(s) under the instrument probated as
the Last Will and Testament of the Employee, or, if the Employee shall
die intestate or shall leave a Will creating no trust, the executor(s) or
administrator(s) of the Employee.
/ /10.Employee's executor(s) or administrator(s).
/ /11.------------------------------------------------------or its successors.
(Insert Name and address of firm or organization.)
III.If any one of subparagraphs 1 through 7 of paragraph II above is
applicable and if no individual beneficiary named is living at the
Employee's death, the Beneficiary shall be the executor(s) or
administrator(s) of the Employee.
IV.This Designation of Beneficiary revokes all prior designations and shall
be effective as of the date it is filed with the Company. The Employee
retains the right to revoke this Designation of Beneficiary.
Date at New Holland, Lancaster County, Commonwealth of Pennsylvania, on
June 12, 1995.
WITNESS:
------------------------------------ ---------------------------------
Melvin Pankuch
12
<PAGE>
CONSENT OF SPOUSE
I hereby consent to the designation of the above beneficiary(ies) to receive the
benefits payable under the Melvin Pankuch Deferred Compensation Plan Agreement
between Melvin Pankuch and Blue Ball National Bank, dated June 12, 1995, as the
result of the death of Melvin Pankuch and waive any and all rights necessary to
provide the payment of such benefits to such beneficiary(ies).
Dated at New Holland, Lancaster County, Commonwealth of Pennsylvania on June 12,
1995.
WITNESS:
- ------------------------------------- ---------------------------------
RUTH A. PANKUCH
FILING ACKNOWLEDGMENT
Filed with the records of the Company this 12th day of June, 1995.
By -----------------------------------------
Title
13
<PAGE>
Exhibit 21
PENNROCK FINANCIAL SERVICES CORP.
SUBSIDIARIES OF THE REGISTRANT
Subsidiary State of Incorporation Percent Owned
---------- ---------------------- -------------
Blue Ball National Bank Pennsylvania 100%
(National Banking Association)
<PAGE>
Exhibit 23
PENNROCK FINANCIAL SERVICES CORP
INDEPENDENT AUDITORS' CONSENT
(LETTERHEAD)
We consent to the incorporation by reference in the registration statement of
PennRock Financial Services Corp. on Form S-3 (No. 33-10568) of our report dated
January 26, 1996 on the consolidated financial statements of PennRock Financial
Services Corp. and subsidiary appearing in and incorporated by reference in this
Annual Report on Form 10-K.
/s/ Simon Lever & Company
March 25, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at December 31, 1995 and the Consolidated Statement
of Income for the year ended December 31, 1995 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
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<LONG-TERM> 6500
0
0
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</TABLE>
