<PAGE>
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, 1996
PENNROCK FINANCIAL SERVICES CORP.
----------------------------------------------------------------------------
(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
--------------------------------- -------------------------------
(Address of principal executive (Zip code)
offices)
Registrant's telephone number, including area code (717) 354-4541
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
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, 1997 was approximately $97,353,381.
As of February 27, 1997, there were 6,050,953 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 22, 1997 are incorporated by reference into Part III of this report.
<PAGE>
PENNROCK FINANCIAL SERVICES CORP
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
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.............................8
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.....................33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures.......................................62
PART III
Item 10. Directors and Executive Officers of the Registrant..............63
Item 11. Executive Compensation..........................................63
Item 12. Security Ownership of Certain Beneficial Owners and Management..63
Item 13. Certain Relationships and Related Transactions..................63
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.64
SIGNATURES
</TABLE>
<PAGE> 2
PART II
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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 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 through 14 full service branches in
Lancaster, Berks and Chester Counties in southeastern and south-central
Pennsylvania. Additionally, the Bank also provides personal and corporate
trust and agency services to individuals, corporations and others, including
trust investment accounts, investment advisory services, mutual funds, estate
planning, and management of pension and profit sharing plans.
Commercial lending services provided by the Bank include short and medium term
loans, revolving credit loans, letters and lines of credit, real estate
construction loans and agricultural loans. Consumer lending services include
various types of secured and unsecured loans including installment loans, home
equity loans and overdraft protection lines of credit. Residential mortgage
loans in a wide variety of types are offered by the Bank and by Atlantic
Regional Mortgage Corporation, a Pennsylvania mortgage banking company which
was formed as a wholly owned subsidiary of the Bank on February 29, 1996. The
Bank sells most of the conforming fixed-rate residential mortgage loans it
originates to either FNMA or FHLMC in the secondary market but retains the
servicing.
The Bank's business is not considered seasonal.
<PAGE> 3
Atlantic Regional Mortgage Corporation
- --------------------------------------
Atlantic Regional Mortgage Corporation ("ARMCO") is a full service mortgage
banking company which originates and sells a large variety of variable and
fixed-rate residential first mortgage loans in Pennsylvania, Maryland,
Delaware, Washington D.C. and Virginia. These loans are underwritten to
private investor standards and are sold to these investors in the secondary
market, servicing released. ARMCO does not normally service any of the loans
it originates.
Employees
- ---------
The approximate number of persons employed by the Company's subsidiaries is
305. PennRock 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.
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 its subsidiaries.
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 from 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
<PAGE> 4
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 Pennsylvania 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"). The Bank is subject to regulation and examination by
the Office of the Comptroller of the Currency (the "OCC"), and to a much lesser
extent, the Federal Reserve Board and the FDIC. 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 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, less certain intangible assets. The remainder ("Tier 2 capital") may
consist of certain preferred stock, a limited amount of subordinated debt,
certain hybrid capital instruments and other debt securities, and a limited
amount of the general loan loss allowance. 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 addition to the risk-based capital guidelines, the Federal Reserve Board
requires a bank holding company to maintain a leverage ratio of 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 almost identical capital requirements
adopted by the OCC.
Prompt Corrective Action Rules
The Federal banking agencies have regulations defining the levels at which an
insured institution would be considered "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." 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
<PAGE> 5
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
as "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 for the current year to date, plus (ii) its retained net profits
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. The Federal Reserve Board, the OCC and the FDIC have formal and
informal policies which provide that insured banks and bank holding companies
should generally pay dividends only 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 1997, without prior regulatory approval,
aggregate dividends of approximately $11.2 million, plus net profits earned to
the date of such dividend declaration.
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 assigns 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 evaluations, 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-based 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, 1996, the Bank was well capitalized for purposes of
calculating insurance assessments.
The Bank Insurance Fund ("BIF") is presently fully funded at more than the
minimum amount required by law. Accordingly, the 1997 BIF assessment rates
range from zero for those institutions with the least risk, to $0.27 for every
$100 of insured deposits for institutions deemed to have the highest risk. The
Bank is in the category of institutions that presently pay nothing for deposit
insurance. The FDIC adjusts the rates every six months.
While the Bank presently pays no premiums for deposit insurance, it is subject
to assessments to pay the interest on Financing Corporation ("FICO") bonds.
FICO was created by Congress to issue bonds to finance the resolution of failed
<PAGE> 6
thrift institutions. Prior to 1997, only thrift institutions were subject to
assessments to raise funds to pay the FICO bonds. On September 30, 1996, as
part of the omnibus budget act, Congress enacted the Deposit Insurance Funds
Act of 1996, which recapitalized the Savings Association Insurance Fund
("SAIF") and provided that commercial banks would be subject to 1/5 of the
assessment to which thrifts are subject for FICO bond payments through 1999.
Beginning in 2000, commercial banks and thrifts will be subject to the same
assessment for FICO bonds. The FICO assessment for the Bank (and all
commercial banks) for the first six months of 1997 is $.0065 for each $100 of
deposits.
New Legislation
The Deposit Insurance Funds Act of 1996 was a part of the larger Economic
Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA"). EGRPRA is a
lengthy Act that amends many different bank regulatory and consumer protection
statutes. While EGRPRA does not contain any major changes to banking law
(except for the FDIC and FICO assessments discussed above), it does contain a
number of smaller provisions that are beneficial to the banking industry. In
particular, certain routine regulatory application requirements and procedures
have been reduced or eliminated, making it easier and less expensive for banks
to comply with regulatory requirements. While the changes effected by EGRPRA
are welcome, the direct effect on the Company and the Bank are expected to be
minimal.
Proposed legislation is introduced in almost every legislative session that
would dramatically affect the regulation of the banking industry. Whether or
not such legislation will ever be enacted and what effect it may have on the
Company and the Bank cannot be estimated at this time.
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 by a single bank 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 another state 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, 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.
Pennsylvania, Delaware, Maryland, and New Jersey, as well as other states,
adopted "opt in" legislation which allows such transactions prior to the June
1, 1997 federal effective date.
<PAGE> 7
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.
- ---------------------------------
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
- -----------------------
The principal executive office and main banking office is located in Blue Ball,
Pennsylvania. This and the other 12 branch offices are owned by Blue Ball
National Bank free and clear of any indebtedness. One branch was under
construction at year-end December 31, 1996, although a temporary branch had
been opened at the site. The land on which two of the branch offices are
located is leased.
Atlantic Regional Mortgage Corporation
- --------------------------------------
The main office for ARMCO is located in Baltimore, Maryland. This and three
other offices in Maryland, Pennsylvania and Virginia are leased.
Item 3. LEGAL PROCEEDINGS
Various legal actions or proceedings are pending involving the Company or its
subsidiaries. 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 1996 to a vote of security
holders, through the solicitation of proxies or otherwise.
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all of the executive officers of the Company
as of February 28, 1997, 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.
<PAGE> 8
<TABLE>
<CAPTION>
POSITION AND BUSINESS EXPERIENCE
NAME AGE DURING PAST 5 YEARS
--------------- ---- ---------------------------------------------------------
<S> <C> <C>
Norman Hahn 60 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 62 PennRock Financial Services Corp.:
President (April 1989 to date)
Robert K. Weaver 48 PennRock Financial Services Corp.:
Secretary (March 1986 to date)
Blue Ball National Bank:
Secretary (1977 to date)
Melvin Pankuch 57 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 49 PennRock Financial Services Corp.:
Vice President and Treasurer (April 1989 to date)
Blue Ball National Bank:
Senior Vice President - Operations (July 1993 to date)
Joseph C. Spada 46 Blue Ball National Bank:
Senior Vice President - Banking Sales/Service
(July 1993 to date)
Michael H. Peuler 46 Blue Ball National Bank:
Senior Vice President - Trust Sales/Service
(June 1993 to date)
</TABLE>
<PAGE> 9
PART II
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Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The price of the Company's common stock ranged from $15 3/4 to $21 1/4 in 1996
and from $16 to $25 1/4 in 1995. The book value per share was $8.90 at
December 31, 1996 and $8.52 at December 31, 1995. The prices listed below
represent the high, low and quarter ending prices for stock trades reported
during the quarter.
<TABLE>
<CAPTION>
Quarter Per Share
High Low End Dividend
------- ------- ------- --------
<S> <C> <C> <C> <C>
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 quarter 19 1/2 16 16 5/8 .11
1996
First quarter 21 16 1/8 20 5/8 .11
Second quarter 21 1/4 19 19 7/8 .11
Third quarter 20 17 1/2 19 1/4 .11
Fourth quarter 18 1/4 15 3/4 16 1/8 .12
</TABLE>
<PAGE> 10
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
In thousands, except per share data
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Interest income $40,668 $38,404 $30,091 $30,738 $31,384
Interest expense 18,902 19,393 12,482 14,474 14,474
Net interest income 21,766 19,011 17,310 18,256 16,910
Provision for loan losses 600 360 352 958 1,195
Non-interest income 4,221 3,199 3,388 2,791 2,676
Non-interest expense 16,380 13,520 12,242 11,809 10,887
Net income 6,807 6,182 5,840 6,380 5,570
Per share:
Net income 1.12 1.02 .98 1.08 .95
Cash dividends .45 .41 .38 .35 .30
Book value at year-end 8.90 8.52 6.64 6.83 5.88
Market value at year-end 16.13 16.63 24.31 16.07 11.03
AT YEAR END
Securities 186,026 196,029 207,982 179,997 162,225
Loans 319,354 298,025 239,928 208,382 208,930
Earning assets 512,314 497,366 449,227 399,374 384,983
Total assets 547,603 532,082 480,092 422,002 405,739
Deposits 451,467 417,929 342,434 341,632 336,884
Short-term borrowings 22,106 47,476 82,077 28,732 23,196
Long-term debt 14,000 9,000 10,500 6,500 6,500
Stockholders' equity 53,729 51,674 39,903 40,521 34,587
Full time equivalent employees 277 217 183 181 165
Number of shares outstanding 6,037,419 6,062,412 6,006,040 5,936,519 5,882,454
SELECTED RATIOS
Return on average assets 1.25% 1.21% 1.32% 1.55% 1.50%
Return on average equity 13.12 13.47 13.95 16.74 17.35
Efficiency ratio 58.93 60.45 61.70 54.07 50.80
Net interest margin (taxable
equivalent) 4.48 4.09 4.29 4.85 5.01
Total capital to assets 10.54 10.40 9.04 10.42 9.36
Total capital to
risk weighted assets 16.08 16.97 17.45 17.88 15.90
Price to earnings 14.40 16.30 24.89 14.91 11.61
Market to book value 1.81 1.95 3.66 2.35 1.88
Allowance for loan losses
to total loans 1.26 1.23 1.45 1.66 1.63
Non-performing loans to loans .37 .41 .44 1.15 1.16
Dividend payout 39.99 40.12 39.52 32.24 31.82
</TABLE>
<PAGE> 11
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 ("PennRock" or the "Company"), and its
subsidiaries, Blue Ball National Bank (the "Bank") and Atlantic Regional
Mortgage Corporation ("ARMCO") 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 February 29, 1996, Atlantic Regional Mortgage Corporation, a Pennsylvania
mortgage banking company headquartered in Baltimore, Maryland, was formed as a
wholly owned subsidiary of the Bank. ARMCO is a full service mortgage banking
company which originates and sells variable and fixed-rate residential first
mortgage loans in Pennsylvania, Maryland, Delaware, Washington D.C. and
Virginia.
RESULTS OF OPERATIONS
OVERVIEW
PennRock Financial Services Corp. recorded net income of $6.8 million in 1996,
an increase of 10.1% from the net income of $6.2 million recorded in 1995. Net
income was $5.8 million in 1994. Net income per share was $1.12 in 1996, $1.02
in 1995 and $.98 in 1994.
Return on average total assets was 1.25% in 1996 compared with 1.21% in 1995
and 1.32% in 1994. Return on average equity for 1996 was 13.12% compared with
13.41% in 1995 and 13.95% in 1994.
Average earning assets increased $26.5 million or 5.5% during 1996, while
average interest bearing liabilities grew $17.5 million or 4.3%. The average
yield on earning assets increased from 8.08% in 1995 to 8.17% in 1996, while
the average yield on paying liabilities decreased from 4.75% in 1995 to 4.44%
in 1996. The Company's net interest income on a fully taxable equivalent basis
increased $3.1 million or 15.6% during 1996. The net interest margin increased
from 4.09% in 1995 to 4.48% in 1996.
The provision for loan losses increased from $360,000 in 1995 to $600,000 in
1996. The provision for loan losses was $352,000 in 1994.
Non-interest income other than gains and losses on securities increased
$497,000 or 19.5% in 1996 compared with a $337,000 or 15.2% increase in 1995
and a $576,000 or 20.6% decrease in 1994. The increases in 1996 and 1995 are
mainly attributable to increases in fiduciary fees, service charge fee income
and mortgage banking income.
Non-interest expenses increased $2.9 million or 21.2% in 1996. Contributing to
this increase were costs, primarily personnel, equipment and occupancy costs,
associated with the start-up of ARMCO in 1996 and three new branch offices of
the Bank, one late in 1995 and two in 1996. Other overhead increases included
costs associated with data processing and normal increases in other overhead
<PAGE> 12
expenses. Non-interest expenses in 1995 increased $1.3 million over 1994 also
due to increases in personnel, equipment and occupancy costs. Benefiting both
1995 and 1996 has been a reduction in the assessment rate in FDIC insurance.
In its first year of operations, ARMCO recorded net interest income of $84,000,
non-interest income of $369,000 and non-interest expenses of $1.7 million.
ARMCO realized a loss from operations of $1.2 million, a tax benefit of
$412,000 and a net loss of $801,000 for the year. The operating loss was
primarily due to the cost of start-up operations. Other factors negatively
impacting the first year of operations were the rise in market interest rates
during 1996 which slowed the demand for mortgages by consumers and the
inability to attract qualified mortgage originators as quickly as anticipated.
ARMCO is expected to have a positive impact on the Company's results of
operations in 1997.
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 were taxable at the statutory rate of 34%
for 1996, 1995, and 1994.
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.
<PAGE> 13
Table 1 - Average Balances, Rates and Interest Income and Expense Summary
(Taxable equivalent basis)
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
--------------------------- --------------------------- --------------------------
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 $ 693 $ 40 5.77% $ 723 $ 26 3.60% $ 217 $ 8 3.69%
Mortgages held for sale 3,150 265 8.41 2,234 217 9.71 1,710 170 9.94
Securities available for sale (1)
U.S. treasury and agency obligations 147,616 8,914 6.04 172,081 10,287 5.98 173,684 9,508 5.47
State and municipal 40,828 3,567 8.74 15,330 1,523 9.93 11,381 1,366 12.00
Other 7,066 414 5.86 5,425 289 5.33 4,206 223 5.30
--------- -------- --------- ------- -------- -------
Total securities available for sale 195,510 12,895 6.60 192,836 12,099 6.27 189,271 11,097 5.86
Investment securities
U.S. treasury and agency obligations 1,148 86 7.49 847 65 7.67
State and municipal 12,158 1,025 8.43 6,643 427 6.43
--------- ------- -------- -------
Total investment securities 13,306 1,111 8.35 7,490 492 6.57
Loans (2)
Mortgage 173,063 15,646 9.04 152,549 13,939 9.14 120,826 10,401 8.61
Commercial 86,067 7,924 9.21 77,301 7,317 9.47 68,424 5,896 8.62
Consumer (3) 53,043 5,034 9.49 46,110 4,497 9.75 29,784 2,632 8.84
--------- -------- --------- ------- -------- -------
Total loans 312,173 28,604 9.16 275,960 25,755 9.33 219,034 18,929 8.64
--------- -------- --------- ------- -------- -------
Total earning assets 511,526 41,804 8.17 485,059 39,208 8.08 417,722 30,696 7.35
-------- ------- -------
Other assets 31,813 27,283 23,551
--------- --------- --------
Total assets $543,339 7.69% $512,342 7.65% $441,273 6.96%
========= ====== ========= ====== ======== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits:
Demand deposits $ 71,533 1,769 2.47% $ 65,118 1,880 2.89% $ 58,821 1,348 2.29%
Savings deposits 60,833 1,342 2.21 62,836 1,665 2.63 68,326 1,890 2.77
Time deposits 236,822 12,673 5.35 222,211 12,251 5.51 166,810 7,009 4.20
--------- -------- --------- ------- -------- -------
Total interest bearing deposits 369,188 15,784 4.28 350,165 15,786 4.51 293,957 10,247 3.49
Short-term borrowings 49,611 2,709 5.46 48,947 3,015 6.16 35,265 1,604 4.55
Long-term debt 7,085 409 5.77 9,238 592 6.41 16,566 931 5.62
--------- -------- --------- ------- -------- -------
Total interest bearing liabilities 425,884 18,902 4.44 408,350 19,393 4.75 345,788 12,782 3.70
-------- -------
Non-interest bearing demand deposits 58,312 51,449 47,540
Other liabilities 7,264 6,433 6,071
Stockholders' equity 51,879 46,110 41,874
--------- --------- --------
Total liabilities and stockholders' equity $543,339 3.48% $512,342 3.79% $441,273 2.90%
========= ====== ========= ====== ========
Net interest income $22,902 $19,815 $17,914
======== ======= =======
Interest rate spread 3.73% 3.33% 3.65%
Effect of non-interest bearing funds .75 .76 .64
------- ------ ------
Net interest margin 4.48% 4.09% 4.29%
======= ====== ======
(1) Interest income on loans includes fees. Average loan balances exclude nonaccrual loans.
(2) Loans outstanding net of unearned income.
</TABLE>
<PAGE> 14
Table 2 presents the net interest income on a fully taxable equivalent basis
for the years ended December 31, 1996, 1995 and 1994.
Table 2 - Net Interest Income
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Total interest income $40,668 $38,404 $30,092
Total interest expense 18,902 19,393 12,782
------- ------- -------
Net interest income 21,766 19,011 17,310
Tax equivalent adjustment 1,136 804 604
------- ------- -------
Net interest income
(fully taxable equivalent) $22,902 $19,815 $17,914
======= ======= =======
Net interest income on a fully taxable equivalent basis was $22.9 million in
1996, an increase of $3.1 million or 15.6% from the $19.8 million earned in
1995. Net interest income in 1995 increased 10.6% from $17.9 million in 1994.
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 1996, net interest income increased
$1.9 million due to changes in volume and increased $1.1 million due to changes
in interest rates. In 1995, net interest income increased by $3.0 million due
to changes in volume and declined by $1.1 million due to changes in interest
rates. During 1994, net interest income increased $1.4 million due to changes
in volume and declined by $2.3 million due to changes in interest rates.
<PAGE> 15
Table 3 - Volume and Rate Analysis of Changes in Interest Income
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
In thousands
1996 over 1995 1995 over 1994
------------------------ -----------------------
Change due to Change due to
--------------- Total --------------- Total
Volume Rate Change Volume Rate Change
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Short-term investments ($ 1)$ 15 $ 14 $ 19 ($ 1) $ 18
Mortgages held for sale 89 (41) 48 52 (5) 47
Securities (681) 365 (316) 553 1,068 1,621
Loans 3,380 (531) 2,849 4,920 1,906 6,826
------- ------- ------- ------- ------- -------
Total interest income 2,787 (192) 2,595 5,544 2,968 8,512
Interest paid on:
Interest bearing demand
deposits 185 (296) (111) 144 388 532
Savings deposits (53) (260) (313) (152) (83) (235)
Time deposits 806 (385) 421 2,328 2,914 5,242
Short-term borrowings 41 (347) (306) 622 789 1,411
Long-term debt (138) (45) (183) (412) 73 (339)
------- ------- ------- ------- ------- -------
Total interest expense 841 (1,333) (492) 2,530 4,081 6,611
------- ------- ------- ------- ------- -------
Net interest income $1,946 $1,141 $3,087 $3,014 ($1,113) $1,901
======= ======= ======= ======= ======= =======
</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.
<PAGE> 16
Table 4 - Interest Rate Spread and Net Interest Margin on Earning Assets
<TABLE>
<CAPTION>
(Taxable equivalent basis)
In thousands 1996 1995 1994
-------------- -------------- --------------
Average Average Average
Balance Rate Balance Rate Balance Rate
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Earning assets $511,526 8.17% $485,059 8.08% $417,722 7.35%
======== ======== ========
Interest bearing liabilities $425,884 4.44% $408,350 4.75% $345,788 3.70%
----- ------ -----
Interest rate spread 3.73% 3.33% 3.65%
Interest free sources used to
fund earning assets 85,642 .75% 76,709 .76% 71,934 .64%
-------- ----- -------- ----- -------- -----
Total sources of funds $511,526 $485,059 $417,722
======== ======== ========
Net interest margin 4.48% 4.09% 4.29%
===== ===== =====
</TABLE>
As indicated in Table 4, average earning assets increased to $511.5 million in
1996 from $485.1 million in 1995 and $417.7 million in 1994. Interest rate
spread was 3.73%, 3.33% and 3.65% in 1996, 1995 and 1994, respectively. The
net interest margin was 4.48% in 1996 compared with 4.09% in 1995 and 4.29% in
1994.
Interest rate spreads increased 40 basis points during 1996. Earning asset
yields increased 9 basis points while funding costs declined 31 basis points.
Although loan yields fell in 1996, this decline was more than made up by
increases in the yields in the investment portfolio. Lower loan yields are a
result of intense competition among financial institutions for all types of
loan products and from lower market rates. The prime rate dropped 25 basis
points from 8.75% to 8.50% late in 1995 and again by 25 basis points to 8.25%
early in 1996 and remained at that level for the rest of 1996. Yields on
securities increased 19 basis points primarily due to a larger investment in
higher yielding tax-free municipal bonds. Rates on interest bearing deposits
declined in all deposit categories. Short-term borrowings and long-term debt
rates also declined in 1996.
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 8.50% at both the beginning and the end of 1995 but
the rate was higher than 8.50% for most of the year. Yields on securities
increased 52 basis points partially due to higher yields on adjustable rate
securities. 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.
<PAGE> 17
PROVISION FOR LOAN LOSSES
The provision for loan losses charged against earnings was $600,000 in 1996
compared with $360,000 in 1995 and $352,000 in 1994. The amount of the
provision is based, among other factors, on the amount of net credit losses
which totaled $212,000 in 1996, $181,000 in 1995 and $331,000 in 1994.<PAGE>
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 was .07% in both 1996 and 1995
while the ratio of net charge-offs to the allowance for loan losses increased
from 4.94% to 5.24%. Non-performing loans decreased from $1.2 million at the
end of 1995 to $1.1 million at the end of 1996 and as a percentage of total
loans from .41% in 1995 to .35% in 1996.
NON-INTEREST INCOME
Total non-interest income grew $1.0 million or 31.9% in 1996 with all
categories showing gains. Non-interest income decreased $189,000 or 5.6% in
1995. Excluding security gains and losses, non-interest income increased
$497,000 or 19.5% in 1996 compared with a $337,000 or 15.2% increase in 1995
and a $576,000 or 20.6% decrease in 1994. Table 5 indicates changes in the
major categories of non-interest income.
Table 5 - Non-interest Income
<TABLE>
<CAPTION>
In thousands 1996/1995 1995/1994
------------------------ ------------------------
Increase Increase
(Decrease) (Decrease)
-------------- --------------
1996 Amount % 1995 Amount % 1994
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts $1,142 $ 128 12.6% $1,014 $102 11.2% $ 912
Other service charges and fees 97 49 102.1 48 (29) (37.7) 77
Fiduciary activities 700 111 18.8 589 113 23.7 476
Net realized gains on sales of
available for sale securities 1,172 525 81.1 647 (526) (44.8) 1,173
Mortgage banking 752 120 19.0 632 133 26.7 499
Other 358 89 33.1 269 18 7.2 251
------ ----- ------ ------ ------
Total $4,221 $1,022 31.9% $3,199 ($189) ( 5.6%)$3,388
====== ====== ====== ====== ======= ====== ======
</TABLE>
Net security gains totaled $1.2 million in 1996, $647,000 in 1995 and $1.2
million in 1994. Securities gains and losses in all three years were
attributable to the sale of securities for the purpose of adding liquidity or
to manage interest rate risk. In addition, higher gains from equity securities
were realized in 1996 to take advantage of the recent rise in that market
sector and some gains were realized in 1994 with respect to prerefunded
municipal bonds in the Company's available-for-sale portfolio which were
<PAGE> 18
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.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard No. 122, "Accounting for Mortgage Servicing Rights, an
amendment of FASB Statement No. 65" (SFAS 122) on a prospective basis as
required by the standard. SFAS No. 122 provides for the recognition of
originated mortgage servicing rights ("OMSR") retained for loans sold by
allocating total costs incurred between the loan and the servicing rights based
on their relative fair values. Prior to the issuance of SFAS 122, only
purchased mortgage servicing rights were recognized as a separate asset.
OMSR's are amortized in proportion to, and over the period of, estimated net
servicing income. To determine the fair value of OMSR, the Company estimates
the present value of future cash flows, incorporating numerous assumptions
including servicing income, cost of servicing, discount rates, prepayment
speeds and default rates. The Company has no purchased mortgage servicing
rights.
SFAS No. 122 also requires establishment of a valuation allowance for the
excess of the carrying amount of capitalized OMSR's over estimated fair value.
The amount of impairment recognized is the amount by which the capitalized
mortgage servicing rights exceed their fair value. For purposes of measuring
impairment, the rights are stratified based on the predominant risk
characteristics of the underlying loans including loan type, amortization type
(fixed or adjustable) and note rate. Fair values in excess of the carrying
amount of capitalized OMSR's are not recognized. Fair values are estimated
considering market prices for similar mortgage servicing rights and discounted
future net cash flows considering loan prepayment expectations, historical
prepayment rates, interest rates and other economic factors. The valuation
allowance may be adjusted as the value of the OMSR's increase or decrease over
time. The cost of the OMSR's is amortized over the estimated period of net
servicing revenues.
During 1996, $141,000 of OMSR's were capitalized and $4,000 of amortization of
OMSR's was recorded. The estimated fair value of OMSR's was $122,000 at
December 31, 1996.
NON-INTEREST EXPENSE
Total non-interest expense for 1996 increased $2,860,000 or 21.2% compared with
a $1,278,000 or 10.4% increase in 1995. Salaries and employee benefits
increased $2.0 million or 26.5% in 1996 and $544,000 or 7.9% in 1995.
Total full-time equivalent employees increased from 184 at year-end 1994 to 217
at the end of 1995 and to 277 in 1996. The increase in 1996 is due in part to
the addition of two new branch offices in 1996 plus another branch office late
in 1995 but primarily due to the formation in 1996 of ARMCO which, at year end
1996, employed 45 full-time equivalent employees. The increase in 1995 was due
primarily to the addition of four new branch offices. The ratio of average
assets (in millions) per employee was $2.40 in 1994, $2.36 in 1995 and $1.96 in
1996. The average salary per employee was $28,000 in 1994, 1995 and 1996.
<PAGE> 19
Expenses related to premises and equipment increased $574,000 or 28.3% in 1996
and by $384,000 or 23.3% in 1995 reflecting the Company's significant
investment in property and equipment over the past two years. This investment
includes an operations center and six branches, furniture and equipment to
furnish each, expansion of and enhancements to the Company's local and wide
area networks, new check imaging equipment and furniture and equipment for
ARMCO. Other non-interest expenses increased $313,000 or 7.7% in 1996 and by
$350,000 or 9.4% in 1995. 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 the second half
of 1995 and totaled only $2,000, the statutory minimum, in 1996. As a result,
total deposit insurance costs for the Company declined by $323,000 or 41.8% in
1995 and by $447,000 or 99.6% in 1996. The FDIC insurance assessment in 1997
is expected to be between 1% to 2% per $100 of insured deposits in 1997.
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.
Table 6 - Non-interest Expense
<TABLE>
<CAPTION>
In thousands 1996/1995 1995/1994
------------------------- ------------------------
Increase Increase
(Decrease) (Decrease)
------------- --------------
1996 Amount % 1995 Amount % 1994
------- ------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and benefits $ 9,405 $1,973 26.5% $ 7,432 $ 544 7.9% $ 6,888
Occupancy, net 1,362 354 35.1 1,008 216 27.3 792
Equipment depreciation and service 1,240 220 21.6 1,020 168 19.7 852
Computer software expense 874 134 18.1 740 134 22.1 606
Deposit insurance 2 (447)(99.6) 449 (323)(41.8) 772
Other 3,497 626 21.8 2,871 539 23.1 2,332
------- ------ ------- ------ ------
Total $16,380 $2,860 21.2% $13,520 $1,278 10.4% $12,242
======= ====== ====== ======= ====== ====== =======
</TABLE>
PROVISION FOR INCOME TAXES
Income tax expense totaled $2.2 million in 1996 compared with $2.1 million in
1995 and $2.3 million in 1994. The statutory federal tax rate was 34% each
year. The Company's effective tax rate was 24.4% in 1996 compared to 25.8% in
1995 and 27.9% in 1994. 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.
<PAGE> 20
The Company uses the liability method 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.
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 $26.5 million or 5.5% in 1996
compared with an increase of $67.3 million or 16.1% in 1995.
Table 7 - Sources and Uses of Funds
<TABLE>
<CAPTION>
In thousands 1996 1995
----------------------------- ----------------------------- 1994
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 $ 693 ($ 30) (4.1%) $ 723 $ 506 233.2% $ 217
Mortgages held for sale 3,150 916 41.0 2,234 524 30.6 1,710
Securities available for sale 195,510 (10,632) (5.2) 206,142 9,381 4.8 196,761
Loans 312,173 36,213 13.1 275,960 56,926 26.0 219,034
-------- -------- -------- -------- --------
Total uses $511,526 $26,467 5.5% $485,059 $67,337 16.1% $417,722
======== ======== ======== ======== ======== ======== ========
Funding sources:
Interest bearing demand deposits $ 71,533 $ 6,415 9.9% $ 65,118 $ 6,297 10.7% $ 58,821
Savings deposits 60,833 (2,003) (3.2) 62,836 (5,490) (8.0) 68,326
Time deposits 236,822 14,611 6.6 222,211 55,401 33.2 166,810
Short-term borrowings 49,611 664 1.4 48,947 13,682 38.8 35,265
Long-term debt 7,085 (2,153) (23.3) 9,238 (7,328) (44.2) 16,566
Non-interest bearing funds, net 85,642 8,933 11.6 76,709 4,775 6.6 71,934
-------- -------- -------- -------- --------
Total sources $511,526 $26,467 5.5% $485,059 $67,337 16.1% $417,722
======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE> 21
SECURITIES AND SHORT-TERM INVESTMENTS
As discussed in Note 4 of the Notes to Consolidated Financial Statements, the
FASB permitted a one-time reassessment of the appropriateness of the
designations between the available for sale (AFS) and held-to-maturity (HTM)
portfolios without calling into question the intent to hold other debt
securities to maturity. To reflect the Company's active management of the<PAGE>
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, 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 and 1996, the Company had no securities classified HTM.
Table 8 indicates the composition and maturity of the securities available for
sale portfolio at December 31, 1996. 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. For mortgage-
backed securities, maturity is based on average lives rather than contractual
maturity. The average life to call or repricing of the portfolio was 4.2 years
at December 31, 1996 and 3.7 years at December 31, 1995.
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 Yield
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and Agencies $ $12,127 $ 5,198 $13,977 $ 6.77%
States and political subdivisions 265 230 774 47,583 8.76
Mortgage backed securities 4,710 18,499 10,933 6.92
Collateralized mortgage obligations 11,137 53,801 2,508 5.65
Other securities 30 7.56
Equity securities 5,492
-------- -------- -------- -------- --------
Total (amortized cost) $11,402 $70,898 $26,979 $72,493 $5,492 7.01%
======== ======== ======== ======== ========
Total (fair value) $11,391 $70,096 $26,718 $72,147 $5,674
Taxable equivalent yield 5.49% 5.80% 6.84% 8.33%
Percent of portfolio 6.09% 37.86% 14.41% 38.71% 2.93%
Average maturity 7.4 years
</TABLE>
Measured on an amortized cost basis, average securities and short-term
investments in the aggregate, decreased $10.0 million or 5.2% during 1996 and
increased by $9.9 million or 5.0% in 1995. As of December 31, 1996, AFS
securities at fair value totaled $186.0 million compared with $196.0 million at
the end of 1995. During 1996, the Company sold $77.0 million and purchased
$78.4 million in available for sale securities. During 1995, the Company sold
$65.0 million in securities and purchased $57.7 million. In addition, $10.0
million and $15.3 million was received from maturities of securities and
principal repayments on mortgage-backed securities in 1996 and 1995,
respectively.
At December 31, 1996, the AFS portfolio had a net unrealized loss of $1.2
million consisting of gross unrealized gains of $915,000 and gross unrealized
losses of $2.2 million. At December 31, 1995, the total 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, 1996, the Company had $101.6 million invested in mortgage-
backed pass-through securities and CMO's compared with $134.0 million at
December 31, 1995. 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 $34.1 million in mortgage-backed pass-
through securities at December 31, 1996 of which $13.6 million were adjustable
rate and $20.5 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 $67.4 million in CMO securities at December 31,
1996 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.
<PAGE> 22
LOANS
Table 9 presents loans outstanding, by type of loan, for the past five years.
Loans increased from year-end 1995 to year-end 1996 by $21.3 million or 7.2%,
compared with a $58.1 million or 24.2% increase from year-end 1994 to year-end
1995. Most of this growth was realized in commercial real estate loans which
grew $20.4 million or 19.2%. Also during 1996, the Company originated $58.2
million in salable residential mortgage loans and sold $54.9 million.
Table 9 - Loans Outstanding, Net of Unearned Income
<TABLE>
<CAPTION>
In thousands December 31,
-------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural:
Commercial secured by real estate $127,124 $106,675 $ 86,173 $ 58,312 $ 57,311
Agricultural 9,533 10,268 9,729 9,113 9,001
Other 56,118 52,734 43,354 49,106 50,254
Real estate - construction 9,415 8,761 2,489 6,742 7,742
Real estate - mortgage 99,798 104,211 85,565 73,299 69,368
Consumer loans 17,366 15,376 12,618 11,810 15,254
-------- -------- -------- -------- --------
Total loans $319,354 $298,025 $239,928 $208,382 $208,930
======== ======== ======== ======== ========
</TABLE>
Table 10 - Loan Maturities and Interest Sensitivity (1)
<TABLE>
<CAPTION>
In thousands December 31, 1996
-------------------------------------------
One year One through Over
or less five years five years Total
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 8,975 $20,761 $163,039 $192,775
Real estate construction 9,415 9,415
---------- ---------- ---------- ----------
Total $18,390 $20,761 $163,039 $202,190
========== ========== ========== ==========
Loans with predetermined interest rate $ 4,321 $ 9,756 $ 14,935 $ 29,012
Loans with variable interest rate 14,069 11,005 148,104 173,178
---------- ---------- ---------- ----------
Total $18,390 $20,761 $163,039 $202,190
========== ========== ========== ==========
(1) Excludes residential mortgages and consumer loans.
</TABLE>
<PAGE> 23
NON-PERFORMING ASSETS
Table 11 shows the Company's non-performing loans for the five years ended
December 31, 1996. 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.
Table 11 - Non-performing Assets
<TABLE>
<CAPTION>
In thousands December 31,
----------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 795 $ 862 $ 624 $1,670 $1,267
Loans accruing but 90 days past
due as to principal or interest 311 375 434 729 1,156
------ ------ ------ ------ ------
Total non-performing loans 1,106 1,237 1,058 2,399 2,423
Other real estate owned 187 276 1,048 816 1,029
------ ------ ------ ------ ------
Total non-performing assets $1,293 $1,513 $2,106 $3,215 $3,452
====== ====== ====== ====== ======
Ratios:
Non-performing loans to total loans 0.35% 0.41% 0.44% 1.15% 1.16%
Non-performing assets to total loans
and other real estate owned 0.40% 0.51% 0.87% 1.54% 1.64%
Allowance for loan losses to
non-performing loans 366.09% 295.96% 329.11% 144.27% 140.53%
</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 $7.6 million at December
31, 1996, compared with $4.7 million at December 31, 1995 and $6.2 million at
December 31, 1994.
At December 31, 1996, 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, 1996, the Company did not
have any loans outstanding to any foreign entity or government.
Other real estate owned (OREO) amounted to $187,000 at December 31, 1996 and
was included in other assets on the Consolidated Balance Sheets. At December
31, 1995, OREO totaled $276,000. Valuation reserves are established for OREO
properties whenever estimated current realizable values fall below the original
fair value recorded.
<PAGE> 24
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.
Table 12 - Allowance for Loan Losses
<TABLE>
<CAPTION>
In thousands December 31,
--------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $3,661 $3,482 $3,461 $3,405 $2,738
Provision charged to expense 600 360 352 958 1,195
Loans charged off:
Commercial, financial and agricultural 159 103 228 882 344
Consumer 132 122 233 170 225
------- ------- ------- ------- ------
Total loans charged off 291 225 461 1,052 569
------- ------- ------- ------- ------
Recoveries:
Commercial, financial and agricultural 49 15 95 66 8
Consumer 30 29 35 84 33
------- ------- ------- ------- ------
Total recoveries 79 44 130 150 41
------- ------- ------- ------- ------
Net charge-offs 212 181 331 902 528
------- ------- ------- ------- ------
Balance, end of year $4,049 $3,661 $3,482 $3,461 $3,405
======= ======= ======= ======= =======
Total loans:
Average $312,173 $275,960 $219,034 $208,701 $203,554
Year-end $319,354 $298,025 $239,928 $208,382 $208,930
Ratios:
Net charge-offs to:
Average loans .07% 0.07% 0.15% 0.43% 0.26%
Loans at year-end .06% 0.06% 0.14% 0.43% 0.25%
Allowance for loan losses 4.94% 4.94% 9.51% 26.06% 15.51%
Provision for loan losses 50.28% 50.28% 94.03% 94.15% 44.18%
Allowance for loan losses to:
Average loans 1.33% 1.33% 1.59% 1.66% 1.67%
Loans at year-end 1.23% 1.23% 1.45% 1.66% 1.63%
</TABLE>
The allowance for loan losses totaled $4.0 million at December 31, 1996, an
increase of 10.6% from 1995. The allowance for loan losses as a percentage of
year-end loans was 1.26% at December 31, 1996 and 1.22% at December 31, 1995.
<PAGE> 25
The provision for loan losses exceeded net charge-offs by $388,000 in 1996, by
$179,000 in 1995 and by $21,000 in 1994. The allowance for loan losses as a
percentage of non-performing loans was 366.09% at December 31, 1996 and 295.96%
at December 31, 1995.
Charge-offs decreased from $461,000 in 1994 to $225,000 in 1995 but increased
to $291,000 in 1996. Recoveries of loans previously charged-off decreased from
$130,000 in 1994 to $44,000 in 1995 and increased to $79,000 in 1996. The
ratio of net charge-offs to average loans decreased from .15% in 1994 to .07%
in 1995 and .07% in 1996.
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,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- -------------- ------------- ------------- -------------
% 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 $2,835 60.4% $2,713 56.9% $2,967 58.0% $2,888 55.9% $2,998 55.8%
Real estate-construction 2.9 2.9 1.0 3.2 3.7
Real estate-mortgage 53 31.2 118 35.0 133 35.7 84 35.2 138 33.2
Consumer 323 5.5 313 5.2 258 5.3 206 5.7 245 7.3
Unallocated 838 517 124 283 24
------ ------ ------ ----- ------ ------ ------ ----- ------ ------
$4,049 100.0% $3,661 100.0% $3,482 100.0% $3,461 100.0% $3,405 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
On January 1, 1995, the Company adopted the provisions of 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." 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, and
leases and debt securities.
<PAGE> 26
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.
At December 31, 1996, the Company's recorded investment in loans considered to
be impaired under SFAS 114 was $740,000 of which $614,000 were on non-accrual
status. Included in this amount is $732,000 of impaired loans for which the
related allowance is $267,000 and $8,000 for which there is no related
allowance. The average recorded investment in impaired loans for 1996 was
$749,000 and the interest recognized for the year was $16,000.
At December 31, 1995, the Company's recorded investment in impaired loans was
$758,000. The allowance for loan losses related to these loans is $217,000.<PAGE>
The average recorded investment in impaired loans for 1995 was $793,000 and the
interest recognized for cash payments received during the year was $27,000.
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), and liquidating money market investments such as federal
funds sold. 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 $33.5 million or 8.0% in 1996 compared with $75.5
million or 22.0% in 1995. Of the increase in 1995, $38.1 million was
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.
<PAGE> 27
Table 14 - Deposits by Major Classification
<TABLE>
<CAPTION>
In thousands December 31,
------------------------------------------------
1996 1995 1994 1993 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Non-interest bearing deposits $ 65,537 $ 57,775 $ 50,405 $ 46,685 $ 39,287
NOW accounts 41,209 39,942 39,038 39,873 36,121
Money market deposit accounts 34,125 31,227 20,152 24,635 27,683
Savings accounts 59,977 60,852 66,247 67,661 54,944
Time deposits under $100,000 224,071 208,022 149,784 142,634 157,684
-------- -------- -------- -------- --------
Total core deposits 424,919 397,818 325,626 321,488 315,719
Time deposits of $100,000 or more 26,548 20,111 16,807 20,143 21,165
-------- -------- -------- -------- --------
Total deposits $451,467 $417,929 $342,433 $341,631 $336,884
======== ======== ======== ======== ========
</TABLE>
Table 15 - Maturity of Time Deposits of $100,000 or More
<TABLE>
<CAPTION>
In thousands December 31,
--------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Three months or less $10,992 $ 7,774 $ 3,230
Over three months through six months 5,433 3,724 1,799
Over six months through twelve months 5,762 4,682 4,734
Over twelve months 4,361 3,931 7,044
------- ------- -------
Total $26,548 $20,111 $16,807
======= ======= =======
</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 decreased from $40.6 million at December 31, 1995 to $21.1 million
at December 31, 1996. The Bank also maintains a line of credit with the
Federal Home Loan Bank of Pittsburgh. There were no line advances outstanding
at December 31, 1995 or 1996. The Bank 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 4.55%
in 1994 to 6.09% in 1995 but decreased to 5.46% in 1996. Table 16 shows the
Company's short-term borrowings for the five years ended December 31, 1996.
<PAGE> 28
Table 16 - Short-Term Borrowings
<TABLE>
<CAPTION>
In thousands December 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Federal funds purchased and securities
sold under agreements to repurchase $21,136 $40,579 $13,046 $19,182 $ 4,635
Advances from Federal Home Loan Bank 6,500 67,604 8,050 17,061
U.S. treasury tax and loan note 970 397 1,427 1,500 1,500
------- ------- ------- ------- -------
Total short-term borrowings $22,106 $47,476 $82,077 $28,732 $23,196
======== ======= ======= ======= =======
</TABLE>
CAPITAL RESOURCES
On June 27, 1995, PennRock 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<PAGE>
employee benefit and executive compensation plans or for the dividend
reinvestment plan. On June 11, 1996, the Board of Directors extended the plan
for an additional 12 months. PennRock purchased 100,083 shares for $1.9
million and reissued 59,657 shares for PennRock's dividend reinvestment plan
and 1,125 shares under the Omnibus Stock Option Plan in 1996. PennRock
purchased 20,000 shares for $374,000 and reissued 19,421 shares for PennRock's
dividend reinvestment plan in 1995. There were 39,880 shares with a cost of
$740,000 and 579 shares with a cost of $11,000 held as treasury stock on
December 31, 1996 and 1995, respectively.
Total stockholders' equity increased $2.1 million or 4.0% in 1996 compared with
an increase of $11.8 million or 29.5% in 1995. The increase in 1996 was due to
net income of $6.8 million less dividends declared of $2.7 million and was
negatively impacted by the change in net unrealized loss on securities
available for sale on which the fair value declined by $1.6 million and by the
purchase of treasury stock throughout the year. The increase in 1995 was due
to net income of $6.2 million less dividends declared of $2.5 million and by
the change in net unrealized gains on securities available for sale on which
the fair value increased by $6.8 million. The ratio of average equity to
average assets was 9.55% in 1996, compared with 9.00% for 1995, and 9.49% in
1994. The ratio of average equity to average assets net of the SFAS 115
adjustment was 9.76% in 1996, 9.62% in 1995 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 7.87%
in 1996, 8.03% in 1995 and 8.43% in 1994.
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 certain intangibles, 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
<PAGE> 29
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 be 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.
As of December 31, 1996, the most recent notification from the Federal Reserve
Bank categorized the Company as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the
Company must maintain minimum total risk-based capital of 10%, Tier 1 risk-
based capital of 6% and Tier 1 leverage ratios of 5%. There are no conditions
or events since that notification that management believes have changed this<PAGE>
category. Table 17 shows the Company's capital resources for the past three
years.
Table 17 - Capital Resources
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
PennRock Financial Services Corp.
Leverage ratios:
Total capital to total assets 9.96% 10.40% 9.04%
Tier 1 capital to total assets 9.80% 9.39% 8.31%
Risk-based ratios:
Common stockholders' equity to
risk-weighted assets 14.95% 15.82% 16.22%
Tier 1 capital to risk-weighted assets 14.95% 15.82% 16.22%
Total capital to risk weighted assets 16.08% 16.97% 17.45%
</TABLE>
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," which establishes a fair value method of accounting for stock
options and other stock-based compensation arrangements with employees. Under
this method, the fair value of a stock option is recognized as compensation
expense over the service period (generally the vesting period). SFAS 123
requires that if a company continues to account for stock options under the
intrinsic method established by APB Opinion No. 25, "Accounting for Stock
Issued to Employees" (Opinion 25), it must provide pro forma net income and
earnings per share information as if the new fair value approach had been
adopted. The recognition provisions of SFAS 123 may be adopted upon issuance.
The disclosure provisions are effective for years beginning after December 15,
1995. The pro forma disclosures are to include the effects of all awards
granted in 1995 and later years. The Company adopted the provisions of SFAS
<PAGE> 30
123 on January 1, 1996. However, the Company will continue to account for
stock-based compensation under Opinion 25 and related Interpretations.
Adoption of SFAS 123 did not have a material impact on the Company's
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<PAGE>
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 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, 1996. 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.
<PAGE> 31
Table 18 - Interest Sensitivity Analysis
<TABLE>
<CAPTION>
December 31, 1996
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 $ 1,244 $ $ $ $
Mortgages held for sale 5,690
Securities available for sale 18,909 11,598 8,429 85,322 61,768
Loans 88,495 11,562 25,688 132,723 60,886
-------- -------- -------- -------- --------
Total earning assets $114,338 $23,160 $34,117 $218,045 $122,654
======== ======== ======== ======== ========
Interest bearing liabilities:
Interest bearing demand deposits $ 75,334 $ $ $
Savings deposits 59,977
Time deposits 72,949 54,310 60,559 62,801
Short-term borrowings 22,106
Long-term debt 2,000 12,000
-------- -------- -------- --------
Total interest bearing liabilities $232,366 $54,310 $60,559 $74,801
======== ======== ======== ========
Interest sensitivity gap:
Period ($118,028) ($ 31,150) ($ 26,442) $143,244 $122,654
Cumulative (118,028) (149,178) (175,620) (32,376) 90,278
Interest sensitive assets to interest
sensitive liabilities ratio:
Period .49 .43 .56 2.92
Cumulative .49 .48 .49 .92 1.21
</TABLE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 125 (SFAS 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings.
Under the financial-components approach, after a transfer of financial assets,
an entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and ceases recognition of financial assets it no
longer controls and liabilities that have been extinguished. The financial-
components approach focuses on the assets and liabilities that exist after the
transfer. Many of these assets and liabilities are components of financial
assets that existed prior to the transfer. If a transfer does not meet the
<PAGE> 32
criteria for a sale, the transfer is accounted for as a secured borrowing with
a pledge of collateral.
SFAS 125 extends the "available for sale" or "trading" approach in SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities," to non-
security financial assets that can contractually be prepaid or otherwise
settled in such a way that the holder of the asset would not recover
substantially all of its recorded investment. Thus, non-security financial
assets (no matter how acquired) that are subject to prepayment risk that could
prevent recovery of substantially all of the recorded amount are to be reported
at fair value with the change in fair value accounted for depending on the
asset's classification as "available-for-sale" or "trading." SFAS 125 also
amends SFAS 115 to prevent a security from being classified as "held-to-
maturity" if the security can be prepaid or otherwise settled in such a way
that the holder of the security would not recover all of its recorded
investment.
SFAS 125 requires that a liability cease to be recognized if and only if either
(a) the debtor pays the creditor and is relieved of its obligation for the
liability or (b) the debtor is legally released from being the primary obligor
under the liability either judicially or by the creditor.
SFAS 125 is effective for transfers of financial assets and extinguishments of
liabilities occurring after December 31, 1996 except that the rules governing
secured borrowing and collateral as well as transfer of financial assets for
repurchase agreements, dollar rolls and securities lending are delayed until
years beginning after December 31, 1997. Earlier or retroactive application is
not permitted. Also, the extension of the SFAS 115 approach to certain non-<PAGE>
security financial assets and the amendment to SFAS 115 is effective for
financial assets held on or acquired after January 1, 1997. Management does
not believe the adoption of SFAS 125 will a material effect on the Company's
financial statements or the results of operations.
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 Subsidiaries
Independent Auditors' Report.............................34
Consolidated Balance Sheets..............................35
Consolidated Statements of Income........................36
Consolidated Statements of Stockholders' Equity..........37
Consolidated Statements of Cash Flows....................38
Notes to Consolidated Financial Statements...............39
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of PennRock Financial Services Corp.
We have audited the accompanying consolidated balance sheets of PennRock
Financial Services Corp. and subsidiaries as of December 31, 1996 and 1995, 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, 1996.
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 subsidiaries at December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/S/ SIMON LEVER & COMPANY
January 31, 1997
Lancaster, Pennsylvania
<PAGE> 34
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
In thousands December 31,
---------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 16,405 $ 17,888
Short-term investments 1,244 939
Mortgages held for sale 5,690 2,373
Securities available for sale (at fair value) 186,026 196,029
Loans (net of unearned income of $50,000 and
$128,000, respectively) 319,354 298,025
Allowance for loan losses (4,049) (3,661)
--------- ---------
Net loans 315,305 294,364
Premises and equipment 10,662 9,111
Accrued interest receivable 3,333 3,264
Other assets 8,938 8,114
--------- ---------
Total assets $547,603 $532,082
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 65,537 $ 57,775
Interest bearing 385,930 360,154
--------- ---------
Total deposits 451,467 417,929
Short-term borrowings 22,106 47,476
Long-term debt 14,000 9,000
Accrued interest payable 2,758 2,494
Other liabilities 3,543 3,509
--------- ---------
Total liabilities 493,874 480,408
Stockholders' Equity:
Common stock, par value $2.50 per share;
authorized 20,000,000 shares;
issued 6,077,299 and 6,062,991 shares
of which 39,880 and 579 shares are held
as treasury stock, respectively 15,193 15,157
Surplus 11,153 10,905
Unrealized gains (losses) on securities
available for sale, net of deferred taxes (816) 769
Retained earnings 28,939 24,854
--------- ---------
54,469 51,685
Less treasury stock, at cost (740) (11)
--------- ---------
Total stockholders' equity 53,729 51,674
--------- ---------
Total liabilities and stockholders' equity $547,603 $532,082
========= =========
See notes to consolidated financial statements.
</TABLE>
<PAGE> 35
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
In thousands, except per share data Year Ended December 31,
-----------------------------
1996 1995 1994
-------- -------- --------
<S > <C> <C> <C>
Interest income:
Interest and fees on loans $28,634 $25,755 $18,890
Securities available for sale:
Taxable 9,327 10,660 9,796
Tax-exempt 2,443 1,746 1,228
Mortgages held for sale 223 217 170
Other 41 26 8
------- ------- -------
Total interest income 40,668 38,404 30,092
Interest expense:
Deposits 15,784 15,786 10,246
Short-term borrowings 2,709 3,015 1,605
Long-term debt 409 592 931
------- ------- -------
Total interest expense 18,902 19,393 12,782
------- ------- -------
Net interest income 21,766 19,011 17,310
Provision for loan losses 600 360 352
------- ------- -------
Net interest income after provision for
loan losses 21,166 18,651 16,958
Non-interest income:
Service charges on deposit accounts 1,142 1,014 912
Other service charges and fees 97 48 77
Fiduciary activities 700 589 476
Net realized gains on sales of available
for sale securities 1,172 647 1,173
Mortgage banking 752 632 499
Other 358 269 251
------- ------- -------
Total non-interest income 4,221 3,199 3,388
------- ------- -------
Non-interest expenses:
Salaries and benefits 9,405 7,432 6,888
Occupancy, net 1,362 1,008 792
Equipment depreciation and service 1,240 1,020 852
Computer software expense 874 740 606
Deposit insurance 2 449 772
Other 3,497 2,871 2,332
------- ------- -------
Total non-interest expense 16,380 13,520 12,242
------- ------- -------
Income before income taxes 9,007 8,330 8,104
Income taxes 2,200 2,148 2,264
------- ------- -------
Net income $ 6,807 $ 6,182 $ 5,840
======= ======= =======
Net income per share of common stock $ 1.12 $ 1.02 $ .98
Cash dividends declared per share $ .45 $ .41 $ .38
Weighted average shares outstanding 6,068,639 6,048,503 5,979,650
See notes to consolidated financial statements.
</TABLE>
<PAGE> 36
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
In thousands Net Unrealized
Gains (Losses) Total
Common Retained Treasury on Securities Stockholders'
Stock Surplus Earnings Stock Available for Sale Equity
-------- -------- -------- -------- ------------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $ 9,837 $13,053 $17,631 $ $ $40,521
Net income 5,840 5,840
Net unrealized gain on securities available
for sale as of January 1, 1994, net of tax 2,498 2,894
Change in net unrealized gains and losses
on securities available for sale, net of tax (8,932) (8,932)
Shares issued under dividend reinvestment plan 174 1,725 1,899
Three-for-two stock split and cash paid in
lieu of fractional shares 5,004 (5,004) (11) (11)
Cash dividends declared ($.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 ($.41 per share) (2,480) (2,480)
-------- -------- -------- -------- ------------------ -------------
Balance at December 31, 1995 15,157 10,905 24,854 (11) 769 51,674
Net income 6,807 6,807
Change in net unrealized gains and losses
on securities available for sale, net of tax (1,585) (1,585)
Acquisition of treasury stock (1,852) (1,852)
Sale of treasury stock under dividend
reinvestment plan 55 1,101 1,156
Sale of treasury stock under omnibus stock
option plan (9) 22 13
Shares issued under dividend reinvestment plan 36 202 238
Cash dividends declared ($.45 per share) (2,722) (2,722)
-------- -------- -------- -------- ------------------ -------------
Balance at December 31, 1996 $15,193 $11,153 $28,939 ($ 740) ($ 816) $53,729
======== ======== ======== ======== ================== =============
See notes to consolidated financial statements.
</TABLE>
<PAGE> 37
PENNROCK FINANCIAL SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
In thousands Year Ended December 31,
----------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,807 $ 6,182 $ 5,840
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 600 360 352
Depreciation and amortization 990 861 620
Amortization of deposit premium 107 98
Accretion and amortization of securities 135 317 495
Deferred income taxes 76 18 7
Net realized gain on sale of available
for sale securities (1,172) (647) (1,173)
Proceeds from sales of mortgage loans 54,879 26,232 40,409
Originations of mortgages held for sale (58,237) (27,273) (30,679)
(Gain) loss on sale of mortgage loans, net 40 (90) 48
Recovery of losses on mortgages held for sale (153)
Increase in interest receivable (68) (338) (422)
Increase in interest payable 265 677 582
Other changes, net (611) (2,900) (3,414)
-------- -------- --------
Net cash provided by operating activities 3,811 3,497 12,512
INVESTING ACTIVITIES
Proceeds from sales of securities available
for sale 77,025 65,045 26,701
Purchases of securities available for sale (78,358) (56,395) (80,096)
Purchases of investment securities (1,319) (14,089)
Maturities of securities available for sale 9,974 13,266 31,027
Maturities of investment securities 2,000
Proceeds from sale of other real estate 451 1,340 1,629
Net increase in loans (21,541) (58,097) (31,878)
Purchases of premises and equipment (2,541) (3,161) (2,826)
-------- -------- --------
Net cash used in investing activities (14,990) (37,321) (69,532)
FINANCING ACTIVITIES
Net increase in non-interest bearing deposits 7,762 7,370 3,721
Net increase (decrease) in interest
bearing deposits 25,776 68,126 (2,919)
Net increase (decrease) in short-term
borrowings (25,370) (34,601) 53,345
Net increase (decrease) in long-term debt 5,000 (1,500) 4,000
Issuance of common stock and treasury stock 1,407 1,635 1,900
Acquisition of treasury stock (1,852) (374)
Cash dividends (2,722) (2,480) (2,308)
Cash paid with stock dividend (11)
-------- -------- --------
Net cash provided by financing activities 10,001 38,176 57,728
-------- -------- --------
Increase (decrease) in cash and cash
equivalents (1,178) 4,352 708
Cash and cash equivalents at beginning of year 18,827 14,475 13,767
-------- -------- --------
Cash and cash equivalents at end of year $17,649 $18,827 $14,475
======== ======== ========
Supplemental disclosures of cash flow information:
Cash payments for:
Total interest paid $18,637 $18,716 $12,200
Total income taxes paid 2,725 2,377 2,120
See notes to consolidated financial statements.
</TABLE>
<PAGE> 38
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting policies of
PennRock Financial Services Corp. and its subsidiaries.
Business:
PennRock Financial Services Corp. (PennRock or the Company) is a bank holding
company incorporated under the laws of Pennsylvania in 1986. Blue Ball
National Bank (the Bank), a wholly owned subsidiary of PennRock, provides a
broad range of banking, trust and other financial services to consumers, small
businesses and corporations in south-central and southeastern Pennsylvania.
The Bank's mortgage banking subsidiary, Atlantic Regional Mortgage Corporation<PAGE>
(ARMCO) originates and sells residential first mortgage loans of various types
in the Maryland, Delaware, Pennsylvania, Washington, D.C. and Virginia markets.
Basis of Presentation:
The consolidated financial statements of PennRock include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
The accounting and reporting policies of PennRock and its subsidiaries conform
to generally accepted accounting principles and to general practices within the
banking industry. 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. Certain prior year amounts have been
reclassified to conform with current year classifications. Such
reclassifications had no effect on net income or stockholders' equity.
Cash Equivalents:
For purposes of the Consolidated Statements of Cash Flows, the Company defines
cash equivalents to 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. Any resulting unrealized
losses are included in other income.
Securities:
Securities are classified at the time of purchase, based on management's
intention, in one of three categories and are accounted for as follows:
Investment securities:
Debt securities are classified as investments if management has both the
positive intent and ability to hold these securities 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.
<PAGE> 39
Securities available for sale:
Debt securities are classified as available for sale if management intends to
hold these securities for an indefinite period of time but not necessarily to
maturity. All equity securities are classified as available for sale. 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.
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
interest income on trading account securities.
A decline in the market value of any investment or available for sale 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.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standard No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended. SFAS 114 requires loans to be measured for impairment when
it is probable that all amounts, including principal and interest, will not be
collected in accordance with the contractual terms of the loan agreement. The
amount of impairment and any subsequent changes are recorded as an adjustment
to the allowance for loan losses. SFAS 114 applies to all loans, both
collateralized and uncollateralized, except for large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment, loans held
for sale and debt securities. The Company evaluates a loan for impairment when
the loan is internally classified as substandard or doubtful. All non-accrual
loans not meeting the definition of smaller balance homogeneous loans are
considered impaired. As required by SFAS 114, the Company generally measures
impairment based upon the present value of the loan's expected future cash
<PAGE> 40
flows, except where foreclosure or liquidation is probable or when the primary
source of repayment is provided by real estate collateral. In these
circumstances, impairment is based upon the fair value of the collateral.
Impairment with regard to substantially all of the Company's impaired loans has<PAGE>
been measured by the fair value of the underlying collateral. Prior to 1995,
losses related to these loans were estimated based on undiscounted cash flows
or the fair value of the underlying collateral.
Allowance for Loan Losses:
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
for loan losses on impaired loans pursuant to SFAS 114 is one component of the
methodology for determining the allowance for loan losses. Other components of
the allowance for loan losses include estimated losses on specific commercial,
consumer and real estate loans and general amounts based on historical loss
experience. 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 life 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.
Mortgage Servicing Rights:
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard No. 122, "Accounting for Mortgage Servicing Rights, an
amendment of FASB Statement No. 65" on a prospective basis as required by the
standard. SFAS No. 122 provides for the recognition of originated mortgage
servicing rights ("OMSR") retained for loans sold by allocating total costs
<PAGE> 41
incurred between the loan and the servicing rights based on their relative fair
values. Previously, the value of OMSR was not recognized as an asset when the
related loan was sold. OMSR's are amortized in proportion to, and over the
period of, estimated net servicing income. To determine the fair value of
OMSR, the Company estimates the present fair value of future cash flows,
incorporating numerous assumptions including servicing income, cost of
servicing, discount rates, prepayment speeds and default rates. The Company
has no purchased mortgage servicing rights.
SFAS No. 122 also requires establishment of a valuation allowance for the
excess of the carrying amount of capitalized OMSR's over estimated fair value.
The amount of impairment recognized is the amount by which the capitalized
mortgage servicing rights exceed their fair value. For purposes of measuring
impairment, the rights are stratified based on the predominant risk
characteristics of the underlying loans including loan type, amortization type
(fixed or adjustable) and note rate. Fair values in excess of the carrying
amount of capitalized OMSR's are not recognized. Fair values are estimated
considering market prices for similar mortgage servicing rights and on the
discounted future net cash flows considering loan prepayment expectations,
historical prepayment rates, interest rates and other economic factors. The
valuation allowance may be adjusted as the value of the OMSR's increase or
decrease over time. The cost of the OMSR's is amortized over the estimated
period of net servicing revenues.
Deposit premium:
The deposit premium is the excess of the value of deposit liabilities 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 $863,000 and $970,000 million of
deposit premiums at December 31, 1996 and 1995 respectively. This premium is
being amortized using the straight-line method over 10 years.
Long-lived assets:
On January 1, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standard No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
SFAS 121 provides guidance for recognition and measurement of impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
both assets to be held and used and assets to be disposed of.
Long-lived assets and certain intangibles to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the
related carrying amount may not be recoverable. When required, impairment
losses on assets to be held and used are recognized based on the fair value of
the asset and long-lived assets to be disposed of are reported at the lower of
carrying amount or fair-value less cost to sell. Adoption of SFAS 121 did not
have a material effect on the Company's financial position and results of
operations.
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.
<PAGE> 42
Federal Income Taxes:
Income taxes are accounted for under the liability 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 expected to apply to taxable income in the years 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 the change is enacted.
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 are based on the Bank's return on equity. Costs are funded as
accrued.
Stock-Based Compensation:
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," which establishes a fair value method of accounting for stock
options and other stock-based compensation arrangements with employees. Under
this method, the fair value of a stock option is recognized as compensation
expense over the service period (generally the vesting period). SFAS 123
requires that if a company continues to account for stock options under the
intrinsic method established by APB Opinion No. 25, "Accounting for Stock
Issued to Employees" (Opinion 25), it must provide pro forma net income and
earnings per share information as if the new fair value approach had been
adopted. The recognition provisions of SFAS 123 may be adopted upon issuance.
The disclosure provisions are effective for years beginning after December 15,
1995. The pro forma disclosures are to include the effects of all awards
granted in 1995 and later years. The Company adopted the provisions of SFAS
123 on January 1, 1996. However, the Company will continue to account for
stock-based compensation under Opinion 25 and related Interpretations.
Adoption of SFAS 123 did not have a material impact on the Company's
consolidated financial statements.
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.
<PAGE> 43
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%.
NOTE 3: 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 reserves at December 31, 1996 was approximately $5,582,000.
Balances maintained at the Federal Reserve Bank are included in cash and due
from banks.
NOTE 4: SECURITIES AVAILABLE FOR SALE
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, 1996 and 1995, the Company had no securities classified as held to
maturity.
<PAGE> 44
The amortized cost and estimated fair value of securities available for sale
are as follows:
<TABLE>
<CAPTION>
In thousands December 31, 1996
------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and other
U.S. government agencies $ 31,302 $ 45 ($ 347) $ 31,000
Obligations of states and political
subdivisions 48,852 605 (294) 49,163
U.S. agency mortgage-backed securities 34,142 46 (580) 33,608
Collateralized mortgage obligations 67,446 (908) 66,538
Other 30 12 42
--------- ---------- ---------- ---------
Total debt securities available
for sale 181,772 708 (2,129) 180,351
Equity securities 5,492 207 (24) 5,675
--------- ---------- ---------- ---------
Total securities available for sale $187,264 $915 ($2,153) $186,026
========= ========== ========== =========
December 31, 1995
------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ---------
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
========= ========== ========== =========
</TABLE>
The amortized cost and fair value of debt securities as of December 31, 1996,
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.
<PAGE> 45
<TABLE>
<CAPTION>
In thousands December 31, 1996
------------------
Amortized Fair
Cost Value
-------- --------
<S> <C> <C>
Due in one year or less $ $
Due after one year through five years 12,387 12,404
Due after five years through ten years 5,972 5,928
Due after ten years 61,825 61,873
-------- --------
80,184 80,205
Mortgage-backed securities 34,142 33,608
Collateralized mortgage obligations 67,446 66,538
-------- --------
Total debt securities $181,772 $180,351
======== ========
</TABLE>
Gains and losses from sales of securities available for sale are as follows:
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Debt securities
Gross gains $1,009 $582 $1,174
Gross losses (114) (80) (61)
------ ------ ------
Total debt securities 895 502 1,113
Equity securities, net 277 145 60
------ ------ ------
Total securities gains $1,172 $647 $1,173
====== ====== ======
</TABLE>
Proceeds from sales of securities available for sale are as follows:
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Debt securities $75,869 $64,441 $26,063
Equity securities 1,156 604 638
------- ------- -------
Total proceeds $77,025 $65,045 $26,701
======= ======= =======
</TABLE>
Securities with a carrying value of $20,818,000 and $23,213,000 at December 31,
1996 and 1995 were pledged to secure public and trust deposits, repurchase
agreements as well as other purposes.
<PAGE> 46
NOTE 5: LOANS
The loan portfolio net of unearned income and deferred loan fees, at December
31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
In thousands 1996 1995
-------- --------
<S> <C> <C>
Commercial, financial and agricultural:
Commercial, secured by real estate $127,124 $106,675
Agricultural 9,533 10,268
Other 56,118 52,734
Real estate - construction 9,415 8,761
Real estate - mortgage 99,798 104,211
Consumer 17,366 15,376
-------- --------
Total loans $319,354 $298,025
======== ========
</TABLE>
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, 1996, was as follows:
In thousands
<TABLE>
<CAPTION>
<S> <C>
Balance, January 1, 1996 $5,302
New loans 4,668
Repayments 2,242
------
Balance, December 31, 1996 $7,728
======
</TABLE>
Included in the loan portfolio are loans on which the Bank has ceased the
accrual of interest. Such loans amounted to $795,000 and $862,000 at December
31, 1996 and 1995, respectively. If interest income had been recorded on all
non-accrual loans outstanding during the years 1996, 1995 and 1994, interest
income would have been increased as shown in the following table:
<PAGE> 47
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Interest income which would have been
recorded under original terms $92 $73 $119
Interest income recorded during the year 11 7 8
----- ----- -----
Net impact on interest income $81 $66 $111
===== ===== =====
</TABLE>
At December 31, 1996, the Company's recorded investment in loans considered to
be impaired under SFAS 114 was $740,000 of which $614,000 were on non-accrual
status. Included in this amount is $732,000 of impaired loans for which the
related allowance is $267,000 and $8,000 for which there is no related
allowance. The average recorded investment in impaired loans for 1996 was
$749,000 and the interest recognized for the year was $16,000.
At December 31, 1995, the Company's recorded investment in impaired loans was
$758,000. The allowance for loan losses related to these loans is $217,000.
The average recorded investment in impaired loans for 1995 was $793,000 and the
interest recognized for cash payments received during the year was $27,000.
NOTE 6: 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, 1996 and 1995 were $188.9 million and $201.0 million,
respectively.
During 1996, $141,000 of originated mortgage servicing rights were capitalized
and $4,000 of amortization of mortgage servicing rights was recorded. The
estimated fair value of mortgage servicing rights was $122,000 at December 31,
1996.
<PAGE> 48
NOTE 7: ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $3,661 $3,482 $3,461
Provision charged to operations 600 360 352
Recoveries of loans charged off 79 44 130
------- ------- -------
4,340 3,886 3,943
Loans charged off (291) (225) (461)
------- ------- --------
Balance at end of year $4,049 $3,661 $3,482
======= ======= ========
</TABLE>
NOTE 8: PREMISES AND EQUIPMENT
Details of premises and equipment at December 31 are as follows:
<TABLE>
<CAPTION>
In thousands 1996 1995
------- -------
<S> <C> <C>
Land $ 2,105 $ 1,350
Premises 6,884 6,697
Leasehold improvements 4
Furniture and equipment 9,601 8,661
Construction in progress 581
------- -------
Total cost 19,175 16,708<PAGE>
Less accumulated depreciation (8,513) (7,597)
------- -------
Net book value $10,662 $ 9,111
======= =======
</TABLE>
Depreciation and amortization expense was $990,000 in 1996, $861,000 in 1995
and $620,000 in 1994.
Future minimum rental payments related to non-cancelable operating leases
having initial terms in excess of one year are:
1997 $291,000
1998 301,000
1999 266,000
2000 248,000
2001 190,000
Thereafter $169,000
Total lease payments were $160,000, $74,000 and $108,000 in 1996, 1995 and
1994.
<PAGE> 49
NOTE 9: SHORT-TERM BORROWINGS
Federal funds purchased, securities sold under agreements to repurchase and the
treasury tax and loan note generally mature within one to thirty days from the
transaction date.
A summary of short-term borrowings is as follows for the years ended December
31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Securities sold under agreements to repurchase $21,136 $28,579 $ 3,686
Overnight federal funds purchased 12,000 9,360
Federal Home Loan Bank borrowings 6,500 67,604
U.S. Treasury tax and loan note 970 397 1,427
------ ------- -------
Total short-term borrowings outstanding at year-end $22,106 $47,476 $82,077
======= ======= =======
Average interest rate at year-end 5.50% 5.62% 5.56%
Maximum outstanding at any month-end $79,052 $62,594 $82,077
Average amount outstanding $49,611 $48,947 $35,265
Weighted average interest rate 5.46% 6.09% 4.55%
</TABLE>
All securities that serve as collateral for the securities sold under
agreements to repurchase are controlled by the Company.
The Bank has approved federal funds lines totaling $17 million and a borrowing
capacity of $164 million at the Federal Home Loan Bank.
NOTE 10: 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 January,
1997 to December, 2001, and interest rates ranging from 4.74% to 5.83%.
NOTE 11: CAPITAL TRANSACTIONS
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. All per share data have been retroactively restated to
reflect the stock split.
On June 27, 1995, PennRock 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. On June 11, 1996, the Board of Directors extended the plan
for an additional 12 months. PennRock purchased 100,083 shares for $1.9
million and reissued 59,657 shares for PennRock's dividend reinvestment plan
and 1,125 shares under the Omnibus Stock Option Plan in 1996. PennRock
<PAGE> 50
purchased 20,000 shares for $374,000 and reissued 19,421 shares for PennRock's
dividend reinvestment plan in 1995.
NOTE 12: INCOME TAXES
An analysis of the provision for income taxes included in the Statements of
Income is as follows:
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Current expense $2,124 $2,130 $2,257
Deferred taxes 76 18 7
------ ------ ------
Provision for income taxes $2,200 $2,148 $2,264
====== ====== ======
</TABLE>
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 IS as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
Tax exempt income (8.8) (6.6) (5.1)
Other, net (.8) (1.6) (1.0)
----- ------ -----
Effective income tax rate 24.4% 25.8% 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, 1996 and 1995
are as follows:
<PAGE> 51
<TABLE>
<CAPTION>
In thousands 1996 1995
------ ------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $1,302 $1,170
Net unrealized loss on securities
available for sale 420
Other 43 19
------ ------
Total deferred tax assets 1,765 1,189
------ ------
Deferred tax liabilities:
Depreciation 271 223
Investment security discount 95 65
Net unrealized gain on securities
available for sale 396
------ ------
Total deferred tax liabilities 366 684
------ ------
Net deferred tax asset $1,399 $ 505
====== ======
</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.
Management believes that it is more likely than not that the net deferred tax
asset of $1,399,000 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 13: EMPLOYEE BENEFIT PLAN
The Bank has a non-contributory profit sharing plan covering substantially all
full time employees of the Bank. Contributions made to the plan by the Company
were $607,000 in 1996, $491,000 in 1995 and $520,500 in 1994.
NOTE 14: STOCK OPTION PLAN
PennRock 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 PennRock. The Board of Directors has granted the
following incentive stock options under this plan 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. There are no options exercisable at December 31,
1996. All options have been adjusted to reflect stock splits since the date of
grant.
<PAGE> 52
<TABLE>
<CAPTION>
Shares Price per Share
------ ---------------
<S> <C> <C>
Balance, December 31, 1992 -
Incentive option granted 2,250 $11.67
Exercised in 1996 (1,125)
-------
Balance, December 31, 1993 1,125
Incentive option granted 1,500 $16.92
-------
Balance, December 31, 1994 2,625
Incentive option granted 1,000 $23.25
-------
Balance, December 31, 1995 3,625
Incentive option granted 1,000 $19.00
-------
Balance, December 31, 1996 4,625
=======
</TABLE>
The pro forma disclosures required by SFAS 123 are not applicable due to
immateriality.
NOTE 15: 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
financial instruments include commitments to extend credit, standby letters of<PAGE>
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, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
In thousands 1996 1995
------- -------
<S> <C> <C>
Commitments to extend credit $62,327 $54,715
Financial and performance standby letters of credit 8,657 8,957
Commitments to purchase securities 3,074 3,016
Commitments to sell residential mortgages 4,552
</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
<PAGE> 53
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.
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 5. 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, 1996, this limit was $5,224,000.
NOTE 16: RESTRICTIONS ON RETAINED EARNINGS<PAGE>
Certain restrictions exist regarding the ability of the bank subsidiary to
transfer funds to PennRock 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 1997
without approval of the Comptroller of the Currency of approximately $8,417,000
plus an additional amount equal to the Bank's net profit (as defined) for 1997
up to the date of any such dividend declaration.
NOTE 17: REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weightings and other factors.
<PAGE> 54
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1996,
that the Company meets all capital adequacy requirements to which it is
subject.
As of December 31, 1996, the most recent notification from the Federal Reserve
Bank categorized the Company as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the
Company must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth below. There are no conditions or events since
that notification that management believes have changed this category. The
Company's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
In thousands
To Be Well
Capitalized Under
Prompt Corrective
Actual Action Provisions
------------------- -------------------
Amount Ratio Amount Ratio
--------- --------- --------- -------
<S> <C> <C> <C> <C>
(Equal to or greater than)
As of December 31, 1996:
Total capital
(to risk weighted assets) $57,717 16.08% $35,904 10.0%
Tier 1 capital
(to risk weighted assets) $53,668 14.95% $21,542 6.0%
Tier 1 capital
(to average assets) $53,668 9.88% $17,952 5.0%
As of December 31, 1995:
Total capital
(to risk weighted assets) $53,597 16.97% $31,575 10.0%
Tier 1 capital
(to risk weighted assets) $49,936 15.82% $18,945 6.0%
Tier 1 capital
(to average assets) $49,936 9.39% $15,787 5.0%
</TABLE>
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.
<PAGE> 55
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.<PAGE>
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.
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.
<PAGE> 56
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.
At December 31, 1996 and 1995, the estimated fair values of financial
instruments based on disclosed assumptions are as follows:
<TABLE>
<CAPTION>
In thousands 1996 1995
------------------ ------------------<PAGE>
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 16,405 $ 16,405 $ 17,888 $ 17,888
Short-term investments 1,244 1,244 939 939
Mortgages held for sale 5,690 5,690 2,373 2,373
Securities available for sale 186,026 186,026 196,029 196,029
Loans:
Commercial, financial
and agricultural 192,775 198,835 169,677 172,559
Real estate - construction 9,415 9,714 8,761 8,815
Real estate - mortgage 99,798 100,011 104,211 104,784
Consumer 17,366 17,196 15,376 15,418
Allowance for loan losses (4,049) (3,661)
-------- -------- -------- --------
Net loans 315,305 325,756 294,364 301,576
Accrued interest receivable 3,333 3,333 3,264 3,264
Financial liabilities:
Deposits:
Non-interest bearing demand 65,537 65,537 57,775 57,775
Interest bearing demand 75,334 75,334 71,169 71,169
Savings 59,977 59,977 60,852 60,852
Time deposits under $100,000 224,071 223,888 208,022 209,376
Time deposits over $100,000 26,548 26,521 20,111 20,233
-------- -------- --------- --------
Total deposits 451,467 451,257 417,929 419,405
Short-term borrowings 22,106 22,106 47,476 47,476
Long-term debt 14,000 16,610 9,000 8,939
Accrued interest payable 2,758 2,758 2,494 2,494
Off-balance sheet financial instruments:
Commitments to extend credit 62,337 62,337 54,715 54,715
Financial and performance standby
letters of credit 8,657 8,657 8,957 8,957
Commitments to purchase securities 3,074 3,074 3,016 3,016
Commitments to sell residential mortgages 4,552 4,561
</TABLE>
<PAGE> 57
NOTE 19: PARENT COMPANY ONLY FINANCIAL INFORMATION
The following represents parent only financial information:
PennRock Financial Services Corp. (Parent Company Only) Balance Sheets
<TABLE>
<CAPTION>
In thousands December 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Assets:
Short-term investments $ 600 $ 140
Securities available for sale 1,707 1,872
Due from subsidiary 649 712
Investment in subsidiary 51,557 49,606
Other assets 15 72
------- --------
Total assets $54,528 $52,402
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Dividends payable $ 725 $ 667
Accrued expenses and taxes 74 61
-------- --------
Total liabilities 799 728
-------- --------
Stockholders' Equity:
Common stock 15,193 15,157
Surplus 11,153 10,905
Retained earnings 28,939 24,854
Unrealized gain (loss) on securities
available for sale (816) 769
-------- --------
54,469 51,685
Less: Treasury stock - at cost (740) (11)
-------- --------
Total stockholders' equity 53,729 51,674
-------- --------
Total liabilities and stockholders' equity $54,528 $52,402
======== ========
</TABLE>
<PAGE> 58
PennRock Financial Services Corp. (Parent Company Only) Statements of Income
<TABLE>
<CAPTION>
In thousands December 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Income:
Dividends from bank subsidiary $3,225 $1,380 $ 225
Securities available for sale 86 89 93
Net realized gains on sales of available for sale
securities 278 145 60
------ ------ ------
Total income 3,589 1,614 378
------ ------ ------
Expenses:
General and administrative 257 240 260
------ ------ ------
Income before income taxes and undistributed net
income of subsidiaries 3,332 1,374 118
Income tax expense (benefit) 29 (17) (63)
------ ------ ------
Income before equity in undistributed net income
of subsidiaries 3,303 1,391 181
Equity in undistributed net income of subsidiaries 3,504 4,791 5,659
------ ------ ------
Net income $6,807 $6,182 $5,840
====== ====== ======
</TABLE>
<PAGE> 59
PennRock Financial Services Corp. (Parent Company Only) Condensed Statements of
Cash Flows
<TABLE>
<CAPTION>
In thousands December 31,
---------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Operating activities
Net income $6,807 $6,182 $5,840
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Equity in undistributed net income of subsidiaries (3,504) (4,791) (5,659)
Net realized gain on sale of available for sale
securities (278) (145) (60)
Increase (decrease) in due from bank subsidiary 63 (219) (479)
Other, net 144 118 (10)
------- ------- -------
Net cash provided by (used in) operating activities 3,232 1,145 (368)
Investing activities
Proceeds from sales of securities available for sale 1,156 1,147 637
Purchases of securities available for sale (760) (1,009) (544)
------- ------- -------
Net cash provided by investing activities 396 138 93
Financing activities
Issuance of common and treasury stock 1,406 1,637 1,900
Acquisition of treasury stock (1,852) (375)
Cash dividends paid (2,722) (2,480) (2,308)
Cash paid with stock dividend (11)
------- ------- -------
Net cash used in financing activities (3,168) (1,218) (419)
------- ------- -------
Increase (decrease) in cash and cash equivalents 460 65 (694)
Cash and cash equivalents at beginning of year 140 75 769
------- ------- -------
Cash and cash equivalents at end of year $ 600 $ 140 $ 75
======= ======= =======
</TABLE>
<PAGE> 60<PAGE>
NOTE 20: CONSOLIDATED QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
In thousands 1996
-------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $9,906 $10,339 $10,178 $10,244
Interest expense 4,719 4,879 4,633 4,670
------ ------- ------- -------
Net interest income 5,187 5,460 5,545 5,574
Provision for loan losses 149 149 151 151
Non-interest income 902 773 1,125 1,420
Non-interest expense 3,662 3,946 4,262 4,509
------ ------- ------- -------
Income before income taxes 2,278 2,138 2,257 2,334
Income taxes 618 432 483 667
------ ------- ------- -------
Net income $1,660 $ 1,706 $ 1,774 $ 1,667
====== ======= ======= =======
Net income per share $ .27 $ .28 $ .29 $ .27
Dividends declared per share $ .11 $ .11 $ .11 $ .12
1995
-------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
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
</TABLE>
<PAGE> 61
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
<PAGE> 62
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 22, 1997 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 22, 1997 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 22, 1997, 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 22, 1997.
<PAGE> 63
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
financial statements or in the notes thereto included in this Annual
Report.
(a) 3. Exhibits
(3)(a) Article of Incorporation of the Corporation are incorporated
by reference to Exhibit 3(a) to Form 10-Q for the quarter
ended June 30, 1996.
(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(b) 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 Agreement Plan is
incorporated by reference to Exhibit 10(d) to Form 10-K for
the year ended December 31, 1995.
(21) Subsidiaries of the Registrant
(23) Consent of Independent Auditors
(27) Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed in the fourth quarter of 1996.
<PAGE> 64
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: March 11, 1997 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 11th of March, 1997.
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
MELVIN PANKUCH and Director
/s/ George B. Crisp Vice President and
- ------------------------ Treasurer (Principal
GEORGE B. CRISP Accounting and Financial
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
<PAGE> 65
ANNUAL REPORT ON FORM 10-K
INDEX EXHIBIT
YEAR ENDED DECEMBER 31, 1996
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-Q
for the quarter ended June 30, 1996, 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, 1992
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 Agreement Plan is
incorporated by reference to Exhibit 10(d) to Form 10-K for
the year ended December 31, 1995.
21 Subsidiaries of Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
<PAGE> 66
Exhibit 21
PENNROCK FINANCIAL SERVICES CORP.
SUBSIDIARIES OF THE REGISTRANT
The registrant has one direct wholly-owned subsidiary, Blue Ball National Bank.
The Bank, a national bank and a member of the Federal Reserve System, is
engaged in the commercial, retail and trust business.
Blue Ball National Bank has one direct wholly-owned subsidiary, Atlantic
Regional Mortgage Corporation. ARMCO is incorporated under the laws of
Pennsylvania for the purpose of originating and selling residential mortgage
loans in the secondary market.
<PAGE>
Exhibit 23
PENNROCK FINANCIAL SERVICES CORP.
CONSENT OF INDEPENDENT AUDITORS
(Letterhead of Simon Lever & Company appears here)
INDEPENDENT AUDITORS' CONSENT
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 31, 1997 on the consolidated financial statements of PennRock
Financial Services Corp. and subsidiaries appearing in and incorporated by
reference in this Annual Report on Form 10-K.
/s/ SIMON LEVER & COMPANY
March 11, 1997
Lancaster, Pennsylvania
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
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